Miners will need $3,000 gold price to be profitable, WGC head says

Unobtanium

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I found this interesting because I have never seen numbers before that describe what gold price/oz that the miners need to break even.

This raises the question then, how did they make a profit between 1982-2005 when gold was < 450/oz? Surely mining costs have not gone up three-fold since 2005? If not, then something is wrong with this picture.

http://www.reuters.com/article/2012/05/15/peru-mining-wgc-idUSL1E8GF0AR20120515

Miners will need $3,000 gold price to be profitable, WGC head says
Submitted by cpowell on Tue, 2012-05-15 13:42. Section: Daily Dispatches
From Reuters
Monday, May 14, 2012

Sharp increases in mining costs mean gold will need to reach $3,000 an ounce in five years for the industry to stay profitable, World Gold Council chief executive Aram Shishmanian said on Monday.

Miners currently needed a gold price of $1,300 to survive, Shishmanian said, but faced steep rises in mining costs, along with the cost of dividends and host nation taxes.

"If this continues for the next five years the gold price needs to be at least $3,000 just to stay in the business," he said. However, he was optimistic sustained demand would drive prices higher over the long term.

Spot gold fell to a 4 1/2-month low of $1,556.5 an ounce on Monday on concerns over the European debt crisis. Normally a refuge for investors in times of economic turmoil, gold has recently traded in line with risk assets like base metals and stocks.

Future demand would come from emerging markets, central banks and investors, Shishmanian said, noting that China and India now represent 55 percent of the world gold market.

"Emerging markets are going to hold increasing amounts of gold reserves," Shishmanian said. "Holding billions of dollars doesn't help them. The alternative potentially is gold."

Exchange traded funds backed by gold currently hold $120 billion, he said.

"This is the tip of the iceberg," he said. "U.S. pension funds do not hold substantial amounts of gold but we see that changing over the next 20 years."
 
Good stuff there Unobtanium. What a lot of folks do not realize is that gold mines no longer have large veins of pure gold sitting in quartz veins waiting to be exploited. Barring some random discovery of some unknown gold reserve/vein, the quality of gold mines will continue to degrade. As it is, most gold mines are graded in grams of gold recovered per ton of material removed for processing. Again, that's GRAMS of gold per ton. Think about the energy requirements for extraction of this gold. It is absolutely astounding.

In South Africa, some of the largest mines are now miles and miles deep, necessitating incredible energy output to get an ounce of marketable gold.

This will certainly be something to monitor.
 
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Ah yes, I remember seeing a video recently showing that the grams of extracted gold per ton of material was on a decreasing spiral.

I also found this 15-year-old statistic at:
http://www.galmarley.com/framesets/fs_commodity_essentials_faqs.htm

The average production cost of the world's biggest producer - South Africa - is about $238 per troy ounce. 1997 industry estimates by the Federal Reserve Board suggested an average production cost worldwide of $300 per ounce.
 
Here are some historic charts for gold mining ore grades for the past few decades:

From http://www.kitco.com/ind/Resopp/20120504.html

73os5w.gif



From http://articles.businessinsider.com...096642_1_gold-mines-hard-rock-mines-ore-grade

1esvgj.jpg
 
OK, now let's project the above curve out another decade or so. The price pressure on gold (and silver) is going to be tremendous well BEFORE this line gets to zero grams/ton in 2025-2030.

This, I believe, will drive the increase of the price of gold at a higher rate than inflation, being simply exacerbated by the QE printing of money. In other words, you will be able to get several high-end men's suits for an oz of gold in the very near future.

IMHO, the projections of gold at $3000, $5000, $10000+/oz in the near future now seem even more real to me; and this being possible even without a Mad Max, SHTF, all-hell-breaks-loose world.

263wvmo.png
 
Tou know, there are thousands of square miles of land that is high in ore but off limits to prospecting. This is not fertile crorn belt stuff either, it's forbidding mountainous desert shit. The Government has seen fit to stop all prospecting in a lot of areas. I don't know if this is calculated or shat, but it is at the least, maddening.
 
...we are clearly at (or post) peak everything - gold is but another natural resource, that is FINITE, which inevitably conflicts with our "infinite growth required and built in" economic/monetary theories and policies.

same with copper, silver, etc.

I wouldn't be surprised AT ALL to learn that the costs of manufacturing something elementary have risen two-threefold since 15 years ago. That we as the people do not experience such a drastic inflation in our everyday shopping, is mainly due to continuously lowering the quality of the produce we buy everyday. But try to compare the prices of STUFF, hardcore STUFF, that cannot be cheapened (i.e.: grade steel, grade plywood, etc. ), because it is what it is, and no amount of tinkering can make it a "cheaper mouse trap" - it's price has risen dramatically. Even things like stupid minced meat - however rising in prices very high - if someone 15 years ago sold me a minced "meat", which "Ingredients" section on the packaging says "Meat content: 60%", He would go out of business immediately. Today - it is a norm in supermarkets - I never buy brands anymore, I read the "ingredients" sections only. And this is only what they let me KNOW about their ingredients, I am not kidding myself - still, better than not reading them.

My point is, that industries, who use base, hardcore, elementary stuff as their input (mining seems to be one of them), they simply cannot possibly tint their input "meat" with soy, pink slime and fuck knows what else - they need to use grade steel, grade plywood (...). So their costs MUST rise, appropriately.

EDIT: Unobtanium: that falling grade chart, answers very directly your original question about the costs of mining - if the grade was ~4 in '90ties, and it is ~1 now - they have to mince 4 times as much rock, to get the same amount of metal produced. That is costly, I'd say - energy hungry, equipment eating, chemicals, etc..... At least four times increase of base costs, and it does not take into account rising prices of "stuff" they use, to mince through all that rock... Phew, one have to mince >30tons of rocks for one Eagle coin, that tells us something about the resource depletion...
 
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Here is a pretty good interview with the USGS Mineral Commodities Specialist Micheal George about gold mining.

http://news.goldseek.com/GoldSeek/1337842431.php

Will 'Peak Gold' Exploration Continue to Grow?

-- Posted Thursday, 24 May 2012
Source: GoldSeek.com

Global gold production is at an all-time high, according to a new report from the U.S. Geological Survey. In this exclusive interview with The Gold Report, the Survey's Mineral Commodities Specialist Micheal George pinpoints where the gold is coming from and what trends can be expected in the coming years.

The Gold Report: The U.S. Geological Survey's (USGS') Mineral Commodity Summaries (MCS) 2012 describes world mine production and reserves by country. What are the biggest changes from last year?

Micheal George: There weren't a lot of big changes other than replacing reserves that were mined during the previous year. The largest changes were Australia increasing reserves by 100 tons (t) and Canada decreasing reserves by 70 t. The reason behind Canada's decrease was the closure of mines due to exhausting mineable reserves. Australia's increase was due to adding new mines to its potentially active mine list.

