China moves to increase gold power — and world supply looks to dwindle – by Robin Bromby (InvestorIntel.com – April 20, 2016)

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Gold miners are, well, worth their weight in gold because they look likely to be beneficiaries of a seismic event and a trend. Both factors should ensure not only that demand for the metal stays strong, but the gold price remains robust.

The seismic event was China’s launching on Tuesday of a yuan-denominated gold benchmark. This is throwing down the gauntlet in two respects: one, to dislodge the US dollar as the sole currency in which gold is quoted, the first fix this week being 256.92 yuan a gram (equivalent to $1,234.50/oz); and, two, to wrest some power in the global gold market away from London and New York.

China is the world’s biggest gold producer, a vital importer of gold, and biggest consumer of the metal, but until now the gold price has been influenced by New York traders and the London fix (which was invented in 1919 by N.M. Rothschild & Son to bring some transparency to the pricing of the metal).

The trend is the fact that gold production is likely to begin falling. Capital Economics in London reports that mine supply is likely to tighten across all the precious metals. Analyst Simona Gambarini sees gold mine output slipping by 1% this year (and silver by 3%).

She points out a fact that is often overlooked: “The majority of the existing gold has already been mined and is now in the hands of investors and/or consumers. However, a fall in mining output will still tighten the market and most of all should positively affect sentiment towards the sector”.

This squeeze on gold supply has Capital Economics expecting a gold price this year of $1,400/oz (against Wednesday afternoon trading in Asia settling around $1,252/oz).

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