I am often asked – why do I invest in gold and gold stocks? There are many reasons why gold prices are increasing and will continue to increase, but the simplest answer is the basic principles of supply and demand. In the early 80s, Cabbage Patch dolls were selling 100 times retail price due to lack of supply. This priced many people out of the market and angered parents around Christmas time. I don’t believe the company intended to drive prices up with a limited supply strategy – especially since it didn’t benefit from the higher prices as a secondary market evolved. Thus, to profit from the demand the company had to increase production. I believe that a similar scenario is evolving in the gold patch.
From 1980-2001, there was very little interest in Gold as it fell to a low of $255/oz. Mining companies were not able to attract investment capital to bring new mines and projects to fruition, thus gold supplies diminished. During this same time period, India and China were beginning to see the fruits of their industrialization efforts. As the countries industrialized, their citizens benefited and began moving from the poor to middle class.
There are literally billions of people in India and China. Each has cultures that encourage savings and have a strong affinity to gold. As more move to the middle class and transfer a part of their savings to gold, the investment demand will be tremendous. This will be exciting for gold investor; however, that will only be a fraction of the demand. The central banks of Russia, Argentina and South Africa have all announced that they will be increasing their gold reserves with rumors of China and perhaps all of Asia to follow.
The gold mining companies do not have the luxury of the Cabbage Patch doll company which was able to quickly ramp up production. It takes 5-10 years to bring a new gold mine into production. This will leave the industry in supply deficit for many years to come. Investment demand alone should be enough to get you excited about investing in gold. However, there are many more reasons. The Aden Sisters captured it extremely well in their latest commentary.
The investment demand from individuals as well as governments will put a tremendous demand on an industry that is already in supply deficit. As with any investment, its price will not go straight to the
moon, but will ebb and flow. However, until supply and demand are in balance prices will continue to increase. An investor with a systematic approach as described in my previous article, “Dollar Cost Averaging Your Way to Double Digit Returns,” will be extremely pleased.