Hi,
Is It Possible for Gold to Run Out?
Gold cannot be replenished like renewable resources, but will it ever run out? Despite new mines opening up over the decades, new discoveries are becoming rarer. However, the number of users demanding gold is only increasing.
Hence, gold may become exceedingly rare, although it is unlikely that there will come a day where physical gold runs out altogether.
What Is Behind the Gold Shortage?
It is possible to experience an episode where physical gold becomes exceedingly rare, especially when the supply fails to meet demands. This situation occurs when:
- The demand for gold rises because of some crisis or other events
- Logistical complications hinder the process of producing and distributing the gold
- Mining produces less gold as miners explore fewer gold-bearing areas
- The government starts buying gold for its reserves
With the above factors occurring simultaneously, physical gold in the retail market may become increasingly scarce.
Price Behavior During Gold Shortage
If physical gold goes into a phase of shortage, the price is bound to soar. However, it is also important to note the discrepancy between paper gold and physical premiums.
- When the physical stock of gold drops, so does the availability
- There could be an increase in premiums over the spot
- Popular items could end up selling out
At worst-case scenarios, the gold may become technically available but almost impossible to purchase in its physical form.
The Premium Says It All
During peak periods of demand, premiums play a critical role in understanding how things are shaping up. For instance, when you go to buy a 1 oz gold coin, you would normally pay a relatively small amount over the spot price. In times of shortage, however, there might be substantial premiums to consider due to inventory limits. Investors who get in early take advantage of the lower premiums.
Investor Behavior During Physical Gold Shortage
It is easy to observe behavioral changes among investors during physical gold shortages:
- Buyers who invest early benefit from low premiums and abundant supplies
- Latecomers find little availability, with rising premiums for what remains
- Investors owning physical gold hang on to their precious assets
As you can tell, shortages could create situations in which demand leads to increased prices, making shortages even worse.
Why Should You Own Physical Gold?
The above information should illustrate why having physical ownership over your gold investments makes a lot of sense. For example, you will have to wait for premium reductions to purchase physical gold during shortages. Meanwhile, paper gold might allow you to buy and trade at the prevailing spot prices without any restrictions.
Final Thoughts
Although gold won’t run out any time soon, it is possible for the physical stock to experience shortages. The best advice is never to wait for such circumstances to buy your investment metals. The moment gold starts gaining popularity, the costs of acquiring it become prohibitively high.
