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 there is huge profit potential for us.
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 thought. In fact, SNL discovered that the time from discovery to production has dramatically widened over the years.
Between 1985 and 1995, the average was about 8 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, and 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.
What About Silver?
I wish the same level of detail and amount of data was available for silver, but consider the following:
- Silver isn’t worth anywhere near as much per ounce, driving down returns when compared to gold.
- Silver production will see the same lengthening time spans between discovery and production. After all, a vast amount of silver production is essentially a byproduct of gold and copper mines.
- There are very few dedicated silver mines and silver ore grades are falling alongside gold ore grades.
- All of the factors contributing to the 20-year gap between discovery and production are the same: rising infrastructure and capital requirements, tougher permitting and public scrutiny of projects, etc.
It’s important to understand that silver demand has outstripped production for years – it is clear silver mining is on the same path as gold.
Deficits between supply and demand have been consistent since the 1980s. Just last year, demand soared 13%. Mine production went up a mere 3.4% and scrap operations couldn’t keep up.
According to the Silver Institute, 2013 saw demand soar 13%, mine production went up a mere 3.4%.
Scrap operations couldn’t come close to making up the difference, leading to a 100.3 million ounce deficit.
The Ways to Play
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 that won’t be matched for years or decades to come.
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.
The Outsider Club‘s Jimmy Mengel has some of the best research you can find on silver and it’d be foolish not to defer to him on the topic…
For gold, there is a way to translate the coming supply squeeze into gains that are larger than what pure bullion investors will see.
Truth be told, we wouldn’t even need gold prices to improve to capture profits off of investments in a handful of junior miners.
After all, majors are starting to scramble to replace dwindling resources, and they’re going to pay a premium for new resources that are close to production with low estimated all-in costs.
Nick Hodge has already recommended one of these companies to his Like Minded People subscribers with an estimated all-in cost around $900/oz, well below the $1,100 to $1,200 average.
Plus he is adding two more junior miners with ultra-low all-in costs within the next couple weeks.
Sign up with Nick and you’ll get the first one today and the next two the instant his reports are released.
