Is a Significant Drop in Gold Production on the Horizon?

During the Denver Gold Forum last September, the chairman of the World Gold Council said he thinks the world may have reached peak gold. That 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.

Randall Oliphant is not the only high-profile person in the gold industry expressing concern about gold supply over the long-term. Franco-Nevada chairman Pierre Lassonde also expects a significant dip in gold production in the coming years. During a recent interview with the  German financial newspaper Finanz und Wirtschaft, Lassonde said we’re seeing a significant slowdown in the number of large deposits being discovered. The big question is how will the industry replace the massive gold mines that have produced large amounts of the yellow metal over the last 130 years or so?

Production is declining and this is going to put an enormous amount of pressure on prices down the road. If you look back to the 70s, 80s and 90s, in every one of those decades the industry found at least one 50+ million ounce gold deposit, at least ten 30+ million ounce deposits and countless 5 to 10 million ounce deposits. But if you look at the last 15 years, we found no 50 million ounce deposit, no 30 million ounce deposit, and only very few 15 million ounce deposits. So where are those great big deposits we found in the past? How are they going to be replaced? We don’t know. We do not have those ore bodies in sight.”

There is evidence that people like Oliphant and Lassonde aren’t just blowing smoke. Last month, we reported that Australian gold mine output is on track to fall by half over the next 25 years. Chinese gold production has fallen 10% through the first three quarters of this year.  As a Business Insider article pointed out, large goldfields such as South Africa’s Witwatersrand Basin, Nevada’s Carlin Trend, and Australia’s Super Pit are all nearing the end of their life cycles.

Lassonde said that mining companies have not invested enough in exploration and technology development. Even if investment ramps up, it will still take years to see results.

What the industry has not done anywhere near enough is to put money back into exploration. They have not put anywhere near enough money into research and development, particularly for new technologies with respect to exploration and processing. The way our industry works is it takes around seven years for a new mine to ramp up and then come to production. So it doesn’t really matter what the gold price will do in the next few years: Production is coming off and that means the upward pressure on the gold price could be very intense.”

The Business Insider article pointed out another problem confronting the gold industry. The “low hanging fruit” has mostly been picked.

Gold is both scarce and finite—one of the main reasons why it’s so highly valued—and explorers are now having to dig deeper and venture farther into more extreme environments to find economically viable deposits.”

Consider South Africa. More than 40% of all the gold mined in human history came from the Witwatersrand Basin. But annual golf output in South Africa has plummetted. In 1970, South African mines produced 1,000 tons of gold. Since then, production has steadily dropped. The country only produced 167.1 tons in 2016. That represents an 83% drop from the 1970 peak.

When we look at the future of gold, it’s easy to get caught up in the latest geopolitical turmoil or the most recent policy pronouncement by the Federal Reserve. Of course, it’s important to keep abreast of the latest developments in the news cycle. But 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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