Based on huge increases in demand from Asia, the desire to own gold and silver promises an increasingly solid foundation for years to come. China, India, and Southeast Asia have historically accumulated precious metals as a method of saving, a hedge against political uncertainty (such as India’s surprise demonetisation last year of 80 per cent of the country’s paper currency), and as an expression of affection. China’s newly-emerging affluent middle class alone is set to become larger than the population of the US. Frank Holmes, chief executive of US Global Investors, refers to these factors as “love and fear trades”.
Then there is China’s One Belt, One Road Initiative: the world’s largest-ever construction project. It is designed to link 60 per cent of the world’s population in a cooperative financial and economic network. Considering all this, the continued migration of gold supply from west to east seems inevitable.
Even as the West ships much of its remaining gold eastward (largely via Swiss refineries who repurpose it into .9999 fine gold), countries like Germany and Turkey have stepped up, becoming noteworthy drivers of demand in their own right. Meanwhile, fund managers are finally realising that gold deserves to be a permanent portfolio asset holding category, another long-term, rock-solid foundation to gold’s demand – and price.
Gold Supply Seizures
Metaphorically-speaking, available data strongly suggest (with evidence mounting since 2015) that over the next few years a further narrowing of the gold supply veins and arteries will lead to a series of demand seizures, climaxing in a systemic ‘heart attack’.
South Africa’s Gold Production Keeps Heading South
Astonishingly, South Africa’s Witwatersrand Basin has been the source of almost 40 per cent of all the gold ever recovered. But the government has become so obdurate that its current rank as the world’s seventh-largest producer looks set to fall further.
It has once again decided to change the country’s mining code, demanding higher royalties and increased black empowerment participation, leading to a dire warning from credit rating agency Moody’s. It stated that “if the substantial expansionary investment required to reconfigure loss-making mining operations and make them profitable is not forthcoming, mines will either be restructured or closed.”
“Mining ‘nationalism’ has reintroduced one of the most crippling elements a mining producer – or explorer can face…unpredictability.”
South Africa’s next move follows recent gambits against other large gold producers in Indonesia (Freeport) and Tanzania (Acacia Mining). Dave Forest, who keeps track of this in his newsletter, Pierce Points, remarked:
Mining “nationalism” has re-introduced one of the most crippling elements a mining producer – or explorer can face…unpredictability. If there is no certainty that some sort of “rule of law” will prevail, then trying to anticipate / predict how much gold and copper will/can be produced in a given operation flies out the window. Look how much is going on right now as gold hovers “merely” around $1,300 per ounce. What do you think that this witches’ brew of greed, corruption, power-grabbing and incompetency is going to produce when gold trades – as it will before long- at $2,000, $3,000, $5,000 or more?
Even without heavy-handed regulations, South African mining would be facing increasing costs as mines go deeper to access gold and platinum. The way things are going, the last nails in the coffin appear set to be hammered into place. In the early 1970s, annual gold production topped out at an amazing 1,000 tonnes per year. Since 2000, gold production has spiralled downward towards a paltry 200 tonnes per year.
When A Gold Giant Speaks, You Should Listen…
Pierre Lassonde is a giant in the mining business. In 1982, he co-founded Franco-Nevada, the first publicly-traded gold royalty company, which now has a market capitalisation of $7bn. He played a critical role in the growth of Newmont Mining, the world’s second largest gold producer, heading to become the largest as current number one Barrick Gold divests non-core mines. When he speaks, we should pay attention. In a recent interview, discussing the global gold supply, Lassonde said:
“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 each 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…
They have not put anywhere near enough money into research and development, particularly for new technologies with respect to exploration and processing… 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.”
You Can’t Fight A War – Or Produce Gold – Without Reserves
Of the five formal categories used to estimate the amount of economically-recoverable gold a mining company has in the ground, reserves ranks highest. The other four categories decline in estimated value and the likelihood they will ever be profitably recovered. As of this year, global gold reserves barely equal those of 2004 – the very beginning of the metal’s bull run. Despite this gold has risen from $250/oz to (briefly) $1,900/oz, and is now around $1,300/oz.
The inescapable truth is that every ounce of mined gold that is not replaced by a new reserve places a producer just that much closer toward going out of business.
This is The Calm Before The Storm
Do not be lulled into complacency by this year’s muted US gold and silver sales figures.
So-called ‘high grading’ (mining the best ore bodies first in order to remain profitable), a lack of exploration success in replacing reserves despite increased funding, and high country risk around the world, are placing declining supply on a collision course with increasing demand.
Establish and keep adding to your gold stash now while the price is favourable. Don’t be shut out when an unpredictable but inevitable gold supply ‘heart attack’ takes place.
David Smith
David Smith is Senior Analyst for TheMorganReport.com and Riches in Resources, as well as a regular contributor to MoneyMetals.com. He has investigated precious metals’ mines and exploration sites in Argentina, Chile, Mexico, Bolivia, China, Canada, and the U.S. He shares his resource sector observations with the media, readers, and North American investment conference attendees.
