Have We Reached Peak Production of Gold?
Ever since the big turndown in the gold price started in 2011, some commentators have been predicting Peak Gold – the point in time global production of newly mined gold starts to fall – but so far this has failed to materialize. Global gold production has now been rising for the past seven years. What is not understood by many analysts is that lower prices can initially lead to higher production as gold mining operations which are able to do so may decide to mine higher grade sections of their orebodies, in order to maintain profitability, but at the eventual expense of mine life. And mining higher grades at an unchanged mill throughput means higher gold output.
Recent Gold Production and Price
The lower gold prices of the past five years have indeed caused miners to cut back on big new projects and on gold exploration which ultimately will trickle through in terms of reduced gold production, but this process takes much longer than many, who are not technical mining people, understand. Mine closure can be an expensive process – usually incurring redundancy and rehabilitation costs, so if it is possible to keep a mine open the mining company involved will likely try and do so, putting off the inevitable until the last possible date.
Even the best mines eventually run out of mineable gold – as witness the decline of South African gold production which has fallen from over 1,000 tons* in the early 1970s to around 160 tons today as its elderly mines close. Today there is not one South African gold mine in the world top 20 gold producers. In the early ‘70s virtually the entire Top 20 gold mine list would have been comprised of South African mines!
New-Mined Gold on the Rise
We have recently seen three very detailed analytical reports come out on global gold supply and demand – from the CPM Group in the U.S. and from Metals Focus and GFMS in the UK. All three assess global new-mined gold output to have continued to rise last year, but by relatively small amounts, and only one of them, that from GFMS, reckons 2017 will actually see a fall in output and then only a very small one in the overall context of new mined global gold production of a little over 3,200 tons annually.
From the reports, CPM believes global new-mined gold output will increase by a minuscule 500,000 troy ounces (around 15.6 tons) or about half a percent during the current year. Metals Focus, which also supplies the data utilised by the World Gold Council, won’t be drawn on an absolute number but sees 2017 output as perhaps marginally higher than 2016 or flat, while GFMS is the only one of the three actually predicting a fall during the current year – but only a very small one. All three do forecast declining gold output by the end of the decade, and for this decline to accelerate until a major rise in the gold price makes new mine construction or expansion of existing operations a much more viable proposition than it is at the moment. Meanwhile aging mines will see production continuing to diminish as they are forced to mine remaining lower grades, or even completely run out of ore.
Some of this may depend on gold price performance, but a higher gold price won’t necessarily see a rise in production – at least not for some years yet. Conversely to the point made above, that lower gold prices may see mines raise outputs through high grading, a higher gold price may see some of the uneconomic lower grade mining reserves become viable again, and the mining of lower grades at an unchanged milling rate would mean lower metal production.
Impact of Price on Gold Output
It tends to take a significant rise in the price of metals to see an increase in actual gold output materialize through stimulating new developments and new projects, but this is an extremely slow process taking some years to implement. From discovery to the first production for a new mining project may take ten years or more – and for some, opposition from local communities and environmental activists may mean that even viable projects may never see the light of day. Large new gold discoveries over the past decade have been few and far between – probably almost zero since the big fall off in gold exploration activity over the past five years.
The Future of Gold Production and the Price of Gold
The question now arises, will the eventual, and seemingly inevitable, drop in global production actually make any serious difference to the gold price? Gold production is currently in surplus according to the precious metals consultancies, so a fall-off in current new-mined production may only succeed in bringing the market closer to balance. Yet despite this, the gold price has been rising. It is thus apparent that at least for the time being the level of the gold price is relatively independent of the global supply/demand balance. The prime gold price driver remains investor sentiment and perception and this may operate independently of supply/demand fundamentals – at least to an important extent.
But there will come a time when global new-mined gold output will indeed start dropping sharply and providing demand holds up, we will start seeing a potential sharp rise in the gold price, which will re-stimulate gold exploration and the building of new mines. But this may well be too little too late and isn’t likely to have a real impact until well into the next decade, or beyond.
In terms of demand growth, the principal consumers remain the general population in Asia and we have seen substantial gold flows from West to East. However 2016 was a particularly weak year for demand in the two biggest gold-consuming nations – China and India – but there are signs that this may be beginning to turn around – notably Indian gold imports have already been picking up this year as have Shanghai Gold Exchange (SGE) gold withdrawals. So far SGE withdrawals appear to be trending higher than 2016 levels, although still well below those for the record 2015 year. *A ton is a metric ton of 1,000 kilograms or 2024.6 lbs