Is a Global Gold Supply Crunch Forming?Jeff Clark These warnings arent always taken seriously, especially by those who see that mine production has been growing. At first glance, theyre correct but only if you look at the short-term picture. The following chart shows that global mine production has indeed been rising since 2008. From 2009 through 2011, output rose an average of 3.9% per year. However, we know that a good chunk of this increase is due to China, and upon excluding its output, you can see how it alters the global picture. Further, while some point to the growth in production since 2008, output is still 12.8% below the year 2000 level. And there are reasons to believe the gap between global mine production vs. mine production excluding China could widen. MarketWatch reports that Chinas Ministry of Industry and Information Technology has said that China wants domestic gold production to reach 14.5 million ounces by 2015, an increase of approximately 25% over last years levels. Given that whats produced in the country stays in the country (where there is escalating domestic consumption), a widening of the fundamental market shortage, as per the MarketWatch article, seems almost certain. Another trend to take in to account is Chinas growing interest in natural resources basic materials, energy, and others. What gets underreported, however, is that the Chinese are also purchasing gold mines. Here is a list of Chinese gold-mining acquisitions over the last year: November 2011: Baiyin Nonferrous Group completes a takeover of Gold One International, a gold operator in South Africa. December 2011: China Gold International Resources Corporation buys a gold mine in Central Asia, and is reported to be looking at Canada and Mongolia for its next targets. (It bought Canadian gold miner Jinshan a few years ago.) December 2011: The Chinese take control of A1 Minerals, a gold exploration and production company, and rename it Stone Resources Australia. December 2011: Shanghai investors buy a controlling stake in the Australian-owned Zara gold project in Eritrea. April 2012: Sovereign Gold partners, along with Jiangsu Geology Engineering, pay $4 million for a 30% interest in two gold tenements (an area of land in Australia where the holder may conduct exploration or mining activities). In November 2012 the firm increased its funding to fast-track exploration and development of the projects. August 2012: A subsidiary of Zijin Mining Group (Chinas top gold producer by output) buys more than 50% of Norton Gold Fields, acquiring a large, operating gold miner. August 2012: China National Gold Corporation announces a $3.9 billion bid to acquire African Barrick Gold, Tanzanias largest gold miner. If the deal is approved, China National Golds production capacity will double. September-December 2012: Chinas Shandong Gold Group announces its intention to purchase 51% of Australian gold miner Focus Minerals, which has four active mines in Western Australia. The deal is expected to be completed early this month. November 2012: China-based Western Mining Group, through its subsidiary, buys all the outstanding shares of Inter-Citic Minerals, a Canadian-based gold exploration and development company.. The facts cant be denied: China is on the hunt for gold deposits and mines. These gold-focused deals will add more ounces to the countrys pool of gold assets. Just the three most recent acquisitions (Focus Minerals, Norton Gold Fields, and Inter-Citic Minerals) contain 12.5 million ounces of gold resources. As the Chinese have publicly stated before, acquiring large amounts of gold on the open market would almost certainly drive prices higher, as well as trigger greater volatility. One way to get around that is to purchase deposits that either are or will be producing the precious metal, allowing them to accumulate the gold before it hits the international market and at cheaper prices than spot. In spite of the gargantuan quantity flowing through Hong Kong, its entirely possible that we are underestimating Chinas demand. In light of all this, it seems clear that concerns about future supply are real. There are some clear implications for us investors: Supply will get tighter. Its not because theres a lack of metal in the ground. Its increasingly critical to ask whether any given deposit is economically viable, politically feasible, and ecologically agreeable. Despite increased budgets on exploration (last year the gold industry spent a record $8 billion) and despite a 570%+ increase in the gold price since 2001, discovery rates are still decreasing. Its clear that the gold industry is unable to grow supply to a significant degree in spite of increased spending and increasing margins. Chinese production wont show up at your local dealer. The country is keeping it all. When you read about growing global supply, you have to subtract what China produces and imports to determine whats really available. As Chinese appetite continues to grow, this could become a front-and-center issue. A public rush for metal will empty the shelves. Theres no rush like a gold rush, and if we enter a mania period, bullion will be hard to come by at retail outlets. Why wait for that? A mania is when you want to sell. Our advice is simple: make sure your personal gold reserves are in place before a gold supply crunch becomes reality. And for leverage on the likely resulting mania, build a portfolio of the best of the best gold stocks. linkwithin_text=Related Articles: 