Annual world mine production increased approximately 5% in 2011. It was the third year in a row of an increase in production and marked an all-time high for gold produced since recorded history. Compared to the recent low in 2008, production is up about 19% or 440 t. So it's recovered quite a bit.

TGR: What are the reasons for higher gold production? Is it simply because the gold price was higher?

MG: The gold price was higher, so more mines are processing, and they're pushing out more gold. A lot of it is coming from China right now. Quite a bit of gold is coming from other countries as well.

TGR: Are mining companies replacing reserves through exploration or acquisition?

MG: Both. Nowadays, a lot of the additional reserves have been coming from exploration, mainly around the deposits that are currently being mined.

TGR: How does the USGS estimate reserves for this report?

MG: Reserve estimates are calculated by the government in each country in the report. For example, the Australian government or Canadian government does research and revises reserve numbers and that is what we use in the report. The USGS also researches public company reserve reporting. Sometimes we use company published reserves if we know all of the companies in a country. For example in Papua New Guinea, all the mining companies are publicly traded, so they all have to report their reserves.

TGR: How about production and reserve numbers from China?

MG: The production numbers are straight from the Chinese government. I don't think it has updated countrywide reserves in the last couple of years. If it has, we don't have a new number from it.

TGR: Are you saying the change in gold price and increase in production over the last year hasn't materially changed the reported gold reserves in China?

MG: In our publication, yes, China's reserves have not changed too much mainly because we don't have any new reports out that have updated reserves or that Chinese miners have just basically replaced what they've mined out in recent years. Reserves are a moving target. It's constantly changing based on price, based on technology, based on a whole host of factors.

TGR: At these prices, are we running out of gold? In the energy sector, we hear about "peak oil." We don't really hear about "peak gold." Is there such a thing?

MG: "Peak gold" doesn't really work as a theory. There have been several historical "peaks" in gold production. There was a peak in U.S. gold prior to World War II in 1938 at 161 t. Production then dropped during the war because of a shift to wartime materials. Gold production trended downward until the 1970s because of low gold prices. After a sudden increase in gold prices in the 1980s, a rush to find new gold deposits led to the discovery of additional deposits in the Carlin trend area in Nevada. The Carlin mine had been operating since the 1960s, mining these massive, low-grade deposits. At that time, USGS geologists were out there and investigating these deposits. The U.S. Bureau of Mines helped develop the process of cyanide heap leaching, which, in turn, allowed the low-grade deposits to be economically developed. That caused a substantial increase in U.S. gold production. By 1998, we hit another high of U.S. gold production at 366 t. But at the time, the price of gold was at a historical low. By 2002, the price started to increase and has steadily increased through today. The persistent high gold price has led to increased production in 2010 and 2011, with new mines coming on-line and existing mines expanding operations. Continued exploration spurred by the high gold price has led to numerous discoveries, some of which have quite a bit of reserves, such as on the Cortez trend. There is a mine that just started up a couple of years ago that has a huge reserve right now. The world follows a similar pattern as the U.S., with multiple peaks in production over time.

In this way, gold is unlike oil, which is a consumed material. Gold is unique in that it's an investment, not merely a commodity. Because of its value, gold is rarely ever consumed in a traditional sense. It's nearly indestructible, and it's nearly completely recycled. I think the only gold use I found that isn't recycled is in spacecrafts. This means that an increase in demand may not be solely met by new supply. It could be met by scrap supply. It also takes decades for gold production to respond to price movements because of the time lag it takes from deposit discovery to production. It could take decades for a mine to start up. Also, when gold prices are low, production generally plateaus and may decline, owing to a lower rate of return on investment. At the same time, exploration for new deposits is minimal because companies need to reduce their expenses and they don't go looking for new deposits. That's what happened in the 1990s and early 2000s. There were historically low levels of exploration, so we had this time lag of about 10 years. Now, we're seeing the gold price affecting production and causing production to go up where we didn't see that a couple of years ago.

TGR: Is there a similar situation on the supply side where it takes decades or a long period of time to create sustained demand? Perhaps demand in China is an example?

MG: Not necessarily because demand can really bounce around quite a bit. You have a huge pool of recycled material sitting out there. So if the price gets high enough, people are willing to give up their gold.

TGR: Comparing gold to oil again, one meaning of "peak oil" is that we are running out of cheap and easily obtained oil. Now there's a lot of oil, but it's expensive to get to. Is there a similar situation for gold? As long as the price is high, people are going to look for it, but is it becoming more and more expensive to find, mine and process?

MG: Only when you compare dollars to dollars. Yes, it is more expensive to look for gold now than it was previously, but not significantly. If you put inflation factors on it, exploration and production costs have not risen nearly as much as for oil. However, when the price of gold goes up dramatically, companies will mine lower grade deposits. So if the gold price drops significantly, then ore grade would actually go up. Right now, miners evaluate deposits based on where the deposit ends or where the pit wall is going to be. The mine gets bigger as the price goes up, and the mine gets smaller as the price goes down. With a lower gold price, they are going after higher-grade deposits. But with a high price, they are going after as much ore as they can produce that is profitable.

TGR: You also mentioned that as the price of gold goes up, spending on gold exploration goes up. The 2010 Minerals Yearbook just came out. It says that gold was the primary mineral exploration target with more than 50% of the world's non-ferrous exploration budget of $5.4 billion, 59% more than in 2009. Do you see that trend continuing?

MG: Yes. That trend has continued from 2011. It has gone up again, and gold is still more than 50% of the targeted materials.

TGR: What is the next most popular mineral for exploration?

MG: Probably copper. It gets a little fuzzy because miners may be going after copper porphyry, but copper porphyry also has gold in it. But it's probably copper.

TGR: Is the nature of the mining industry still cyclical?

MG: Yes, it's just how mining is. There are boom and bust periods. The successful companies are able to spread out their risks more than others. They're making huge profits right now to make up for huge losses coming up. Mining is one of the few industries where the companies know they're going to have a big loss coming up eventually. The industry is cyclical. Gold prices go up, gold prices come down. In mining, they have to balance out the really good years with the really bad years. Hopefully the gains and losses offset and the companies make a profit over 30 or 40 years.

TGR: A large component of domestic gold supply listed in the MCS was imports of ore and concentrates from Mexico. How do those fit into the market?

MG: That is cross-border refining. Mexico doesn't have enough refining capacity to refine its own ore so it is sent across the border, sometimes by the same company owning both properties in the U.S. and in Mexico. Ore is sent to the U.S. to be further refined into either dore or bullion to be sold on the market. Sometimes, refined ore will be shipped to another country, say, Switzerland, where it's further refined into bullion, which enters into the London market to be sold.

TGR: Let's dig a little more into the recycling market. Last year, the U.S. had 225 t of gold recycled. That was approximately equal to the domestic mine supply.

MG: Yes. Regarding scrap, the price is driving people to give up their gold. Television commercials for buying gold air every day, and that's essentially what's driving the market. People are parting with their gold jewelry that they don't want anymore.

TGR: But for every buyer, there's a seller. So who's driving the demand side?

