Despite the widespread assertion that gold is becoming scarcer, the metal actually is oversupplied, according to Kitco Metals senior analyst Jon Nadler, who provided a contrarian counterpoint to the decidedly bullish precious metals mood at the Hard Assets Investment Conference this week.
Total gold supply (including scrap) rose for the fourth consecutive year in 2010 to 3,763 metric tons, yet another record, Nadler said, adding that mine production is expected to rise another 4.6% this year.
Average cash production costs for the industry were about $550/oz. last year, yielding hefty margins for most producers and encouraging ever more mining and exploration. Speakers and exhibitors represented at the conference seemed to bear this out, being overwhelmingly weighted toward gold and, to a lesser extent, silver.
Meanwhile, total annual demand for gold is falling, Nadler warned. Jewelry demand, for example, declined in 2010 to 1,888 tonnes. The gold market remains in a 1,250-1,700-tonne surplus, and the metal has not offered shelter from the recent market correction, he added.
Net additions to gold ETFs are down year to date in 2011 after having risen steadily since at least 2003, while gold purchases by central banks slowed last year, with some becoming sellers, he said.
Nadler has previously written that central bank policies regarding gold are difficult to divine and full of inconsistencies. The only thing consistent about central bank policy is inconsistency, Nadler said during his conference presentation, but he also indicated that the possibility of increased gold sales is looming.
"Countries such as Portugal, Greece and Spain have large percentages of gold in their reserves," Nadler said, suggesting that such countries may need to sell gold to alleviate their sovereign debt problems. In Portugal, for example, gold represents approximately 88% of the nation's reserves, and probably higher in the wake of recent price spikes, he said.
"The gold price ... was a legacy of QE2 (the second round of quantitative easing by the US government)," Nadler said, but added that this is drawing to a close. He suggested that the recent silver selloff may indicate what's in store for gold.
Silver is in a similar position, Nadler said. The metal is in ever greater supply but demand is "so-so." In fact, silver fabrication demand declined 9% in 2009 before rebounding somewhat in 2010 to about 19,500 tonnes. Total silver supply is expected to expand by 3-4% this year, and the market is oversupplied by 5,000-7,000 tonnes, he added.
As with gold, cash costs to produce silver (around $5/lb, according to Nadler) remain far below selling prices, even after last week's major selloff.
"Granted, selling prices have doubled in the past five years, but think of the margins for producers even at $25/oz. silver." Nadler said.
ETFs and hedge funds have been as active in silver as in gold, Nadler said, adding: "You saw the market action they can engender in just five days last week." Nadler said in conclusion that, while silver performed better than gold in the period 1991-2009, it now carries about twice the risk of gold.
Chris Munford researches and writes about commodities, with an emphasis on metals and energy. He is based in the New York area and is a new contributor to ResourceInvestor.com.