The Looming Gold Production Cliff That Will Drive Prices Higher

In recent years, global gold production has been at or near record levels. The plentiful supplies have led gold bears to argue that the yellow metal's decade-long bull run will end.

But gold bears are dead wrong.

In fact, the 'glory days' of gold production may be ending soon.

That's because some industry experts are beginning to point to a gold "production cliff' that is looming not far in the future.

And this coming decline in production can mean only one thing: higher gold prices.

The Gold Warning From North of the Border

This scenario is the forecast from several analysts at Canada's National Bank Financial - Shane Nagle, Steve Parsons and Paolo Lostritto.

These analysts wrote in a Feb. 1 note that a sharp gold production decline looms around 2017. The reason? The major gold producers have found too few, high-grade deposits in recent years to sustain their rate of gold production.

And don't even think about junior gold producers saving the day. Financing in the junior mining space has been terrible for several years with no improvement in site.

The NBF analysts added that several other factors have accelerated the move toward their scenario. These include the delaying or outright cancellation of projects by the big gold mining companies.

Gold miners have been under considerable pressure from disgruntled shareholders to improve stock price performance and increase payouts in the form of dividends. In order to comply with shareholder wishes, many firms have gone into a major cost-cutting mode. This is translating into project delays or abandonment.

The analysts wrote: "We contend that [constrained production] is already reflected in the shares of these companies, not because the issue is well understood, but because investors have simply responded to the side effects: capex pressures, project delays and eroding margins."

More Gold Production Cliff Warnings

The NBF analysts are not alone in their warning.

The chairman of Franco Nevada (NYSE: FNV), Pierre Lassonde, also sounded a similar note when speaking last month at a mining conference in Vancouver. Franco Nevada is a leading gold royalty and streaming company.

Lassonde said that from a gold supply standpoint, the past decade of exploration was not a good one. This is despite the incentive of high gold prices.

The number of so-called super-giant (more than 20 million ounces) discoveries dropped to only two in the past five years, with none being discovered in the last two years.

Contrast this rate of discovery to the rate in earlier decades. In the 1980s, there were 14 super-giant deposits found. There were 11 such deposits found in the 1990s.

He also pointed to the fact that most of the discoveries made recently were of lower quality than in the past. Ore grades fell from an average of 12 grams per ton in the 1950s to currently only about 3 grams per ton at best. Many gold finds, Lassonde said, were yielding only 1 gram per ton.

And in the skyrocketing capital expenditures needed for gold projects, conditions look even more glum.

Lassonde believes that only one thing can save the gold mining industry from the "cliff': new technologies, similar to what has happened in the oil and gas industry.

According to Lassonde, gold miners need to pool their resources into a major research and development effort. He says that the industry needs a 'paradigm shift' in technology.

More Reasons for Investing in Gold

Lassonde also repeated his outlook that gold is currently in a mid-cycle trough in an otherwise undisturbed bull market. He pointed to increasing emerging market demand and continued money printing by central banks, in addition to the looming supply shortage, as reasons for his bullishness.

These are many of the same reasons cited by Money Morning's own Global Resources Specialist, Peter Krauth for his optimism regarding gold prices. Krauth forecast gold prices to hit $2,200 in 2013.

The facts regarding recent gold production, cited by Lassonde, cannot be denied.

For investors looking to participate, here are two exchange-traded vehicles to consider: the ETFS Gold Trust (NYSE: SGOL) and the Sprott Physical Gold Trust (NYSE: PHYS).

Both securities are backed by physical gold bullion. SGOL is backed by physical gold held in London while PHYS actually allows investors to convert their holdings into gold bullion if they wish.

For more insight on investing in gold, check out this report from our resources expert Peter Krauth.

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