Last September, Bloomberg reported We’re Reaching Peak Gold.
The world may have already produced the most gold in a year it ever will, according to the chairman of the World Gold Council.
Production is likely to plateau at best, before slowly declining as demand rises, especially given global political risks and robust purchases by consumers in India and China, Randall Oliphant said in an interview Monday.
“It’s not clear how the whole U.S. political system will play out,” said Oliphant, an industry veteran who’s been an executive at some of the world’s biggest gold miners. “All this uncertainty seems very fertile ground for people to get into gold.”
“We’re not going to fall off a cliff in the near term, but in the same time it’s really hard to see how we’re going to produce enough gold to meet all this demand,” Oliphant said.
Meeting Demand
The last statement by Oliphant, the chairman of the World Gold Conference is absurd.
There is ample gold to meet demand. Unlike energy or silver, gold is not used up.
Nearly every ounce of gold ever mined is still in existence. The exchanges would not run out of gold even if production fell to zero tomorrow and stayed that way for the next decade.
What’s the Real Long-Term Driver for Gold?
Most analysts are totally clueless about gold and gold markets. They cite jewelry, mining production, central bank sales, and all sorts of other irrelevant factors in their analysis.
If you really want to understand what gold is all about, I suggest you read an interview on Gold Switzerland with Robert Blumen: “What’s really key for the price formation of gold?”
Blumen discusses assets vs. consumption, mine supply, jewelry, marginal demand, the alleged (and nonexistent “gold deficit”), and sentiment.
For a quick summation of Blumen, see the addendum below.
Reserve Exhaustion
Gold will not run out, but gold mining companies can and do exhaust their reserves. If reserves drop to a level where production no longer makes any sense, the company goes out of business.
Therefore, the major mining companies are always on the lookout to replenish reserves.
Glimpse of the Future
John Rubino tackles the reserves idea in a Glimpse of Precious Metal Mining’s Future: Hecla Buys Klondex for 59% Premium.
Big gold and silver miners have a problem: They’re evaporating. Each year they take more metal out of the ground than they discover, which brings them ever-closer to the end of the road. They know it and their shareholders know it, which means their stock prices tend to languish in the shadow of falling production and depressed future earnings.
The solution? Buy out junior miners sitting on resources big enough to arrest the majors’ decline. There aren’t that many such juniors, which points to a bidding war as the best are snapped up and the rest rise in sympathy.
The Trick
The trick is to find undervalued junior miners that are likely to be bought out.
Good management teams are critical. Look for companies where drilling is about to begin or has already begun as opposed to buying companies that promise to find something.
Many companies do nothing but provide perpetual shareholder dilution selling shares and raising money to stay in business.
It takes effort. Newsletters can be helpful. So can following the news.
Rubino mentions five possible plays.
My opinion?
- Do own due diligence.
- Stay away from nonsense like this: Harry Dent Warns of “$700 Gold by 2018”
Addendum
Reader “Long VIX” replies:
Mish, can you summarize in single paragraph “What’s the Real Long-Term Driver for Gold?” without your readers having to read the whole Robert Blumen’s interview? This is the quote that stood out to me.
“The gold price is formed by a balancing process, as investors shift different assets in order to hold the amount of gold, cash, and other assets they want.“
That is a reasonable summation in a sentence. The supply of gold is relatively constant: Nearly every ounce ever mined. Someone has to hold every ounce.
Discussion of jewelry, India, production, running out, etc. are noise.
The price rises when desirability of gold goes up. When is that? The best explanation is when faith in central banks wanes.
Faith in Central Banks
For further discussion, please see my October 15, 2017 article “Gold Price To Suffer a Tremendous Drop” says Goldman Sachs: Mish Says “This Is a Buy Signal”
Mike “Mish” Shedlock
I do not use any of that stuff. Cash, gold, treasuries I like (not in the latter) Forget about earnings. It’s mostly lies. Keep some dry powder. It could be important. Also like Yen-hedged Japanese equities.
Thank you @Mish! I just sent him a message and mentioned you. Would you consider sites like Morningstar and Yahoo Finance to be reliable for data such as earnings, debt, etc? If not, what do you recommend?
Chris Temple at the National Investor writes a great newsletter. Ask for a free issue. Tell him I sent you. I get nothing out of this.
