Day after day, our clients have seen gold prices set new all-time records, giving them wealth appreciation never before seen in the modern history of the yellow metal.
To sharpen this point: Over the last 12 months, the S&P 500 has risen 33%, the NASDAQ has climbed 37%, and the Dow has gained 27%, while gold has outperformed them all, leaping by 47%, or $840/oz.
Most of the discussion of this extraordinary rally in gold priceshas focused on the demand side of the market and how a constellation of forces have aligned to drive a relentless rise in prices, including:
- Falling inflation,
- Prospects for interest rate cuts,
- A weakening dollar,
- Spreading warfare in Europe and the Middle East,
- The potential for conflict with China,
- Rising political instability around the globe,
- Massive central bank gold-buying, and
- Private gold demand in China.
But while these demand forces are likely to continue lifting prices for the foreseeable future, they have distracted us from another force that is likely to support a long-term rise in prices: the inability of gold miners to maintain production.
As prices have doubled over the last decade, mine production has barely budged.
Despite an enormous incentive to increase output, miners have been unable to increase the metal pulled out of the ground. The following graph illustrates this point:
Gold prices almost doubled between yearend 2015 and 2023, while mine production rose by only 3.6%. Moreover, since reaching a peak in 2018, production has actually declined by 3.3%.
This raises a crucial question for the future of gold prices: Has the world reached “peak gold”, where annual mine production remains flat, then trends downward for years to come?
Here’s more data that sheds light on the supply-demand equation:
Despite being the world's most prolific producer of gold, China's consumer and central bank demand is so great that the nation also has the globe's largest imbalance in supply and demand, consuming 753.7 more metric tons than it produces. India follows closely behind.
This chart illustrates another point crucial to understanding the gold market:
China and India dominate the demand side of global gold consumption.
Gold buying from these two countries is three times greater than that of the other eight countries on this list combined. Moreover, these figures understate actual demand in China and India. Both countries suppress consumer demand by imposing import restrictions, retail sales quotas, and price premiums, and both governments are under pressure to loosen these measures.
Just as Americans can dissent against their government's policies by exchanging dollars for gold, Chinese can do the same by exchanging yuan for gold. And the Chinese are doing just that, in huge quantities. They’ve seen their stock market, real estate, and retail sectors crater while massive government debt burdens rise, the workforce shrinks, and deflation lurks. As a result, Chinese consumers are fleeing Chinese asset classes for the safety and wealth accumulation of gold. And as goes Chinese gold demand, so goes gold prices around the globe. As mining production and demand in China rise, so do global gold prices.
So supply and demand forces are creating an unprecedented opportunity for American gold buyers to have their cake and eat it too—to add gold to their portfolios both as wealth insurance and for wealth appreciation.
