I’m seeing a lot of iffy low-ball price targets for gold, and it reminds me of my halcyon days when I first started driving.
In 1998 I chipped in with my brother and got a 1988 Oldsmobile Cutlass Ciera. It was baby blue with royal blue dual couch seats, and within a week in the high school parking lot the “L” was mysteriously chipped out of the model name plate.
Regardless, it was a great car. And even when making minimum wage at a state park for half a year, I had no problem topping off with gas at $1.06 a gallon.
So how does this relate to those iffy gold price targets? Well, we’ll never see those prices again. They are a thing of the past, never to return.
We’re all familiar with peak oil. At a certain point the easy-to-get oil will be gone, extraction will get more expensive and production will steadily decline, never to hit new highs.
The thing is, the same can apply to any finite resource. This is especially true for gold, silver, and other high-value metals.
Peak gold theories have been floating around for some time, but haven’t gotten much attention. Perhaps that should change…
SNL Metals & Mining, one of the sector’s largest statistical analysis and research firms, recently released a report titled “Strategies for Gold Reserves Replacement.”
Gold miners have some increasingly difficult problems to address, but the days when cheap gold can be brought to the market are long since over. There is a huge profit potential for us.
There is no way this is an “if” question. It is only a matter of when.
More Out Than In
Since early 2013 we’ve certainly seen good reason for gold miners to shelve development of new projects in favor of cutting costs. The severe drop in precious metals prices put many on a course to insolvency otherwise.
Meanwhile 2013 was a record year for gold production, with 3018.6 tonnes produced worldwide.
In spite of incredible demand from investors — especially in India and China — there is enough of a time delay when operations are scaled back to prevent any short-term supply squeeze. Without constraints, the market let gold plummet until support was found at $1200/oz.
If you step back and take a look at the broader picture, a squeeze has been in the works for quite some time, and should reach a tipping point over the next several years.
Over the past 24 years mining companies have discovered some 1.66 billion ounces of gold in 217 major discoveries. I know, that is an absurd amount of gold.
Over the same period the industry has produced 1.84 billion ounces of gold. Discoveries have not been keeping pace with production.
This was especially true during 2010 and 2011, when the massive surge in gold prices fueled junior miners and exploration.
Significant discoveries are diminishing and the trend is accelerating. In the 1990s, 124 deposits containing 1.1 billion ounces of gold were discovered. Since 2000, this has fallen to 605 million ounces in 93 such discovered deposits.
Annualize that data and it comes out to 110 million ounces per year discovered in major mines during the 90s and 46.5 million per year from 2000 through 2013 — a 57% decrease.
The 674 million ounces of gold discovered since 1999 could eventually replace just 50% of the gold produced during the same period, assuming a 75% rate for converting resources into economic reserves and a 90% recovery rate during ore processing.
SNL added, “Considering that only a third of the discovered gold has been upgraded to reserves or has already been produced, and that many of these deposits face significant political, environmental or economic hurdles, the amount of gold becoming available for production in the near term is certainly much less.”
Long Delays In Production
All of this wouldn’t be as much of a problem if it was easy to quickly turn a discovery into a producing mine in short order.
That simply isn’t possible though. In fact, SNL discovered that the time from discovery to production has dramatically increased over the years.
Between 1985 and 1995, the average was about eight years. The time increased to 11 years between 1996 and 2005, then 18 years between 2006 to 2013.
SNL estimates that the 63 projects scheduled to begin production between 2014 and 2019 are expected to take a weighted-average of 19.5 years from the date of discovery to first production.
Then there are the estimates for 2018 and 2019…
There are plenty of reasons for this to happen, including greater costs from infrastructure and processing capacity due to lower ore grades, remote locations, limited capital, an increasing need for more detailed feasibility reports, and tougher permitting requirements and studies of social and environmental impacts.
These factors are only going to get worse too, and within the next couple years the mining industry is going to feel their effects more and more as production capacity and resources dwindle.
The New Gold
It is probably a bit too early to say that we’ve hit the all-time peak gold and silver production, but all signs point to a peak within the next year that cannot be matched unless capital costs can be slashed to a small fraction of what they are today.
From our perspective as investors, this is great news. Supply goes down, prices go up. Maybe it’ll kill off some of the perpetual short positions too.
Going forward, we’re at the beginning of an extremely well established 40-year gold cycle as well.
The pattern has held strong for the last 200 years. With the timing of it lining up just right, and a hard floor for gold that means prices must rise or gold stops coming out of the ground, now is the time to get in ahead of the curve.
