NEW YORK (
) -- Since 1999, global gold production has fallen 19% while
have jumped 400%.
Many analysts believe one of the contributing factors to prices' meteoric rise is the constriction of above ground gold stock. Above ground stock grows by 2,400 tons a year but as
shift from being net sellers of gold to net buyers and investor demand increases, gold supply tightens. If this trend continues, gold prices could see another spike up.
Now see how gold supply will keep dwindling as demand grows. SLIDESHOW>>
Gold production and world population growth mirror each other maintaining a tight relationship between supply and demand. Total above ground stock is 160,000 tons and it grows about 1.7% per year. This stays relatively equal to the world population which helps gold keep its purchasing power.
Global gold production has steadily increased since 1930 with the majority of production coming from South Africa. Starting in the late 1980's, many more countries started producing gold which increased above ground supply. However, beginning in 2000, gold production in all countries started to decline.
Gold production forecasts for all countries have been in a steep decline since 2000. The three largest gold producing countries according to this graph, South Africa, the U.S. and Australia saw production peak in 2000 while the fourth runner up, China, will see peak production between 2010 and 2011 but then decline.
Countries are trying to combat gold production decline. From 2003 through 2008, global exploration budgets have jumped from $2 billion to over $13 billion as countries seek out more mineral deposits. However, according to the
, the 2009 global exploration budget is expected to fall by 40%to $8.4 billion due to the recession.
Western gold discoveries peaked in the 1980's and 1990's when gold prices finished their first bull run. The majority of gold discoveries are made by junior miners who either partner with large cap miners or receive aggressive financing.
Jewelry demand is still the largest demand subsector of gold even though it peaked in 1997. In the past decade, gold became its own asset class as investor demand grew and prices spiked. Gold isn't just bought as a safe haven investment for
, but the commodity is now traded as a risk asset by large institutional investors like
, David Einhorn and
Many analysts expect this trend to continue and that this increase in investor demand will off-set the decrease in jewelry demand.
The U.S. has the largest gold reserves in the world. Germany, France, Italy, Switzerland and the U.K. trail the U.S. Reserves have leveled out since the 1970's.
This chart shows the Dow/Gold ratio. James Turk, author and founder of GoldMoney, believes that there is a one to one relationship between gold and the Dow which will push gold prices to $8,000 an ounce. After the boom in the 1920's, there was a bust in the 1930's during which time the Dow was at 34 and gold was at $35 creating this one to one relationship. After the boom of the 50s and the 60s, you had the bust in the 70s and in 1980. Gold was $800 and the Dow was 800, so again you had a 1 to 1 relationship. After the boom in the 1990's to 2001, Turk says "at the end of this bust that we're now going through, you will again see this one to one relationship between gold and the Dow."
Oil and Gold have had a similar production trajectory with both commodities peaking in the early 2000's. Analysts expect production to continue falling through 2200.
Watch my video with James Turk, author and founder of GoldMoney, who thinks gold will hit $8,000 but that gold production has nothing to do with prices. See what fundamentals he thinks are really driving gold.
Written by Alix Steel in New York