MG: Investment is driving the demand side, especially worldwide investors. Across the board, even in the U.S., people are investing in gold as a safe haven. They don't want to invest in the dollar or the euro because they aren't doing so well. So they find something else that is gaining value and that gives them a good rate of return but also has the liquidity in that they can sell it anytime, anywhere. Even if the world economy collapsed, gold would be valued by somebody somewhere.

TGR: Is this individual investors or central banks or both?

MG: Both. Central banks have historically been sellers on the market until 2010. Now they are buyers. The sellers are traditionally the European banks, and now we're seeing buyers from non-European banks.

TGR: What about institutional investors?

MG: Oh, yes, they're buying gold, too. Everyone from Joe Public to the Russian Central Bank and Chinese Central Bank is buying gold. Everyone is buying gold for investment.

TGR: We hear a lot about emerging geographies for gold exploration and mining. What about Africa? What are the largest producing countries in Africa?

MG: Africa as a continent is one of the largest gold producers, and it has more reserves than most of the other areas because it's underdeveloped right now. I just got some new numbers that show this year the third largest producer in Africa is Tanzania. Mali, which is now number four, went up, but Tanzania went up by more. Their numbers are pretty close to each other, so they probably will flop back and forth. They both have several large mines owned by multinational companies, so they're pretty stable owners. However, they won't catch up to South Africa any time soon.

TGR: South Africa is still number one?

MG: South Africa is number one, but it's falling just because of its age. Its mines are so much older, so much deeper and so much more complex. It's also been having labor issues. Across the board, costs have gone up. Everything is underground, and there are some mines that are two miles underground.

TGR: What country is number two in Africa?

MG: Number two is Ghana. Ghana is almost double Tanzania and Mali. South Africa is another 100 t above Ghana. So there's still room. No one is going to catch South Africa right away. It will take years.

TGR: And how is the U.S. doing?

MG: U.S. production is increasing. It increased again last year a little bit.

TGR: According to your report, annual production is approximately 230 t?

MG: It's been about that for a while. Some of the larger mines are aging so they're showing some drops in production. It can be hard to get new mines started in the U.S. The U.S. has several world-class deposits that are either in lawsuits or just having difficulties getting permitted.

There is a lot of gold up in Alaska that is untouched. There are a lot of areas in Alaska that are untouched for exploration also. Nevada still has quite a few deposits that are not developed that can come on-line soon. As I said, Cortez came on a couple of years ago, and now it's a huge mine.

TGR: Are there other areas in the U.S. that might contribute to gold production in the future? North Carolina has seen some activity during this cycle.

MG: North Carolina is an interesting area. It's all on private land. Mining companies own the land, so they don't have to worry about permitting like out West, where they have to permit through the Bureau of Land Management or the Bureau of Reclamation. They just have to get their permits through state agencies. It's a little easier that way. The deposits are different, the gold is locked up in quartz and greenschist, which is a little harder material to work with, but it can produce gold. There is one project that's far ahead of everybody else, and then there are a couple that are still in the early phases.

TGR: Can you explain what your group at the USGS does? Do you promote mineral development in the U.S.?

MG: We are like a warehouse of information. A company could call me up and ask questions about what has happened in the past and why the price has gone up in the last few years. It could ask me questions, but we don't do anything to directly promote mineral development.

We produce the MCS, which gives a quick glance at what's going on today in the gold industry. The larger, more detailed Yearbook gives more of an overview of what happened during that year so you can see where development and production took place. It provides insight into why production was flat per se or why exploration has gone up. It gives a good basis to understand the industry during the past year.

TGR: Thank you for your insights.

The most up-to-date documents referenced in this interview can be accessed at http://minerals.usgs.gov/minerals/pubs/commodity/gold/index.html .
 
More about gold reserves, from:
minerals.usgs.gov/minerals/pubs/mcs/2012/mcs2012.pdf

Reserve Base.
That part of an identified resource that
meets specified minimum physical and chemical
criteria related to current mining and production
practices, including those for grade, quality,
thickness, and depth.

The reserve base is the inplace
demonstrated (measured plus indicated)
resource from which reserves are estimated.

It may encompass those parts of the resources that have a
reasonable potential for becoming economically
available within planning horizons beyond those that
assume proven technology and current economics.

The reserve base includes those resources that are
currently economic (reserves), marginally economic
(marginal reserves), and some of those that are
currently subeconomic (subeconomic resources).

The term “geologic reserve” has been applied by others
generally to the reserve-base category, but it also
may include the inferred-reserve-base category; it is
not a part of this classification system.


Inferred Reserve Base.
The in-place part of an identified resource from which inferred reserves are
estimated. Quantitative estimates are based largely
on knowledge of the geologic character of a deposit
and for which there may be no samples or
measurements.

The estimates are based on an
assumed continuity beyond the reserve base, for
which there is geologic evidence.

Reserves.
That part of the reserve base which could
be economically extracted or produced at the time of
determination. The term reserves need not signify
that extraction facilities are in place and operative.
Reserves include only recoverable materials; thus,
terms such as “extractable reserves” and
“recoverable reserves” are redundant and are not a
part of this classification system.

Marginal Reserves.
That part of the reserve base
which, at the time of determination, borders on being
economically producible. Its essential characteristic is
economic uncertainty. Included are resources that
would be producible, given postulated changes in
economic or technological factors.

Economic.
This term implies that profitable extraction
or production under defined investment assumptions
has been established, analytically demonstrated, or
assumed with reasonable certainty.

Subeconomic Resources.
The part of identified
resources that does not meet the economic criteria of
reserves and marginal reserves.
 
http://www.hyperinflation-us.com/world_gold_supply_mining.html

In-Ground Low Grade Ore Supply is Staggering
.......USGS estimates that of all the gold in the earth's crust, 99.9998% is too dispersed to have ever been profitably mined, gold prices and extraction costs being what they've been thus far throughout history.

Thus, the great majority of all the gold ever mined has so far been confined to the most concentrated .0002% of the earth's gold. (The exception is roughly 15% of gold production which is recovered as a byproduct of other minerals' mining.)

Of course if the price of gold continues to rise to say $2,000 and beyond, miners will not be confined to just .0002% of the crustal gold. Lower grades of ore becoming profitable for the very first time might raise their opportunity, very conservatively, to say, .0005%.

Even such a tiny change would suggest potentially increasing the miners' in-ground gold Reserve Base by a stunning additional 150%. That works out to an extra 150,000 tons--an amount nearly equal to all of the gold ever mined.


In short, as the price of gold continues to reach new records, some portion of that other 99.9998% becomes increasingly available to miners.

Thus, there is more than ample gold in the ground to keep a lid on the price of gold in the long term, especially when you consider that gold's price rising in and of itself can transform already located poor grade worthless ore into profitable Reserves.

Recall that all the gold ever mined would fit in a cube roughly 65 feet to a side. Many, many, many times that amount remain in the earth's crust, and if humans want more badly enough, we can get it.
 
Thanks for the interesting article, Unobtainum!