Thanks for these great insights, @Mish and readers. I am starting to self direct my personal investing as I don’t trust our family cookie cutter advisor. You mentioned doing your own diligence on junior miners and wondered what are some good resources for finding reliable stats and news on publicly traded companies (miners and other sectors)? I would like to analyze debt levels, reserves, dividends, earnings, etc. Thank you!
My points are simple:
1. If you already don’t trust Central Banks with Fiat, then why would you trust Central Banks with paper backed Gold Standard?
2. Just like there is currency debasement with Fiat, there was currency debasement with Gold standard (see The Great Debasement 1544-1551 or Nixon abandoning Gold Standard in 1971).
3. Gold Standard is not coming back. Fiat Debasement is here to stay. Debasement is how governments have been running for the last 3000 years.
4. Technology has made real, physical Gold currency obsolete. I agree that this one could prevent debasement that you are concerned about. But it is obsolete.
5. S&P500 has outperformed gold even during Gold Standard times. I would recommend you to compare “Gold buying power” vs “S&P500 buying power” and not “Dollar buying power”.
And my question is simple – For a minute assume that gold standard is not coming back and even less people will keep using gold as étalon, then what will happen with gold prices?
P.S.
I am not denying that we may be in stock market bubble right now.
“S&P 500 including dividends has already outperformed gold since 1971.”
And the Venezuelan stock market outperformed that again. At least until it didn’t. Not too mention Bitcoin, Beanie Babies and Tulips.
@Maximus_Minus
I agree that gold has some very very important qualities that served well for thousands of years. For example, the weight of gold coin was reliably used as coin authenticity verification mechanism. At those times there was no sophisticated technology, like Internet, that allowed to exchange information about fraudulent serial numbers written on pieces of paper. Or banking network that can even prevent theft with electronic dollar bills. On the other hand gold alone does not have these nice extra qualities that the new electric money has.
As for setting lower bound on when gold could become irrelevant. I would not trust any promises from Central Banks (whether that is Russian, US, Chinese or Indian Central Bank). And whether that promise is “we will unwind QE”, “we will hike X times this year” or whether it is “we will give you 1 ounce of gold for every $10,000 paper bill”. Nixon already demonstrated how easy it is for Central Banks to break its “backed by gold promise” when its chariman comes under pressure “due to national interests”. The question I have is – if for another 5, 50 or 100 years any attempts to introduce paper printed, gold backed currency will fail, then what would happen with gold price? Would people start to forget the idea of Gold Standard and gold price would become irrelevant? Or will people start to push their governments for physical gold coins that they will carry around in their pockets so that it would be impossible for Central Banks to break the “backed by gold in central bank vault” promise?
As for setting upper bound on when gold would become completely irrelevant – It will happen once humans finally master Nuclear Fusion and can create AU atoms from other much more common atoms. Most likely not in our lifetimes. Gold will plummet for sure then. It may not be good idea to think of gold as investment for your grand, grand, grand… children.
Like it or not – the fiat Debasement is here to stay! In my opinion, the only way to “win this game” is to invest your money in money making activities – be business owner yourself or passively invest in stocks, bonds and take some risk of major crash. S&P 500 including dividends has already outperformed gold since 1971.
There were no citizens or choice for that matter. Gold became a means of exchange by common custom because of its qualities (right after the turtle shells were discarded), a stand in for every other commodity, and the foundation of pricing mechanism. Electronic fiat can be created by a stroke of a key, and that ease is the foundation of it’s debasement.
Rather than peak gold this may be peak speculation, and that never ends well. My thesis is that gold will drop with stocks because the tail wags the dog, GLD positions used to hedge the market will be closed out. From there I see Gold entering a bull market based on the prolonged collapse of fiat monetary systems and the rise of cryptocurrency which isn’t going to be fast or easy. A real bull market in gold mining companies will take years and will climb a wall of worry, and someday a gold mining company will be in the DOW 30. A central banker is a man with customers, and he or she wants to provide the clients with what they want, a gold backed currency. To that end they will use all their rapidly deflating fiat currency to buy all the gold they can, its easy, print money, buy gold. Once that happens price is of no consequence, rather its supply and supply is being constrained. Gold tends to follow good economic conditions, and the central bankers have been printing more fiat which is used to buy gold. Gold will rightly shine when everything else (FB, self driving cars, AI) turns out to be the investment from hell. There is more to it, we will all be a lot poorer and the poor love gold most of all 🙂
The supply of gold is based on price.. Gold ore exists (dependent upon the grade) only at a certain price point. If the price goes up, the more ore there will be….
