Don’t be put off by last weeks sell off in gold as it was not physical gold that was sold but paper gold.  No one sold their sovereigns, eagles ,napoleons, kuggerands.  Nor did the Chinese, Indian or Russians sell gold from their national vaults. Do not think we are about to experience a reversal in value of gold.  World output of gold has declined by 1 million ounces annually since 2001.

All indications are that we should expect an impending gold shortage. Total ETF holdings of the yellow metal now exceed total world production. South Africa suffered its steepest decline in gold production since 1901, falling 14%, to a mere 232 tons. It now ranks only third in global production of the yellow metal, after China and the US.

Here’s a chart that goes back over 30 years. It’s clear that gold output from South Africa is steadily falling and the rest of the world has not yet taken up the slack.
South African mines are, overall, getting so deep, hot and dangerous that they are on the edge of a major rapid decline in gold output. Rising production costs have driven the global breakeven cost of new gold production up to $500 an ounce. It takes a lot of labor, fuel, and heavy machinery to get gold out of the ground, and none of these are getting any cheaper.

Political risks are heating up. In the meantime, the financial crisis has driven a surge to the safety  of physical gold pushing demand for gold bars and coins to all time highs. The big gold players China, India and Russia are building their reserves so that they can meet international commitments with gold as they are carefully moving away from the waning USD, the fallback international currency.

Last year, the US Treasury ran out of blanks for one ounce $50 American Gold Eagle coins and major mints in Europe reported dramatic increases in production in the latter half of 2009. This shows that American citizens are waking up to the need to own some gold and when they are fully awake it will drive a  huge increase in demand. Some  European countries and notably the French, are fully aware of the power of gold and in particular gold coins, that hedged currency devaluations and political turmoil throughout  the 20th century. Consequently they continue to put their faith in gold to hedge financial instability in the 21st.  Competitive devaluations by most central banks mean that currencies are not performing as the hedge that many had hoped. It all has the makings of serious gold shortage for the future. The current downturn has to be just a blip in the long term bull market.

Now is the time to carefully watch the spot price as it is possible that gold may fall as low as $1030  and that will be time to buy, as it is predicted that we could be seeing $1500 the fourth quarter as demand increases.

Tags: crisis, DOLLAR, Gold, Gold coins, sovereign

This entry was posted on Friday, February 12th, 2010 at 2:11 pm and is filed under Economy, France, Gold, Gold coins, Great Britain, Investment, Money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.