LAUNCESTON, Australia, July 21 (Reuters) – What does gold have in common with iron ore and coal? All three are travelling down the same road of structural oversupply, softer demand growth and severe cost-cutting by their producers.
While exciting for gold watchers, Monday’s mini flash crash, which sent the most-active U.S. gold futures contract to a five-year low of $1,088 an ounce in thin early Asian trade, is largely irrelevant, unless viewed against a wider backdrop.
The broad picture for gold is that since the spot price reached its peak of $1,920.30 an ounce in September 2011, demand has dropped as supply has risen.
More than anything else this simple dynamic explains why gold has now given up about half the gains of the decade long rally between 2001 and 2011.
Figures from Thomson Reuters GFMS show that in 2011 there was an overall deficit of 154.1 tonnes in the gold market, which fell to a deficit of 77.9 tonnes in 2012, then rose to a surplus of 248.7 tonnes in 2013 and 358.1 tonnes last year.
While not entirely to blame for the rising surplus in the market, mine supply has been on an upward trend, from 2,845.9 tonnes in 2011 to 3,129.4 tonnes last year, according to GFMS data.
Mine supply is now projected to start declining, to 3,124.7 tonnes this year, 3,057 tonnes in 2016 and 2,970.3 in 2017.
This largely reflects the closure of higher-cost operations and the scaling back of exploration expenditure in response to low prices, which curtails new projects.
GFMS uses a robust methodology and has a strong track record, but like all forecasters, it has to assume other factors remain equal, and this is why forecasting is generally fraught with risk.
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