Are we running out of major gold mines?

The World Is Running out of Gold Mines—Here’s How Investors Can Play It

By Frank Holmes – CEO and Chief Investment Officer U.S. Global Investors

the world is running out of gold mines, here's how investors can play it

My good friend Pierre Lassonde, cofounder and chairman of Franco-Nevada, doesn’t know how we’ll replace the massive gold deposits of the past 130 years or so. Speaking with the German financial newspaper Finanz und Wirtschaft this month, Pierre says we’re seeing a significant slowdown in the number of large deposits being discovered. Legendary goldfields such as South Africa’s Witwatersrand Basin, Nevada’s Carlin Trend and Australia’s Super Pit—all nearing the end of their lifecycles—could very well be a thing of the past.

Over the medium and long-term, this could lead to a supply-demand imbalance and ultimately put strong upward pressure on the price of gold.

According to Pierre:

If you look back to the 70s, 80s and 90s, in every one of those decades, the industry found at least one 50+ million ounce gold deposit, at least ten 30+ million ounce deposits and countless 5 to 10 million ounce deposits. But if you look at the last 15 years, we found no 50 million ounce deposit, no 30 million ounce deposit and only very few 15 million ounce deposits. 

So few new large mines are being discovered today, Pierre says, mostly because companies have had to slash exploration budgets in response to lower gold prices. Earlier this year, S&P Global Market Intelligence reported that total exploration budgets for companies involved in mining nonferrous metals fell for the fourth straight year in 2016. Budgets dropped to $6.9 billion, the lowest point in 11 years. Although we’ve seen an increase in spending so far this year, it still dramatically trails the 2012 heyday.

Total nonferrous exploration budgets fell to an 11 year low in 2016
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And because it takes seven years on average for a new mine to begin producing—thanks to feasibility studies, project approvals and other impediments—output could recede even more rapidly in the years to come.

“It doesn’t really matter what the gold price will do in the next few years,” Pierre says. “Production is coming off, and that means the upward pressure on the gold price could be very intense.”

Have We Reached Peak Gold?
Frank Holmes standing next to Pierre Lassonde right at Mines and Money London in December 2015

What Pierre is talking about, of course, is the idea of “peak gold.” I wrote about this last year and suggested another factor that could be curtailing new discoveries—namely, the low-hanging fruit has likely already been picked. Gold is both scarce and finite—one of the main reasons why it’s so highly valued—and explorers are now having to dig deeper and venture farther into more extreme environments to find economically viable deposits.

Other factors contributing to the decline include tougher regulations and higher production costs. And unlike with the oil industry, no “fracking” method has been invented yet to extract gold from hard-to-reach areas, though Barrick—the world’s largest producer by output—has been experimenting with sensors at its Cortez project in Nevada.

Take a look at how drastically annual output has fallen in South Africa, once the world’s top gold-producing country by far. In the 1880s, it was the discovery of gold in South Africa’s prolific Witwatersrand Basin—responsible for more than 40 percent of all gold ever mined in human history, if you can believe it—that helped transform Johannesburg into one of the world’s largest and most populous cities. Today, South Africa’s economy is the most advanced and stable in Sub-Saharan Africa, all thanks to the yellow metal.

In 1970, miners dug up more than 1,000 metric tons—an unfathomably large amount. Since then, production has steadily dropped. No longer in the top spot, South Africa produced only 167.1 tons in 2016, an 83 percent plunge from the 1970 peak. Meanwhile, miners in the notorious Mponeng mine—already the world’s deepest at 2.5 miles—continue to follow veins even deeper into the earth at greater and greater expense.

South Africa's gold output has been in steady decline for more than 45 years
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Australia could soon be seeing a similar downturn over the next four decades. A first-of-its-kind study conducted by MinEx Consulting and released this month, shows that Australia’s gold production is expected to see a significant drop between now and 2057. By then, all but four of the 71 currently operating mines in the country will be exhausted. Most of these will close in the next couple of decades. Any additional production will be dependent on new exploration success, which will become increasingly difficult if companies don’t invest in exploration and if the Australian government doesn’t relax rules in the mining space.