I've wondered, for quite a while, what the cost of production was for silver. I've just never got around to researching it.

Other than peak PMs, my curiosity is now piqued. ;)

ADK
 
(...)Even such a tiny change would suggest potentially increasing the miners' in-ground gold Reserve Base by a stunning additional 150%. That works out to an extra 150,000 tons--an amount nearly equal to all of the gold ever mined.

In short, as the price of gold continues to reach new records, some portion of that other 99.9998% becomes increasingly available to miners.

Thus, there is more than ample gold in the ground to keep a lid on the price of gold in the long term, especially when you consider that gold's price rising in and of itself can transform already located poor grade worthless ore into profitable Reserves.

Recall that all the gold ever mined would fit in a cube roughly 65 feet to a side. Many, many, many times that amount remain in the earth's crust, and if humans want more badly enough, we can get it.

It is both true, and untrue. True, increasing price of commodities, make the deposits, that would be otherwise economically unobtainable, all of the sudden, reasonable to explore. IF we consider gold price rising alone, that is. Same mechanism works here for tar sands, deep water drilling etc.

BUT....
with one caveat. To tap to these lower & lower grade resources, we need to do two things:
first: literally, destroy whole counties, to claw ever-decreasing fractions of metals, from ever-increasing mountains of.... mountains? I don't have time now to google the images of copper mines, which are now huge holes in the ground, where the mountain used to be, but they look similar to that one:
http://www.elmhurst.edu/~chm/vchembook/330copper.html

second: with that known, how do you think it is, in terms of ENERGY required, to mince and further process, a fecking mountain? IF the oil is going north as it is, for the same reason (cheap & easy to get resource depletion) - all of the sudden, even the CURRENTLY economically viable deposits, might become unprofitable. (specifically: how ever-increasing oil price will affect the profitability/sustainability of the mining operations, in both current-grade deposits, let alone these supposedly "vast" lower-grade ones?). Like you said: miners need $1300/OZ, to cover their costs. That is with TODAY'S energy prices, right? But what will be the price per OZ required, if energy price doubled? Why people make the assumption, that "gold price will continue to rise, making worse-grade deposits profitable", without coming to quite a symmetrical conclusion, that oil (by extension: energy) price, will follow at same or even faster pace (increasing developing world competition for their bite of the ever-shrinking cake of cheap energy), making these lower-grade ores non-economical back again?

(...)and if humans want more badly enough, we can get it.
ahh, typical economic arrogance, that assumes our greed and lust will overcome physics, somehow, just because we want something. I think that all economists in the world, must have been very spoiled children, who grew up thinking that the whole world will make an exception to the laws of physics and even some algebra, just because they want it so bad.

In terms of depleting easy-obtainable oil, there is simple measure, when the party stops. Marginal barrel, which is when we spend a barrel of energy equivalent, to get one barrel off the ground and to the pump. (Think about it as all of the energy that has been put in place over the lifetime of the derrick - starting with... getting the ore off the ground, process it to make steel, transport, assemble&maintain that steel into an oil derrick, etc, etc.). We are at the collision course for these two graphs to cross :). I mean, we spent more & more energy, to get new oil fields online. And these new oil fields, are not even enough, to offsert the decline in the cheap & easy ones. And we do that stuff in ever harsher environments (Deep Water Horizon, anyone?). We went from these:
http://mercurymasterpunk.ca/images/oil_derrick.jpg
to these
http://www.commondreams.org/headlines01/0320-02.htm
...and it takes A LOT of embedded energy to make and use them. Not to mention the risks...

I don't know how to make the analogy of "marginal barrel" for gold, but these "theoretical abundance" mind-exercises fall short of taking even the parallel effects to their own assumptions into consideration, let alone other real-world factors.

Amusingly (not!), our economic policies/frameworks, were designed in times, when the capital scarcity was the main problem - there were always new resources available, if we could manage to get together enough capital to work, to get them out of the ground. Thus, all the scholars in the field of economy, all the Bernankes, Draghis and others, operate under that false assumption, that it is, and always will be the case (while it is even an algebraic impossibility, not even a real-world one). While it clearly is not, anymore.
 
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Yup, we've pretty much "high-graded" everything at this point, only minor exceptions exist. New tech might overcome some of that for some things, but not for most.

Gold from ocean water is *almost* worth it and will be if prices rise enough, but that's more or less the same situation. You take some out, and at some point the concentration of what's left goes down. That is, unless you can store whole oceans of already processed seawater someplace instead of having to put it back to dilute whats left. Good luck with that!
 
Thanks bushi and DC. You comments make the extrapolated curve in post #5 and even more curious and interesting curve.
 
Yeah, in terms of supply/demand, I think that if traders had ANY idea about what is going on in the real world, and that unlike technical analysis, charts, electrons, derivatives casino, "money for nothing" creation and talking heads world, there are very hard LIMITS of what we could possibly get from Earth - they should already killing each other over what' s left in non-renewable commodities. See what Chinese are doing...

Gold is but one of them, but similar charts can be drawn for almost anything today.

What is scary, and puts us on a direct crash course, is that our economic/monetary systems, (as of today), they require year-on-year exponential growth of economy - just to prevent them from collapsing. So, to be compatible with even TODAY's resource extraction rates, we would need technology to provide reverse-exponential upgrades in material usage, year on year. Can you imagine that each year, the stuff that we manufacture & consume, uses x% less and less base material & energy to manufacture (where x is equal to real GDP growth, to stay flat with base resource usage)? I mean, yes, it happens, we are getting more and more crap products for our money (heuristics in CPI, anyone? :)), but hey, we simply cannot possibly keep the pace with consumption growth by cheapening the designs, at ever-increasing pace. And it wouldn't even reduce resource usage, only keep it at today's levels. (Example: let's assume you are world-only chair maker, and you HAVE to increase your production by x% yearly, to sustain world's economy, and you can only use 100 trees a year (=flat resource usage). So, you would need to use less and less timber per chair every year, and that would have to go DOWN exponentially, as reverse to your yearly production growth. Pretty soon, your timber content per chair would be close to zero. That is simply impossible in the real world.

Space mining... The only viable option, going forward? But is it possible at all? And the energy requirements for that to happened... My gosh.
 
Yeah, in terms of supply/demand, I think that if traders had ANY idea about what is going on in the real world, and that unlike technical analysis, charts, electrons, derivatives casino, "money for nothing" creation and talking heads world, there are very hard LIMITS of what we could possibly get from Earth - they should already killing each other over what' s left in non-renewable commodities. See what Chinese are doing...

Gold is but one of them, but similar charts can be drawn for almost anything today.

