Gold could surge in 2016 as potential supply crunch unfolds

Gold production likely has peaked and the stars have now aligned for a potential gold supply crunch in the near future, according to the metal experts at Thomson Reuters GFMS.

Falling prices since the record peak in 2011 have slammed the mining industry, forcing companies to cut costs by curtailing new exploration, halting production, and abandoning costly projects. With the average cost to mine a single ounce of gold estimated to run between $1,000 and $1,200, the current price near $1,100 has made mining a losing proposition for many firms.

And now the chickens are coming home to roost, with the industrys multi-year streak of annual supply increases apparently coming to an end in 2016. Global production of gold is expected to fall 3% this year, ending a seven-year period of rising output, Londons Financial Times reported. GFMS expects gold mine production in 2015 to have risen 1% to a record 3,155 tonnes.

I always put my faith in a recovery driven by reduction in supply and I believe we will see the first signs of impending recovery in the second half of this year, Polymetal CEO Vitaly Nesis told the FT. The fourth quarter last year was in my opinion the peak quarter for fresh global mine supply. ... I think supply will drop by 15% to 20% over the next three to four years.

We were all talking about how production was going to increase every year. I think those days are probably gone, Gold Fields chief Nick Holland added. You are not going to see massive production increases in the industry.

So with less of it around, and more demand for it, gold could surgein 2016, the normally gold-bearish Business Insider was forced to admit in conveying the GFMS findings as well as a new bullish forecast from UBS.

The new GFMS forecast is in lines with other recent predictions that the worlds gold supplies are headed for a decline. In December of last year, the World Gold Council noted that mine production has begun to level off. And Goldcorp predicted a 2015 production peak during a November 2014 presentation at a Goldman Sachs conference, while Goldman analyst Eugene King concluded that there are only 20 years of known mineable reserves of gold and diamonds.

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