MinEx estimates that “for the Australian gold industry to maintain production at current levels in the longer term, it will either need to double the amount spent on exploration or double its discovery performance.”

To be fair, large discoveries haven’t disappeared entirely. Back in March it was reported that Shandong Gold Group, China’s second-largest producer, uncovered a deposit in eastern China containing between 380 and 550 metric tons of the yellow metal. If true, this would make it the country’s largest ever by amount. The mine has an estimated lifespan of 40 years once operations begin.

In addition, Kitco reports this month that Toronto-based Seabridge Gold recently stumbled upon a significant goldfield in northern British Columbia. The find appeared, coincidentally, after a glacier retreated. It’s estimated to contain a whopping 780 metric tons.

“There’s no question that as glaciers retreat, more ground will become available for exploration and more discoveries could be made in that part of the world,” Seabridge CEO Rudi Fronk told Kitco.

The company already has the permits to begin mining.

Seabridge gold is up 15 percent for the three month period
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Exploration Budgets Jumped
Gold represents over half of global annual commodities exploration budgets

As I said earlier, we just saw an encouraging spike in the amount spent on exploration. According to S&P Global Market Intelligence, exploration budgets increased in the 12-month period as of September for the first time since 2012. Budgets jumped 14 percent year-over-year to $7.95 billion, with gold explorers leading the way. During this period, gold companies spent around $4 billion on exploration, which is roughly half the value of all nonferrous metals mining budgets.

But because exploration is getting more expensive for reasons addressed earlier, senior producers might very well decide instead to acquire smaller firms with proven, profitable projects.

This could create a lot of value for investors, so I would keep my eyes on juniors that look like targets for takeover. Dealmaking in the Australian mining industry, for example, is showing some growth this year compared to last, according to a September report by accounting firm BDO. Last year, Goldcorp finalized its deal to acquire Vancouver-based junior Kaminak Gold, and in May of this year, El Dorado announced it was taking over Integra Gold for C$590 million. I expect to see even more deals in the coming months.

In the meantime, I agree with my friend Pierre’s “absolute rule” that investors should hold between 5 and 10 percent gold in your portfolio. I would also add gold stocks to the mix, especially overlooked and undervalued names, and rebalance once and twice a year.

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World Top 20 Gold: Countries, Companies and Mines

Herewith a series of tables, all gleaned from Metals Focus’ Gold Focus 2017 report released last week, which between them confirm that Peak Gold is not with us quite yet, although probably getting very close.

Table 1.  Top 20 Gold Producing Nations 2015/2016 (Tonnes)

Rank Country 2015 Output 20 16 Output %  Change
1 China 460.3 463.7 +1%
2 Australia 279.2 287.3 +3%
3 Russia 268.5 274.4 +2%
4 USA 215.5 225.7 +5%
5 Peru 170.6 166.0 -3%
6 South Africa 165.1 165.6
7 Canada 157.7 162.1 +3%
8 Mexico 131.7 128.4 -2%
9 Indonesia 114.2 109.5 -4%
10 Brazil 95.4 96.8 +1%
11 Ghana 95.4 95.6
12 Uzbekistan 85.5 86.7 +1%
13 Papua New Guinea 58.1 60.4 +4%
14 Argentina 63.8 59.6 -7%
15 Tanzania 53.2 55.3 +4%
16 Kazakhstan 51.0 52.6 +3%
17 Colombia 49.2 51.8 +5%
18 Mali 49.2 50.1 +2%
19 Burkina Faso 38.6 41.6 +8%
20 Chile 42.5 40.7 -4%
  Others 57.5 58.1 +1%
  Total 3,220.2 3,255.4 +1%

Source: Metals Focus

Table 2.  Top 20 Gold Producing Companies 2015/2016 (Tonnes) (1 tonne= 32150.7 troy ounces)

