Regular readers of these commentaries are used to reading
material which is ahead of its time, in terms of identifying important trends
in precious metals and the overall economy. In
May
2014
, a Sprott Money article was published titled Evaporating Gold Reserves Signal Dying Sector.
Three years ago, that article pointed to the precipitous
drop in gold reserves for the senior gold mining companies. For readers
unfamiliar with mining fundamentals, in order for gold mining companies to be
able to maintain steady, efficient production, they require (at least) several
years of reserves of ore to process.
These years of reserves are referred to as the “mine life”
of that particular mining operation. Obviously mines (and companies) with more
years of mine life in their reserves will be healthier than those with less
years of reserves.
Between 2012 and 2013 alone, gold mine reserves across the
industry plunged by almost 15% -- a huge decline. That was the data which
prompted the earlier article. Flash ahead three years, however, and mine reserves
have continued their decline, uninterrupted.
Last year was the fifth consecutive year of industry-wide
declines in reserves. The cumulative effect of these years of declines? A
report from
AGF
Investments
on this subject calculates that current reserves reflect a 30-year low for the gold mining industry.
Think about that.
In August 1999; the price of gold fell to what was
(effectively) an all-time low: $251.70 (USD). That was less than 20 years ago.
Even at that appalling price level, mine reserves were at a healthier level
than today. This supports the argument that
in real dollars, the current price for gold (and silver) represents an
all-time low
.
The reasoning here is simple. Since 2000 (and mostly since
2008); Western currencies – especially
the
U.S. dollar
– have been debauched to complete worthlessness. The only
reason why these fraudulent fiat currencies have not already sank to their
correct exchange rate (zero) is because of the permanent-and-extreme
currency
manipulation
operations of the Big Bank crime
syndicate
, a subject of several previous commentaries.
What happens when gold reserves steadily decline? Gold production
begins to fall as well. Either some mines run out of reserves altogether and
close, or mines simply reduce their production rate to reflect dwindling
reserves. In 2016; gold mine production fell for the first time in a decade,
and the
expectation
is for that decline to continue/worsen this year.
What happens if reserves dwindle to near-zero? Mine
production collapses completely. A recent conversation with the CEO of a junior
gold mining company yielded an interesting observation. Even with the current,
abysmal (all-time low?) price for gold, he was very optimistic about the
prospects for doing a joint venture with a larger mining company to take his
project into production.
Why? Because after years of having their heads up their
rears, the
bankers
who run most of these large gold mining companies have finally figured out that
they are in trouble. Their shareholders (and boards) aren’t going to continue
to approve their inflated salaries to produce zero ounces of gold per year.
How worried are these senior mining companies? They have
even started to do some of their own exploration again. For most of the last 20
years, these banker-operated companies have been content to allow the junior
gold miners to do all gold exploration for the entire industry.
The bankers running these senior gold miners would sit
around, cheque-books in hand, waiting for some junior gold miner to establish a
multi-million ounce gold resource (preferably 10 million ounces or more). Then
they would overpay for the project and put it into production themselves. And
the shareholders of these miners wonder why they can never make any money
holding shares in these companies.
However, with effectively an all-time low for the price of
gold, this has represented depression conditions for the junior miners. The
temporary rise in the price of gold last year breathed some brief life into the
juniors. But at the current depression share prices at which these companies
are trading, it is still impossible for them to finance enough gold exploration
to halt the continued decline in reserves.
Even with belated interest in exploration from the seniors,
and a willingness to lower their threshold for project size (to less than 5
million ounces), at current price levels for gold there is absolutely no
indication that the industry can halt either the current decline in production
or the continued decline in reserves.
This supply crisis needs to be put into perspective through
looking at demand. Gold imports into Asia (mostly China and India) continue at
roughly 2,000 tonnes per year – often spiking to higher levels. Note, however,
that China also produces more than 500 tonnes per year, with never a single
ounce leaving the country.
That accounts for roughly 2,500 tonnes of demand per year.
Even with central bank gold purchases dropping off to a rate of ‘only’ about
300 tonnes per year, that accounts for almost all annual supply (currently
about 3,100 tonnes).
This leaves virtually nothing for Western gold demand.
Nothing for Western jewelry demand. Nothing for Western investment demand, to
supply the sales of gold bars and coins from our national mints. This is a
market in perpetual deficit (just like
silver).
The AGF report referenced earlier was titled “A brighter
outlook for gold junior miners”. Indeed, that reflects the anecdote from the
junior gold mining executive. However, equally, this is also a brighter outlook
for gold prices.
Gold mine reserves today are lower than they were when the
price of gold was at $250/oz (USD). The only solution to this crisis is a
higher gold price, a much higher price. With capital costs continuing to soar,
making the decision to even
begin
construction of a new mine (and finance it) requires a much higher price of
gold for most of the multi-million ounce gold deposits which are not currently
in production.
The limited number of high-grade gold projects which could
come into production over the medium term at the current price are not
sufficient to halt the declines in either production or reserves. Here it is
important for readers to understand that higher gold prices impact the reserves
of miners in two ways.
How did mine reserves decline by 15% in just one year? Did
mining companies use up 15% of all reserves in that period of time? Of course
not.
In 2012; the price of gold was in free-fall. The bankers
were hard at work reversing bullion prices from their medium term high of over
$1,900/oz (USD). As the price kept falling, gold mining companies were forced
to re-calculate their reserves.
Grades for gold ore vary considerably. Some (lower grade) ore
that can be economically mined at $1,900/oz cannot be economically mined at
$1,500 (and certainly not at $1,250/oz). Thus gold mining companies have been
forced to revise their reserves down to much lower levels, for any/every mine
producing gold at lower grades.
This means that any additional declines in the price of gold
would almost immediately exacerbate this crisis even further. However, these
dynamics operate in both directions.
When
the price of gold starts to rise, once that price has advanced significantly,
mining companies will be able to revise their reserves to higher numbers,
adding additional years of mine life to their projects.
The gold mining industry is in a state of crisis. Only
(sustained) higher prices can lead the industry out of crisis. The longer that
the banking crime syndicate delays in allowing the price to rise, the more
dramatic the increase which will be necessary to raise the industry out of
crisis.
This likely bodes well in the near term for those investing
in junior gold mining companies, or planning to do so. However, it is yet
another reason why investors in bullion can count on a rising price for gold
over the medium term.
This doesn’t change the forecast which readers have received
previously concerning gold (and silver). Almost certainly bullion prices need
to go
lower before going much, much
higher.
The reasoning remains the same. The bankers’ absurdly
inflated paper markets are
way
overdue
for a major crash – along with Western real
estate markets
. Obviously gold and silver prices will not be allowed to
shine as a beacon of stability when the bankers’ paper markets are collapsing.
However, the current crisis in gold mine reserves is yet
another reason why the pending take-down in bullion markets must be
a brief event. Neither the gold mining
industry nor the gold market could sustain any significant drop in price for
any length of time. As with the take-down which took place in 2008, bullion
holders can expect another V-pattern: a sharp decline accompanied by an equally
sharp reversal.
There is a light at the end of the tunnel. And as fundamentals continue to deteriorate in the gold mining industry, that light continues to shine brighter.
|
Jeff Nielson is co-founder and managing partner of Bullion Bulls Canada; a website which provides precious metals commentary, economic analysis, and mining information to readers and investors. Jeff originally came to the precious metals sector as an investor around the middle of last decade, but with a background in economics and law, he soon decided this was where he wanted to make the focus of his career. His website is www.bullionbullscanada.com.
|
The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
