Focus on Fundamentals: No More Easy Gold
When we talk about gold and its future prospects, we tend to focus on the latest event, economic news, or central bank pronouncement. We debate whether the Fed will raise or lower rates. We try to project the impact of Brexit on the price of gold. And we pour over the latest job numbers and other economic data to gauge the health of the economy.
Of course, all of these things do affect the price of gold, but oftentimes these factors only have short-term impacts. There are fundamentals that affect the price of gold in the long-term that often get drowned out by the noise of squawking talking-heads.
The gold supply is one of those fundamentals often lost in the shuffle. Every indication is that it’s poised to shrink, and that could be more significant for the future price of gold than whatever latest news we’re obsessing over.
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Last month, we reported that the CEO of one of the world’s largest gold mining companies said he expects the gold supply to shrink over the next five years. He predicted a 7% slide by the year 2021. Even more significantly, some analysts believe we are close to, or have already reached, what is known as “peak gold.”
Since the 1970s, the amount of gold mined each year has steadily increased. But when the world hits peak gold, the amount of gold mined each year will begin to shrink. In September 2014, Chuck Jeannes announced that he believes the world will reach “peak gold” either in 2015 or 2016. 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.”
Now there is some solid evidence that we may indeed be at or near peak gold. As Mining.com put it, there are no more easy gold discoveries. In fact, the number of major gold discoveries is shrinking:
Looking at the past 20 years, exploration spending for gold peaked in 2012 when mining companies spent a total of $6.05 billion. In the subsequent years, only 4 major gold deposits were discovered, compared to an average of 10 per year leading up to 2012. While a major discovery could take several years to prove up, there is no denying that the velocity of major gold discoveries has decreased significantly.”
Analysts define a major discovery as either containing 1 million ounces of reserves or at least 2 million in resources. These types of discoveries may soon become a thing of the past:
We will never see the type of deposits discovered in the 90s again. Gold prices traded around $280-420 per ounce, meaning the majority of easy to access, low-cost projects have been discovered.”
While the pressure on the supply side is down, the demand for gold continues to increase. Economics 101 tells us this will put long-term upward pressure on the price of the yellow metal.
It’s easy to get caught up in the latest economic news or headline grabbing world event, but it’s important to always keep an eye on basic fundamentals.
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There are some tricky and expensive details left to work out, but we will soon begin exploring the deep sea beds for metallic resources. Most of the problems we will face are bound to be purely political. Yes, deep sea exploration is right next door to rocketry insofar as technical demands go, in fact it is more challenging in some ways, but where there’s gold, and there is, there’s a way. That will leave international politics as the major obstacle.
What is the time lag between discovery of a deposit and the gold out of that discovery actually coming into supply into the markets?