PEAK GOLD NOT BULLISH…
For over a year now, the South African mining industry has experienced a measurably significant decline in the amount of gold produced. Statistics reported by South Africa last week show that the amount of gold produced by South African mines has declined for fifteen consecutive months. In December, gold output dropped thirty-one percent from the year before.
All mines, including gold, have a useful life which is determined by the ‘extraction period’ – the period of time during which recovery of the desired mineral deposit is procured. The output over time tends to grow at first, reach a peak, and then decline.
As the decline in output for a particular mine grows, the extraction process eventually proves unprofitable. After a certain point, it is no longer feasible to pursue the activity.
Generally speaking, this simply means that it costs more to mine the gold (in this case) than it can be sold for.
By the time this occurs, the miner (mining company, owner, investor, etc.) has usually moved on to a newer mine with a longer, useful life and the opportunity for more productive use of time, money, and activity.
But that is not happening in South Africa. Mining companies are not investing in new South African projects.
This is at least partly due to hostile actions (including expropriation) by the South African government. There are other factors, too. Among them are labor disputes and violence. But the end result is still the significant drop in gold produced by South African mining.
In other parts of the world, it is difficult to find and economically develop new reserves. When this is considered in addition to the problems in South Africa, some have predicted that global gold production could actually decline on a world basis. Maybe even this year.
This has led to a reference to something called ‘peak gold’. Ostensibly, it means that the total amount of gold pulled out of the ground in a one-year period is as high as its going to get; and will decline going forward.
Proponents of peak gold theory as it pertains to possible impact on gold prices believe that traditional forces of supply and demand will create a situation that is bullish for gold, i.e., higher gold prices.
On the demand side of the equation, global gold demand has increased continuously over the past ten years. With new gold supply expected to decline, and global demand rising, then the gold price should rise…
“One of the leading proponents of the peak gold thesis is Ian Telfer, chairman of Goldcorp – now part of Newmont Mining. Telfer called for peak gold in 2018 and expects global gold output to go down from here. If he’s right, it will be hugely bullish development for prices.”…Money Metals
Sounds logical. But there are other factors.
First, there is an implicit assumption that demand for gold will continue at record levels. Or, at least strongly enough to provide pressure upwards on prices in the face of a more limited new supply.
But why will demand continue at record levels? And does that impact gold prices?
Nearly all the gold that has ever been mined in history is above ground, and available as a potential source of supply. And, since the new production of gold on an annual basis represents only one to one and one-half percent of the total above ground supply, changes in gold production have little impact on total supply; hence any impact on prices is negligible.
Second, gold is not subject to traditional laws of supply of demand. Total supply of gold is relatively fixed with small incremental increases from annual production. Gold’s total demand is also constant and is comprised of two major factors: a) monetary demand, primarily and b) industrial demand (jewelry, ornamentation) secondarily.
The total demand for gold does not change appreciably. When monetary demand for gold is heightened, any additional demand is met by a corresponding reduction in jewelry demand. During times of relative stability and less emphasis on gold’s monetary role, jewelry demand increases and gold’s use as money declines. Regardless of any changes in percentage allocation of the two factors, gold’s use as money is always primary. Any industrial use of gold for jewelry and ornamentation is secondary to gold’s role as money.
Third, any changes in gold’s price have nothing to do with changes in its supply or demand; or its value. Gold’s value is in its use as money. Gold is real money, original money. Its value is constant and does not change.
Changes in the price of gold result from only one factor – changes in the value of the U.S. dollar. The U.S. dollar is a substitute for real money, i.e., gold. It is in a state of continual depreciation and its declining value over time is reflected in correspondingly higher prices for gold.
And regardless of how high the price of gold in dollars goes (or any other paper currency), gold’s value does not change. Its value is constant and unchanging. Gold is the standard by which all other things of value are measured.
Peak gold may be here. But it is not a relevant issue as far as gold prices are concerned.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!