Dropping Supply Will Lead To Higher Prices
by David Tanner
I have frequently written about how the increasing demand for gold is driving prices higher. However, until now, I have not addressed the supply side of the gold market since it is rather static and inelastic. The following excerpt will serve as an intro to this supply-side discussion.

News reports state that "economic genius" President Hugo Chavez has announced his intention to take over Venezuela's gold sector which produces around 400,000 ounces of gold per year. With gold beating nominal records, we expect the decree to come in short order and Venezuelan gold production to shift into decline not long after the developed multimillion-ounce deposits in hand are plundered. Source:Resourse Nationalism, Casey Research

Currently, the gold mining industry cannot produce enough gold to keep up with global demand AS IT IS. I said "as it is" because it appears that the current supply side of the equation is about to change. In short, it appears that governments around the world, looking for quick cash infusions to balance their budgets, are gearing up to go plundering their natural resource companies, which, as is always the case when the government enters the private sector, will result in inefficiencies and loss of productivity. This, in turn, will surely lead to a decreased supply.

How does government intervention result in a lower supply of gold?

In short, private investors sink billions of dollars into mine exploration and development years before the first gold is ever extracted. Imagine you are one such investor and just as the gold is finally being produced, the government steps in and takes a big chunk of the profits you were counting on reaping when you invested your hard earned dollars years earlier. What would your reaction be the next time someone asks you to invest in a gold mine? You'd likely decline the opportunity to get robbed as second time!

So, if governments do begin nationalizing their gold and silver mines, look for long-term investment in the mining industry to dry up. And when that happens, supply eventually dries up as well.

The bottom line is that nationalization will lead to much lower precious metals supply at precisely the time the world is clamoring for more supply. This is an explosive combination that should lead to some "explosive" prices in the not-too-distant future.

Hang on.