About a month ago, I wrote an editorial on why gold was going to be in a perpetual bull market. The editorial noted that gold production was down while jewelry demand was up, and concluded that this meant that gold’s price would increasingly go up. While I am still extremely bullish on gold over the next few decades, I’m going to need to clarify a few claims and predictions.
I’m man enough to admit when I’m wrong, and my entire implication in the last article was off. I recently was browsing over the Mises Institute’s website, and stumbled across a collection of articles dealing with gold mining and how it impacts the price of gold.
I’ll be discussing some of the points they listed, as well as making a few additional points regarding why I believe gold mining and new gold has a very small impact on the gold market.
1. New Gold is Small. New gold from gold mines makes up less than 1% of gold that exists. Considering gold is bought and sold on a global market, with spot prices pretty much the same around the world, this means that the impact of gold that is recently mined is negligible. Not non-existent, of course – but negligible.
2. Old Gold is Recycled. Don’t forget about old gold. Scrap gold is all the rage these days, with old jewelry, coins, and industrial gold being sent back to the refiners to be melted down and resold to gold dealers and gold jewelry companies.
3. More Gold Exists. There’s always going to be more gold. Some gold might be in spots that are extremely expensive to purchase, but it’ll still exist. For example, if gold costs $2,000 to mine an ounce in an extremely difficult location, then gold will need to be above $2,000 an ounce before miners will mine it. That might not be now, but it could be in the future.
4. Gold is Still Going Up. This isn’t all to say I think gold isn’t going up. Far from that, I believe that inflation, hyperinflation, the recession, and the potential for economic collapse will have investors scrambling to put more gold on their portfolios over the next few decades than ever before in history. Plus, the world population is increasing, which means commodities like gold, silver, and agriculture are almost always a safe bet.