Rank Country 2015 Output 2016 Output %  Change
1 Barrick Gold 190.3 171.6 -10%
2 Newmont Mining 156.6 162.9 +4%
3 AngloGold Ashanti 122.8 112.8 -8%
4 Goldcorp 107.8 89.4 -17%
5 Kinross Gold 78.9 83.3 +6%
6 Newcrest Mining 77.4 76.7 -1%
7 Gold Fields 67.2 66.7 -1%
8 Polyus Gold 54.8 61.2 +12%
9 Navoi MMC (est) 61.0 61.0
10 Agnico Eagle Mines 52.0 51.7 -1%
11 Sibanye Gold 47.8 47.0 -2%
12 China National Gold 41.5 42.1 +1%
13 Yamana Gold 38.9 39.5 +2%
14 Randgold Resources 37.7 39.0 +3%
15 Shandong Gold 36.0 37.1 +3%
16 Zijin Mining 37.2 36.1 -3%
17 Harmony Gold 33.3 33.2
18 Glencore 30.0 31.9 +7%
19 Freeport McMoran 35.5 30.8 -13%
20 Fresnillo 23.7 29.1 +23%

Source: Metals Focus,

Table 3.  World’s 20 Largest Producing Gold Mines 2016 (tonnes of gold)

Rank Mine Name Country Operator 2015 Output 2016 Output %  Change
1 Muruntau Uzbekistan Uzbek Govt. 61.0 61.0
2 Pueblo Viejo Dominican Rep Barrick 29.7 36.3 +22%
3 Goldstrike USA Barrick 32.8 34.1 +4%
4 Grasberg Indonesia Freeport 38.3 33.0 -14%
5 Cortez USA Barrick 31.1 32.9 +6%
6 Carlin USA Newmont 27.6 29.4 +7%
7 Olimpiada Russia Polyus 23.6 29.3 +24%
8 Lihir PNG Newcrest 25.0 28.1 +12%
9 Batu Hijau Indonesia Amman Mineral 21.0 26.7 +27%
10 Boddington Australia Newmont 24.7 24.9 +1%
11 Cadia Valley Australia Newcrest 19.8 23.5 +19%
12 Super Pit Australia Newmont 19.9 23.3 +18%
13 Loulo-Gounkoto Mali Randgold 19.6 22.0 +12%
14 Kupol Russia Kinross 21.6 20.7 -4%
15 Yanacocha Peru Newmont 28.6 20.4 -29%
16 Kibali DRC Randgold 20.0 18.2 -9%
17 Canadian Malartic Canada Osisko 17.8 18.2 +2%
18 Tarkwa Ghana Gold Fields 18.2 17.7 -3%
19 Kumtor Kyrgyzstan Centerra 16.2 17.1 +6%
20 Sukari Egypt Centamin 13.7 17.1 +26%

Source: Metals Focus, Lawrieongold

To read additional comment on the above, Lawrieongold readers should click on the following links:

 Top 20 Gold Producing Nations See Small Gain in Output in 2016

World Top 20 Gold Miners and Mines

 

 

 

 

Peak Gold:  Not there yet!

The first paras of a new article posted on the info.sharpspixley.com website

There have been a number of commentators out there telling us that the global gold mining industry has already reached peak output (Peak Gold), but according to Jeff Christian, one of the most astute gold analysts out there, we have not actually reached this yet.  Jeff runs the New York based CPM Group metals analysis consultancy which is due to release its Gold Yearbook 2017 later this week.*

Jeff differentiates between what he calls Peak Gold and Peaking Gold.  The former he describes as the concept that the world is running out of mineable gold deposits, which he refers to as ‘hokum’. There are many well known projects and deposits, he says, and also estimates and geologically based scientifically supported views that there is plenty of gold in mineable deposits yet to be discovered around the world. Some are in remote places that have not been adequately explored, like eastern Russia and much of China, the Tibetan plateau, the inner Amazon. Some are likely in plain sight, but may be uneconomic to mine, or too costly to develop, with current technology and at current metal prices.

