If you ever get the chance to camp near an old gold or silver mine, take it. I did it years ago. Not only is it a great experience, but it also made me a better metals trader.
Why? Well, there’s nothing like seeing long-abandoned mines with your own eyes. You realize, in a visceral way, that someone did a rough estimate on supply and demand decades ago, and they got it wrong.
That has also been the case in recent years, with gold prices well below 2011.
But that is about to change…
My camping trip was somewhat impromptu. I was in Reno for a conference. A friend of mine had a topographical map of some old mines in the high desert of the Santa Rosa Mountains, about four hours north.
We drove, camped in the middle of the sagebrush, and the next morning hiked up a steep hillside to a small plateau. That’s where we find the entrance to the mine (closed with dynamite), an old wooden shack, and other crumbling remnants of the operation.
We also found the mine’s “power plant”: the rusted skeleton of a Model T, sitting on blocks. Instead of wheels, it had big conveyor belt axles bolted to its axles!
There is a long way, in terms of time and technology, from that old mine to the huge industrial gold leach mines that dot northern Nevada today.
But the decades-long cycles of supply and demand, boom and bust, remain. And while few outside the industry are talking about it yet, the seeds for the next boom are already in the air.
The reason has to do with global production.
gold spike?
According to industry insiders, top investment bankers and others, 2015 will be the peak year for global gold production.
If you buy into the common sense idea that lots of supply equals lower prices, then that’s the bad news.
The good news? Those same sources say production is headed much lower in 2016 and beyond.
Nevada gold mining statistics tell a small part of the story.
Last month, the state minerals division totaled its gold production statistics for 2014: it fell to 4.9 million ounces, the lowest level in 27 years.
But here’s the biggest trend: Nevada’s total production actually peaked in 1998 at nearly 9 million ounces. Since then, gold production has declined in 12 of the last 17 years.
What’s going on? Simply put, the areas with the highest grade minerals have been systematically excavated. And because Nevada contributes the majority of US gold production, US production data tells a similar story.
The statistics for Australia and South Africa are very similar. Gold production in South Africa peaked in 1970. Australia peaked in 1997.
For a long time, production from China and Russia filled the gap.
But with gold prices falling, more mines closing, and gold mining companies wisely avoiding new projects, the “production cliff” (as some analysts call it) is finally around the corner…
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Goldman Sachs, in a March report, sees only “20 years of known mineable gold reserves” remaining in the world. The bank has noted fewer and fewer discoveries of new gold deposits since 1995.
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Earlier this month, analysts at the National Bank of Canada told The Financial Post: “It’s not a question of whether or even when the output crash will happen. It’s really a question of how companies respond.” According to the bank, world gold production will fall sharply in the coming years.
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Likewise, an analyst at Grant Thornton told AustraliaMining.com that “2015 will be the peak of world gold production.”
A hidden gold buffer
So if that’s all the case, you say, why haven’t we seen higher prices yet?
A big reason is the influence of “scrap gold” on the world market. All those melted earrings, bracelets and dental fillings constitute a significant source of supply, up 36% in 2011 and 2012.
But that source is also constantly drying up. In 2014, only 28% of the world’s gold supply came from recycled sources. The World Gold Council noted that the supply of recycled gold hit its lowest level since 2007.
Those trends continue into 2015. The group says recycled gold supply fell 3% and another 8% in the first two quarters of the year (on a year-over-year basis).
Supply crunch will lead to higher prices
Here’s a final point: it takes time for new information to filter through in any market. The rise and fall of gold prices? That’s old news by now, fully discounted in the price of the metal and its miners.
But what is it that most people still don’t realize (and would hardly believe if you told them)? Gold’s “production cliff” fits the bill. As new data confirms the forecast, expect this to be a major new catalyst for gold prices in the coming quarters.