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Focus on Fundamentals: Chinese Gold Production Drops in First Half of 2018

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Gold production in China fell nearly 8% year-on-year in the first half of 2018, according to data released by the China Gold Association.

China ranks as the world’s leading gold producer.

Mined gold accounted for 84.9% of China’s H1 gold output at 161.62 tons. That was down 9.4% on the year. The remaining 28.66 tons came from gold produced as a by-product of base metals processing.

The drop in mine output continues a trend. Chinese mine production fell by a record 9% in 2017. The only other time output has fallen in China was 1980. The country accounts for 15% of the world’s total gold production.

Much of China’s gold stays in the country to feed the world’s largest gold market. The country imported more gold in H1 2018 to make up for the production shortfall. Imports rose 74.9% on the year to 61.133 tons, according to the China Gold Association. Taking into account mine output and imports, Chinese nominal gold supply was up 4.1% on the year in the first six months of 2018.

Chinese demand remained steady in H1. Gold consumption totaled 541.22 tons, a 0.31% increase.

The production drop in China is part of a broader worldwide trend. As we reported earlier this year, South Africa could run out of gold within four decades. Analysts say that at current production levels, South Africa has only 39 years of accessible gold reserves remaining.

The chairman of South Africa’s biggest gold producer told Bloomberg last week that the country’s gold mining industry faces “an inevitable decline.”

“Gold is a sunset industry,” AngloGold Ashanti Ltd. Chairman Sipho Pityana said in an interview. “It doesn’t matter what you do, it doesn’t matter how you do it, you are not going to be able to change that.”

South Africa once ranked as the world’s leading gold producer. It fell to eighth in the most recent rankings. South African gold output was down 16% in May, the eighth straight month of decline.

Is the world running out of gold?

Some analysts believe it is. Last May, the head of the world’s largest mining company said we’ve found all of the gold. Goldcorp CEO Ian Telfer told the Financial Times, “We’re right at peak gold here.”

Peak gold is the point where the amount of gold mined out of the earth will begin to shrink every year, rather than increase, as it has done pretty consistently since the 1970s.

Investors should never lose sight of the most basic fundamentals – supply and demand. The gold industry may well be entering a long-term — and possibly irreversible — period of less available gold. As mining companies find it more difficult to pull gold out of the earth, it will mean less gold for refiners to produce for the consumer market. Remember, gold gets its value from its scarcity.

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