Gold’s long-term supply outlook remains constrained

London Gold a.m. fixing price fell 3.1% during the week as of March 15, the second worst week since the week of Dec. 16. This fall has been largely attributed to the worry that the Fed would not embark on further quantitative easing and the strength in the dollar against the euro (0.3%) and yen (+1.3%) this week. Analyst such as Dennis Gartman called the fear trade is over as global activity is getting better. Bond yield are surging and money is moving away from gold.

At the close of New York trading on Thursday, Comex April futures rebounded 1%, spurred by physical gold demand from India and the surge in sales in American Eagle gold coins to 23,500 ounces March-to-date, which exceeded February's sales, reported Bloomberg.

One piece of data particularly struck us this week. This relates to the South African January gold production volume, which fell a whopping 11.3%. South Africa Chamber of Mines expected this year's production to be 220 tonnes which is back to the level achieved in 1922. South Africa used to be the world's largest gold producer, producing 80% of the world's share back in 1970 or about 1,000 tonnes of gold per year, according to Goldseek. Now, because of maturing old mines, rising costs and mining safety problems due to deeper and deeper deposits needing to be mined, South Africa produces only about 15% of world's production. Declining South African production largely contributes to the supply constraint in gold.

In last week's PDAC conference, a mineral industry-renowned conference held annually since 1932, miners complained of rising costs and financing difficulty which means headwind in gold production. The Metals Economics Group (MEG) highlighted that both the size of new deposits and quality/grade are declining. The gestation period between discovery and first production has now extended to 14 years, according to JP Morgan.

Therefore, the long-term supply outlook will continue be constrained which is a key fundamental support factor for gold price.

About the Author
Ross Norman

Ross Norman is owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.

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