May turned in another poor monthly performance for gold bullion with losses of 4.5% – closing at around $1,250 an ounce. The gold market is now entering a price zone where a lot is at stake, and above all the market’s health and stability.
Before we go into more details concerning the specifics of the gold market, we should first consider the reasons that lead gold to lose almost all its gains of the year. Most analysts agree that the Ukraine crisis (a major factor that boosted prices almost 15%) is essentially over, since it is now almost impossible to imagine military conflict outside Ukraine borders. The worst that could happen is that Europe may face a mini energy crisis, although not even that seems to be happening as Europeans are basically reluctant to impose sanctions against Russia.
On the other hand, analysts are divided when it comes to assessing the strength and significance of US economic data and lack of inflation. This makes investors wary of investing in gold, perhaps expecting lower prices, although the opposing group of analysts support that this is just wishful thinking.
The dangers of a further fall in gold prices
There is no sign that indicates that gold will not lose more of its value. However, it’s important to point out that the yellow metal is trading at price levels that make it very hard for most small miners to stay in business.
Gold demand is subdivided into jewellery production, central bank reserve increases, industrial consumption (including dental), and investment (bullion bars and coins).
In theory, gold mining does not need to make up for gold demand because gold is a reusable resource. Currently, gold mining produces, each year, around 2% of the existing above-ground gold which is estimated at 158,000 tonnes. Mined gold production was 2,689 tonnes in 2010,2,660 tonnes in 2011, and 2,700 tonnes in 2012. In all these years, demand exceeded supply by around 1,000 tonnes, which was easily covered by official sales (typically gold by central banks), and scrap gold. But how long can this go on, if new gold production shrinks?
Last year the issue was put on the table as a large number of mining companies went out of business or were sold off to Chinese corporations. Signs of falling exploration for new sources became more evident, and catatonic demand made things even worse for the gold market. Most analysts waived the opportunity to take a stand on the matter, resting on the fact that there was an ongoing financial crisis, and lots of people would be forced to pawn their gold jewellery or sell off their gold bullion, even at lower prices than those of 2013. They also added that gold mining won’t cease, as large companies have much lower mining costs.
But is the market really able to function properly without an adequate supply of new gold every year? Can anyone convince us that an extra 2,700 tonnes can be bought yearly from the new-poor and the desperate of the world?
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