Sometimes a nugget of investment insight can be found in the most unexpected of places.
At the recent Denver Gold Forum, Randall Oliphant, the chairman of the World Gold Council, threw such a nugget to investors with his assertion that gold production this year, “may be the most that will ever be produced.”
In an interview with Bloomberg, Oliphant continues:
We just haven’t been finding the new gold deposits – there hasn’t been an interest in bringing on as many mines as we had in the past, and a lot of companies have declining production profiles. So, we have supply rolling over as demand continues to grow. It seems to be setting up good fundamentals for the gold market.
Gold is currently valued at around $1,200 an ounce. The plateauing of new gold entering the market, combined with global political turmoil and demand from China and India, means gold prices could increase to $1,400 over the next year. Oliphant predicts a longer-term price of up to $1,900 an ounce. If these views on gold production and demand are correct, this year could be the last time gold is in the $1,200 zone. Clearly, it’s a good time for investors to consider getting into the precious metals market.
But how can we prove we’ve hit peak gold production?
While this is a difficult question to answer, we seem to be at a sticking point for mining companies. New mines are laborious to find, and funding is difficult because successful mines require locations of political and economic stability. Intermediate mines, however, have the best combination of capital reserves and flexibility, and Oliphant sees the main production opportunities here. He argues that senior mines are almost exhausted and can’t maintain their current production level, let alone expand it.
Importantly, this view is backed by David Harquail, the Chief Executive Officer of gold royalty and streaming company, Franco-Nevada Corp. (NYSE:FNV). He, too, spoke of the older mines running out of ore and then being replaced with new mines that did not increase production.
Such supply side issues are often played out over time. So there will not be a sudden halt in production but a gradual decline.
For most commodities, a declining supply is normally met with a controlled increase in price. Gold values do not react in this way. The usual supply and demand model says gold prices should have decreased this year, but that is not the case. In 2017, gold prices increased in a controlled manner – despite the record-setting amount of gold mined and brought to market in any one year. Even at current levels, gold has increased by around 13 percent since January. This leads experts to believe that as the output lessens, we will see the price of this precious metal sharply rise.
Supply and demand isn’t the only influence affecting the potential price of gold. Gold’s role as a geopolitical indicator is demonstrated by the recent temporary fall in price following the knee-jerk reaction to events in North Korea, along with U.S. hurricanes’ and their possible effects on the oil supply. This correction is short-term as these crises depart from the news headlines.
Inflation, or the devaluation of paper currency, is another factor predicting future gold prices. Concerns about the lack of inflation around the world and the inability of Central Banks to predict and influence are clear to see. As we know the Fed are looking to reduce their balance sheet and the Bank of England is also contemplating infusing £572 billion into its banking system. On top of that, the model used for years to generate inflation by manipulating the Federal Funds rate is no longer there. Central banks find themselves in a very difficult place with no obvious tools with which to fight the next recession. An increase in inflation corresponds with an increase in the price of gold, and indicators show we’re due for an inflation hike any day now.
Last, but by no means least, the position of the world’s equity markets affects gold prices. Typically, as the markets fall, precious metal values rise. The S&P 500 is clearly overvalued with all indicators showing the market is overdue for a correction, and nervousness around the lofty heights of the markets is almost palpable. History tells us that these market highs simply cannot be sustained. As the last straw for an already unstable economy, this could launch gold prices into the stratosphere.
Peak gold? Signs point to yes.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.