Monday 5th June, 2006 AD

"PEAK GOLD"

Our 'Sector Selection' principles are straightforward; when demand exceeds supply, prices will rise. When demand is growing and supply is falling, then prices will continue to rise, sometimes dramatically. Investing in sectors where prices of the underlying commodity are rising, positions 
the investor for healthy returns in the long term. 

Regular readers are familiar with the term 'Peak Oil'. The theory simply claims that at some future time we will reach a point of peak oil, where global oil production will peak - at that point we will have discovered and recovered much of the readily available, easily extractable oil. According to the theory, from that stage on, oil will become more difficult and expensive to  recover, overtime leading to falling supply. While many debate the timing or even the inevitability of shrinking oil supply, no-one is debating our continually increasing global demand. 

For sometime now commodity and precious metal analysts have been looking at the supply/demand picture for gold and silver and arriving at interesting conclusions in what could easily be called a Peak Gold/Peak Silver scenario. 

Ross Norman, director of BullionDesk.com, sites eco-regulation and a lack of decent discoveries as the principle reasons for drastically shrinking new mine supply in recent years. Alarmingly, falling mine supply has now become a multi-year phenomenon DESPITE higher prices for the precious metals. 

For example, Gold output in South Africa, the world's biggest supplier, fell 10.9% in the first quarter of 2006. The country's production has reached its lowest level since 1923. Likewise, other large producing nations have shown leveling off or declining gold production in recent years. 

Globally it seams, production is on the decline, but what about demand? This weekend an article in London's Telegraph quoted a recent UBS report, "the world's big money brigade is snapping up gold bullion at eight times the rate originally thought." 

The article continues, "Oil states armed with an estimated current account surplus of $480bn in 2006 are thought to be feeding the "stealth demand" for bullion, led by Russia. President Vladimir Putin, has ordered the Russian central bank to raise the gold share of foreign reserves from 
5% to 10%.

Russia's reserves have surged to $237bn - the world's fourth biggest - after rising 61% in 2004 and 40% in 2005. With a current account surplus of 10% of GDP, it must sweep up a big chunk of global gold output just to stop its bullion share of reserves from falling.

In China, monetary committee member Yu Yongding last week issued the most explicit call to date for Beijing to diversify its $875bn reserves into gold. "We need to use some of the reserves to buy other assets such as gold and strategic resources such as oil," he said."

In summary, many claim that we are quickly reaching, or have already hit Peak Gold & Peak Silver. Current production figures seem to suggest that new mine supply is flat or declining despite higher prices (which would normally stimulate higher production). 

On the other hand demand is rising. Nations like China and Russia have deep pockets, sitting on huge amounts of US dollar reserves. In contrast, the Gold and Silver markets are so very, very small compared to the amount of paper dollars sloshing around in the treasuries of those 
exporting nations - it wouldn't take too many dollars to push demand to far higher levels.

Sincerely - Philip Judge pjudge@anglofareast.com