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 (21)
No. 1-21
Robin Banks
Robin Banks

Vladimir Putin's safe hasn't reached peak gold, yet. Nearly 2000 tonnes and I'm sure he's got space for a few more bars. Also good to see a professional at work. Now if he was to place an order for 200 tonnes on the London gold markets and demand physical delivery we could see some fireworks.

Long VIX
Long VIX

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? I glanced over the whole interview and the only quote that stood out to me was:

"""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."""

Long VIX
Long VIX

Just playing devil's advocate ...

What, if things have changed since Nixon closed gold standard and the next generations would think that they don't need to rebalance any of their wealth into gold at all? In other words, what if we are indeed on edge of massive paradigm change that already happened in 1971?

I suppose to be somewhat able to speculate on that question one would have to go back in time and ask, if for the last 3000 years:

  1. it was government choice to force its populations to use currency backed by gold; OR
  2. it was citizen choice to force their governments to issue currency backed by gold?

Assuming, it was government's choice for last 3000 years to have gold standard, then their motivation at that time probably was to:

  1. limit counterfeiting (e.g. at that time it was technologically hard to create gold coated coins with similar mass compared to other currency alternatives); AND
  2. reduce administrative costs (e.g. replacing rotting Tally Sticks could be expensive business for government compared to minting gold coins that last)

I think that electronic, fiat money addresses those two issues that government is concerned about.

Assuming, it was citizen choice to force their governments to issue currency backed by gold for the last 3000 years, then what was citizen motivation in doing so? Was it to hedge their accumulated wealth against run-away inflation or deflation?

I also think that people have already lost faith in gold backed, paper currency after seeing what Nixon did. So the only option, I imagine, would be to reintroduce physical gold currency that people would hoard, but to me that seems a step backwards in terms of doing transactions.

Mish, the question I have to you is - if faith in central banks would be lost, then what kind of currency we would have - Would it be physical gold coins, Would it be paper notes redeemable for 1 ounce of gold at Central Bank; Or would it still be fiat currency? And if it would still be fiat currency and there won't be any life of sign to revive gold standard, then what in your opinion would happen with gold price - would there be risk for gold to become completely irrelevant?

AWC
AWC

@Long Vix, let me know when Gold becomes irrelevant. I’ll haul it away for you for free. ;)