Many factors support sustained higher gold prices in the future. From exploding government debts and quantitative easing programs to various inflationary pressures, the case can be made for having gold in one's portfolio. Investors now may have another bullish reason to get excited about the precious metal and funds such as the ETFS Physical Swiss Gold Shares (ARCA:SGOL) - Peak Gold.
CEOs from a few different well-respected mining firms have recently pointed to the fact that all the easy and high ore-grade gold may have already been found. For investors, the idea of peak gold could be what is needed to push the metal past its record highs.
SEE: How To Invest In Commodities
$2,500 an Ounce
Investors in the gold sector could be seeing higher prices per ounce as the industry is fast approaching a "Peak Gold" scenario. According to IAMGOLD (NYSE:IAG) CEO Steve Letwin, the mining industry has already exploited the best possible and easiest ways to tap gold reserves and is now being forced to deal with higher-cost and lower-grade deposits.
Data from Bloomberg seems to support this notion. Global gold production in the first nine months of 2012 fell 1% versus a year ago to sit at 61.5 million ounces. More importantly, the average ore grade of reserves at 12 of the largest producers also fell. Compared to the previous 10 years, ore grades plunged 51% to reach just 0.028 ounce of gold per ton of earth in 2011. Those poor ore grades, plus rising mine development costs, have pushed profitability in the sector downward and sent many miners into politically unstable parts of the globe to find new sources.
The notion of peak gold output echoes peak oil theory. That idea basically says that the earth is running out of crude oil, and production will stop rising before it declines over the longer term. With ore grades and production dropping for gold over the last 10 years or so, there is some credence to the theory. The IAMGOLD CEO isn't alone in supporting the theory. Back in 2009, Barrick Gold (NYSE:ABX) reported that "there is a strong case to be made that we are already at peak gold conditions."
All in all, Letwin estimates that the declining production profiles will result in gold hitting $2,500 an ounce in the near future. That's roughly a 51% gain from today's prices.
SEE: 8 Reasons To Own Gold
Playing the Peak
For investors, the potential of peak gold and rising prices is certainly worthy of a portfolio position. The obvious play would be in the SPDR Gold Shares (ARCA:GLD). The physically-backed fund is still the king in terms of assets and remains one of the easiest ways to add gold to a portfolio. Likewise, the futures-backed PowerShares DB Gold (ARCA:DGL) could also be used.
Another choice could be the miners themselves. The Philadelphia Stock Exchange Gold & Silver Index has declined roughly 10% over the last five years, while gold has surged 91%. Rising gold prices could help the sector return to profitability. Not every gold miner, however, will be able to survive the switch to lower-grade ore. Both Barrick and IAMGOLD will be based on their balance sheets, cost controls and ability to add new mine supply. Also fitting the bill is giant Newmont (NYSE:NEM) and growing junior Yamana (NYSE:AUY). Both have similar production profiles as Barrick and IAM.
Finally, betting on those smaller firms that will be the source of supply for the bigger boys could also be in order. As ore grades have dwindled, buy-out activity in the gold mining sector has surged. The Global X Gold Explorers ETF (ARCA:GLDX) tracks 20 junior miners, including Seabridge Gold (NYSE:SA), and offers investors a chance to bet on future mine supply.
SEE: Getting Into The Gold Market
The Bottom Line
With ore rates and production dwindling, analysts now estimate that we have entered a peak gold scenario. That could mean higher sustained gold prices on the horizon. For investors, that means now could be a great time to add gold to a portfolio. The previous picks make ideal selections to play the trend.
At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.