What is scary, and puts us on a direct crash course, is that our economic/monetary systems, (as of today), they require year-on-year exponential growth of economy - just to prevent them from collapsing. So, to be compatible with even TODAY's resource extraction rates, we would need technology to provide reverse-exponential upgrades in material usage, year on year. Can you imagine that each year, the stuff that we manufacture & consume, uses x% less and less base material & energy to manufacture (where x is equal to real GDP growth, to stay flat with base resource usage)? I mean, yes, it happens, we are getting more and more crap products for our money (heuristics in CPI, anyone? :)), but hey, we simply cannot possibly keep the pace with consumption growth by cheapening the designs, at ever-increasing pace. And it wouldn't even reduce resource usage, only keep it at today's levels. (Example: let's assume you are world-only chair maker, and you HAVE to increase your production by x% yearly, to sustain world's economy, and you can only use 100 trees a year (=flat resource usage). So, you would need to use less and less timber per chair every year, and that would have to go DOWN exponentially, as reverse to your yearly production growth. Pretty soon, your timber content per chair would be close to zero. That is simply impossible in the real world.

Space mining... The only viable option, going forward? But is it possible at all? And the energy requirements for that to happened... My gosh.

If you can not increase the "value", just play with the underlying rules. To raise the amount of USD the same house is worth exponentially, just devalue the USD exponentially!

Take a look at the half life curve of USD priced in gold grams:
http://pricedingold.com/2012/06/08/usd-update-7-jun-2012/
 
but benjamen, should such debasement ever "work" economically, I would be living as a king in Poland (actually, we all Poles would), haven't been emigrated, Russian empire wouldn't collapse, and I wouldn't be typing it, for I wouldn't be allowed the luxury of open communication from behind the Iron Curtain.

There is the real component of GDP growth, and there is monetary/inflationary component of it (caused by increasing money supply). The second one is a hidden tax/theft of capital, by government/CB. If inflating GDP by printing money could ever lead to anything else than destruction of an economy, well, that's all that we would ever need to do. But I haven't seen this implemented successfully, and I really struggle to call it anything but a nonsense. Besides, it is strongly inflationary, and there's no way around it.
 
but benjamen, should such debasement ever "work" economically, I would be living as a king in Poland (actually, we all Poles would), haven't been emigrated, Russian empire wouldn't collapse, and I wouldn't be typing it, for I wouldn't be allowed the luxury of open communication from behind the Iron Curtain.

There is the real component of GDP growth, and there is monetary/inflationary component of it (caused by increasing money supply). The second one is a hidden tax/theft of capital, by government/CB. If inflating GDP by printing money could ever lead to anything else than destruction of an economy, well, that's all that we would ever need to do. But I haven't seen this implemented successfully, and I really struggle to call it anything but a nonsense. Besides, it is strongly inflationary, and there's no way around it.

I believe most GDP growth reported by countries is merely due to the devaluation of their currency. Take a look at the U.S.; every time the stock market drops, the FED prints a boat load of money, devalues the USD, and stock prices, valued in USD, go up. This is the "feel good" effect. They are less wealthy than before (because you get taxed on your "profits"), but most people are happier because the USD number next to their stocks is higher.
 
good thread.

Just wanted to suggest that rather than worry about reprocessing the same bit of sea water too many times, a better approach might be to set up at a river mouth with a directional flow of higher gold content water
 
Hi,

Just came across that curiosity re: some of the costs erlated to mining (I cannot post the source nor more content here, it is on the paid report I am subscribed to, I believe it would violate their copyrights - but as I post it below, it is completely out of context, and doesn't not infringe on their copyrights, I believe):

For example, one of the most popular mining trucks today costs a whopping $2.7 MILLION. Each tire costs $30,000... and the annual fuel costs run more than $1 million per truck!

so here we go - some of the costs of stuff that goes as "input" for miners. This stuff is very likely to only go up in price in case of shrinking supply (resource depletion), pushing either required ore quality OR price/OZ upwards, for miners to stay profitable.

So the stories of "we have plenty of X on that planet, it is just that it is not commercially viable to mine for it, today, because price is too low", are fairy tales, without any real footing.
 
Bushi,
With gold around 15,000 dollars an ounce, it becomes economically viable to "mine" it from seawater. I read somewhere that the ocean contains a huge amount of gold, only it is too costly to extract. Given a high enough return on investment, it is economically viable to mine even tiny fractions of an ounce per ton of spoil.
 
Bushi,
With gold around 15,000 dollars an ounce, it becomes economically viable to "mine" it from seawater. I read somewhere that the ocean contains a huge amount of gold, only it is too costly to extract. Given a high enough return on investment, it is economically viable to mine even tiny fractions of an ounce per ton of spoil.

Unfortunately, most of those estimates assume only gold skyrocketed in USD price. In reality, if gold is that high it most likely means high inflation. Therefore, how much would oil, wages, and other mining expenses also skyrocket?

If under current conditions it cost $14,000 to "mine" seawater for gold, how much would it cost to do so in the situation of high inflation?

:popcorn:
 
Naturally Benjamen, this hypothetical number is merely a guess. If one presumes that there is no inflation, and that the manipulation of metals has been corraled, and that the free market and popular demand are determining the price, and that paper derivatives and ETF's have been banned, ano on and on and on.

In the real world, gold will never be "mined" from seawater because it is simply too prohibitive and will always be so.
 
yeah that's my whole point - if "inputs" costs for miners are rising alongside (or quicker, as I presume might be the case for oil) with gold spot, it doesn't necessarily mean that lower grade deposits become economically viable, in fact, it might very well mean quite the opposite - because of increased input costs, even the current grade ores might become unprofitable.

Basically, I think people doing this quick mental exercise 'there is X times more resources in earth crust, that we ever mined - we "only" need the technology to effectively mine the lower (in fact, diminishing) grade ore - and higher commodity prices, will make that new technology economically viable', are falling short of considering parallel effects to their own reasoning, not to mention the hard reality "in the trenches".

Fact is, record high oil prices, for example, haven't helped to pump out more oil since 2004, I believe - world crude production remains pretty much flat, despite "unthinkable" a decade ago prices. Why, I ask myself, are people not willing to cash on these historically high prices? Or maybe they are pumping flat out and cashing in as much as they can, but simply cannot increase the production any more. Which seems to be the case.
 
Why Mine?

So a couple of points here.

First is says one of the factors for why costs have spiked is tariffs, taxes, etc from governments. OK, so if the government makes it too expensive to do, they won't do it. Then the government has to back off if they want the income. This will always be an ongoing push/pull scenario.

Second, we stop mining? What does that due to supply/demand. Supply stays fixed, demand increases, therefore....price increases. Since about 2000 when gold started to sky rocket the demand to mine has been increased quite a bit, this mining has kept up supply and thereby actually probably kept the cost down. W/o mining the price will only go up, yes?
 
...yes I agree, any way I try to look at this, it is bullish long term for gold that has been MINED already (like the one in my stack :)) - unless the banksters succeed in making everyone so scared to even touch it, so the retail demand would die. I do not think it is possible, long term. Try as they might.
 
...
Second, we stop mining? What does that due to supply/demand. ...

I would guess that as production falls off, price will rise and then some production will resume. Net-net, production will likely diminish, but not stop altogether.
 
Under the Sea!!!

