Like any gold bug, I have my own lunatic predictions of $5,000 per ounce gold in the foreseeable future. However, unlike most I don't ascribe it to plots by the Illuminati or the death of fiat currency or even a worldwide financial meltdown. Rather, I see it as a matter of supply and demand.
Take last year for example. Demand picked up in the 4th Qtr. of last year to a 10 year high (Source: World Gold Council) driven by central bank buying, while supply diminished by 4% to a seven year low, the first such reduction since 2008. Not exactly a trend, it nevertheless underscores what some mining executives have said in recent years about peak gold. According to them, we've already reached it.
The classic Hubbert's Peak scenario is a singular event which ushers in an era of production decline. Gold, unlike oil, is not consumed, or at least not totally. However, it is not immune to the classic "peak" phenomenon of extraction rates dropping off a cliff.
What no one seems to talk about however is the controversy over mineral extraction methods. Miners will have to retool their operations in the coming years, to square with evolving environmental regulations, and that is expensive. I think heap leach mining is really in trouble. The most cost effective method of gold recovery, this technology has been a godsend to producers over the past 20 years because it renders previously uneconomic, low-grade bulk deposits profitable. Its days may be numbered. The environmental problems of aging mines are beginning to surface, and the public is increasingly aware of them. Nobody wants to live next door.
This has driven exploration farther afield where environmental damage is even more acute, and permitting more difficult to obtain.
Adding the fact that miners are in a difficult and costly operating environment leads to one inescapable conclusion: Physical gold pricing is set for a big move, even if the share prices of producers don't follow suit. They may even decline, or remain static. Metals manufacturing in general will become more expensive, and recycling will be huge. I'd be inclined toward scrap dealers rather than producers -- if I were investing, which I'm not. I'm buying physical gold and particularly silver, mostly because it's cheap at just under $18 per ounce and the upside is cleared all the way to triple digits.
Hover over the charts below to see how much further gold and silver have to run.
Buy with a strategy
Most investors see gold or silver going up and run out and buy it. When the price drops, which it invariably does, they sit tight. This is wrong. Never risk a sizeable amount of capital in any one buy. The best approach is a long term one: Buy monthly, over time, and average out your dollar cost. It's more expensive, certainly. But in 10 years you won't care; you'll merely be glad you did it.
Not all vendors are the same
As gold buying increases, so too does the price of acquiring, handling and shipping it. The classic bull market scenario. In recent years we've seen a rash of new online precious metals vendors. Not all are reputable, and even those who are tend to gouge during peak pricing periods. Price is actually your least concern. Where you get killed is on shipping & handling and/or credit card charges and minimum purchases and storage. I've seen shipping costs range from $9.97 to over $140. Read the fine print on those contracts. Vendors who offer deep discounts usually make it up elsewhere.
I've provided a list of reputable dealers here. Some dealers take personal cheques, others accept bitcoins for payment. Look around. Coins are good too. I'll be scouring the woods for attractive deals in the coming weeks and months and sending buy bulletins when bullion prices come into range. Kevin Barker