If you ever have the opportunity to go camping near an old gold or silver mine, take it. I did it years ago. Not only was it a great experience, but it also made me a better investor in metals.
Why? Well, it’s nothing like seeing long-dead, abandoned mines with your own eyes. You realize, viscerally, that someone made a calculation with the best assumption of supply and demand decades ago – and he guessed wrong.
This has been the case in recent years, with gold prices being significantly lower than in 2011.
But this is about to change …
My camping trip was a momentary thing. I was in Renault for a conference. A friend of mine had a top map of some old mines in the high desert of the Santa Rosa Mountains, about four hours north.
We went up, set up camp among the wormwood, and the next morning climbed a steep hill to a small plateau. There we found the entrance to the mine (closed with dynamite), an old wooden hut and other destroyed remains of the operation.
We also found the mine’s “power plant”: a long-rusty T-skeleton perched on blocks. Instead of wheels, he had large spindles on conveyor belts bolted to his axles!
It’s a long way, in terms of time and technology, from this old mine to the huge industrial gold mines that are strewn today in northern Nevada.
But long decades of supply and demand cycles, booms and busts remain. And while few outside the industry are still talking about it, the seeds for the next boom are already in the wind.
The reason is related to global production.
According to industry insiders, leading investment bankers and others, 2015 will be the peak year in world gold production.
If you believe the sound idea that a lot of supply equals lower prices, then this is bad news.
The good news? These same sources say that production was much lower in 2016 and beyond.
Nevada’s gold mining statistics tell a small part of the story.
Last month, the U.S. Minerals Division raised gold production statistics for 2014: it fell to 4.9 million ounces, the lowest level in 27 years.
But here’s the bigger trend: Nevada’s total production actually peaked in 1998 at almost 9 million ounces. Since then, gold production has declined in 12 of the last 17 years.
What is happening? In short, the areas with the highest quality ores have been systematically excavated. And because Nevada contributes the lion’s share of America’s gold, data on American production tells a similar story.
Statistics from Australia and South Africa are almost the same. Gold production in South Africa peaked in 1970. Australia peaked in 1997.
For a long time, production from China and Russia filled the gap.
But with falling gold prices, the closure of more mines and gold mining companies wisely avoiding new projects, the “production scale” (as some analysts call it) is finally on our doorstep …
- Goldman Sachs, in a March report, sees that there are only “20 years of known gold reserves that can be mined” left in the world. The bank has seen fewer and fewer discoveries of new gold deposits since 1995.
- Earlier this month, analysts at the National Bank of Canada told The Financial Post: “It’s not a question of whether or even when the production breakdown will happen. It’s really a question of how companies react.” According to the bank, world gold production will fall sharply over the next few years.
- Similarly, an analyst at Grant Thornton told AustraliaMining.com that “2015 will be the peak of global gold production.”
Hidden golden buffer
So, if that’s the case, why would we still not see higher prices?
One big reason is the impact of “golden scrap” on the world market. All these fused earrings, bracelets and dental fillings are the main source of supply – as much as 36% in 2011 and 2012.
But this source is also constantly drying up. In 2014, only 28% of global gold supplies came from recycled sources. The World Gold Council noted that the supply of recycled gold had reached its lowest level since 2007.
These trends remain in 2015. The group says that the supply of recycled gold fell by 3% and another 8% in the first two quarters of the year (on an annual basis).
Reducing supply will lead to higher prices
Here’s the last point: it takes time for new information to filter its way to each market. The boom and fall in gold prices? This is old news, completely reduced in the price of metal and its diggers.
But what is it that most people still don’t realize (and would hardly believe if you tell them)? The golden “production scale” corresponds to the bill. As new data confirms the forecast, expect this to be a major new catalyst for gold prices in the coming quarters.