The annual western world gold supply reported by the American press usually indicates a growth rate of approximately two percent. This is confusing, because the two percent is referring to the total gold produced since time immemorial (i.e. the total existent gold above ground). Several sources accord this amount to be approximately 119,000 metric tons (3.8 billion troy ounces). Therefore, many researchers still have no clear idea of the real supply/demand dynamics. Recently, I had the good fortune to receive the South Africa Chamber of Mines of Statistical Data publication. What I found was as illuminating as surprising.

For the purpose of this study certain less significant supply/demand factors are NOT considered here. ON THE SUPPLY SIDE: central bank sales, old gold scrap, gold loans, forward sales, option hedging and implied disinvestment WERE NOT CONSIDERED. ON THE DEMAND SIDE: central bank purchases, bar hoarding, gold loans, option hedging and implied investment ARE  ALSO  NOT  TAKEN  INTO  ACCOUNT.  OUR  SPECIFIC  PURPOSE  IS  TO  ONLY  MATCH  YEARLY  GOLD  MINE  PRODUCTION  TO  COMMERCIAL  DEMAND  FOR  FABRICATION - i.e. real supply and demand factors.

It is evident that western world gold production (including CIS sales) during the last 11 years has been erratic -- ranging from an increase of 17.4% (1986) to a decline of 5.8% (1991). For the most part erratic production during the decade may be blamed upon the vagaries of Russian/CIS mine mismanagement and political instability.

Whereas the 11-year (1985-1995) annual western world gold supply compound growth rate was 3.4%, production during the most recent five years has declined 1.5% per annum - VIRTUALLY  FLAT. Furthermore, there is scant hope that the 1997 production will rebound. In view of the fact the world's largest gold producer (South Africa) has suffered substantial production declines in the last two years, it is quite possible this year's total western world's mine production will again be flat to down.

Observation of the annual western world gold demand table (below) provides a picture of moderate consumption growth - albeit erratic. Nevertheless, the annual compound demand growth was 6.3% for the 11-year period (1985-1995). However, demand grew at a slower 3.9% compounded annually during the most recent five years. Although at first glance this seems rather modest, it is relevant to notice that demand is growing, while mine production is virtually flat to down. Looking at the entire 11-year span demonstrates that gold demand is increasing 1.9 times faster than the supply's yearly compound growth rate (6.3% versus 3.4%). The third table depicts significant gold mine production shortfalls vis-à-vis mine supply. 1996's production deficit is estimated at 1,119 metric tons, equal to 35% of total fabrication demand -- AND RISING.

Any Econ 101 course book provides the unassailable logic that whenever demand is growing faster than supply, causing production deficits to expand, THE PRICE OF THE COMMODITY MUST INEVITABLY RISE AS A RESULT -

• To mollify burgeoning demand

• And to stimulate production

It is highly imperative to note that demand figures encompass only western world gold demand - which ignores the accelerating demand of the affluent far-eastern nouveaux riches. Their traditional insatiable appetite for the noble metal has only been limited by their comparative heretofore lack of means vis-à-vis westerners. It is no secret that the affluence gap is rapidly narrowing! The commercial byword of the not too distant future may well be .......................

The noble metal of yesteryear's elite is inexorably moving into the province of the common working person -- from Boston to Bern to Beirut to Beijing. Sometime in the 21st century the annual popular demand for gold will be primarily a function of world demographic growth and increasing affluence. It is therefore logical to conclude that since the yellow metal's supply is severely restricted and demand relentlessly expanding, there will be no ultimate price level in the future for what Pindar, the famous poet of ancient Greece, called "the Child of Zeus - ruler of the celestial realm." Growing scarcity, indestructibility and physical beauty over time become priceless.

Jim Rogers is recognized today as one of the world's most savvy international investors. He is the former investment partner of the incomparable George Soros. Recently, Mr. Rogers publicly stated that China will have the world's largest GNP and be the richest economy by 2020 -- and that parents would do well to prepare their children for the future by having them learn the Chinese language. Also very noteworthy was a recent article published in Barron's - which listed Mr. Soros stock portfolio. By far his largest position is Newmont Mining (gold).

The financially redoubtable Peter Lynch has publicly endorsed gold. In a feature article of a major national magazine, Mr. Lynch made a convincing case that everyone should have some gold mining mutual funds in their investment portfolios.

The estimated 1996 gold production deficit is an all-time high record -- and represents more than 54% of the actual annual mine production. In fact the mine production deficit has accelerated during the last five years. Unless the central banks of the world take up the burgeoning slack by dumping bullion on world markets, sooner or later the immutable economic laws of supply and demand will impose higher values on the yellow metal.

What is the probability that central banks -- who possess one third of the world's existing hoard of the noble metal -- will indeed increase their open market sales of gold? James R. Cook in his book, The Great Gold Comeback," offered logical rationale why this will not ever happen. He reasons that "future central bank sales will be tempered by a reluctance to damage the price of gold and hurt the value of their own holdings along with the possibility of angering their citizenry and uncertainty about the future role of gold in monetary affairs." A valid and weighty argument in support of Mr. Cook's opinion is the fact that the U.S. government has had the exact same amount of gold in its coffers for more than 20 years: 261 million ounces, not an ounce more nor an ounce less. This undoubtedly is highly significant - and undeniably sets an example for all the other central banks of the world to follow.

The worsening mine production deficit vis-à-vis growing demand for the yellow metal may not have an immediate impact upon on its price. The reason is technical in nature and subject to market forces. NEVERTHELESS, supply/demand dynamics will inevitably and eventually catch up to the market, causing substantial price increases -- and quite likely a protracted bull market in gold.

An Optimistic Opinion by the World Famous and Prestigious BARRON'S:

"With gold supply increasing at a slower pace and demand continuing its brisk rise, a small increase in investor interest in the yellow metal could produce a large run-up in its price. The investment sleeper of the 1990's, in sum, could be gold."

vronsky        

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