"F" is for "Fundamentals"
Golden Gut Check
Why gold is likely to keep moving higher over the long run
"Gentlemen, this is a football."
Coach Vince Lombardi at the start of Green Bay Packer football camp
Occasionally I like to take a close look at gold's fundamentals -- a gut check of sorts. It helps me get a deeper sense of what is driving the market. It also helps me reorganize my thinking around sound principles. Vince Lombardi, the legendary coach of the Green Bay Packers, always stressed knowing and understanding the fundamentals as the key to success on the football field. Likewise, learning the fundamentals is key to knowing and understanding gold. By doing so, you will become a more confident, better informed and successful gold owner.
From scarcity to shortages, the past is prologue
I cannot remember a time when the fundamentals have lined up more favorably for gold. The factors which have driven the price up over 75% over the past few years remain in place and in fact seem to be intensifying. The past, in this respect, could very well serve as prologue. Great forces, mostly benevolent, are at work in the gold market. Demand, as reported copiously by the mainstream financial press, continues to grow steadily on a global basis. It is on the supply side of the equation, however, where we now find the strongest arguments for resumption of the bull market. To come to the point, fundamental trends suggest that the gold market may be moving from a period of general scarcity to outright shortages. Unless some formidable source for gold is suddenly found, the period of shortages could come to full flower as early as 2008.
Though benevolent forces seem to be guiding the gold market at the moment, there is, at the same time, a darker side to the emerging gold story. A shortage raises the possibility that investors who have yet to purchase gold (or plan to purchase more) might be crowded out of the market by major financial institutions and mining firms intent on squaring their physical short positions.
The threat of a gold shortage should not be taken lightly. Recent reports of a rice shortage in Asia are a case in point. Nation states immediately began hoarding rice and governments put incentives in place to encourage production. The possibility for shortages applies to a range of key commodities, not just gold. Along these lines Goldman Sachs recently predicted explosive rallies in commodities led by crude oil rising to $175 per barrel. Shortages, hoarding, rapid price increases, breakdowns in international trade, a collapsing social order and the increased purchasing power of gold -- all typically accompany periods of currency debasement.
The mining companies face reduced production. . .
In 2005, the world's mines produced 2,550 tonnes of gold. In 2007, production had declined to 2,447 tonnes. Production, in fact, has been in steady decline for a number of years. Newmont Mining's Pierre Lassonde, who is generally considered one of the more savvy mining executives, explains why the mines have failed to increase production even with prices at record levels: "When is the last time we had a 30 million ounce discovery in the world? It's not in this decade, I can tell you that (and) it's not over the last 10 years. It's a long time ago. Look at exploration expenditures * they are going up, but we are not getting the discoveries. And not only are we not finding them, but the ones we do find, they take forever to put into production." Lassonde goes on to say that in his view "it's not going to get any better * at least for the next five years, and possibly for as long as the next 10 years."