Almost every analysis on gold investing focuses on the demand side. Higher inflation increases investor demand for gold. Higher uncertainty increases investor demand for gold. Central banks demand more gold to reduce their reliance on the dollar.
The supply side of the equation doesn’t get as much attention. Partly, this is because supply changes slowly. In the short term, price changes in gold are entirely due to changes in demand. But in the long term, supply matters.
The Hidden Supply Response
In 2023 and 2024, gold miners’ budgets for new exploration dropped significantly. The industry collectively spent $7 billion on gold exploration in 2022. By 2024, this fell to $5.6 billion. With less new supply on the market, and roaring demand, gold prices have gone from $2,000 per ounce to $5,000 per ounce currently.
Lessons from the Shale Oil Revolution
But the high prices have another effect. They create a supply side response.
In 2025, gold miners’ exploration budgets increased to $6.2 billion following two years of decline. From a miner’s perspective, this makes perfect sense. The price of gold has more than doubled in two years. Thus, the return from investing in new mines is much higher.
The Discovery Gap: Smaller Mines, Higher Costs
Does this mean the supply of gold is poised to increase? Here’s where uncertainty comes in.
If firms spend more to mine gold, they will almost certainly produce more. But how much more? In recent years, the average production of new gold mines has fallen. There are fewer new discoveries. And each new discovery is smaller on average.
How the supply side changed the oil market
In the 2000s, the world was worried about peak oil. Prices reached record highs and new production slowed. Then, starting in 2012, the shale oil revolution took off. New production methods led to a big increase in supply. And oil prices today are far lower than they’ve ever been.
One of the factors that drove investment in new production methods was high prices. High prices encourage suppliers to find new and better ways to increase production. Keep in mind that it took time. The price of oil peaked in 2007, and the new supply didn’t materialize until 2012.
If gold prices maintain current levels for the next year, we should expect big increases in exploration budgets. Miners will want to take advantage and increase supply as much as possible. Now, we don’t know whether gold production will undergo its own transformation, like oil did. But if it does, that’s a huge downside risk to gold prices.
How should investors respond?
And this is something every gold investor should be aware of. At current prices, there is a large downside risk to gold.
How should an investor manage this risk?
The simple answer here is to stay diversified. Usually, I would advise investors not to put all their money in stocks. Investors should hold some bonds and gold. Today, I would advise the same thing. But I will phrase it differently.
Investors should not keep all their money in gold. They should hold some stocks and bonds.
Disclaimer:
Note: The purpose of this article is to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly encouraged to consult your advisor. This article is for strictly educative purposes only.
Asad Dossani is an assistant professor of finance at Colorado State University. His research covers derivatives, forecasting, monetary policy, currencies, and commodities. He has a PhD in Economics. He has previously worked as a research analyst at Equitymaster, and as a financial analyst at Deutsche Bank.
Disclosure: The writer invests in gold.