The Bennett Newsletter
"Peak Gold"
Global Gold production has been falling every year since 2001. There was a minor revival last year as the price increase encouraged working previously uneconomic ground. But the story everywhere is of falling yields and rising costs. The situation is exemplified by South Africa, which in 1970 produced 70% of global gold, but is now a lesser producer, with some 4 kilometer-deep mines almost worked out. Australia is largely a “brown field” producer, working over old fields for a few gold grams per ton of spoil.
As in other cases, production is moving to emerging markets. A decade ago China, Russia, Peru and Indonesia accounted for only 19% of world production, but last year their production was 34% of global production. Explorers have to move to “green fields” in places like West and East Africa, where political conditions are often unstable and the infrastructure inadequate.
Supply is tight because the biggest producers like China and Russia hoard their production. Both purchase more gold. China is the biggest producer and Russia the fifth largest but neither sells to world gold markets.
Exploration efforts have greatly increased, assisted by modern methods. But all the technology in the world cannot hide the fact that significant new discoveries are rare. From 1992 to 2007, a total of 90 deposits with 2.5mn ounces of gold each were discovered. However, the number of discoveries is caught in a sharp downward trend: after the turn of the millennium, only three larger deposits have been discovered per year. Graham Birch, manager of the BGF World Gold, said that he expected a decrease in production of 10-15% over the coming five years. At the moment, 80mn ounces are produced, but only 15mn ounces are discovered every year.
Gold content has been gradually slipping: in 2000, the average gold content was still 2 grams per tonne of rock, this ratio declined to 1.2 grams in 2008. New discoveries will probably be gradually smaller, of lower grade, and in more exotic and remote regions.
Africa will possibly boost production. Gold mine production increased in 2009 by 6% due especially to production increases in China, Russia, Tanzania and Senegal. But global total production is still below its 2001 peak of 2,600 tonnes.
The cost of opening new mines is increasing. Compliance costs have increased. Remoteness comes at a cost. A new mine in New Zealand could hook into the national grid, but in many other countries mines must make their own generating capacity. Most will have to budget for high spending on infrastructure of roads, power etc. The US Geological Survey estimates that setting up a new underground mine which might have cost US$100m a decade ago costs a billion now. There are many low-cap explorers but when a resource is located, they have to farm it out to a big producer to develop it. Heritage Gold NZ, for example, has proven reserves and a mining permit, but needs overseas capital to fund production.
Thus several of the past giant producers, South Africa, the US and Australia, have already passed their peak. Their existing mines are running out of resources and new finds are rare. Some significant producers take the risk of mining in politically unstable countries. But some big companies, like Barrick mining, are cautious. Although the big operators have reserves, they will have difficulty in maintaining their output in the years to come. Most gold experts believe gold supply with decline 3%-5% p.a. in the future. Aaron Regent of Barrick believes “we are already at peak gold” as “it is increasingly difficult to find ore”.
Recycled gold is a significant part of supply since the recession began in 2007. Many people have turned unwanted jewellery into money. Gold buyers have moved into malls, offering a fraction of scrap value to sellers. Recycling volume rose by 30% in 2008 to a global total of 1,218 tons. In 2009 recycled gold leapt by 28% to 1,549 tons which is approximately 60% of the years total mine production of 2,554 tonnes.
The jewellery market in 2009 fell about 20% year-on-year. After a disastrous first quarter, demand increased in consecutive quarters as Indian buying revived. India and China are the largest markets and demand is brisk. Gold demand in the industrial and dental markets faltered in 2009 but ended the year strongly, with demand for uses in electronics increasing 25%.
Gold demand was influenced by the decision of central banks to retain their reserves. In previous years, selling had depressed the market. 2009 sales were negligible. The IMF put some gold on the market but it was eagerly snapped up by the central banks of India, Sri Lank and Mauritius. The Russia central bank bought gold to add to its reserves too. A Daily Telegraph feature revealed that the non-western powers had gold as only 2.2% of reserves as opposed to 38% for the “old world”. Basically the emerging world would have to buy US$700 bn to build up their gold reserves to old world levels.
China has 34 million troy oz. or only 1.7% of its reserves. China is accumulating its own gold production but also buying on the dips. I conclude that China has put a bottom under gold. This could explain why gold has been rising in conjunction with a rising dollar: though both assets are regards as havens in a flight to safety.
It is surprising that many countries have negligible gold reserves. The gold proportions are: Hong Kong (0%), Singapore (0%), Korea (0.2%), Brazil (0.6%), and India (4.8%) (after its shock purchase of IMF gold) and Russia (5.5%). Meanwhile, the West still retains a lot in percentage terms — US (86%), France (78%), Italy (72%), Switzerland (33%), Germany (25%) I can think of few better reasons to accumulate gold than the state of the world’s gold reserves and the contrast between the Old world and emerging markets.
Demand is soaring for physical gold, especially from Exchange Traded funds (ETF) which hold 1768 tonnes and for coins etc which is running at about 180 tonnes a quarter but appears to have leapt recently. Mints are crying out for gold. I will discuss how the investment market works in another column.
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