Will we have enough gold to meet demand in the near future? In 2001, gold dropped well below $300. As a result, exploration budgets plummeted in 2002. The results of that decline are being felt now -- according to GFMS Ltd., 2006 global demand for gold was pegged at 3,380 metric tons, while worldwide production fell 3% to 2,471 tons.
In 2006, the metal hit a high of $730 a troy oz. and, so, not surprisingly, 2007 exploration investment now tops $3 billion, according to the Metals Economic Group. Given the lag between exploration and production, this increase won't impact supplies for some time.
Also, as mines in stable countries play out, companies are forced toward exploration in higher-risk countries. This, along with climbing energy costs, has resulted in an increase in production cost for gold worldwide of $45 per ounce, according to GFMS Ltd. Consolidation of exploration companies has also had a dampening effect on gold exploration.
Industrial uses for gold continues to take a huge bite out of annual production. In 2006, jewelers consumed almost 2,300 metric tons, while other industries, including dentistry, chewed up another 450 tons.
Those investing might also remember the fiasco of 1980, when gold spiked to nearly $900. Jewelers saw their over the counter sales virtually stop, as the nation emptied its collective jewelry boxes to cash in on the boom. This dormant supply could again come onto the market if the price is right, which would serve to help make up any shortfall.
Another factor impacting gold prices is the attraction it holds for those in new economies, especially India. Look for high gold demand for wedding gifts and the mattresses of investors unfamiliar or mistrusting of other markets and banks.
So, are we running out of gold? The answer is no; we continue to produce enough for industrial use. However, the appetite for investment in gold will probably outstrip production for at least the next several years. If the Indian and Chinese economies keep humming, their demand for investment gold alone could keep the value strong.
My conclusion? Gold is volatile because so many factors go into its pricing, and investing in it is a high-risk play. If you have a gambler's mentality, go for it. If not, be content with your wedding ring and invest in more reliable markets.