Why Gold Is Rising

Source: Thinkstock

Source: Thinkstock

The price of gold has risen this year by about 5.5 percent, which is more than the S&P 500 and the Dow Jones Industrial Average. After spiking at the beginning of the year from $1,200/ounce to nearly $1,400/ounce, gold corrected to under $1,250/ounce where it was met with buying. Now the yellow metal appears to be on the rise again.

I expect it to continue to do so, as there are several catalysts driving the price.

First, there is interest from central banks, who have been net buyers of gold since 2010. In particular we have been seeing interest from Russia, which sold Treasury Bonds in April in order to accumulate 30 tonnes of gold, or more than 1 percent of annual mine supply. We have also been seeing interest from Turkey, Kazakhstan, and South Korea. It is widely believed that the People’s Bank of China has been buying a tremendous amount of gold, and this belief is backed up by the incredible amount of buying that we have seen in China over the past two years or so. However, there is no formal statement from the PBoC that this is the case, and so this claim is speculative, at best.

Second, we should expect to see a decline in gold supply over the next couple of years. Lower prices plus higher production costs have made it very difficult for many mining companies to find funding for their projects. This has impacted some very large projects from Seabridge Gold’s (NYSE:SA) KSM project to Chesapeake Gold’s (OTCMKTS:CHPGF) Metates project, each of which would add nearly a million ounces of gold to the world supply per year.