Is the Gold Market Heading for a Supply Deficit?

The price of gold has risen sharply again recently, due not least to the invasion of Russian troops in Ukraine. This had only accelerated the already inevitable and that is that the gold price rose again above $2,000 per ounce. With the massive currency printing and the resulting inflation, which was evident in the strong gold prices of recent months, this would have had to happen sooner or later anyway.

The supply on the gold market decreased in 2021 compared to 2020, according to the World Gold Council. Based on this, the total supply on the market was 4,666.1 tons compared to 4,721.1 tons in 2020, which is due to the fact that the supply of recycled gold decreased by 11%. On the other hand, gold production increased by only 2%. This has led to a lower supply on the world market.

In 2021, mine production recovered after the sharp decline in 2020 due to COVID 19 restrictions, but as the data show, the trend remains downward. Thus, 2021 is also the third consecutive year of decline in global gold mine production.

In 2022, however, the gold market could suffer a severe blow. This is mainly due to the sanctions against Russia, which is the second-largest gold producer in the world. A large part of the gold supply on the European market comes from Russia, and the trend in Russian gold production continues to point upwards. This could go as far as Russia overtaking No. 1 China to become the world’s largest gold producer.

U.S. sanctions have excluded some Russian banks from the SWIFT system, and Russian foreign exchange reserves have also been frozen. Now that the U.S. has imposed sanctions on Russian energy imports, sanctions on Russian gold are also being brought into play. The sale of Russian gold is to be hindered, thus preventing the financing of the war.

If demand for gold remains high or increases, but Russian supply is cut off from the world market, there could be a deficit in the market, which in turn would only drive prices up. Under the given circumstances created by central banks since the outbreak of the pandemic COVID 19, the outlook for gold was already bullish. The sanctions against Russian gold only strengthen the bullish picture.

Gold bulls and investors who have taken advantage of gold’s weak phase and positioned themselves accordingly will probably be able to sleep soundly in the coming time. Those who have allowed themselves to be paralyzed by the mainstream headlines may have a tough time ahead.

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