Market analysts would love know the future. The problem is—they can’t. So how can a prospective investor know what to expect in the coming years? I believe that investors should investigate proven market factors like supply and demand. In the gold market, several factors have surfaced that indicate shifts in the supply curve and demand curve for gold. Market forces of supply and demand can be trusted to accurately predict prices in a free enterprise system. Thus, decreases in gold supply, increases in gold demand, and the history of demand spikes all suggest that the price of the precious metal will rise in coming years.
How could gold supply decrease when gold mines operate around the clock? The answer lies in the decreasing available supply. China recently has bought up billions of dollars worth of gold from the west. One estimate states that China has increased its gold holdings by more than 1,600 metric tons in the past five years, a change worth more than 77 billion dollars . Instead of allowing gold price to rise, gold ETFs (commercial commodity hoards, often comprised of natural resources, which trade ownership similarly to corporate stocks) have exported heaps of gold to the Far East, to meet their demand. But since gold is a scarce good, the ETFs are depleting irreversibly . Thus, this supply shifter, the move from commercial ownership of gold to governmental ownership of gold, indicates that available supply is decreasing dramatically, and when supply decreases, price rises (Figure 1).
|Figure 1. Supply Decrease Curve |