Peak Gold? No: Peak Gold Production? Perhaps

Some claim we have reached peak gold. It depends on what one means by the term. Perhaps we have reached peak production.

Last September, Bloomberg reported We're Reaching Peak Gold.

The world may have already produced the most gold in a year it ever will, according to the chairman of the World Gold Council.

Production is likely to plateau at best, before slowly declining as demand rises, especially given global political risks and robust purchases by consumers in India and China, Randall Oliphant said in an interview Monday.

“It’s not clear how the whole U.S. political system will play out,” said Oliphant, an industry veteran who’s been an executive at some of the world’s biggest gold miners. “All this uncertainty seems very fertile ground for people to get into gold.”

We’re not going to fall off a cliff in the near term, but in the same time it’s really hard to see how we’re going to produce enough gold to meet all this demand,” Oliphant said.

Meeting Demand

The last statement by Oliphant, the chairman of the World Gold Conference is absurd.

There is ample gold to meet demand. Unlike energy or silver, gold is not used up.

Nearly every ounce of gold ever mined is still in existence. The exchanges would not run out of gold even if production fell to zero tomorrow and stayed that way for the next decade.

What’s the Real Long-Term Driver for Gold?

Most analysts are totally clueless about gold and gold markets. They cite jewelry, mining production, central bank sales, and all sorts of other irrelevant factors in their analysis.

If you really want to understand what gold is all about, I suggest you read an interview on Gold Switzerland with Robert Blumen: “What’s really key for the price formation of gold?

Blumen discusses assets vs. consumption, mine supply, jewelry, marginal demand, the alleged (and nonexistent “gold deficit”), and sentiment.

For a quick summation of Blumen, see the addendum below.

Reserve Exhaustion

Gold will not run out, but gold mining companies can and do exhaust their reserves. If reserves drop to a level where production no longer makes any sense, the company goes out of business.

Therefore, the major mining companies are always on the lookout to replenish reserves.

Glimpse of the Future

Big gold and silver miners have a problem: They’re evaporating. Each year they take more metal out of the ground than they discover, which brings them ever-closer to the end of the road. They know it and their shareholders know it, which means their stock prices tend to languish in the shadow of falling production and depressed future earnings.

The solution? Buy out junior miners sitting on resources big enough to arrest the majors’ decline. There aren’t that many such juniors, which points to a bidding war as the best are snapped up and the rest rise in sympathy.

The Trick

The trick is to find undervalued junior miners that are likely to be bought out.

Good management teams are critical. Look for companies where drilling is about to begin or has already begun as opposed to buying companies that promise to find something.

Many companies do nothing but provide perpetual shareholder dilution selling shares and raising money to stay in business.

It takes effort. Newsletters can be helpful. So can following the news.

Rubino mentions five possible plays.

My opinion?

  1. Do own due diligence.
  2. Stay away from nonsense like this: Harry Dent Warns of "$700 Gold by 2018"

Addendum

Reader "Long VIX" replies:

Mish, can you summarize in single paragraph "What’s the Real Long-Term Driver for Gold?" without your readers having to read the whole Robert Blumen's interview? This is the quote that stood out to me.

"The gold price is formed by a balancing process, as investors shift different assets in order to hold the amount of gold, cash, and other assets they want."

That is a reasonable summation in a sentence. The supply of gold is relatively constant: Nearly every ounce ever mined. Someone has to hold every ounce.

Discussion of jewelry, India, production, running out, etc. are noise.

The price rises when desirability of gold goes up. When is that? The best explanation is when faith in central banks wanes.

Faith in Central Banks

For further discussion, please see my October 15, 2017 article "Gold Price To Suffer a Tremendous Drop" says Goldman Sachs: Mish Says "This Is a Buy Signal"

Mike "Mish" Shedlock

Comments
No. 1-21
Mike Mish Shedlock
Mike Mish Shedlock

Editor

I do not use any of that stuff. Cash, gold, treasuries I like (not in the latter) Forget about earnings. It's mostly lies. Keep some dry powder. It could be important. Also like Yen-hedged Japanese equities.

JBoomBoom
JBoomBoom

Thank you @Mish! I just sent him a message and mentioned you. Would you consider sites like Morningstar and Yahoo Finance to be reliable for data such as earnings, debt, etc? If not, what do you recommend?

JBoomBoom
JBoomBoom

Thanks for these great insights, @Mish and readers. I am starting to self direct my personal investing as I don't trust our family cookie cutter advisor. You mentioned doing your own diligence on junior miners and wondered what are some good resources for finding reliable stats and news on publicly traded companies (miners and other sectors)? I would like to analyze debt levels, reserves, dividends, earnings, etc. Thank you!

Long VIX
Long VIX

My points are simple:

  1. If you already don't trust Central Banks with Fiat, then why would you trust Central Banks with paper backed Gold Standard?
  2. Just like there is currency debasement with Fiat, there was currency debasement with Gold standard (see The Great Debasement 1544-1551 or Nixon abandoning Gold Standard in 1971).
  3. Gold Standard is not coming back. Fiat Debasement is here to stay. Debasement is how governments have been running for the last 3000 years.
  4. Technology has made real, physical Gold currency obsolete. I agree that this one could prevent debasement that you are concerned about. But it is obsolete.
  5. S&P500 has outperformed gold even during Gold Standard times. I would recommend you to compare "Gold buying power" vs "S&P500 buying power" and not "Dollar buying power".

And my question is simple - For a minute assume that gold standard is not coming back and even less people will keep using gold as étalon, then what will happen with gold prices?

P.S.
I am not denying that we may be in stock market bubble right now.

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