If you ever get the chance to go camping near an old gold or silver mine, take it. I did years ago. Not only is it a great experience, but it made me a better metals investor too.
Why? Well, there’s nothing like seeing long-dead, abandoned mineworks with your own eyes. You realize, in a visceral way, that someone made a best-guess calculation on supply and demand decades ago – and guessed wrong.
That’s been the case in recent years too, with gold prices way down from 2011.
But that’s about to change…
My camping trip was a spur-of-the-moment thing. I was in Reno for a conference. A buddy of mine had a topo map of some old mines in the high desert of the Santa Rosa Mountains, about four hours to the north.
We drove up, camped out amid the sagebrush, and the next morning, hiked our way up a steep hillside to a small plateau. That’s where we found the mine entrance (dynamited shut), an old wooden hut and other tumbled-down remnants of the operation.
We also found the mine’s “power plant”: the long-rusted skeleton of a Model T, sitting up on blocks. Instead of wheels, it had big conveyor-belt spindles bolted to its axles!
It’s a long distance, in terms of time and technology, from that old mine to the huge, industrial heap leachate gold mines that dot northern Nevada today.
But the long multi-decade cycles of supply and demand, boom and bust, remain. And though few outside the industry are talking about it yet, the seeds for the next boom are already in the wind.
The reason has to do with global production.
Peak Gold?
According to industry insiders, top investment bankers and others, 2015 will be the peak year in world gold output.
If you believe the common-sense idea that lots of supply equals lower prices, then that’s the bad news.
The good news? Those same sources say production is headed a lot lower in 2016 and beyond.
Nevada’s gold mining statistics tell a small part of the story.
Last month, the state’s division of minerals totaled up its gold production stats for 2014: It fell to 4.9 million ounces, the lowest in 27 years.
But here’s the bigger trend: Nevada’s total production actually peaked in 1998 at almost 9 million ounces. Since then, gold production has declined in 12 out of the last 17 years.
What’s happening? In a nutshell, the areas with the highest-grade ores have all been systematically dug out. And because Nevada contributes the lion’s share of America’s gold output, America’s production data tells a similar story.
The stats from Australia and South Africa are much the same. Gold production in South Africa peaked in 1970. Australia topped out in 1997.
For a long time, production from China and Russia filled the gap.
But with gold prices way down, more mines closing and gold-mining companies wisely avoiding new projects, the “production cliff” (as some analysts call it) is finally on our doorstep…
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- Goldman Sachs, in a report in March, sees only “20 years of known mineable reserves of gold” left in the world. The bank noted fewer and fewer discoveries of new gold deposits since 1995.
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- Earlier this month, analysts at the National Bank of Canada told The Financial Post, “It’s not a matter of if or even when the production cliff will happen. It’s really a matter of how companies respond.” According to the bank, world production of gold will drop sharply in the next few years.
- Likewise, an analyst at Grant Thornton told AustraliaMining.com that “2015 will be the peak in world gold production.”
A Hidden Gold Buffer
So if all that’s the case, you say, why haven’t we seen higher prices yet?
One big reason is the influence of “scrap gold” on the world marketplace. All those melted-down earrings, bracelets and tooth fillings constitute a major source of supply – as much as 36% in 2011 and 2012.
But that source is steadily drying up too. In 2014, only 28% of the world gold supply came from recycled sources. The World Gold Council noted that the supply of recycled gold hit its lowest level since 2007.
Those trends remain in 2015. The group says the supply of recycled gold dropped 3%, and another 8%, in the first two quarters of the year (on a year-over-year basis).
Supply Crunch Will Lead to Higher Prices
Here’s a final point: It takes time for new information to filter its way into any marketplace. The boom and bust of gold prices? That’s old news by now, fully discounted in the price of the metal and its miners.
But what is it that most people don’t realize yet (and would scarcely believe if you told them)? The gold “production cliff” fits the bill. As new data bears out the forecast, look for this to be a major new catalyst for gold prices in the quarters to come.