He goes on to comment that any failure to find new gold orebodies reflects human missteps, not a lack of geological deposits. When you take current exploration expenditures and (a) deflate them for inflation and (b) adjust them for fluctuations in the quality and quantity of data parsing, you find that the amount of real money being spent on exploration for metals in general and gold in particular actually is a fraction of what it was in the glory days of discoveries in the 1980s and early 1990s. Furthermore, an increasing proportion of ‘exploration’ expenditures is being sucked up in costly computer modeling programs. Computer models are based on past discoveries. Just as  the pharmaceuticals industry is suffering from a dearth of new drug discoveries because it has shifted from laboratory work to computer generated concepts and models, so too the mining exploration industry is consigning itself to only discovering deposits similar to ones discovered in the past. If you only look for those types of deposits, you will not find new ones. So, the failure the find new gold deposits is not a geological paucity of deposits, but rather a function of human behavior.

In terms of ‘Peaking Gold,’ CPM Group sees gold mine production as having actually risen by 2.5 million ounces, or 2.8%, in 2016, and to rise by another 500,000 ounces, or 0.6%, in 2017.  The Group sees production peaking in the 2017- 2019 period, and then declining………..

To read full article click on:

LAWRIE WILLIAMS: Peak Gold: Not there yet! – CPM Group

 

Gold Flow reversals – will they continue after U.S. holiday season over?

The U.S. holiday season effectively gets into full swing on the Independence Day weekend around July 4th, and comes to an end after Labor Day, which was on July 5th.  These holidays can represent major turning points in investment sentiment.  Gold investors will have Labor Day 2011 writ on their hearts as that was effectively the day the gold bull market ended, and a four and a half year bear market in the precious metal began.  This year saw the big SPDR Gold Shares (GLD) gold ETF reach its interim peak at 982.72 tonnes immediately following Independence Day.  Currently its holdings stand at 937.89 tonnes – a fall of 44.83 tonnes in only two months.  Gold investors will thus be nervous at what the post-holiday period will bring this year and sentiment indicators, like the GLD holdings, will thus be followed with particular interest for the next few days to see where the market is possibly headed.

Initial indications on European markets look positive with gold putting on a few dollars in morning trading today (July 6th), but it is the opening of the U.S. markets later on (this is being written at 6.24 am EST) which will be watched with particular interest as it is still very much the U.S. gold futures markets which call the tune on the gold price.

But the GLD figures, which tend to be a strong indicator of North American gold investment sentiment, particularly from the institutional viewpoint, will not be the only indicators being viewed with huge interest by gold investors.  As we have pointed out here beforehand there have been some hugely relevant reversals in gold supply and demand patterns this year.  Asian demand has been seen as weak with the two largest markets, China and India, taking in less gold that previous years, while Swiss gold import and export statistics have reversed with respect to some key nations which usually export gold to Switzerland for re-refining, becoming significant gold importers from the Alpine nation – notably the UK and the US – while on the other hand some key nations which had been significant importers of Swiss gold to meet their own trading needs have in turn become the largest exporters of gold back to Switzerland – notably the United Arab Emirates (UAE) and Hong Kong.

We have speculated here that this remarkable change in gold flows has been for two main reasons.  The first is that physical gold availability in the West has been becoming tight – particularly due to the big first half of the year needs of the major gold ETFs to maintain their gold balances in the light of big money flows into them by gold-focused investors.  The second reason, we have suggested, is that the big gold fabricators and traders in nations/states like the UAE and Hong Kong have been suffering from a severe downturn in gold demand from their traditional purchasers, mostly in Asia, and have been liquidating excessive inventories built up in the expectation of continuing high Asian demand levels.  With the substantial rise in the gold price so far this year this has been a profitable trade.

