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The Certainty of a Gold Price Rise

Many things are uncertain in the world today. One thing which we can be certain of, however, is that the price of gold will rise in paper money terms. Yes, there will be short term fluctuations in both directions, but we can expect to see gold rise 60-70% over the next 4-5 years. We don’t say things like this often, or without good reason. To make a statement like that without a good reason is not wise for a financial or precious metals analyst to make. I will explain our rationale in this article. While we are not infallible, and may have missed something, we have been right before. Things appear to be set up for a slam dunk case for gold, and precious metals. To be clear, there is not a shortage of gold above or below ground. But there there appears to be a shortage of mineable gold available at the current price.

There is currently, and for the last few years, a dearth of new supplies of gold being discovered in the mining sector. This is not because mines have stopped looking. On the contrary, miners have been looking harder in the last decade, than in the previous one. Despite a 60% increase in spending by miners to discover new supply, the gold has simply not materialized in the quantities necessary to meet demand. They have been spending more, to discover less.

It is not as critical to find new supplies of mineable gold, when the existing mines still have ample supply left. But many existing mines have already harvested the bulk of the easy gold; that is, gold that can be harvested profitably at existing prices. Much of the known gold still in the ground will require more time consuming and technologically challenging labor, to get it to the refiner. This is one of the main drivers of future gold price increases. It is not only that new sources of gold are getting hard to find, it is that the known sources of gold are getting more expensive to mine.

output of gold

Why would the industry risk spending 60% more on gold discovery, when there is less new gold to find? Because the known alternative is even more expensive. The alternative way to spend money is to continue to mine the more difficult gold, which can run as much as 80-120% more per ounce, than the current price of gold, just to break even. We seem to be at an impasse, where the mining industry is demanding higher future prices, to continue to either search for, or mine gold.

This is a good thing for those who currently own gold, or will be purchasing some soon. It is not likely we will see gold prices where they are today, in the years ahead. One of the historically best ways to estimate the baseline gold price, is not by trying to guess the timing of the next geopolitical event. Thankfully, sometimes those issues work themselves out before turning into a full blown catastrophe. Neither is it always accurate to predict future gold prices by looking at what financial mayhem is present, or lurking around the next corner. Sometimes the Ponzi scheme of over-indebted financial engineering is able to continue for more years than we could have imagined. While geopolitical events and/or financial mayhem can often certainly be a driver of short-term moves in the price of gold, they generally settle to a price supported by something else.

cost of mining gold

 

That something else, it turns out, is the cost to mine the metal. As you can see from the included chart, the spot price of the metal is often related, to a varying degree, to the cost of mining. For the purpose of this example we have used the costs of Barrick and Newmont, to approximate the costs of viable miners as a whole. There are times when the price fluctuates higher or lower, based on various geopolitical or financial events. But the fluctuation is generally around a price close to the cost of mining.

This is not to say that demand has no impact on price, it is just not the only, or even the most dominant determiner of price. Demand is certainly there, from the largest purchasers (Central Banks). While the sales of individual coins tends to ebb and flow with how people feel about the future, their view or sense of what is ahead is often limited. Central Banks, on the other hand, have a front row seat to the financial abyss they have helped create. And recently, Central banks have been buying gold. Their purchases were up 42% in the first quarter of 2018, from an already elevated level. Some believe that an upcoming change to the financial system is imminent, with the pecking order determined in part by the quantity of gold holdings a nation has. The same benefit that nations seek by purchasing gold, are available to individuals as well. Sometimes it is useful to take our cue from what officials are doing, rather than from what they are saying. While most governments want the public to believe their currency is solid, those governments themselves are either holding or purchasing significant amounts of gold.

Such an insurance policy is also good for individuals to have, especially when it is so easy to do. While it is always possible that someone will strike a mother lode of gold in an unexpected place, the experts have been having the opposite results. They have been spending significantly more to search for gold that isn’t there, because the costs to mine known gold would cost even more than that. With the solid demand of Central Banks, and the investing public around the world (Americans have a lot of catching up to do), gold will be found, and gold will be mined. That gold found and mined will cost significantly more, 80-120% more, than it does today. Throw in some geopolitical or financial instability, and we could see a real barn burner. That is why we believe it is conservative to expect gold to be 60-70% higher in upcoming years. That kind of return sure beats what’s available at the bank.

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