"PERFECT GOLDEN STORM" » Limited supply of gold

Limited supply of gold

If all the gold mined over the last 6,000 years were gathered and melted down, it would form a cube with sides of no more than 20 yards.

We have talked about four interrelated factors that increase demand for gold: global instability, the decline of the US dollar, the interest-rate bind, and the investment climate. All the demand in the world, though, would not significantly raise the price of gold if the supply of gold could be quickly and inexpensively increased to meet the demand.

The opposite, however, is the case. As the illustration shows, the entire world supply of mined and refined gold is quite small, and it takes years to ramp up the supply of gold from below ground to meet increased demand.

The investment aphorism, “Bear markets beget bull markets,” is especially apropos of gold. During the 18-year bear market in gold from 1982 through 2000, mining companies had little incentive to explore for gold. In fact, they choose not to develop most existing properties because the cost of producing an ounce of gold would have been too high relative to the depressed price of gold.

The mining companies instead relied on their lowest-cost projects. As a result, the easiest gold to mine and refine was depleted. The companies expanded by merger and acquisition rather than exploration. Merger and acquisition, of course, added nothing to the world gold supply. In fact, it tended to reduce the supply when merged companies concentrated their attention on their most profitable mines.

During this bear market, central banks, believing that they were storing an asset that might continue to decline in value, sold hundreds of tons of gold. They now have less to sell. In an effort by banks to regulate the market, The Central Bank Gold Agreement (The Washington Agreement), signed in September 1999, limited its signatories to selling no more than 400 tons of gold per year over the five years ending Sept. 2004. Renewal of the agreement is expected, but is less of an issue because now the banks, concerned about the risk of holding dollars, have less reason to sell, and may even become buyers. On January 28, 2004, for example, Japanese finance minister Sadakazu Tanigaki said Japan would have to “carefully consider” diversifying its central bank’s reserves into gold.

Once gold in sufficient concentration to mine profitably is discovered, it takes an average of seven years to begin sustained commercial production. In addition to the time required for geological studies and planning and building infrastructure, a new mine must go through the permitting process. Mining gold has significant physical and chemical effects on the environment and is therefore subject to intense governmental regulation in every gold-producing country. return to my place in “Perfect Golden Storm”

Even rarer than gold bullion — and absolutely no way to increase supply
From 1796 through 1933, the United States government minted gold coins for circulation. Certified US rare gold coins are in demand by collectors and investors. But, no matter how much demand grows, the supply cannot increase by even one coin. The US Mint simply does not make them anymore.

The same factors that drive investors to buy gold — the factors described in this article— also drive investors to buy tangible assets such as certified US rare gold coins. Historically, when there is a bull market for gold, there is a bull market for rare gold coins. History also reveals that the price of certified US rare gold coins tends to rise faster than the price of gold bullion. The most vivid example: when the CU 3000 Mint State Gold Coin Index hit its all-time high of 265,654 in May 1989 it had increased 680% from the start of the rare coin bull market in June 1982. In roughly the same period, gold peaked at $415.50 in December 1989, an increase of 40% from its June 1982 low of $296.75. In March 2004 the CU 3000 Mint State Gold Index was in the 79,000s, a nice increase from 71,000 at the beginning of the current bull market in January 2002 — but still 71% below its all-time high.

The June 1982-December 1989 rare coin market rally lasted 7.5 years. Other such rallies have lasted from four to five years. The steepest price increases have come near the end of the rallies, when coins were featured in the media and were the buzz in the financial world. Of course the investors that profited most were those who got in early.

The data suggests we are still in the early stage of the current bull market. Participants in major coin conventions during the first quarter of 2004 describe the demand by dealers and collectors/investors for high-quality, investment-grade rare coins as “unbelievable.” Active trading and price movement on the floor of coin shows and at the auctions conducted during the conventions reveals the explosive potential of today’s rare coin market. The current rallies in the gold, silver, and platinum bullion markets have moved investors to look at rare US coins. As small as the gold bullion market is, the rare coin market is tiny by comparison. If only1% of new bullion investors were to purchase certified rare US gold and silver coins that market would be well on the way to surpassing its all-time high. From the current 79,000 level of the CU 3000 Mint State Gold Coin Index to the previous high of 265,000 would be a 235% increase. Given all the factors described in this article, this bull market is likely to be on the long and strong side. I expect it to continue for another three or four years and to reach well beyond its previous all-time high.

Best Way to Own Gold describes modern bullion coins as well as highly affordable certified US rare gold coins and rarities of greater value. Some of these gold rarities are the finest known specimen of a particular issue or one of only 50 known to exist in a high grade. Owning bullion gold coins is likely to be highly profitable over the next 3-5 years. Letting rarity work for the investor is likely to provide even greater — substantially greater — gain than owning the more plentiful bullion gold coins.

Bottom line: Gold is an extremely rare element, requiring extensive investment of time, energy, and money to find, mine, and refine. It will therefore take many years to significantly increase the world supply of gold. For all the reasons described above, we are in a gold bull market. As a result of limited supply, increased demand for gold will lead to a continued increase in the price of gold bullion and gold investment products for several more years. Investors who understand these dynamics can not only protect themselves by buying gold, but can also put themselves in position to make extraordinary profits.

Here's how you can buy gold now

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