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Economics 101 Says Gold Prices Are Going Higher

By Michael Lombardi | Small Business

Even amateur economists will agree with me on this: when supply declines and demand remains the same, prices increase. Well, it wasn’t too long ago when I said that if gold bullion prices remain suppressed for long, we will see the supply decline. This phenomenon has started to happen.

According to the U.S. Geological Survey (USGS), in June of 2013, the total production of gold bullion from mines in the U.S. was 19,400 kilograms (kg)—about four percent lower than the same period a year ago. (Source: U.S. Geological Survey, Mineral Industry Survey, September 2012 and October 2013.)

The table below compares U.S. mine production in the first six months of 2012 to the first six months of 2013.

Month U.S. Mine Production in 2012 (kg) U.S. Mine Production in 2013 (kg) % Difference January 19,400 18,500 -4.64% February 18,100 17,200 -4.97% March 19,000 18,700 -1.58% April 17,600 17,900 1.70% May 18,700 18,800 0.53% June 20,200 19,400 -3.96% Total 113,000 110,500 -2.21%

But as the supply of gold bullion falls, we see consumer demand for gold bullion increase.

In India (the biggest consumer of the precious metal), demand continues to rise in spite of the efforts of the Indian government and the Indian central bank to curb demand for the yellow metal. The director of the All India Gem and Jewellery Trade Federation, Bachraj Bamalwa, recently noted, “Demand is picking up and supplies have dried up.” (Source: “Gold premiums near record levels on lack of supply,” Reuters, October 22, 2013.)

In China (the second-biggest gold bullion consumer), we are seeing something very similar. According to the Hong Kong Census and Statistics Department, in August, 110.5 metric tons (Mt) of gold bullion was imported from Hong Kong into China. It marked the fourth straight month that imports of the precious metal exceeded 100 Mt. (Source: Reuters, October 8, 2013.) Why is this so important to even mention? China keeps the country’s gold bullion production for internal use; importing from Hong Kong shows how much more is needed to fulfill the demand.

Other than the consumer demand for the precious metal, we are still seeing buying for gold bullion from central banks, especially in Russia and Turkey.

After hitting a bottom in June, gold bullion prices haven’t declined to that level again. In fact, they have been trending higher since. This trend can continue, but you have to keep in mind that we are in a market where irrationality prevails. Time will draw a better picture, but as it stands, I see many opportunities in the mining sector.

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