So I just published this little blurb, thought it was relavent to what we were talking about here. However, I couldn't find anything on how much they'd expect it to cost per oz for undersea mining. If anyone can find numbers on this, I'd greatly appreciate it and add it to the article.


NEW GOLD SUPPLY FROM UNDER THE SEA
When the mention of recovering gold from the sea comes up, most people think of ancient lost treasures and sunken boats. While businesses do try to find and recover such lost amounts of old gold, it has now become risky business. A number of countries have exercised original ownership rights on found treasure by salvagers, with the U.S. government honoring the claims, seizing the lost gold, and turning it over to claimants (http://www.coinnews.net/2012/02/27/odysseys-black-swan-named-sunken-coin-treasure-lands-in-spain/).
However, another form of sea-borne recovery is now taking place with the high price of gold: actual sea-bed mining. Found in crags and clefts of the sea bed, natural gold deposits are the new gold miner’s frontier, as much as two miles under the sea surface. Countries, companies and well-funded private parties are now chasing underwater gold, particularly because of the current high price making the venture profitable (http://www.nytimes.com/2012/07/10/s...f-gold-and-other-ores-lure-seabed-miners.html). With new technology and equipment depths previous untouchable are now ripe for the picking.
A good portion of potential deposits are found along the South Pacific zone ranging from New Zealand and Tonga to Fiji and the Solomon Islands. This of course has attracted the national attention of countries like China and Japan. That said, deposits exist in many locations and in every ocean. The regulator of all this activity is a small United Nations outfit called the International Seabed Authority, which doles out permits for mineral rights and extraction.
Gold fans shouldn’t expect prices to suddenly fall from a new sea supply, however. It takes a lot of expense to get down that deep in the ocean, so miners will be looking for profit on the gold brought back up and sold.

http://goldtrustfinancial.com/my_news/new-gold-supply-from-under-the-sea/
 
...yeah, apparently there is a lot of gold and other valuable stuff in the asteroids belt as well.. to me it is still in the same realm of fantasy, getting actual hold on any of these..
 
I don't know if it has been said in this thread already, but I distinctly remember a link I made to a USGS survey done of Afghanistan Rare Earth Minerals estimated at $4 Trillion. And that survey was done with some pretty fancy equipment. If I'm repeating myself or anyone else, sorry. I'm tired and hungover.
 
I think we need to be careful with blanket statements. Mining costs depend greatly on the specific project. I know of one project up in alaska that costs 600 per ounce currently. However there are other projects in brazil that cost north of 1700 so theu mothballed their mines. I also know of some poorly managed companies that made a 600 per ounce project into a 1200 per ounce project.

My advice is to look for growth in reserves and margin expansion. Also, don't be afraid of the toronto exchange
 
Here is a bit more about PM mining in China, with respect for the demand for gold in China:

King World News
Aug 7, 2012

We’re Headed Into Massive Inflation & A Major Gold Spike
http://kingworldnews.com/kingworldn...o_Massive_Inflation_&_A_Major_Gold_Spike.html

.......
The Chinese accumulation of gold has been described as ‘relentless.’ But it was just reported that China has started shutting down a lot of their unsafe mines. They have just been mined out. The fact that China is shutting down a lot of mines just supports the reporting by KWN that the Chinese demand for gold is ‘insatiable.’

The Chinese are beginning to have problems procuring gold through their current mining activities, so this is highly supportive that they are in fact buying large amounts of gold in the open market. The fact is that the Chinese imports of gold have been going ballistic for some time now.

We can see they have been importing up to 100 tons of gold per month into China. Now we know why, because they are having trouble with production. We have seen an exponential increase in the amount of gold China has been importing.

So when you look at the fact that virtually no one in the West likes gold, but China is importing as much gold as they possibly can, you realize that gold is set up for a major spike at some point. .......
 
I believe China is slowly building their reserves to ultimately back their currency. They see the end of another era of fiat and are planning appropriately. I further believe they now have the largest gold reserves in the world, irrespective of what the pundits say.
 
Below are some excerpts from the article.


Gold mining healthy?
Scott Wright - Zeal Intelligence | August 3, 2012

http://www.zealllc.com/2012/gmhlth.htm


Interestingly mine production had actually been on a pretty alarming decline for a large portion of our current secular bull. Many folks forget that it was just in 2008 that production volume had fallen to a 12-year low, and that the miners were producing a full 10m ounces less than what they were at this bull’s 2001 beginning.


Finally after many years of increased capex towards exploration, development, and overall upgrades to this industry’s infrastructure, 2009 delivered the first production increase in years. And a now-three-year-running increase is something to behold.


Since 2008 gold-mine production has experienced an average annual growth rate of a staggering 6%. And this is especially impressive considering the relatively static nature of mine production. Increasing output is not as simple as turning a dial on a factory floor, as it takes many years of development to build a new mine and/or increase capacity at an existing mine. And when you take the natural depletion cycle into account, this 6% growth rate is all the more impressive.


But though impressive, it doesn’t take a rocket scientist to realize that this recent production growth rate is unsustainable. In fact, some recent fundamental unveilings raise questions as to whether even the existing rate of production is sustainable over time.


One major tell on the inner workings of the gold-mining industry is exploration spending. Exploration spending is essential in feeding the pipeline of next-generation mines, those that will be built to replace the ones that are depleting. And depletion is of course accelerated on higher production volume like we are seeing today. Faster-depleting reserves lead to more pressure on the replenishment front, which naturally leads to the need for more exploration spending. It’s a simple formula!


As one can imagine, gold’s secular bull has spawned a huge increase in exploration spending. According to prominent research house Metals Economics Group (MEG), gold exploration spending had seen a whopping 400%+ increase from its 2002 low to 2008 (~$3.2b). And though there was a huge dip in 2009 as a ripple effect of the global economic crisis, spending has been strong and on the rise ever since. But has it been enough?


Provocatively there’s an alarming trend unfolding on the exploration-spending front that is likely to have a major fundamental effect on the gold market. MEG points out that while exploration spending hasn’t declined, there’s an interesting shift in the types of projects attracting the capex.


It notes that over the last few years only about a third of exploration spending has been directed towards greenfield (early-stage/generative) exploration, with the majority going towards brownfield (near-mine) exploration. Even more troubling than this historically-low ratio is the fact that this industry-wide shift hasn’t resulted in a proportionate increase in assets advancing through the development pipeline. Typically in brownfield work the availability of infrastructure allows for fast-track development, yet we aren’t seeing this.


On one hand I can see why the miners have become more risk-averse considering the state of the global economy. It’s definitely less risky to prove up reserves where positive mining economics are known to exist. But this trend will have consequences on the reserve-renewal front.


While miners will occasionally make big discoveries via brownfield efforts, for the most part the biggest discovery in a brownfield zone has already been made. In general the major multi-million-ounce discoveries that this industry needs in order to effectively renew reserves are a product of greenfield exploration. And this brownfield bias has led to a lack of major discoveries.