But is all this about to change and will Labor Day be the trigger?  The return of fund managers and traders to their desks may prompt a serious rethink in terms of gold investment policy and this could take the gold price in either direction depending on consensus.  This makes the past two months’ gold price mostly range-bound movements perhaps the calm before the storm.

So what is changing which could affect the price scenario?  By all accounts Indian and Chinese demand is beginning to pick up again, while on the other hand gold ETF inflows have been replaced by outflows, but this could change rapidly with any improvement in sentiment towards gold investment.  Net central bank gold buying appears to have fallen off, although as we pointed out in our recent article: Central bank gold buying – what the media reports don’t really tell you , perhaps not too much should be read into this yet given there are only three significant central bank gold buyers – Russia, China and, to a lesser extent, Kazakhstan and month by month announced reserve increases by the first two of these can be somewhat variable.

On the gold production front, we may, or may not, have reached peak gold, although evidence suggests we are now there or thereabouts.  The Australians may be bucking the trend and increasing production to maximise returns (See: Australian Gold Output Hits 15-Year High, but in other nations undoubtedly new mined gold output is beginning to slip.

So gold fundamentals are somewhat mixed in outlook, but close to balance and the markets could move it in either direction.  We remain gold positive as even when price weakness has appeared with some big technical sales on the COMEX futures market driving the price down, such raids have tended to prove shortlived in duration and effect suggesting there are plenty of buyers out there in the $1,300 – $1,340 range where gold is currently trading.  But it could be a whole new world for gold from today when the traders and fund managers are fully back on track.  With the U.S. futures market still effectively setting the gold price, although Shanghai seems to be having an increasing mitigating influence, this is all vitally impotrtant for the gold price direction from here on.  We shall see.

The above is an edited and updated version of one which I had previously posted on info.sharpspixley.com 

Has the new-mined gold output crunch already begun?

Frank Holmes, CEO and Chief Investment Officer of US Global Investors, talks us through whether we have  yet reached Peak Gold production and the price implications for the precious metal if indeed we have.

Goldcorp CEO Chuck Jeannes called 2015 the eyar for peak gold, citing the lack of new major gold discoveries. Do the facts line up with his predictions?

Gold is one of the rarest elements in the world, making up roughly 0.003 parts per million of the earth’s crust. (For some perspective, one part per million, when converted into time, is equivalent to one minute in two years. Gold is even rarer than that.) If we took all the gold ever mined—all 186,000 tonnes, from the bullion at Fort Knox to India’s bridal jewelry to King Tut’s burial mask—and melted it down to a 20.5 meter-sided cube, it would fit snugly within the confines of an Olympic-size swimming pool.

The yellow metal’s rarity, of course, is one of the main reasons why it’s so highly valued across the globe and, for most of recorded history, recognized and used as currency. Unlike fiat money, of which we can always print more, there’s only so much recoverable gold in the world. And despite the best efforts of alchemists, we can’t recreate its unique chemistry in a lab. The only way for us to acquire more is to dig.

But for how much longer?

Goldman Sachs analyst Eugene King took a stab at answering this question last year, estimating we have only “20 years of known mineable reserves of gold.”

The operative word here is “known.” If King’s projection turns out to be accurate, and the last “known” gold nugget is exhumed from the earth in 2035, that won’t necessarily spell the end of gold mining. Exploration will surely continue as it always has—though at a much higher cost.

(In fact, our insatiable pursuit of gold might one day soon take us to space, as President Barack Obama signed legislation in November that permits commercial mineral extraction on asteroids and the moon. Many near-Earth asteroids are said to contain trillions of dollars’ worth of precious metals and other minerals. But that’s a discussion for another time.)

We’ll probably see a surge in mergers and acquisitions, as I told Kitco News’ Daniela Cambone last week. I think that as long as they have reliable output, mid-cap companies could be gobbled up by the Barricks and Newmonts of the world.