You are making a mistake I see repeated over and over. Folks in the West think their opinions of gold are all that matters. They’re wrong.
There a a couple of billion people outside of the US that are not about to question the desirability and utility of gold. You are philosophizing in a FED-centric microcosm.
An informative article. Buying up juniors or leasing their resources has always been a tactic of the major mining companies and it sounds as if that strategy is becoming more useful. I was a partner in a small gold mine in the 1980’s and due to smelting and transport costs, we found it more profitable to lease our claims to Newmont (10 year lease). It worked out well for both sides. New mint used our discovery to find larger veins around our site as well which we did have time or money to stake.
No mention of the Central Bank Gold Agreement in the chart. I think it’s the main reason gold took off from the bottom (they stopped leasing gold). In the agreement of 2014 they reintroduced leasing and gold plummeted again.
@Long VIX
Gold becomes more relevant as fiat currencies become more and more debased. Whomever issues a fiat currency, will always have an incentive to debase it; as doing so is a cost-free way of transferring what others have, to himself. No fiat currency has survived very long because of that. And none ever will, since the prospective ruler with the fewest hang-ups about debasing, can afford to make the most grandiose promises to those he proposes to rule; hence will gain the greatest support. Hence will end up ruling over his more cautious rivals.
Gold, otoh, circumvents all that; as it prevents theft by debasement. No amount of promises and weaseling around, digs more Gold out of the ground. Hence Gold can always be relied on as a bulwark by those getting thus robbed. Some crypto currency may take on similar role as Gold, but as long as Gold remains scarce, it can, hence will, always serve its role, even if it has to share it with other currencies.
Sure, you can come right now, because gold for me is already irrelevant and you can take all my gold holdings that I [don’t] have. 😀
But seriously, why in your opinion gold would become more relevant than it is right now? “More Relevant” is sense that either gold price goes significantly up compared to other metals and/or Central Banks reintroduce gold backed currencies?
Just playing devil’s advocate …
What, if things have changed since Nixon closed gold standard and the next generations would think that they don’t need to rebalance any of their wealth into gold at all? In other words, what if we are indeed on edge of massive paradigm change that already happened in 1971?
I suppose to be somewhat able to speculate on that question one would have to go back in time and ask, if for the last 3000 years:
1. it was government choice to force its populations to use currency backed by gold; OR
2. it was citizen choice to force their governments to issue currency backed by gold?
Assuming, it was government’s choice for last 3000 years to have gold standard, then their motivation at that time probably was to:
1. limit counterfeiting (e.g. at that time it was technologically hard to create gold coated coins with similar mass compared to other currency alternatives); AND
2. reduce administrative costs (e.g. replacing rotting Tally Sticks could be expensive business for government compared to minting gold coins that last)
I think that electronic, fiat money addresses those two issues that government is concerned about.
Assuming, it was citizen choice to force their governments to issue currency backed by gold for the last 3000 years, then what was citizen motivation in doing so? Was it to hedge their accumulated wealth against run-away inflation or deflation?
I also think that people have already lost faith in gold backed, paper currency after seeing what Nixon did. So the only option, I imagine, would be to reintroduce physical gold currency that people would hoard, but to me that seems a step backwards in terms of doing transactions.
Mish, the question I have to you is – if faith in central banks would be lost, then what kind of currency we would have – Would it be physical gold coins, Would it be paper notes redeemable for 1 ounce of gold at Central Bank; Or would it still be fiat currency? And if it would still be fiat currency and there won’t be any life of sign to revive gold standard, then what in your opinion would happen with gold price – would there be risk for gold to become completely irrelevant?
Excellent Suggestion: See addendum. You made the post
Mish, can you summarize in single paragraph “What’s the Real Long-Term Driver for Gold?” without your readers having to read the whole Robert Blumen’s interview? I glanced over the whole interview and the only quote that stood out to me was:
“””The gold price is formed by a balancing process, as investors shift different assets in order to hold the amount of gold, cash, and other assets they want.”””
Vladimir Putin’s safe hasn’t reached peak gold, yet. Nearly 2000 tonnes and I’m sure he’s got space for a few more bars. Also good to see a professional at work. Now if he was to place an order for 200 tonnes on the London gold markets and demand physical delivery we could see some fireworks.