Gold Supply In 2016: What Can Investors Expect?

“Sell me this pen.” Fans of Martin Scorsese’s The Wolf of Wall Street will remember the basic lesson in supply and demand: If you tell someone to write something down, and they don’t have the supply of pens to write anything down, prices go up.

Supply and demand is a basic, economic law that any investor needs to understand. And though supply and demand aren’t the only factors that determine the price of a good, the simple fact remains that if you understand supply and demand, and you understand where prices may be headed.

It’s No Different For Gold.

The more investors clamor for gold, and the less gold there is out there, the more we can expect the yellow metal to continue its bull market in 2016 and, potentially, even flirt with new highs. But is the supply and demand status of gold really primed for that kind of run? Let’s take a closer look.

Gold Supply: The Basics

Why does an ounce of gold cost over one-thousand dollars? One factor is supply is, ultimately, scarce. According to the World Gold Council, at the end of 2015, there is only enough gold above ground to make a pure 21-meter cube.

Gold’s positive steps in 2016 come after some sluggish figures, with gold supply steadily expanding over the past several years. 2015 was even a record year for gold supply. But the prospects for 2016 to repeat that trend appear to be dwindling, especially as demand far outpaces the new gold supply. Vitaly Nesis, CEO of Polymetal, said, in January of this year, that he thinks gold supply will actually drop 15-20 percent over the next three to four years. Kevin Dushnisky, President of Barrick Gold, a prominent gold mining company, said: “Falling grades and production levels, a lack of new discoveries, and extended project development timelines are bullish for the medium- and long-term gold price outlook.”

Where Is Gold Supply Headed From Here?

Remember that supply and demand don’t exist in separate vacuums. As demand goes up, so will the profit motive to generate more gold supply. In late April, we saw gold mining hedging jump sharply as investors looked to lock in the current price of gold. With Barrick Gold’s output in the first quarter of this year dropping from the same period last year, it appears as though many investors see that the supply of gold will not move sharply up in the immediate future.

For gold investors, this can be very good news. If places like Barrick Gold have trouble seeing global supply remaining high, and gold looks situated for a bear market, then increased demand can only drive the price of gold higher - especially if global banks pursue negative interest-rate policies that make gold a better option for wealth storage than savings.