Another consequence of recovering the last known nugget? The gold price could spike dramatically to levels only imagined. My colleague Jim Rickards, in his book “The New Case for Gold,” puts it at $10,000 an ounce. GoldMoney founder James Turk says it’s closer to $12,000. There’s really no way of knowing how high gold could go.

Did Gold Production Peak in 2015?

What we do know is that global gold output has been contracting since 2013. Last year might have been the tipping point, however, in line with Goldcorp CEO Chuck Jeannes’ prediction that peak gold was within spitting distance.

“There are just not that many new mines being found and developed,” he told the Wall Street Journal in 2014, adding that this was “very positive” for the gold price going forward.

This year, second-quarter mine supply was 2 percent less than the same period in 2015, according to preliminary estimates made by Thomson Reuters GFMS. Some analysts now expect global production to fall 3 percent in 2016, after seven straight years of growth.

world quarterly mine production is trending down
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What’s more, few new projects and expansions are expected to come online this year, writes Thomson Reuters, “and those in the near-term pipeline are generally fairly modest in scale, hence our view that global mine supply is set to begin a multiyear downtrend in 2016.”

Indeed, if we look at projects that opened in just the last two or three years, we see that they’re of lower grade, meaning they don’t produce nearly as much as older, easy-to-mine gold deposits.

new mines are making small contributions to global gold production
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The truth of the matter is, when it comes to discovering new gold deposits, the low-hanging fruit has likely already been picked. Gone are the days when someone could stumble upon an exposed hunk of gold at the bottom of a riverbed, as James Marshall did in 1848, setting off the California Gold Rush. Every year, the pursuit of gold becomes increasingly more challenging—not to mention more expensive—requiring ever more sophisticated tools and technology, including 3D seismic imaging, directional drilling and airborne gravimetry. (A satisfactory “gold fracking” method, however, seems unlikely to become reality any time soon.)

Compounding the issue is the fact that the number of years between discovery of a new major deposit and production is widening, due to the increase in feasibility assessments, compliance, licenses and more—and that’s all before nugget one can be extracted. The average lead time for gold mines worldwide is close to 20 years, though it can sometimes be more, depending on the jurisdiction. This highlights the need for worldwide policy reform to remove many of the barriers that obstruct responsible mining.

number of years between deposit discovery and production is growing
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In The Goldwatcher, the book I co-wrote with John Katz, I expressed the importance of knowing which developmental stage of a mine’s lifecycle a project currently falls into, as this has a strong influence on stock performance. Investing, like life, is all about managing expectations.

lifecycle of a mine
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Few New Mines as Companies Deleverage

What all of this means is we’ll probably continue to see fewer and fewer major discoveries, or those that yield more than a million ounces. As you can see below, new gold discoveries peaked in 1995. Exploration spending peaked nearly 20 years later when the price per ounce averaged $1,600.

Where Have All the Gold Discoveries Gone
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With gold now trading above $1,340 an ounce, up 26 percent for the year, many investors expect producers to begin lifting spending on exploration and production (or dividends).

Instead, most companies are in cost-cutting mode, using this opportunity to pay down debt and liquidate assets. According to Reuters, North American gold producers have managed to lower their debt levels 30 percent since late 2014.

Speaking to Mining.com, Newmont Mining CEO Gary Goldberg said his company, the second-largest gold producer in the world, is one of the few that’s currently building new mines—specifically the Merian project in Suriname and Long Canyon in Nevada. Because of the lack of new mines being built, he sees supply falling 7 percent between now and 2021.

Demand for the yellow metal, on the other hand, should remain strong during this period, helping to support prices even more.

Massive Inflows into Gold Funds

Daily Percent Change Following Positive Jobs Report

In the meantime, gold continues to find support from global monetary policy and low to negative government bond yields. Last week the Bank of England cut rates as part of a stimulus package, which both weakened the British pound 1.5 percent and gave the yellow metal a jolt.

