Looming Shortage Could Send Gold Prices Surging

If you want to know where gold prices could be headed, it’s important to pay close attention to current supply. And right now, supply is telling us that there could be a shortage looming–and it could be great for gold prices.

Investors should also note gold production and exploration across the globe. For gold bugs, there’s a perfect storm brewing, with production either declining or expected to decline going forward.

According to Melbourne-based mining consultant firm Surbiton Associates, Australian gold production in the fiscal year 2017-2018 amounted to 310 tonnes, the highest output in 20 years or so. Australia is the second-biggest gold producer in the world after China.

Will Australian gold production continue to increase? According to Surbiton director Sandra Close, “despite the buoyant results, gold production may well be lower in the next few quarters.”(Source: “Australia posts highest gold output in 20 years,” Australian Mining, September 3, 2018.)

In the U.S., the fourth-largest gold producer, production is facing headwinds too. In the first seven months of 2018, U.S. mines produced 122,000 kilograms (or 122 tonnes) of gold. In the same period a year ago, gold mine production as 138,400 kilograms (or 138.4 tonnes). That’s a year-over-year decline of close to 12%. (Source: “Gold: Mineral Industry Surveys,” U.S. Geological Survey, last accessed September 18, 2018.)

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The Biggest Mistake Gold Miners Made

Going forward, things could get a lot worse.

As gold prices started to trend lower in 2013, gold miners rushed to get the low-hanging fruit, extracting gold from ground that had the highest precious metal concentration. At the same time, exploration spending was significantly cut across the board.

Why would miners do that? Not a lot of them expected gold prices to remain this low for extended period of time.

This was the biggest mistake they could make.

If you look at current mining companies’ operations, a lot of them seem to be reporting lower production. Why? Because their grades in the ground are decreasing.

For example, take Goldcorp Inc.’s (NYSE: GG) Red Lake mine, one of the well-known gold mines. In the first six months of 2018, average mill head grade (think of it as how much precious metal there is in a tonne of ore) was 9.64 grams/tonne. That is 28% lower than the same period a year ago. (Source: “Second Quarter Report,” Goldcorp Inc., last accessed September 18, 2018.)

This is not just happening at Goldcorp. This phenomenon prevails across the precious metal mining sector.

As for exploration, for the past few years, miners haven’t done much searching for the precious metal. Exploration is an investment in the future production, so this could cause a lot of problems down the road.

Gold Price Outlook: It’s Hard Not to Be Bullish on Gold

I believe this is the most interesting time to look at gold. Given what’s happening, gold prices look very cheap.

We see supply facing headwinds and demand remains strong. If we assume that demand doesn’t change and supply struggles continue, gold prices could be much higher in the coming years. This is just basic economics.

All things considered, I can’t help but be bullish on gold prices.