Gold is, perhaps, the hottest topic in town.
Is it going to take off or not?
There are few better places to get the answer to that question than the Precious Metals Investment Symposium in Sydney.
The two day Symposium is in its second day today. Apart from myself, I don’t think there’s another gold bear in the room — and there are a lot of attendees.
That’s not necessarily a bad thing. While my short term view isn’t favourable, I believe gold will quadruple in the long term. That means there’s huge potential on offer…and you should know about it.
The long term bull case for gold
To start, let me ask you a question…
Have you ever been caught short for words?
I’m not normally known to be short of words. In fact, sometimes my publisher tells me to listen more and do less talking. But when it comes to talking about gold’s long term bullish argument, the proverbial cat has got my tongue. In my view, it seems obvious why you should own gold.
Richard Hayes, Chief Executive Officer of Perth Mint, agrees.
Granted, someone heading up the Perth Mint probably won’t be bearish on gold. But Richard makes a lot of sense. Yesterday he talked about the bullish case for gold.
I won’t walk you through his entire argument today. I’ll give you the best part of the story — ‘gold is rare’. As simple as that statement might seem, don’t ignore it.
Since the dawn of time, only 160,000 tonnes of gold have been produced worldwide. Most of this gold still exists today.
Now, 160,000 tonnes might not mean much to you. I know I found that number hard to envision. But, when Richard said that the gold could fit into a cube the size of a tennis court, my jaw dropped. My first thought…I want to see that cube! My second thought…that’s a really small area to fit the entire planet’s worth of gold into.
Should we worry about supply?
The Independent Online provided more context on gold’s supply story on 27 September:
‘Mark Bristow, South African-born founder and chief executive of Randgold Resources, foresees a looming supply problem in the gold industry, saying that there was not enough exploration to replace gold that was being produced.
‘“To keep the gold industry supplied we need to discover 90 million ounces a year. We are only discovering 10 million to 15 million ounces a year. We either have to discover more quality ounces or reduce the life of mines,” said Bristow
‘“The only way that the industry will deliver what it has delivered in the past 8 months is to have another increase in the gold price, but it will be impossible for the gold price to go up as it did over the past 8 months,” he said.’
I agree with Bristow’s eight month forecast for gold — it will be almost impossible for it to deliver the same gains as the past eight months.
That is, not until the yellow metal hits an inflection point at some time in the future. That’s when total demand will outweigh supply. When that happens, the gold price should start to go parabolic!
Yesterday, Richard Hayes said that about 2,700 tonnes of gold is produced worldwide each year. That might sound like a lot. But gold demand equalled 2,335 tonnes in the first six months of this year alone, according to the World Gold Council.
You don’t need higher maths to see that current gold demand already outweighs supply.
It’s not, however, enough to cause a huge supply crunch…yet.
John LaForge, the head of real asset strategy at Wells Fargo, is a fellow short term gold bear. CNBC reported on his view on 7 October:
‘LaForge points to the abysmal performance of gold in the period from 1980 to 1999 — which set the stage for a stunning turnaround.
‘To explain these cyclical moves, the strategist turns to supply. As commodity prices rise, supply rises as well, but at a certain point, supply far exceeds demand.
‘Turning to gold specifically, he explains that enough gold has now been mined that were all the above-ground gold distributed equally among the earth’s human inhabitants, each would receive 0.8 ounces of the precious metal — one of the highest such amounts since 1950.
‘“History tells us that gold must at least begin to shake some of this supply excess before prices can begin to rise for good again (a new bull cycle),” he explains.’
LaForge’s message is clear: Gold’s excess supply needs to be removed from the market before the yellow metal can truly take off.
Gold’s supply story isn’t normally talked about. But it’s one to watch closely.
All commodities — even gold — are driven by supply and demand. I would expect that the recent gold price bounce has encouraged producers to dig even more gold out of the ground.
We may need a ‘rude awakening’ in the gold sector to set the supply and demand balance correct. In other words, gold may see a sharp reversal to the downside, before truly taking off.
One fact, however, remains: Gold demand in 2016 is fast outweighing gold supply. When the tipping point is reached — perhaps next year — hang on tight to the bull’s horns! Gold could easily quadruple in price over the next few years. And gold stocks could go up thousands of percent in gains. Pick the right stocks, and you could make a life changing result.