Interestingly there are a couple different ways we can put this lack of major discoveries into context. First is some fascinating intelligence from MEG’s latest study on gold-reserves replacement. According to this study, there have been 99 gold discoveries of significance (deposits containing 2m+ ounces) since 1997. MEG added up all the reserves, resources, and production from these discoveries as of the end of 2011. And assuming a 75% resource conversion rate and 90% production recovery rate, the total sum only had the potential to replace 56% of the gold mined during this timeframe.


As MEG’s data clearly implies, gold discoveries are not even close to keeping pace with mine production. There are of course numerous factors contributing to this revelation. But the one that likely trumps them all is the simple fact that large gold deposits are getting harder and harder to find.


As gold’s scarcity rears its face, miners must expand their exploration efforts. They must drill deeper, venture to places with rougher terrains, and enter borders that may be hostile to their endeavors. These conditions are characteristic of greenfield exploration, and are obviously much more costly than brownfield work. And this cost differential perhaps explains why spending is not where it needs to be on the greenfield front.


Drilling down on MEG’s study even more, this 56% replacement rate is likely well on the high side considering some very liberal assumptions. Even MEG acknowledges that the viability of this discovered gold is subject to a lot of variables that could hamper its mineability.


Economics is of course the biggest variable. Many of these deposits are of low-enough grade or high-enough geological complexity that their higher extraction and/or processing costs require a much higher gold price to be economical. If the price of gold retreats much, these reserves/resources would quickly lose their economic viability.


Geopolitical risk is also a major variable. There are numerous amazing deposits that have been discovered over the last decade that will likely never be mined due to their location. Miners are constantly thwarted by deep-pocketed environmentalists, unruly locals, over-regulation, and greedy governments.


So you see even though 99 major discoveries seems like a lot over a period of 15 years, in actuality it is nowhere near what is needed to replace the gold that is being mined. And if the major deposits at best are only able to replace just over half of production, I can only imagine how many smaller deposits need to be discovered to fill the gap.


Speaking of gap fillers, this MEG research got me wondering more about the world’s gold deposits. Wouldn’t it be nice to have a better understanding of the asset base that supports current and future production? And wouldn’t it be nice to have some intelligence on the biggest tier of gap fillers, those in the 1m- to 2m-ounce range?


Thankfully our friends at Natural Resource Holdings were in this same wonderment. So CEO Roy Sebag and his team actually took to the task of compiling this information! After painstaking research that likely took thousands of hours, NRH now has the most comprehensive database of the world’s large gold mines and deposits that I have ever seen. And its 2012 ranking offers an invaluable fundamental read on the world’s asset base of gold deposits.


As part of its research NRH identified 439 deposits throughout the world that currently contain over 1m ounces of resources (all categories). And in looking at this data, I was smacked by the reality of how scarce this precious metal really is. Of the tens of billions of dollars being spent just to find gold, there are only 439 deposits of meaningful size on the planet to show for it!


Interestingly in scrubbing up with MEG’s data NRH identifies 312 deposits that hold 2m ounces or more, which tells us that over two-thirds of the world’s largest deposits had been discovered more than 15 years ago. And of these 312 deposits, provocatively only 150 are currently being mined.


On one hand it can be seen as encouraging that there is a large pipeline of undeveloped major deposits for future use. But on the other hand it can be seen as disturbing that there are so many deposits, especially numerous over 15 years old, that haven’t found their way to production in the current market environment. The fact is many of these deposits will never see the bottom side of a shovel, for reasons discussed above and more.


Of the world’s 127 gold deposits in the 1m- to 2m-ounce range, 39 are currently being mined. Again it is encouraging to see so much potential for the next generation of mines. But I’m afraid the same variables of uncertainty will again prevent many of these deposits from ever coming online.


This NRH data also allows me to put into perspective the relevance of deposits in this 1m- to 2m-ounce range. Interestingly these 127 deposits hold a combined 181m ounces of resources. If all of these resources were converted to mineable reserves with a 100% recovery rate, this would only be enough to cover just over two years’ worth of mine production.


And to put deposits of this size into even more perspective, consider their average annual run rates. To be very conservative, let’s assume that these deposits are able to produce an average of 150k ounces per year. In such a case the 39 operating mines would combine to contribute only 5.9m ounces, which is less that 7% of total mined volume each year. While this next tier of deposit size seems large, in the grand scheme of things they collectively only make a small dent in the total supply. And this realization clearly shows the need for major deposits.


Per NRH, of the major deposits 33 hold greater than 20m ounces (19 in production), 41 hold between 10m to 20m ounces (24 in production), 74 hold between 5m to 10m ounces (40 in production), and 164 hold between 2m to 5m ounces (68 in production). Though this provides the gold-mining industry with an inventory of 162 major undeveloped deposits that have the potential to replace production and reserves, it’s just not enough.


And to make matters worse, there’s another prevailing trend that doesn’t bode well for the structural integrity of the mined gold supply. With much higher input costs and uncertainty with the global economy, many miners have been holding off on the development of their major deposits. Even if these deposits are economically viable with high rates of return, lenders and investors are hesitant to fund the $1b+ it would take to build a decent-sized mine.


So circling back around, is the gold-mining industry healthy? Unfortunately if you peel away the excitement of record production in recent years, I’d say no. Gold discoveries are not keeping pace with mine production, exploration spending trends are not conducive to finding major deposits, the inventory of large-sized deposits is thin, and development capex is harder to come by. The future looks bleak for reserve renewal and ultimately sustaining current production levels.
 
Chart: Global gold production vs demand

Here is the complete article
http://bmgbullion.com/doc_bin/Chart of the Week_10.08.12.pdf

And here are two charts from the article, showing an every-increasing gold deficit:

Global gold production, demand and deficit (by year):

qo6m4p.jpg





Global gold production, demand and deficit (CUMULATIVE):

e7nhpg.jpg



And here is an excerpt from the article addressing problems with overcoming the growing deficit:
So how is this deficit made up? Deficits are made up from central bank sales, stockpiles and scrap. Except
there is now a growing problem. First central bank sales have stopped and central banks have become
once again net buyers of gold. Central bank net sales largely came to an end in 2009. Since then central
banks have been net buyers of gold. In 2011 central banks purchased net 392 tonnes. In the first two
quarters of 2012 central bank net purchases totalled 162 tonnes. The prime buyers have been Russia,
Turkey, the Phillipines and Mexico. China is suspected to also have been a net buyer but their figures had
to be reported.

The other problem is that stockpiles are falling. Since 1950 the world has consumed some 110 thousand
tonnes. That is roughly 80% of all the gold ever found. Production has provided about 93 thousand
tonnes. The shortfall of 17,000 tonnes has come as noted from central bank sales, stockpiles and scrap.
However, that is now 17 thousand tonnes fewer available in the future to make up deficits. With central
bank sales having come to a stop it is left to dwindling stockpiles and hope that scrap makes up the
difference of over 1,600 tonnes annually. The 17,000 tonne shortfall since 1950 is equivalent at current
production rates to 7 years of production.

