Peak Gold

Gold is holding above $800 as I write this morning… and a major investment bank is figuring on $1050 by 2012.

But it's not primarily the trashing of the dollar that prompts this prediction from Credit Suisse analyst David Davis.  Rather, it's rising demand and dwindling supply.

He wrote that global gold production will fall in the coming years, as the diminishing number of new reserves fails to compensate for dying mines.

"We find that over the last 18 years, apart from on three occasions, the supply of gold has been in deficit. This primary deficit has been masked by the secondary supply of gold into the market mainly from central bank sales. We believe central bank sales will wither going forward and the banks could become net buyers of gold."

The supply-demand imbalance is something that's been on the mind of Outstanding Investments editor Byron King.  In a recent note to subscribers, he wrote:

Reserves are getting to be harder to locate and companies are acquiring reserves by way of deal-making, as opposed to exploring and drilling. It sounds a lot like the beginning of a Peak Gold paradigm, and we should incorporate that into our investment philosophy…

Despite a surge in exploration in recent years, the mining industry has been unable to make enough significant discoveries to increase supply in any fundamental way. Of the major new deposits that have been identified, most are in geographically and geologically challenging areas, far from infrastructure and, in particular, from energy supplies for mining operations. Many promising areas are in politically risky jurisdictions such as Venezuela or Bolivia.

In such an environment, even $2000 gold becomes more than plausible.

The Daily Reckoning