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Gold Demand Continues to Outstrip Supply

by: William Trent posted on: September 07, 2006 | about stocks: GGN / GLD / IAU

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The durable goods report showed a good deal of strength in primary metals. It is hard to imagine that this lends itself to the Goldilocks view of the economy (high growth low inflation) more than the Stagflation view.

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Furthermore, a recent article notes that two of the world’s leading gold-producing countries, South Africa and Australia, have posted significant declines in gold production over the past year.

In South Africa, Credit Suisse Standard Securities senior gold analyst Dr David Davis has written extensively on the matter. He has stated that the survival of the South African gold-mining industry depended on the continued replacement of depleted ore reserves by the discovery and conversion of new ore resources.

He argued that a renewed and increased focus on exploration of South Africa’s gold deposits was essential to facilitating the replacement and, more importantly, the growth of reserves.

“While it is evident that South Africa’s reserve base is rapidly dwindling, an upward trend in the gold price for the foreseeable future will likely mitigate the downward trend in reserves.

Credit Suisse Standards Securities’ studies indicated that gold supply was falling behind demand as the diminishing number of new reserves failed to compensate for dying mines worldwide.

Davis had pegged the gold price at $1,200 by 2015.

Gold production has lagged demand for some time, being made up in part by sales of gold reserves by central banks. That issue is particularly important right now, as some are arguing that the expiration of a reduced sale agreement will cause the central banks to unload, while others believe China will increasingly diversify its reserves into the metal. We believe there may be some of both in the short term, but remain longer-term bulls.

Editor's Note: ETFs covering gold include GGN, GLD and IAU.

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