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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.
click to enlarge
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.
click to enlarge
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.
click to enlarge
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.
click to enlarge
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.
click to enlarge
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 Goldberg said 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.
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.
click to enlarge
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.
All opinions expressed and data provided are subject to change
without notice. Some of these opinions may not be appropriate to every
investor. By clicking the link(s) above, you will be directed to a
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for its/their content. This news release may include certain
“forward-looking statements” including statements relating to revenues,
expenses, and expectations regarding market conditions. These
statements involve certain risks and uncertainties. There can be no
assurance that such statements will prove accurate and actual results
and future events could differ materially from those anticipated in
such statements.
The NYSE Arca Gold Miners Index is a modified market capitalization
weighted index comprised of publicly traded companies involved
primarily in the mining for gold and silver. The index benchmark
value was 500.0 at the close of trading on December 20, 2002.
Holdings may change daily. Holdings are reported as of the most
recent quarter-end. The following securities mentioned in the article
were held by one or more accounts managed by U.S. Global Investors as
of 6/30/2016: Barrick Gold Corp., Newmont Mining Corp.
http://www.usfunds.com/
Editors note: The fact that peak gold is taking
place at a time when the world is engaged in a risky monetary
experiment involving massive fiat paper and electronic money creation
on a scale that the world has never seen before, bodes very well for
gold’s long term outlook.
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