These gains were erased, however, following Friday’s better-than-expected U.S. jobs report, which sparked a rally in Treasuries. This contributes to the narrative that gold and government debt are inversely related, a key component of the Fear Trade.

When priced in the local currencies of the U.S., Canada, South Africa or Australia—four of the largest gold-producing countries—bullion is up, which has boosted miners’ profits. Gold stocks, as measured by the NYSE Arca Gold Miners Index, have appreciated 128.92 percent in the last 12 months.

Gold Priced in Local Currencies
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For the first half of 2016, inflows into commodities have been the strongest since 2009. Gold and other precious metals account for about 60 percent of the new money, which has pushed commodity assets under management above $235 billion. Barclays believes 2016 could be the best year on record for gold-related ETFs and other funds, with many big-name hedge fund managers, from Stan Druckenmiller to Paul Singer to Bill Gross, singing the praises of the yellow metal.

 

What does peak gold mean for the gold price

Herewith intro paragraphs for a new article posted by me on sharpspixley.com website

Let us say, for argument’s sake, that the latest GFMS analysis of global gold production is correct and global new mined gold production falls by around 3% in 2016 – the first such fall in around seven years.  This would see, according to GFMS estimates, output fall by a little under 100 tonnes this year.  But would this fall make much, if any, difference to real supply/demand fundamentals and to the gold price itself?

On the margins maybe, and in terms of perception, but there are other supply and demand factors out there which are arguably far more significant than a 100 tonne fall in newly mined gold.  Indeed 100 tonnes, which only represents around 2% of total global annual gold supply, could be seen as a relatively small figure in terms of overall gold flows.  Other supply elements out there have a greater effect on global availability of physical gold and also in relation to total supply, which GFMS estimates at 4,274 tonnes last year.

Let’s take purchases and sales into the major gold ETFs to start with.  These have the potential to dwarf any new mined production changes.  For example we are only one month into 2016 and the major gold ETFs saw purchases of around 2 million ounces of gold – that’s over 60 tonnes – in January alone……..

To read full article CLICK HERE

World’s Top 10 Gold Mining Nations and Peak Gold

According to the latest GFMS Q4 Gold update and survey, the top 10 gold producing nations for 2015 were as follows (the figures are estimats so the total production figures may yet be subject to adjustment as further data comes in):

Top 10 Gold Producing Nations (tonnes) – 2015 (Estimated) (GFMS)

Rank Country 2014 2015 E Change YOY
1. China 447.8 456.5 +2%
2. Australia 274.0 277.0 +1%
3. Russia 262.2 256.7 -2%
4. USA 209.2 213.8 +2%
5. Peru 173.0 173.3 0%
6. Canada 151.2 152.1 +1%
7. South Africa 163.7 148.9 -9%
8. Indonesia 116.4 133.6 +15%
9. Mexico 117.8 123.4 +5%
10. Ghana 107.4 94.5 -12%
Rest of World 1096.7 1096.3 0%
Global Total 3119.4 3126.2 0%

Source: GFMS, Thomson Reuters

While the figures show that global gold production increased again in 2015, it was only by an almost infinitesmal 0.2% and the precious metals consultancy saw a significant downturn beginning in Q4 and reckons the trend towards lower global new mined gold output has at last started to kick in, and that this trend will continue.  This suggests that Peak Gold may well have been reached in Q3 2015.  To read more on this click on World’s Top 10 Gold producers – Peak Gold already here?

Are Peak Gold and Silver with us already

Have we reached peak precious metals? Many analysts think so.

Just to be clear, however, the idea of peak gold and peak silver doesn’t refer to a peak prices. The precious metals put in a cyclical price high in 2011. But annual mining production levels may have peaked in 2014-2015. This is what is meant by “peak precious metals.”

There is good reason to believe that newly mined supplies of gold and silver will decline in 2016 and beyond. The main culprit is low prices. In 2015, gold and silver prices spent most of the year trading below miners’ all-in production costs (which average $17/oz for silver and $1,150/oz for gold).

