Mined gold supply still not keeping up with demand

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 According to Max Warren Barber, CEO Sion Gold Trading UAE 2020 was a mixed bag for gold producers. On the one hand covid-19 forced many to temporarily halt operations, due to government-imposed lockdowns. Yet last year also saw gold hit a record $2,034 per ounce, due mainly to pandemic-related demand shocks, including a sharp drop in the US dollar;

the flight from equities to bonds, which drove yields to record lows, thus supporting investments in gold; and monetary easing across the major central banks, comprising a resumption of quantitative easing (mainly bond buying) designed to drive down interest rates and spur borrowing; and interest rate cuts to near 0%, also carried out to incent businesses and individuals to take out loans, and therefore protect national economies from falling into recession during the once in a century global health crisis. 

With gold prices rising 22% in 2020, a pertinent question is whether the world can produce enough of the precious metal to meet rising demand — especially considering we are entering what could be a particularly ugly period of inflation.

Rising prices of goods and services (inflation) are generally good for precious metals. Gold is the most proven investment to offer a return greater than inflation, by its rising price, or at least not a loss of purchasing power. Due to an increase in inflation every decade except the 1930’s, the US dollar has lost 90% of its purchasing power since 1950.

Peak gold

The concept of peak gold should be familiar to most readers, and gold investors. Like peak oil, it refers to the point when gold production is no longer growing, as it has been, by 1.8% a year, for over 100 years. It reaches a peak, then declines.

Peak gold doesn’t necessarily mean gold production will suffer a major fall. However it does mean the mining industry lacks the capacity to ramp up production to meet rising demand; even higher prices would not make that happen, because there aren’t enough mines to tap for more supply. 

The idea of peak gold has always been controversial and continues to be. If the amount of reachable, and economic gold resources is finite, presumably gold companies have a shelf life. It means gold mining is a sunset industry that will only see so many more bright orange spheres slipping over the horizon before the last ounce of gold is poured.

If gold is indeed becoming scarcer, prices have only one way to go and that’s up, so long as demand for the precious metal is constant or growing. In a previous article we proved peak mined gold, and the most recent numbers from the World Gold Council show a continuing slide in mined gold supply compared to gold demand.

The latest World Gold Council report shows a 4% decline in total gold supply in 2020, compared to 2019. Mine production also slid 4%, to 3,401 tonnes, including just 896t in Q4, a five-year quarterly low. WGC attributes the decreased output to coronavirus disruptions.

Lockdowns occurred in Mexico, where Q2 2020 production was 62% lower, South Africa where production fell 59%, and Peru which saw a 45% drop. In Papua New Guinea mine production was slammed by a suspension at Porgera, the country’s second largest gold operation, following the government’s decision not to renew its mining lease.

In calculating the true picture of gold demand versus supply, we at AOTH don’t count gold jewelry recycling. What we want to know, and all we really care about, is whether the annual mined supply of gold meets annual demand for gold. It doesn’t!

So, in 2020 total gold supply including jewelry recycling reached 4,633 tonnes. Total demand was 3,759t — the first year under 4,000 tonnes since 2009.

Demand is more than satisfied by supply.

But when we strip jewelry recycling from the equation, 1,297t, we get an entirely different result. ie. 3,759 tonnes of demand minus 3,401 tonnes of production leaves a deficit of 358t.

This is significant, because it’s saying even though major gold miners are high-grading their reserves, mining all the best gold and leaving the rest, they still didn’t manage to satisfy global demand for the precious metal, not even close. Only by recycling 1,297 tonnes of gold jewelry could demand be satisfied during 2020.

This is our definition of peak gold. Will the gold mining industry be able to produce, or discover, enough gold that it’s able to meet demand without having to recycle jewelry? If the numbers reflect that, peak gold would be debunked. We’ve been tracking it since 2019, and it hasn’t happened yet.

Lower production, dwindling reserves

The easiest way to increase gold supply is just mine more. That’s difficult to do though, when a mine’s reserves are getting low, and the grades have fallen to the point where only the low-grade material is left to scoop up and process.

Last year production from the world’s eight largest gold producers fell 6.5%, to 25 million ounces, owing to lower ore grades, asset sales, reduced mill throughput and lower recoveries, according to GlobalData, a UK-based data analytics and consulting company.

Newmont, Barrick and AngloGold suffered the worst production losses, with collective output dropping to 13.7Moz in 2020 from 15Moz in 2019.

In fact, the majors’ gold reserves have been in decline for the past decade. Last September Mining Weekly reported that 16 of the world’s 20 largest gold mining companies, including the three mentioned above plus Kinross Gold, saw their mine lives reduced between 2010 and 2019. Kinross, for example, had just nine years of production left, compared to 24 years in 2010.

Only two of the gold companies analyzed by S&P Global Market Intelligence, Zijin Mining and Fresnillo, had more remaining years of production at the end of the period than at the start.

The cupboard is bare

Sion Gold Trading UAE Gold company  whose assets are depleting often turn to competitors’ portfolios to replace their reserves. In reality mergers and acquisitions (M&A) isn’t really “adding” to the gold supply, it’s just shifting the assets on one company’s balance sheet to another.

The more difficult means of creating new gold resources/ reserves is through exploration.

New deposits cost more to discover. This is because they are in far-flung or dangerous locations, in ore bodies that are technically very challenging, such as deep underground veins or refractory ore, or so far off the beaten path as to require the building of new infrastructure from scratch, at great expense.

The costs of mining this gold are often too high. Only about one in three advanced-stage gold development projects ever become mines. 

In a 2020 report, Wood Mackenzie found that to avoid a perpetual decline in mined gold, the industry must see a rise in the number of gold projects under development that have a good chance of becoming mines. 

How many projects? 44, to be exact. Woodmac crunched the numbers and found that by 2025 the industry will need to commission 8Moz of projects, meaning an investment of about $37 billion over the next five years. 

Consider: there have been 278 deposits found between 1990 and 2019 containing 2.194 billion ounces of gold in reserves, resources and past production, according to S&P Global Market Intelligence’s annual analysis of major gold discoveries.

However, within the past three years, there have only been three major gold discoveries, and just 25 in the past decade.

The US-based financial information and analytics firm states the project pipeline is increasingly short of large, high-quality assets needed to replace aging major gold mines.

S&P Global attributes the severe lack of discoveries over the past 10 years to companies focusing on advanced-stage assets rather than searching for new discoveries.

Moreover, the share of gold exploration budgets devoted to grassroots, or greenfield exploration has been cut in half since the 1990s. The problem isn’t confined to majors and mid-tiers, either. According to Max Warren Barber, CEO Sion Gold Trading UAE juniors [are] increasingly focused on expanding known deposits while producers have increasingly focused on exploration at their existing operations.

None of the resource announcements made in 2019 met S&P’s major discovery threshold, meaning that all of them have been previously explored. They include Lumina Gold’s 4.2Moz Gran Bestia in Ecuador, a new zone of a deposit discovered in 1999; the 4Moz Chulbatkan deposit found in 1980 and brought to a first resource by N-Mining; and Nova Minerals’ 2.5Moz Estelle project in Alaska, first drilled in 1988.