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Analysts Predict Significant Drop in Gold Production in 2016

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Mining industry leaders say gold production has reached its peak for the cycle, and that we should expect falling mine output and tighter supply in the future.

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According to CNBC, analysts say few big projects will reach the point of actual production over the next year:

The lack of new assets and declining output at existing mines is expected to curb gold supply, a glimmer of hope for surviving producers of the precious metal in an industry coming to terms with a rush of investment when prices were far higher.”

Global gold production is expected to fall 3% this year, according to a report released by Thomson Reuters’ GFMS metals research cited by the Financial Times. The decline in production will end a seven-year period of rising supply, which peaked in 2015 at 3,155 tons.

According to Ross Strachan, a precious metals demand manager at GFMS, the dip in output will occur “as the contribution from projects that had been commissioned in previous years fades and the pipeline for new projects is limited given the current stressed financial climate.”

According to CNBC, many mining companies are reluctant to move forward with new projects, even as older mines near the end of their useful lives:

The end of the gold bull market has prompted some miners to abandon growth projects, while ore grades across the industry have been falling as mines become depleted. The strike rate in finding significant deposits has also declined and most mining companies are struggling to attract investment to develop projects.”

The projected drop in mine output comes as no surprise. Last December, Randgold Resources Ltd. CEO Mark Bristow told Bloomberg that half the gold mined today is not viable at current prices. There were already signs of slowing production late in 2015. Year-on-year quarterly gold mine production shrank by 1% to 828 tons in the third quarter, according to the World Gold Council.

Analysts are framing the dip in production and the subsequent squeeze on supply as a cyclical phenomenon. But could this possibly be the beginning of a permanent trend? Some analysts think so, predicting we may soon hit what is known as “peak gold.” That is the point at which the amount of gold being pulled out of the earth will begin to shrink every year, rather than increase, as has generally been the case since the 1970s.

In September 2014, Chuck Jeannes announced that he believes the world will reach “peak gold” either in 2015 or 2016. And last April, Goldman Sachs analysts predicted gold production would peak in 2015, saying there are “only 20 years of known mineable reserves of gold and diamonds.”

Several analysts CNBC talked to said they think supply will be a key factor in gold prices over the mid and long-term. Kelvin Dushnisky, president of Barrick Gold, the world’s largest gold miner by annual output, holds this view:

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.”

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4 thoughts on “Analysts Predict Significant Drop in Gold Production in 2016

  1. HenryR says:

    From what I have been reading, most of the junior mining companies are striving ahead, never mind what has been happening to the majors. I have been keeping a close watch on Nautilus Minerals by the way. They have designed, built and are now testing equipment to mine the sea floor from ships. They are in the process of building a dedicated ship for their mining operations as I sit here writing this. I also hear that the Canadian dollar has fallen so far that a gallon of Tide laundry soap costs over thirty loonies.

  2. James Eastman says:

    As has been pointed out in other articles, the current bear market in gold is in US dollars. I invest in the Australian gold mining sector and in the last two years, gold has gone from around $1400 AUD to $1560 AUD today-an increase of over 10%. With the exception of fuel and inputs priced in US dollars, mining costs have more or less stayed constant during that time. The result has been a renaissance in the sector. One example is a company I own shares in: Evolution Mining (ASX. EVN), which recently completed a 5-for-13 share offering to raise capital for expansion, which was oversubscribed. During the previous two years, when analysts were predicting the ‘death of gold,’ the value of my holding in the firm doubled from $0.73 to around $1.40 today. This goes to show that simply looking at the gold price in US dollars is not an indicator of gold’s true value and whether it is rising or falling.

  3. James Eastman says:

    I read a article by a man who claimed his father made a 100-fold return investing in good goldmining companies in 1969 and selling out ten years later near the height of the gold bull market. Still, making money from investing in gold miners is by no means a certain thing. You need to pick the right company at the right time.

    For me, one of the indicators the time is right, is when a company with a history of growth that is paying dividends has a PB ratio below one. When I bought into Evolution Mining at $0.73, it was paying a 2 cent per year dividend, it had just commissioned a new mine, yet its book value was far above the share price-around $1.20. From that I knew it was a good buy.

    There would likely be US goldminers currently satisfying those conditions, so if I was a US investor I would be looking to buy. That said, I’d keep my exposure to under 10% of the portfolio and bear in mind the price will fluctuate wildly (Evolution went down to $0.49 before going up past $1.40). That is where dividends are important-they give you the patience to wait for the capital gain and reduce the volatility of the shareprice to some degree.

    However if you’re not willing to put up with that kind of volatility, an investment in bullion from a reputable dealer like Schiffgold would be another option. Personally, if I were a US investor I would rather have my ‘waiting’ money in gold bullion and sound corporate bonds.

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