Focus on Fundamentals: Gold Supply Dropped Sharply in 2020

Total gold supply fell 4% year-on-year in 2020 to 4,644 tons. It was the largest annual decline since 2013, according to data from the World Gold Council.

The decline was primarily driven by disruptions in mine production due to the COVID-19 pandemic. Gold mine output fell 4% on the year. More significantly, it marked the second straight yearly drop in mine production and continued a trend of flatlining gold mine output.

The supply of recycled gold was up about 1% in 2020, but recycling was also impacted by coronavirus restrictions. With gold prices at record levels, recycling would have likely been much higher absent travel restrictions and mandated business closures. Even so, recycled gold came in at 1,297.4 tons in 2020, the highest level since 2012.

Peru saw the biggest drop in gold mine output with production falling 28% year-on-year. Papua New Guinea, Argentina and Chile also saw sharp declines on the year. Turkey, Kazakhstan and Russia bucked the trend and increased gold production, primarily due to newly commissioned mines.

According to the World Gold Council, mine shutdowns due to the pandemic slowed in Q4, but other factors squeezed production.

Papua New Guinea saw mine production fall 34% y-o-y due to the cessation of operations at the Porgera operation on 25 April, following the government’s decision not to renew the mining lease; Australian production fell 9% y-o-y due to falling grades at several large producers; and Chinese output was down 4% y-o-y on continued implementation of more rigorous environmental standards and consolidation of smaller producers. Only in Peru, where production fell 13% y-o-y, was COVID-19 the principal factor.”

Analysts at Global Data expect production to rebound in 2021 to around 3,560. This would slightly higher than 2019’s production level.

After flat-lining for several years, gold mine output fell by 1% in 2019. Although that year marked the first absolute decline in gold production since 2008, it continued a general trend of falling mine output. Gold mine production was up a modest 77.72 tons between 2015 and 2016, 33.92 tons between 2016 and 2017, and just 28 tons between 2017 and 2018.

Historically, mine production has generally increased every year since the 1970s. There was a drop in production in 2008, but that was something of an anomaly, as it occurred at the onset of the 2008 financial crisis. The recent slowdown in mine production is more concerning. In fact, some have speculated we may be at or near “peak gold.” This is the point where the amount of gold mined out of the earth will begin to shrink every year. Some prominent players in the mining industry think we’re close to that point.

Over the last couple of years, several gold-mining executives have warned that we have discovered most of the world’s reasonably minable gold. For instance, in 2019, Goldcorp chairman Ian Telfer said, “We’re right at peak gold here.”  And during the Denver Gold Forum in September 2017, World Gold Council chairman Randall Oliphant said he thought the world may have already reached that point. Franco-Nevada chairman Pierre Lassonde has also indicated he expects a significant dip in gold production in the coming years. And in the spring of 2019, a report in Deutsche Welle made the case that we’re approaching peak gold.

The pandemic notwithstanding, the biggest problem facing miners is that the easy to mine gold has mostly been dug out of the earth. We’ve had a three-decade decline in the discovery of new gold deposits despite increases in exploration funding. Technology advances could help reach the more difficult to mine gold, but this means increased costs and a higher gold price is necessary to sustain these projects.

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.

Demand was also down last year. Record investment demand was not enough to offset the record drop in gold jewelry sales due to the pandemic.