In my last post I wrote about how scarcity of supply, combined with potential movements into gold from stocks and bonds, could drive gold prices as high as $10,000.
Well, here is another reason why prices could reach some pretty lofty heights.
At a time when central banks have become net buyers of gold bullion, after two decades of being net sellers, the Chinese government if falling behind.
This is one of the main reasons the Standard Chartered bank is predicting a gold price of $5,000. Here is an excerpt from one of their recent reports:
“The limited supply comes at a time when central banks have completely changed their tune on selling down their gold stocks and now appear likely to accelerate their net buying programmes. China is way behind the curve. Currently, only 1.8% of China’s foreign exchange reserves is in gold; if the country were to bring this proportion in line with the global average of 11%, it would have to buy 6,000 more tonnes of gold, equivalent to more than 2 years of gold production. We believe that these factors – limited gold production, buying by central banks and increasing demand from India and China – can potentially drive the gold price to US$5,000/oz, as highlighted in our commodity team’s earlier report.”
As I have mentioned before, the two great drivers of gold prices are an increase in demand, driven by uncertainty about world economic conditions, and a limited supply of gold.
The Standard Chartered report goes on to say:
“We are bullish on gold. Most market commentary on gold has centred on the direction of US dollar movements or inflation/deflation issues. We go beyond this to examine future mine supply, which we think is just as important a driver. Our comprehensive study of 375 gold projects supply suggests a very limited production growth profile for the next five years. A ten-year bull market in gold has done little to drive gold production. The gold miners are running to stand still. A lack of funding from equity markets and a shortage of large gold mines makes it difficult for the industry to compensate for the depletion caused by aging mines and falling grades. In our base case, our 375-mine supply model shows net production growth of 3.6% pa. over the next five years.”
There you have it. Gold supply it flat, at a time of increasing demand for physical gold. Put simply, increased supply of any commodity, product or service will always drive prices up, unless there is a corresponding increase in supply.
It seems unlikely that there will be a significant increase in above-ground gold supply any time soon.
As a result, we can expect gold prices to continue to rise.
And before the price rises too far, I suggest you dip into your cash savings and buy more gold coins and gold bars.
Remember, as a reader of this blog, you are way ahead of the curve. When these stories start appearing on the front page of your local newspaper, many more people will be buying gold, and the price will have risen considerably.
You can buy gold coins and gold bars online at GovMint.com.
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