The question begs. Where is the additional supply going to come from? The conclusion is it appears to be
fairly straightforward that rising deficits requires higher gold prices in an attempt to attract more
production. Trouble is a major producer, South Africa, has been seeing declining production over the past
number of years including down 4% in 2011.
 
Here is another excellent chart showing gold mining from 1850 to 2008, with commentary from two different sources. One commentary is quoted below, and a link to the second commentary is here:
http://jutiagroup.com/20090415-where-have-all-the-gold-mines-gone/


2u6h5k4.png



Looking at Gold Price Trends
By Byron King Jul 17th, 2009

http://whiskeyandgunpowder.com/looking-at-gold-price-trends/

The first thing I do when I sit down at my desk in the morning is check the price of gold. The second thing I do is check the price of oil.

Sure, the price for gold and oil changes all the time. Prices go up and down, for good and bad reasons. Heck, sometimes prices fluctuate and the reasoning defies logic.

Still, I watch the price points. Deep down, I’m looking to see if the prices for gold and oil are following my long-term view of what ought to happen. That is, my long-term view is that both gold and oil prices are going to rise to astonishing heights.

Scarcity rules. That’s the foundation of my investment thesis. Today, I’ll explain my thinking about gold and leave oil for another time.

Reviewing the Gold Landscape

The first thing to understand, as an old geology professor at Harvard once told me, is that “gold is where you find it.” And the second thing to understand is that no matter where you look, gold is hard to find — and getting harder.

In the past decade, gold-related exploration efforts and expenditures have increased dramatically. I’ve seen numbers adding up to tens of billions of dollars poured by mining companies into gold exploration.

But despite the best efforts of the global mining industry, world gold production has DECREASED since early in this decade. Take a look at the chart below, depicting world gold production 1850-2008.

I Love This Chart

I love this chart. I could spend all day discussing it. For example, look at the very steep rise in gold output during the 1930s. That was during the depths of the worldwide Great Depression. In both the U.S./Canada (blue area), and the rest of the world (gray area), people were digging more and more gold. The Soviets (purple area) increased their gold output too, courtesy of Joseph Stalin and his Gulag. Desperate times call for desperate measures, I suppose. Will that sort of history repeat this time around?

Falling Gold Output, Plus Monetary Inflation

Or look at that massive run-up in gold output from South Africa (green area) in the 1950s and 1960s. That was during a time when South Africa was instituting its post-World War II system of apartheid. Labor was cheap (sorrowfully cheap), and quite a lot of international investment poured into South Africa without moral qualm. The South Africans dug deep and just plain tore into those gold-bearing reef structures of the Witwatersrand Basin.

But notice how quickly the South African gold output declined in the 1970s, as the mines got REALLY deep and the rest of the world began to institute sanctions against South Africa over its apartheid system.

And then look at the gold price run-up that followed in the late 1970s. It was a time of inflation, mainly coming from the U.S. dollar. Yet world gold mine output was dropping as well. Falling output, plus monetary inflation? The gold price skyrocketed. Another bit of useful history, right?

Recent History — the Trend Is Down

Now let’s focus on more recent history, since about 1990. There were large increases in gold output from the U.S./Canada (blue), Australia (gold) and Asia (China orange, non-China open bar). By 2000 or so — the world production peak — gold prices were down toward $300 per ounce and below.

But as the chart shows, in the past 10 years, gold output has shown a marked DECLINE in the major historic gold mining regions. The prolific gold output from the U.S./Canada, Australia and South Africa has followed downward trends. Sure, these regions still lift a lot of ore and pour a lot of melt. But the production trend is DOWN.

Why the downward trend? I suppose you could call it “Peak Gold,” but that term really doesn’t convey the explanation. Let’s highlight some of the reasons for the decline.

In North America, Australia and South Africa, people have been kicking the rocks for 100-150 years. The large deposits and the high-grade good stuff have been discovered. The ore that’s “easy” to mine has been mined. The deeper ore is more expensive to dig, lift and process.

And I have to mention that over time, the culture in so-called “developed” parts of the world has gotten greener. People and policy have turned against mining in the developed world. So mining doesn’t happen where it’s not appreciated.

The flip side is that if mining is declining in the developed world, then the future of gold mining must be growing in the developing world, right? Well, yes and no. Of course, it’s true that there are more rocks to kick and ore bodies to uncover in the underexplored regions of the world. But this leads to another problem.

Development Issues in the Developing World

The U.S./Canada, Australia and South Africa all have well-established and (more or less) workable mining laws — despite the best efforts of many current politicians and regulators to screw it all up. These historically producing areas are politically stable. Overall, there’s good mining infrastructure, with road and rail networks, power systems, refining plants, a vendor base, mining personnel and access to capital.

But that’s not the case in many areas of the developing parts of the world. Political stability? Security? Infrastructure? Transport? Power? Refining? Vendors? Personnel? Capital? Everywhere is different, of course. But overall, the entire process is much more problematic. So there’s a lot more risk. When you move away from the traditional mining jurisdictions, the whole process of exploration, development and mining is more expensive.

Thus, the new gold discoveries of the future are going to lack some (if not most, or perhaps all) of the advantages of the developed mining world. That means that the ore deposits of the future will have to offer much higher profit margins, based on size and ore grade, to compensate for the increased risks. Too bad Mother Nature (or Saint Barbara, who looks after miners) doesn’t work that way.

It also means the timeline to develop the mines of the future will likely be stretched over many years while political, legal, bureaucratic, logistical and social issues are ironed out.

Future Gold Output on a Downward Trend

The key driver for the future of worldwide gold supply will be DECLINING output overall over time. Coupled with monetary inflation, you can expect to see MUCH HIGHER GOLD PRICES.

The gold that does come up will be from more distant locales, and deeper levels, or it will be more costly to process from lower-grade ores. The whole gold mining cycle will get more expensive and more risky.

Big Miners Scrambling

Some of the big gold miners — Newmont, for example — are already in a constant, squirrel cage scramble to replace their reserves lost to annual production. Newmont simply cannot grow organically. Newmont can’t “discover” enough new gold resources on its own every year. It doesn’t even try.

Newmont has a reputation within the mining business that it’s being run by accountants, not mining engineers. So the Newmont strategy is simply to go out and “mine gold on Wall Street,” so to speak. If Newmont needs reserves, the company buys a smaller miner. Indeed, Newmont has laid off most of its formerly world-class exploration department. Its in-house geologists spend much of their time looking at other peoples’ mines.

New Deposits Are Out There

There’s a strong exploration and development incentive built into all of this for smaller firms. The current business climate for gold mining has spurred the creation of many small companies that are generating prospects. The players within the industry are smart, hungry junior exploration companies.

The owners and operators of these companies, and their ilk, are bringing new ideas to the mining districts of the world. And despite the ups and downs of the daily gold price, the best of them will have their day. We just have to pick the sharpest, best-run firms… and be patient as history unfolds.

Until we meet again,
Byron W. King

July 17, 2009
 
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