Gold faces 'global supply crunch'

By Richard Evans

Gold miners have responded to recent falls in the price by concentrating on the highest quality deposits, scrapping extraction of more marginal material. This will cause a "significant decline" in global production of gold, according to Angelos Damaskos, who runs the Junior Gold fund. 

"A shift in gold market dynamics in the near future could result in a supply crunch," he said. 

"Investors have recently been disappointed by the gold miners' inability to control costs. With miners' profitability naturally at risk if there is a decline in the gold price, the sector has experienced a sell-off. 

"The response of management is to prioritise cost-control. An effective and immediate way of reducing costs is called 'high-grading'; essentially all mining teams are now focusing on the highest-grade, most profitable operations at the expense of production volume." 

As a result, marginal deposits are being scrapped from miners' business plans and unprofitable operations are being shut down, Mr Damaskos said. "This strategy will increase miners' profits and also inevitably cause a significant decline in global production." 

Investors were also wrong to assume that the eurozone crisis was over and that gold was no longer needed as a "safe haven", he added. 

"The consensus among generalist investors is that gold reached a near-term peak in 2011 when it spiked at $1,927 and is now in decline. This is based on apparent stability in the eurozone and confidence that the debate on the US fiscal cliff will be resolved in a satisfactory manner," Mr Damaskos explained. 

"However, it is likely that macroeconomic events will disappoint and impact the market negatively, dragging the European or US economies back into recession and forcing central banks to intervene in new, radical ways. Such developments would spook the market, encouraging investors to turn to gold as the ultimate safe haven." 

The manager, who co-founded the Junior Gold fund with Jim Slater, the legendary investor, in 2009, pointed out that demand for gold was at an all-time high, according to the latest figures from the World Gold Council. 

"Should economic events take a disappointing turn, causing a flight back to gold, demand levels could exceed supply, creating a global supply crunch," he said. 

"This scenario is a recipe for the gold price to reach highs, potentially of as much as $2,000." Telegraph