​Gold to come out stronger as it reaches peak production

Bullish banks are beginning to back gold again as the bear market is forecast to end and peak production occurs.

In a recent note to clients UBS analyst Julian Garran Stated the U.S. Federal Reserve will continue its current quantitativeeasing, boosting international liquidity in US dollars, and in turn the demand for gold, according to Mineweb.

The UBS notes states gold’s key issues are that with a strong US dollar “excess returns in the US are under pressure”, coupled with continually dropping oil and coal prices are hurting corporate cash flows.

It added that “the prospect of deteriorating liquidity magnifies the threat,” Garran states.

“That in turn is limiting the Fed’s ability to tighten policy and may induce it to ease in the future. We think the Fed has started to recognise that pressure with its dovish backtracking at the March meeting last week.”

Previously speaking to Grant Thornton’s Brock Mackenzie he told Australian Mining how the future of gold prices will be affected in the short term by variations in US economic policy.

IBISWorld has also forecast this year to be the first for revenue growth in the gold sector since 2011/12, with the 2015/16 period seeing a 1.8 per cent increase, after the 2.4 per cent decline expected for the 2014/15 period.

Following that the sector is predicted to grow at a rate of 2.3 per cent the following year, and then 3.5 per cent for the 2017/19 financial year, before once more entering a period of decline as an era of consolidation takes hold and more mergers and acquisitions are seen in the market.

This view of gold’s return is supported by the recent Metals Focus report, which forecasts a bottom in the gold price, with a forecast rise beginning next year.

It stated weakness is expected in the short term it marks the low watermark for the metal which will soon return to strength.

"The biggest headwind continues to be expectations of US interest rate increases later this year, as other developed economies’ ultra-loose monetary policies (notably the Eurozone’s) remain in place, this helping to driveup the dollar against other currencies. Low inflation, weak commodity prices and strong equities are other factors that should keep gold under pressure," the Metals Report said.

Part of this turnaround may be due to the expected peak production for the metal.

"2015 will be the peak in world gold production,"  Mackenzie told Australian Mining,

“So every year after that there will be less gold produced, which will have a positive effect on the price."

Goldman Sachs research echoed Mackenzie’s prediction, with a dire warning of only 20 years of known mineable reserves of gold left, adding that discoveries of new sources peaked in 1995.

The CEO of Goldcorp has also previously said peak gold will occur this soon, stating: “"Whether it is this year or next year, I don't think we will ever see the gold production reach these levels again; there are just not that many new mines being found and developed."

Australian gold output is falling in line with this, and will the country slip from its position as top producer this year, to be displaced by Russia.

To keep up to date with Australian Mining, subscribe to our free email newsletters delivered straight to your inbox. Click here.