During the third quarter of 2016, global gold production dropped by 0.5%.
Miners brought 846.8t onto the market versus 851.2t during Q3 of 2015. While
this isn’t a huge decline, it marks the second consecutive quarter
that gold production was down versus the previous year. The overall
trend of plateauing output remains in place and has increased the odds that
we are approaching, or have already reached, peak gold. The chart of annual
mine production is shown below.
Also notice the sharp decline in the line from 2009 to this year. The
strong growth trend from earlier years has fizzled out and trended towards
zero.
The flat production story is occurring due to operational changes by
miners over the past few years. During the 4+ year correction, miners had to
focus on cost reductions to remain solvent. Furthermore, they had to reign in
exploration and focus on core assets. This will negatively impact gold
production for years, as the project pipeline has been scaled back
considerably and this will reduce the amount of gold that is being
mined annually.
Total gold supply increased, but it was driven entirely by a big jump in
recycled gold. The higher price encouraged consumers to sell some of their
existing gold holdings. These high levels of recycling, driven by the big
jump in gold prices this year, are not likely to be sustained going forward.
Has Peak Gold Arrived?
A few prominent analysts believe that peak gold hit in 2015. Peak
gold suggests that total annual global gold production is likely to have
peaked and will gradually drop into the future. Reduced gold production and
total gold supply is a positive fundamental factor for the gold price
going forward.
The following chart suggests that peak gold hit in 2015/2016, following
peak discovery back in 1995. This gap coincides with the rough 20-year
development cycle from peak discovery to peak production.
Another important factor is that the new discoveries are not as large or
as high grade as they have been in the past. The result is that new mines are
making a smaller contribution to global gold production and failing to
replace the quantity or quality of previously discovered mines.
Goldcorp CEO Chuck Jeannes’ has predicted that peak gold is just around
the corner.
“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.
Mr. Jeannes is not alone in his assessment:
Nick Holland, chief executive of Gold Fields: “We were all talking
about how production was going to increase every year. I think those days are
probably gone … you are not going to see massive production increases in the
industry.”
Vitaly Nesis, CEO of Polymetal: “I think supply will drop by 15 to 20 per
cent over the next three to four years.”
Kevin Dushnisky, president of Barrick Gold: “Falling grades and
production levels, a lack of new discoveries, and extended project
development timelines are bullish for the medium and long-term gold price
outlook.”
Mark Bristow, CEO of Rangold Resources: Peak gold production may be
reached within the next three years as miners fail to replace their
reserves. World’s gold output could peak as early as 2019.
Barrick Gold, the world’s biggest producer, had output of 1.3 million
ounces in the second quarter, a drop of 7.5% versus year ago. AngloGold
Ashanti, the third-largest miner of the metal, notched a 12% decline in gold
production in the first half of 2016.
Gold’s value is partly driven by its rarity. Goldman Sachs estimates that
we have only “20 years of known mineable reserves of gold.” Of course,
unknown gold reserves will be discovered in time, but this helps in
understanding just how little gold there is in the world.
To put these numbers into better perspective, all of the gold mined in
2016, melted down into bars, would roughly fit into 2-car garage. In
fact, all the gold ever mined would fit snugly into an Olympic-size
swimming pool or stacked just 5 stories high on an average
residential house lot. Note that estimated of all the gold in the world vary,
but we think the higher side estimates closer to 180,000 tonne are likely
more accurate. Either way, it is much less than one would imagine, especially
when melted down into a cube.
Total gold demand is on track for a 7% increase in 2016, while global
mine production is trending essentially flat. Higher demand and flat or
declining supply is a recipe for higher price. In the near term, total gold
supply growth is matching demand growth thanks to a huge increase in gold
recycling. But absent recycling, mine production alone would not be
sufficient to cover new demand.
So, we can’t yet say for certain if peak gold has arrived. And even if it
has, the price impact is likely to be muted as the large increase in gold
recycling fills the gap. But over time, a flatlining of gold production
coupled with increasing demand from central banks, investors and ETFs is
likely to be supportive of higher gold prices.
Of course, this is just one of the many fundamental reasons that we
believe the gold price is heading much higher in the coming years. If you
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