If you’re like me, you’ve bought gold due to the money printing policies of most developed countries and the effect those policies will have on the future purchasing power of our paper money. Probably also because there’s no viable way for governments to escape the consequences of all the debt they’ve piled up. And maybe because politicians can’t be trusted to formulate a realistic strategy to avoid any number of monetary, fiscal, or economic crises going forward.
These are valid, core reasons to hold gold in a portfolio at this point in time. But a new trend is under way, and someday soon it will be just as much a driving force for gold prices as anything else: a good old-fashioned supply crunch.
A few metals analysts have mentioned it, but it escapes many and certainly is off the radar of the mainstream financial media. But unless several critical factors reverse course, a supply shortage is on the way with clear implications for the price of gold.
The following four factors are combining to diminish gold supply. While we’ve touched on some of them before, put together they’re creating a perfect storm that will, sooner or later, impact the gold market in several powerful ways. As these forces gather steam, you’ll want to make sure you’ve already built a substantial position in physical bullion.
Factor #1: Production Pullbacks, Development Delays, Exploration Cancelations
Gold producers don’t operate in a vacuum. If the price of their product falls by 30% over a two-year period, they’ve got to make some adjustments. And those adjustments, more often than not, result in lower production, delayed mine development plans, and cuts in exploration budgets. The response is industrywide, and even low-cost producers are not immune.
The drop in metals prices means some mines can’t operate profitably, and if the losses exceed the cost of closure (and possibly, restart in the future), these mines will be shut down. As operations come offline, global output falls.
While lower metals prices are not what any of us want, they’re long-term bullish because, as they say, the cure for low prices is low prices. If prices drop further, a greater number of projects will be unable to maintain production levels. For example, we know of several operating mines that, in spite of large reserves, will be forced offline if the gold price falls to the $1,100 level.
The impact on development and exploration projects is even greater—it’s easy to postpone construction on tomorrow’s new mine when you’re worried about cash flow today. As a result, many companies have cut drilling projects and laid off geologists.
Source Gold Seek