Primary silver production is already on the decline in the major producing countries. Last year silver output fell in Chile by 4.6%, in the United States by 6.5%, and in Canada by more than 20%!

What Scalebacks in Copper Mining Mean for Silver

It’s important to keep in mind that the majority of silver that is mined comes as a byproduct of mining operations for other metals. Fully 55% of all silver produced comes from copper, lead, and zinc mining. Another 13% comes as a byproduct of gold mining.

In order to understand the supply dynamics of the silver market, you have to take a look at what’s happening with base metals mining…

…annual [supply] deficits can begin to apply upward pressure to prices.

Much like gold miners, copper producers are struggling to cope with low spot prices. One of the ways they are trying to survive is by cutting production. Nine of the largest copper producers announced they would cut output by 200,000 metric tons in the first quarter of 2016.

The contraction in the base metals mining industry will contribute to supply tightness in silver. The silver market has experienced an annual supply deficit for most of this decade. That deficit could widen in 2016 and beyond.

The Silver Institute notes, “While such deficits do not necessarily influence prices in the near term, multiple years of annual deficits can begin to apply upward pressure to prices in subsequent periods.”

Drilling Down on the Demand Outlook

Industrial demand for gold and silver may turn out to be tepid for 2016. This is less of a factor in gold markets than for silver, where manufacturers require a good portion of what is produced annually.

Some economists worry about the possibility of recession in the months ahead. Any slump will weigh on demand for items such as jewelry and other goods. However, a lot of industrial demand comes from high-growth sectors which have proven resilient during past recessions. Electronic, solar, and healthcare-related applications for silver come to mind.

It would be a big mistake to analyze silver demand as if silver were just another industrial metal.

It’s true that industrial applications remain the biggest single component of silver demand. But unlike with zinc, nickel, iron, and other industrial metals, silver is also sought after by investors as a precious metal and a form of money. Demand for silver coins, rounds, and bars has grown steadily in recent years, accounting for 19.5% of the total silver market in 2015, according to the Silver Institute.

U.S. and Canadian Silver Production Can No Longer Satisfy Coin Demand

Surging investment demand for physical bullion was perhaps the biggest story in precious metals for 2015. Mints and refiners spent much of the 2nd half of the year unable to keep up. Investors had to contend with higher premiums and delivery delays.

Steve St. Angelo of the SRSrocco Report put out a striking analysis showing how U.S. and Canadian silver coin demand has now eclipsed silver production from the two countries. That would have been unthinkable a few years ago.

He notes that “in 2001 U.S. and Canadian silver production totaled 96.6 million oz (Moz)… That year, Silver Eagle and Maple Leaf sales totaled 9.2 Moz.” A net surplus of 87.4 million ounces.

Fast forward 14 years, and we have a “net deficit of 26.2 Moz in 2015 as total Silver Eagle and Maple Leaf sales reach a record 75 Moz versus combined mine supply of 48.8 Moz.”

That means investment demand is single-handedly outstripping supply.

It’s indicative of a broader trend. According to a 2016 forecast for precious metals markets issued by Commerzbank, “rising physical demand will meet with falling supply.” That is surely a formula for higher prices – eventually.

When Will Physical Realities Override Paper Machinations?

In the long-term, physical supply and demand is everything. But in the short-term to intermediate-term, the fundamentals are almost meaningless. Big institutional futures markets traders can move markets in any direction for any reason… until, at some point, they no longer can.

Leverage recently surged to record levels in the paper-traded gold and silver markets. Physical inventories of silver on the Comex fell from 184 million ounces in July 2015 to 158 million by the end of the year. A run-on-the-bank scenario becomes a very real possibility if just a tiny proportion of futures contract holders stand for delivery of physical metal.

Holders of physical metal would be wise to hang on tight to it and keep a long-term perspective. At some point – perhaps soon – the major price trend will turn back in favor of the bulls as the bullish supply and demand fundamentals on the physical side overwhelm the paper bears.

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