The price of gold has been hard hit in the last two weeks. But consider the big picture...
IN TODAY'S WORLD, deluged as it is with cheap credit, it is comforting to know that some things are still scarce, like common sense, good tastes, and gold.
"A string of stalled gold projects, including the troubled revival of Victoria’s Bendigo and Ballarat fields, has resulted in Australia losing its ranking as the world’s second-largest gold producer," reports Tuesday's Courier Mail from Queensland.
Australian gold mines cranked out just 249 million tones of gold last year, falling behind Team America, which produced 252 million tones. It was the worst production performance in 13 years according to Surbiton Associates here in Melbourne, and was a fiver percent decline from 2005’s production figures.
There is an...er...silver lining in this nugget. Mother nature, unlike the US Federal Reserve, is not in possession of a thing called a printing press. You can’t just print up gold on demand the way you can US Dollars.
This is gold’s great virtue as a store of value. It is hard to find. It is expensive to mine. Its supply cannot be increased willy-nilly by politicians who have wars to pay for and electorates to bribe.
This is why modern politicians hate gold (those who understand it, that is.) It holds them fiscally accountable.
It is also worth nothing that increased capital investment in the mining sector does not automatically lead to greater production of a given resource. The gold is where it is, not where you want it to be – nor when you want it to be there.
Going forward, look for the gold companies with proven reserves in the ground to begin commanding higher premiums in the stock market. The cost of production is rising for mining firms everywhere. But there will always be a lowest-cost producer or a big firm with deep pockets that can find ways to produce gold cost-effectively – provided it knows where the gold is.
That makes small, non-producing gold companies more desirable than current producers (at least, that's how we see it this morning). If you believe the price of gold will double or triple from here, gold kept underground for the meantime is worth more than it would be dug up and sold onto today's spot market.
Proven reserves are essentially a call option on higher gold prices, a call option with no time decay or expiration.