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A Decades-Long Gold Supply Crunch Is Coming

By Matt Badiali, editor, S&A Resource Report
Wednesday, December 1, 2010

By now, you know half the reason the gold price is set to rise: People are fleeing paper currencies for "real wealth," including gold, silver, and other hard assets.
But even without this huge new demand, gold prices would likely rise over the next 10 years or longer. That's because of the other half of the equation: supply.
Gold is facing a twofold supply crunch right now. And I expect that crunch to support gold prices for decades. Let me explain...
In 2006, South Africa was the world's largest gold producer. It had held that spot forever. It averaged 16.6 million ounces per year through the 1990s. Gold production peaked in 1993 at 18 million ounces per year.
By 2009, it had dropped three spots, tying the U.S. for the world's third-largest gold producer. In the intervening years, production fell an average 6.3%. In 2009, the country only produced 6.5 million ounces... about a third of its peak.
Several major gold mines closed because the mines lacked proper electricity... and even with gold prices soaring, there wasn't enough money to keep the lights on. This is happening all over the world.
Take a look...
Major gold mines all over the world are suffering lower output. Gold production had declined steadily over the last 10 years.
In short, all the easy ounces are gone. These days, it takes a whole lot more rock to produce an ounce of gold. And even rising gold prices haven't kept pace with the cost of production at many mines around the world.
That's the first reason gold supply is tight. The second is government sales...
Over the last decade, 11 of the 20 largest gold-holding central banks (including the International Monetary Fund) sold gold. Those countries dumped 24% of their collective holdings. (Switzerland's central bank sold 60% of its gold holdings over the last 10 years.)
In total, they dropped 124 million ounces on the market since 2000... That's roughly 15% of the average annual mine production over that same time.
With the gold price nearing all-time highs, governments are reversing course. Some are actually buying gold. And the IMF cut sales by 40% in October.
Here's the thing: Markets work. Mine production is down. Central banks quit selling. And, of course, demand is rising. These add up to higher gold prices.
At some point, years and years down the road, higher gold prices will turn unprofitable mines profitable again... and we'll see tons of new supply. And maybe when we see South African gold production at all-time highs again, I'll sell my gold. But that's decades away.
Good investing,
Matt Badiali

Further Reading:

The price of gold has soared 90% in the last two years... But soaring profits don't necessarily mean soaring share prices. See Matt's cheap picks before it's too late here: Big Gold Miners Making Huge Profits.
Buying gold may seem easy, but investors need to do their homework before leaping into the markets. That's why Matt has spent the last five years developing a "simple 'backdoor' way to get in on huge gold discoveries with plenty of upside and a lot less risk." Check out his safe strategy here: One Simple Strategy for 3,000% Gains.

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Market Watch
Symbol Price
S&P 500 1206.07 +2.2% +8.8%
Oil 37.20 +3.2% -6.1%
Gold 135.38 0.0% +15.3%
Silver 27.81 +1.4% +48.1%
US-Dollar 81.33 +0.7% +9.3%
Euro 1.31 +1.2% -12.9%
Volatility 21.36 -9.3% -2.6%
Gold Stocks 557.08 +1.3% +11.3%
10-Year Yield 2.96 +5.7% -9.8%

World ETFs
Symbol Price
USA 121.01 +2.1% +8.7%
Canada 30.04 +2.4% +12.4%
Russia 21.15 +3.5% +15.1%
India 37.02 +4.1% +18.3%
Israel 16.33 +0.5% +10.0%
Japan 10.48 +2.0% +6.0%
Singapore 13.74 +2.8% +18.7%
Taiwan 14.49 +2.8% +16.6%
S. Korea 55.63 +3.1% +22.1%
S. Africa 68.20 +2.2% +18.4%
China 44.45 +2.6% -1.0%
Lat.America 52.09 +1.9% +6.2%

Sector ETFs
Symbol Price
Oil Service 134.15 +3.0% +12.0%
Big Pharma 63.74 +1.8% -3.8%
Internet 71.63 +1.2% +23.1%
Semis 15.70 +3.2% +28.7%
Utilities 31.12 +1.2% +2.6%
Defense 18.28 +2.5% +9.1%
Nanotech 9.86 +1.2% +0.1%
Alt. Energy 9.81 +2.1% -5.3%
Water 18.11 +2.3% +11.5%
Insurance 15.88 +2.1% +17.8%
Biotech 20.36 +1.3% +26.7%
Retail 19.63 +1.3% +29.0%
Software 24.36 +2.6% +22.6%
Big Tech 53.19 +2.1% +20.9%
Construction 12.72 +2.7% +11.8%
Media 13.42 +2.3% +24.3%
Consumer Svcs 66.72 +1.8% +22.5%
Financials 53.59 +2.1% +2.7%
Health Care 63.75 +1.7% +0.8%
Industrials 62.25 +2.6% +17.9%
Basic Mat 72.44 +2.7% +21.5%
Real Estate 54.50 +0.8% +23.9%
Transportation 89.96 +2.4% +25.7%
Telecom 22.24 +1.9% +17.6%

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