Today's Hot Topics   ▲  |  ▼

That's increasingly China's strategy when it comes to gold, and as the Red Dragon corners more of the market for this precious commodity, it means the rest of the world may soon face a functional shortage, explains Jeff Clark of Casey Research.

A number of market analysts and gold-industry insiders are warning about a possible shortage of gold supply.

Barrick Gold (BRK) CEO Jamie Sokalsky recently stated that since gold production is inelastic (i.e., insensitive to price changes), there will be a very limited increase in supply from gold producers, even during sharp increases in the gold price. Rick Rule, a billionaire and avid gold investor, pointed out that while we're seeing spectacular demand, a number of issues will make supply very tight in the future, especially among retailers.

The issues facing gold miners are well known: depletion of existing mines, lower grades, and fewer new discoveries—especially big and rich ones. Further, miners face increased calls for nationalization, demands from workers for higher pay or from local communities for better infrastructure, and—of course—environmental concerns.

Many mining company representatives say it's getting harder to not only find large deposits, but to get those deposits into production. Some estimate it now takes twice as long as to go from discovery to production versus a decade ago.

These warnings aren't always taken seriously, especially by those who see that mine production has been growing. At first glance, they're 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.

Click to Enlarge

What's important about China's production is that unlike most other countries, it doesn't reach the world market, since China doesn't export gold.

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.