Editor’s note: The following is a guest commentary from one of WND’s sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.
Despite record-breaking gold demand in the first quarter of 2001 – a jump of 826 tons or about 5 percent – which followed another record-breaking 11 percent jump in the fourth quarter of 2000, it’s estimated that the world gold-mine supply will suffer a 35 percent decline over the coming eight years, according to a new report by Standard Equities, a South African stock brokerage.
This steep decline is due to a tight gold trading range that’s about 15 percent below the average global production cost of $315 an ounce. The implications of these low prices is that the attrition rate is finally catching up with producers, despite powerful forecasts of rebounding gold over the next decade. These forecasts have not been enough to make
gold producers look ahead. Gold exploration expenditures have declined by 60 percent from 1997 to 2000.
So, not only are gold producers beginning to look elsewhere for their revenues, it also means that when gold finally does make its upward move, as is predicted, they will be unable to react quickly to get back online, thereby adding further momentum to a new gold bull market.
“The impact of the decline in world gold production will result in an increasing deficit between supply and demand which is likely to change market perception significantly, and subsequently put upward pressure on the gold price,” the report says.
In recent years, demand from the jewelry industry alone has exceeded global mine production. Ironically, the perception of an economic slowdown in the U.S. has actually been bullish for gold jewelry since consumers appear reluctant to buy the more expensive stone-set items in favor of plain gold. Besides jewelry, gold demand is based on personal and institutional investment interest, gold coinage and a variety of industries including aerospace, medicine, electronics and dentistry.
Adding to the issue of demand are the institutional investors. Seeing the value of the diversification of their portfolios in this shaky economic environment, institutional investors have increased their demand for gold some 250 tons over the past four years.
The total consumption of gold annually outstrips gold mine production by 50 percent. In the past, this shortfall has been bridged by supplies from central bank sales, scrap and recycling. But the central banks have announced a cutback in their gold sales. These bank sales have represented about 9 percent of the total annual supply of gold over the past 10 years, so a cutback here is meaningful.
Even as the report was made public, there have been new predictions of higher gold prices in the financial press. Steve Forbes writing in his Forbes magazine, together with the Wall Street Journal and the major brokerages of Salomon Smith Barney, Morgan Stanley Dean Whitter, Merrill Lynch and Goldman Sachs have all taken stands that gold will rally well into the $325 to $350 price range in the near future. A poll of 17 analysts conducted by Reuters also forecast substantially higher gold prices in 2002.
The investment picture of gold is growing increasingly unique. You have an investment that is selling 15 percent below its production cost. Yet demand has been consistently setting records, and is outstripping annual mine production by 50 percent. More of the same is forecast for the future even as famous Wall Street figures and institutions are predicting dramatically higher gold prices. Even so, the inadequate gold mine production is anticipating a further drop of 35 percent over the next eight years. If this isn’t a formula for a great investment prospect, then what is?
Special for WND readers, Lear Financial is making available free information on investing in precious metals.
With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today’s fastest growing and most successful precious metals investment firms.
