As I write this morning, gold prices have yet again set new records, breaking $2,500/oz. During this extraordinary 10-month rally that began at $1,820/oz., most analysts have focused on the forces that have driven rising gold demand over this period. And rightly so; these forces are having a dramatic impact on the gold market:
- Private Chinese safe-haven demand as China’s economy continues to deteriorate
- Widening warfare in Europe and the Middle East
- Prospects for war with China
- Rising tensions in Eastern Europe and with North Korea
- Unstable politics in the United States
- Central bank gold buying
In the face of all this uncertainty, many individuals the world over have sought to diversify their portfolios by adding the wealth insurance of physical gold.
They’ve done this by tapping into gold’s wealth-building potential as demonstrated by gold’s annual appreciation rate of 43% since this rally began.
Two variables determine prices in a market: demand and supply. And the role of supply gets too little attention when analysts talk about gold’s current rally and its future prospects.
I’m going to focus on the supply side of the equation here because the supply issue is very important to understanding why the current rally is likely to continue for the foreseeable future, with the usual ebb and flow of prices that characterize all markets.
The following graphic tells an important and powerful story about gold supply.
We can take several crucial facts away from this graph:
- The price of gold almost doubled between 2016 and 2023.
- Despite the strong economic incentive higher prices gave to gold miners over these seven years, mine production between 2016 and 2023 didn’t budge.
- In fact, despite gold’s rapidly rising prices after 2018, we’ve seen a slow erosion of gold mine production.
This chart illustrates a point I emphasize: Prices are likely to rise in the future because gold is getting harder to find and more expensive to mine.
Most of the “easy gold”—that is, gold near the surface, mined close to the infrastructure and labor required, in nations that are economically and politically stable and friendly to the United States—is already out of the ground. And most of the gold produced today comes from mines that fail to check several, or any, of those boxes. As a result, miners bear greater costs and risks in their business, and those higher costs and risks must be passed on to buyers through higher prices.
The rising cost of newly mined gold pushes up gold prices across the board.
When this newly mined, higher-priced gold hits the market, prices for gold already in the market—like the gold you bought or could have bought 10 months ago at $1,820/oz.—are the same as the prices of the newly mined gold. And thus, you could make $670 or so on each ounce of gold you bought 10 months ago.
This relationship between price and mine production is unlikely to change anytime soon. When the numbers for 2024 come out, I expect to see an average price north of $2,300/oz. for this year. That means this graph will show prices skyrocketing from 2023’s average price of about $1,950/oz. In the meantime, gold mine production is unlikely to change much.
Mine production is the primary source of supply to the market. Scrap gold—from recycled industrial applications, consumer electronics, and jewelry—adds another share, as does gold sold back into the market, gold that had been held by institutional investors and individuals. But the trend in gold mine production tells a supply-side story that reinforces the demand-side story for why gold is likely to shine for a long time to come.
In my next piece, I’ll look at how rising prices have affected major demand-side segments of the gold market and why we can expect demand to rise despite rapidly rising prices.
