Peak Gold – Did
Gold Production Peak in 2015? by Mark O'Byrne |
August 1, 2016
‘Peak Gold’ is happening
which has important ramifications for the gold market and
is another long term positive fundamental. This is why we
were one of the first analysts to consider the peak gold
phenomenon back in 2007 and 2008 and have considered peak
gold frequently over the years.
One of the more astute gold
analysts today, Frank Holmes also believes that peak gold
is happening and may even have occured in 2015. Peak gold
and the fact that total annual global gold production is
likely to have peaked is an important supply side factor
in the gold market. This is one of the bullish factors which
will support prices and indeed should contribute to higher
prices in the coming years.
Holmes latest article is a must read:
The Last Known Gold Deposit
Gold is one of the rarest elements in the
world, making up roughly 0.003 parts per million of the
earth’s crust. (For some perspective, one part per million,
when converted into time, is equivalent to one minute in
two years. Gold is even rarer than that.) If we took all
the gold ever mined—all 186,000 tonnes, from the bullion
at Fort Knox to India’s bridal jewelry to King Tut’s burial
mask—and melted it down to a 20.5 meter-sided cube, it would
fit snugly within the confines of an Olympic-size swimming
pool.
The yellow metal’s rarity, of course, is
one of the main reasons why it’s so highly valued across
the globe and, for most of recorded history, recognized
and used as currency. Unlike fiat money, of which we can
always print more, there’s only so much recoverable gold
in the world. And despite the best efforts of alchemists,
we can’t recreate its unique chemistry in a lab. The only
way for us to acquire more is to dig.
But for how much longer?
Goldman Sachs analyst Eugene King took a
stab at answering this question last year, estimating we
have only “20 years of known mineable reserves of gold.”
The operative word here is “known.” If King’s
projection turns out to be accurate, and the last “known”
gold nugget is exhumed from the earth in 2035, that won’t
necessarily spell the end of gold mining. Exploration will
surely continue as it always has—though at a much higher
cost.
(In fact, our insatiable pursuit of gold
might one day soon take us to space, as President Barack
Obama signed legislation in November that permits commercial
mineral extraction on asteroids and the moon. Many near-Earth
asteroids are said to contain trillions of dollars’ worth
of precious metals and other minerals. But that’s a discussion
for another time.)
We’ll probably see a surge in mergers and
acquisitions, as I told Kitco News’ Daniela Cambone last
week. I think that as long as they have reliable output,
mid-cap companies could be gobbled up by the Barricks and
Newmonts of the world.
Another consequence of recovering the last
known nugget? The gold price could spike dramatically to
levels only imagined. My colleague Jim Rickards, in his
book “The New Case for Gold,”puts it at $10,000 an ounce.
GoldMoney founder James Turk says it’s closer to $12,000.
There’s really no way of knowing how high gold could go.
Did Gold Production Peak in 2015?
What we do know is that global gold output
has been contracting since 2013. Last year might have been
the tipping point, however, in line with Goldcorp CEO Chuck
Jeannes’ prediction that peak gold was within spitting distance.
“There are just not that many new mines
being found and developed,” he told the Wall Street Journal
in 2014, adding that this was “very positive” for the gold
price going forward.
This year, second-quarter mine supply was
2 percent less than the same period in 2015, according to
preliminary estimates made by Thomson Reuters GFMS. Some
analysts now expect global production to fall 3 percent
in 2016, after seven straight years of growth.
What’s more, few new projects and expansions
are expected to come online this year, writes Thomson Reuters,
“and those in the near-term pipeline are generally fairly
modest in scale, hence our view that global mine supply
is set to begin a multiyear downtrend in 2016.”
Indeed, if we look at projects that opened
in just the last two or three years, we see that they’re
of lower grade, meaning they don’t produce nearly as much
as older, easy-to-mine gold deposits.
The truth of the matter is, when it comes
to discovering new gold deposits, the low-hanging fruit
has likely already been picked. Gone are the days when someone
could stumble upon an exposed hunk of gold at the bottom
of a riverbed, as James Marshall did in 1848, setting off
the California Gold Rush. Every year, the pursuit of gold
becomes increasingly more challenging—not to mention more
expensive—requiring ever more sophisticated tools and technology,
including 3D seismic imaging, direction drilling and airborne
gravimetry. (A satisfactory “gold fracking” method, however,
seems unlikely to become reality any time soon.)
Compounding the issue is the fact that the
number of years between discovery of a new major deposit
and production is widening, due to the increase in feasibility
assessments, compliance, licenses and more—and that’s all
before nugget one can be extracted. The average lead time
for gold mines worldwide is close to 20 years, though it
can sometimes be more, depending on the jurisdiction. This
highlights the need for worldwide policy reform to remove
many of the barriers that obstruct responsible mining.
In The Goldwatcher, the book I co-wrote
with John Katz, I expressed the importance of knowing which
developmental stage of a mine’s lifecycle a project currently
falls into, as this has a strong influence on stock performance.
Investing, like life, is all about managing expectations.
Few New Mines as Companies Deleverage
What all of this means is we’ll probably
continue to see fewer and fewer major discoveries, or those
that yield more than a million ounces. As you can see below,
new gold discoveries peaked in 1995. Exploration spending
peaked nearly 20 years later when the price per ounce averaged
$1,600.
With gold now trading above $1,340 an ounce,
up 26 percent for the year, many investors expect producers
to begin lifting spending on exploration and production
(or dividends).
Instead, most companies are in cost-cutting
mode, using this opportunity to pay down debt and liquidate
assets. According to Reuters, North American gold producers
have managed to lower their debt levels 30 percent since
late 2014.
Speaking to Mining.com, Newmont Mining CEO
Gary Goldbergsaid his company, the second-largest gold producer
in the world, is one of the few that’s currently building
new mines—specifically the Merian project in Suriname and
Long Canyon in Nevada. Because of the lack of new mines
being built, he sees supply falling 7 percent between now
and 2021.
Demand for the yellow metal, on the other
hand, should remain strong during this period, helping to
support prices even more.
Massive Inflows into Gold Funds
In the meantime, gold continues to find
support from global monetary policy and low to negative
government bond yields. Last week the Bank of England cut
rates as part of a stimulus package, which both weakened
the British pound 1.5 percent and gave the yellow metal
a jolt.
These gains were erased, however, following
Friday’s better-than-expected U.S. jobs report, which sparked
a rally in Treasuries. This contributes to the narrative
that gold and government debt are inversely related, a key
component of the Fear Trade.In the meantime, gold continues
to find support from global monetary policy and low to negative
government bond yields. Last week the Bank of England cut
rates as part of a stimulus package, which both weakened
the British pound 1.5 percent and gave the yellow metal
a jolt.
When priced in the local currencies of the
U.S., Canada, South Africa or Australia—four of the largest
gold-producing countries—bullion is up, which has boosted
miners’ profits. Gold stocks, as measured by the NYSE Arca
Gold Miners Index, have appreciated 128.92 percent in the
last 12 months.
For the first half of 2016, inflows into
commodities have been the strongest since 2009. Gold and
other precious metals account for about 60 percent of the
new money, which has pushed commodity assets under management
above $235 billion. Barclays believes 2016 could be the
best year on record for gold-related ETFs and other funds,
with many big-name hedge fund managers, from Stan Druckenmiller
to Paul Singer to Bill Gross, singing the praises of the
yellow metal.