Is gold production about to hit a metallic version of the Peak Oil debate...?
YOU MAY HAVE heard of Peak Oil – the idea that the world is hitting its maximum rate of oil production as oil reserves deplete in the face of rising demand, reports Commodity Online in Mumbai.
But have you heard of Peak Gold? Similar to Peak Oil, the Peak Gold phenomenon sees demand for gold increasing, but Gold Mining production starting to fall – and fall for ever – as the biggest gold discoveries are already mined out.
"While the world's mines are depleting their reserves, particularly their high grade ore, the remaining supplies of gold are becoming harder to find," says gold analyst Jon Herring for Investor's Daily Edge.
Demand for gold reached 1,133 tonnes in 2008, he notes – an 18% increase from the previous year. In Dollar terms, this represented a 51% increase to an all-time record $31.8 billion.
Little wonder Gold Prices are zooming, therefore. Gold rose to $926 per ounce last week, prompting analysts to predict that gold will easily peak nearer $1,000 in a month or two thanks to the global economic meltdown and the free-fall of currencies across the world, led by the US Dollar.
While the price of gold has gone up every year since 2001, global production of gold in contrast has been falling. For instance, gold production in South Africa, formerly the largest producer of gold, peaked in the 1970s. Brazilian gold production peaked in 1982, Canadian in 1991, Australian peaked in 1997 and US in 1998. All these countries together produce around 40% of the world's annual gold output according to Herring.
New discoveries of gold are becoming smaller and companies are struggling to maintain existing gold reserves thanks to high cost of production. In spite of an estimated $18 billion in exploration expenditure over the past five years, the quality and number of new gold deposits dropped, says research from the Metals Economic Group.
Let's face it – there have not been many large new gold discoveries in the recent past. The Metals Economic Group in fact says there have only been four world-class gold discoveries in the last 15 years. Over that time, the top five gold producing companies in the world have each produced between 3.5 and 7 million ounces per year. So while demand for gold has been increasing day by day alongside its price, production or supply of gold has been falling – and proven reserves are shrinking.
So where are the new supplies of gold going to come from? Herring says mining is a depleting business and if a company does not replace the reserves it sells each year, that company will someday cease to exist. "The major producers are voraciously hungry for new gold reserves. But they can't go out and find them by themselves.
"The best exploration geologists no longer work for the big companies. They work for and own the smaller, more nimble outfits – the junior resource companies. In fact, of all new discoveries, 75% are made by the juniors," points out Herring.
According to Herring's peak gold research, the gold exploration industry was decimated by the worldwide bear market last year. "These stocks are selling at a greater discount to gold than they were even when the gold bull market began, back when gold was roughly $600 cheaper than it is today. In fact, many of these companies are trading well below their cash value.
"The bull market in gold is fully intact," Herring believes, "and only shows signs of heating up in the years ahead. The demand for the metal is at record levels and growing. Production has been falling steadily for nearly a decade. The major mining companies are starved for new reserves and they do not currently have the resources to discover them on their own."
Further ahead, and just as the Peak Oil theory sees oil prices rising inexorably until the very last drop is drilled, investors in Gold Bullion might expect Peak Gold to boost prices further as supply continues to lag demand.