Anew trend that would guarantee higher prices in the near future is currently manifesting in the gold market, author of Big Gold for Casey Research Jeff Clark told investors at the recent 2014 Vancouver Resource Investment Conference.

He said that rising supplies of gold over the following quarters would guarantee a supply crunch.

“In addition to all the other current price drivers for the precious yellow metal, there is going to be a severe supply crunch. The reasons for this are mainly due to production pullbacks, development delays and exploration delays,” he said.

Clark noted that this trend could not be easily reversed, and would take anything from three to ten years to rectify as new projects took a lot of time to come on line. Even shuttered projects on care and maintenance take years to get back into production.

“So, even if the price rises to $6 000/oz, it will be years before the supply side can react,” he said.

Compounding a looming supply/demand gap the average grades at gold mines were in decline, Clark pointed out. Over the past several years, the average grade of the ten largest gold mines declined from about 4.5 g/t to an average of barely 1 g/t, which meant less metal was coming to market.

He also pointed to the practice of ‘high-grading’ by mines as gutting deposits of their future output, making low-grade zones uneconomical.

“Mine plans usually call for high-grade and low-grade ores to be mixed in order to make the low-grade ore economical. However, when the mine chooses to use only higher-grade ore in a low-price environment, it renders the lower-grade ores uneconomical later in the mine life, again removing future ounces from the market,” he said.

Clark stated that the current global gold output was on the rise, mostly as a result of high grading, which foreshadowed a looming output pullback.

“Should the gold price jump back up to $1 800/oz, mining management would first of all do everything in their power to keep the price up. “That means not doing all in their power to bring more production on line, but instead, only gradually and very strategically ushering new production on line,” Clark said.

Political hindrances are also at play, preventing a total of about 2.78-million in mineable gold ounces a year from being delivered to market. One such a significant example is the Pebble project, in Alaska, which has the potential to bring to market 673 000 oz/y, but which is currently stalled.

Clark also noted that a once significant player such as South Africa, which as recently as 2003 was the world’s top gold producer, had now declined to being only the fifth-largest gold producer, and output was still on the decline.

Factors authoring this precipitous decline included reserves being depleted as assets were maturing, labour strikes, rising costs, an acute electricity shortage that currently was the worst in five years, and a lot of political interference. He noted that, despite the South African government having last year said it was not in favour of nationalising mines, it had slapped miners with higher taxes.

“These trends won’t be easily stopped,” Clark stressed, adding that South African gold output was expected to continue to decline.

The only top-five producing country that was actually increasing its yearly output was China, while the other producers’ output was also in decline, or flat. However, China does not export any of its gold, except for a limited amount of gold coins, which resulted in the global gold supply being on a flat trajectory.

Meanwhile, Clark noted that the major bullion mints around the globe could not keep up with the unprecedented strong demand from the public to own bullion, and were resorting to rationing the supply.

“All the major mints in the world are reporting that they cannot keep up with demand. The US Mint had reported that the fourth-largest gold sales in its history were taking place right now. This adds to the pressure on the supply side,” Clark said.

Another example of where gold was lost to the market was through dental implants, where substantial amounts of gold were never recovered. Most sources of gold scrap were also not economically recoverable, he added.

Further, gold was in recent months flowing to the East in vast quantities, and was lost to Western markets.

“There is a classic demand/supply squeeze being set up right now. High supply now guarantees a supply crunch in coming quarters. That is why the gold price is now being set up for new record highs in the near future,” Clark said.

The latest Gold Survey 2013 update by Thomson Reuters GFMS confirmed that physical demand for gold was expected to support the market during the first half of 2014.

Following the end of a 12-year bull run in 2013, 2014 was set to be “the year of consolidation” for gold, with the price drivers continuing to adjust on the back of concerns over the health and stability of global financial systems.

Physical gold demand, however, for jewellery, bars, coins and industrial-use products was expected to support average prices above the $1 200/oz level during the year.