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Is gold set to spike?

It is wise to be wary anytime someone talks about the ‘fundamentals’ of gold. Unlike companies where fundamentals refer to factors like how much revenue or debt the company has or the value of its assets, gold doesn’t have any of these factors. This makes determining future prices difficult.

However, moves by gold miners throughout Australia and the world to shelve expansion plans and cut back production in response to the falling gold price could help to seed conditions which limit supply and drive up price.

For example, Australia’s largest listed gold miner, Newcrest Mining (ASX: NCM), announced in its full year presentation that the company is planning to slash spending on exploration by 45% and project development by up to 80%.

Smaller miners such as Silver Lake Resources (ASX: SLR) and Anglogold Ashanti (ASX: AGG) have similarly cut costs to reduce overheads and put some growth plans on hold. This pattern has been repeated globally from West Africa to Canada as the shock of the price drop plays out.

All this reduction in capacity is going to affect world gold output, and according to the World Gold Council’s second quarter Gold Demand Trends report, “[the] recent spending cuts and the closure of costly operations across the industry may start to have an impact on the supply pipeline by the end of this year.”

Added to this, as Newcrest points out, is the fact that new gold discoveries have been falling sharply over the last seven years while demand, particularly out of China and India, is still rocketing. Demand for jewellery out of China and India was up over 50% year on year for the second quarter according to the World Gold Council.

Combining the two elements of lower future production and rising demand for gold (albeit at a reduced price), the picture starts to form that the price could start to be pushed up again in the not too distant future.

Foolish takeaway

If gold is about to spike it may be just the news gold miners have been waiting for to make up for what has been so far a very disappointing year and may flow through to the benefit of investors.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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