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Will Global Gold Production Peak This Year (or Next)? (If So, Gold Prices Should Start Rising Again Soon)
Gold prices (in dollar terms, anyway) are as flat as a pancake. Since September 10, 2013, gold has traded in a range of $1142 to $1385, and that range has narrowed recently, with a ceiling of $1295 since last August. Part of that “ceiling” story is the rapid rise of the dollar since last July, but U.S.-based investors continue to wonder when gold will make a significant move above $1300, then $1400, or $1500 or more.
There are two ways the price of gold can rise – either through growing demand or by a shrinking supply. Most press reports concentrate on the growing demand in India, China and other emerging powerhouse nations. But if gold demand is rising, why isn’t the price rising? Aha! That’s where supply comes in.
New gold supplies have risen in the past five years (after falling from 2001 to 2009). The main reason for the recent rise is that mining companies tend to open up more operations when the gold price is rising, but it takes time for them to bring a new mine into production, so by the time a mine comes into production, the gold price may be lower than it was when the company decided to bring a marginal gold mine on line.
In the long-term picture (above), gold production soared from 1980 to 2000 after gold hit $850 per ounce in 1980, when gold mining companies believed that gold would keep rising to $1,000 or maybe $3,000 per ounce (a popular prediction by the Aden Sisters in 1981). Instead, gold remained stuck in a narrow trading range of $255 to $515 for 20 years (1981 to 2001). By 2001, when gold was still mired at $255, its lowest level since 1978, gold mining companies started to throw in the towel and close some mines.
In a mirror image of that trend, rising gold production in the last five years stems from mines re-opening marginal producers due to the rapid rise of gold prices from $255 in 2011 to a peak over $1900 in 2011, but with gold prices mired below $1400 in the last three years, companies are now closing many mines.
The U.S. gold mining production story reflects the same trend on steroids. Gold production rose sharply from 1980 to 1999, followed by an equally sharp decline. When gold prices are high, mines are opened. When prices are low, mines are closed, but it takes several years to bring those new mines to production.
U.S. gold mine production had three peaks in the last century, first in 1913, when the Federal Reserve war born (right before World War I); then in 1939, at the start of World War II, and then in 1998, after two decades of mining expansion after gold’s meteoric rise in 1979-80. Globally, there was also a peak in production around 1971, when the U.S. went completely off the gold standard and gold began rising.
Global gold production first peaked in 2001, when worldwide gold production reached 2,600 metric tons. Gold production fell then started to increase in 2009, after gold first reached new highs above $1,000 per ounce. Gold production finally reached new highs of 2,690 tons in 2012 and 2,770 tons in 2013, but the gold price had already peaked in 2011, so some of these new mines were selling gold at a financial loss.
The decline in U.S. gold production is also happening in the biggest traditional gold producing nations – specifically South Africa and Australia, where the mining economy is well established but the supplies are running dry and the infrastructure is old and decaying. China has become the #1 gold producer and the biggest new discoveries are coming in more dangerous emerging markets like Peru, Ghana, Papua New Guinea, Tanzania and Uzbekistan – all of which are now among the top 15 gold producers. As the following chart shows, South Africa has fallen far from its #1 spot, while China and Russia are rising.
A New “Peak Gold” Theory from Goldman Analyst Eugene King
Many gold miners expect gold production to peak in 2015, depleting new gold reserves coming to market. This theory is based on the fact that it takes about 20 years to bring a new property to peak productivity. Since the peak year of new mine discovery was 1995, those mines should reach peak production in 2015.
On March 31, 2015, Goldman analyst Eugene King issued a report saying that “there are only 20 years of known mineable reserves of gold” left to find! According to King, zinc will run out in 20 years, too, while all of the platinum, copper and nickel reserves will be used up in 40 years. On the surface, this statement sounds as outrageous as similar statements made by the Club of Rome in “Limits to Growth” in 1972. They said that many key resources would run dry by 1990, but their dark vision was way off base.
In addition, “Peak Oil” theories didn’t work out very well, either, due to the discovery and practice of fracking. However, gold has different supply/demand dynamics than oil. The world runs on oil, so there is a compelling need to find it as cheaply as possible, hence the decline in oil prices over the last year. By contrast, there is no compelling industrial demand for gold. Demand mostly comes from investors, so gold’s unique dynamics –price-driven, not economy-driven – could support a “Peak Gold” calculation.
Another factor favoring Peak Gold is the remarkably low grades of gold being found today. In the 1980s, when mines were relatively rich, geologists measured gold in ounces per ton. Now, they measure gold in grams per ton (there are 31.1 grams per Troy ounce and one million grams per metric ton), so if a typical mine delivers one gram of gold per ton, that’s one part of gold per million parts of dirt and cheaper rocks.
At $1180 gold, one gram is worth $38. That’s not much money for finding, extracting and separating that gram from a ton of dirt. That why Charles Jeannes, CEO of Goldcorp, the world’s largest-cap gold stock, said last September that “Peak Gold” would be reached in either 2014 or 2015: “Whether it is this year or next year, I don’t think we will ever see the gold production reach these levels again,” adding that “There are just not that many new mines being found and developed.” In 1995, new discoveries of mineable gold peaked at nearly 240 million ounces. In 2013, new discoveries were under 10 million ounces, a 96% drop:
There was a slow rise in new discoveries from 2001 to 2006, but the volume of new discoveries has fallen off the table since then. (The 2014 discovery figures aren’t in yet, but they’re sure to be lower, since mining companies have been drastically cutting back on exploration after gold’s $1140 bottom in 2013.)
Specifically, the gold grade of the world’s top 10 operations has fallen from 5.5 grams in 2004 to barely one gram each year since 2012, which (as we’ve seen) means only one part gold per million parts dirt.
Perhaps, peak gold production has already happened (in 2014) or perhaps it is happening now (2015) or soon (2016). The solution to low gold prices is low gold prices – which result in mine closures and a lack of major new discoveries. In addition, there is now a rising trend of great environmental resistance to the destruction of the land by gold miners in Third World countries. A recent example is last week’s New Yorker expose of Peru’s La Rinconada mine: “Tears of the Sun: The Gold Rush at the top of the world.”
Gold mining shares have been depressed for years, partly due to declining production, but mostly due to the lower gold price. Gold mining shares act as a form of leverage to gold’s price. This comes as a bonus for gold bugs when gold prices are rising, but not when prices are flat or falling. Ironically, gold investors should welcome the decline of gold production, for financial reasons as well as environmental concerns. The less gold is mined, the more the gold price can rise due to shrinking supply, even with flat demand.
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