(This post previously appeared at the author’s site)
Brace yourself for the impending gold shortage. Gold shortage? Yup. With the launch of a flurry of dedicated gold ETF’s last year, total ETF holdings of the barbaric relic, now exceed total world production. South Africa suffered its steepest decline in gold production since 1901, falling 14%, to a mere 232tons. It now ranks only third in global production of the yellow metal, after China and the US. Severe electricity rationing, a shortage of skilled workers,and more stringent mine safety regulations have been blamed.
Choked off credit has frozen the development of new capital intensive deep mines, and existing mines are easily flooding. Rising production costs have driven the global breakeven cost of new gold production up to $500 an ounce. It takes a lot of labour,fuel, and heavy machinery to rip 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 flight to safety demand for gold bars and coins to all time highs.
Last year, the US Treasury ran out of blanks for one ounce $50 American Gold Eagle coins, now worth about $1,160. Competitive devaluations by almost every central bank, except Japan, 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 blipin the long term bull market. Now that we are solidly over $1,000, and recently kissed $1,225, the match could hit the fuel dump at any time. Just let thiscurrent risk reversal burn out before you load the boat
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