This page has been archived and commenting is disabled.
Guest Post: Supply Side Economics – How Is Gold Going to Fare This Year?
Submitted by Doug Hornig of Casey's Gold & Resource Report
Gold started the summer doldrums looking strong and has retreated since, but what are its prospects for the rest of the year and beyond? That will largely be determined by the interplay between supply and demand; let’s take a look at the supply side.
Reports of dwindling supply are accurate in some areas; however, the story is not that simple. Unlike most metals that are consumed in industrial use, most of the gold ever mined is still around. Gold is forever. Thus newly mined, refined, and fabricated gold is not all that’s entering the marketplace; there are multiple ways of meeting demand. Here’s a look at each.
Breaking Rocks
Imagine that you could turn back the calendar to late 1848, as word was beginning to spread about the gold discovery at John Sutter’s sawmill on the South Fork of the American River in Coloma, California. Would you have loved gold enough to be one of the 49ers who responded to its siren song?
Those were heady times. The Golden State – though it wouldn’t officially receive its apt nickname until 1968 – had a seemingly endless supply of yellow metal, much of it just lying in remote creek beds, waiting to be scooped up. The French Ravine in Sierra County yielded single nuggets of 426 oz. in 1851 and 532 oz. in 1855. By 1869, the record was a monstrous 1,893-ounce specimen from the Monumental Mine in the Sierra City district.
The days of fabulous discoveries are not entirely gone. As recently as 1980, Kevin Hillier, a lucky Aussie following beeps from a metal detector, dug up a nugget that tipped the scales at 876 troy ounces. And in Ruby, Alaska, in 1998, bulldozer operator Barry Clay was stunned to see a 294-ounce nugget roll off the dirt pile ahead of his blade.
Modern commercial producers, though, aren’t looking for fist-sized nuggets, or even the fingernail-sized flakes that many 49ers hoped to find at the bottoms of their pans. Today, a major gold strike might grade out at 5 grams per ton of rock, and economical recovery is routinely done at significantly lower levels.
The easy-to-get stuff is largely gone. With demand rising, miners are struggling to produce ever more gold from ever-lower grades of ore. And they’re falling behind.
The CPM Group’s 2009 Gold Yearbook, one of the bibles of the industry, notes that world gold production peaked in 2001, after increases in 14 of the 15 prior years (despite a vicious bear market). Production increased only fractionally in 2001, to 82.1 million ounces, and has declined in five of the seven years since. And substantially so, with 2008 production coming in at only 74.6 million ounces, a more than 9% drop.
There are a number of simple reasons for the production decline. The older, more productive mines are playing out; newer mines tend to be lower grade; fresh mega-discoveries have become rare; cost of extraction has soared; environmental regulations are more stringent; and greedy governments demand a growing slice of the revenue pie.
South Africa has been particularly hard hit. After ruling the roost for nearly a century, it dropped to second place in production, behind China, in 2007; and into third, behind the U.S., last year. South African output topped out in 1970, at 32 million ounces, and has since fallen off more than 75%. Some miners now must burrow two miles underground to bring up something usable, and the country appears about played out.
Though the U.S. does hold the #2 spot, at 7.6 million ounces in 2008, it too has experienced a long slide. From the 1998 peak of 11.9 million ounces, it’s fallen every year but one, for a 36% overall decline.
There are some bright spots. Russia, still mostly unexploited, continues slowly but steadily ramping up production, delivering 5.9 million ounces to market in 2008. And China’s industry is growing by leaps and bounds. It captured world leadership in 2007 and cemented that position last year, with production of just over 9 million ounces.
In addition, there are some very large, well-defined deposits waiting to come on line. Kinross/Barrick’s Cerro Casale project in Chile, with 23 million ounces of gold reserves, is scheduled for a 2012 commencement; Barrick’s Pueblo Viejo in the Dominican Republic (20.4 million ounces) is slated for 2011; Newmont’s Boddington Expansion (13 million ounces) is targeted for the third quarter of this year.
But other elephant-sized discoveries are problem-laden. NovaGold/Barrick’s Donlin Creek project in Alaska (30 million ounces) is so remote it may never be economical; Barrick’s Pascua Lama on the Chile/Argentina border (18 million ounces) has been beset by anti-mining NGOs; and Las Cristinas in Venezuela (16.9 million ounces) probably will be developed only if Hugo Chavez is in the mood.
Considering the present state of the industry and the limited opportunities for developing new mines, we think it likely that gold production will fail to meet consumption for years to come. Either the price must rise to mute demand, or the shortfall must be made up from elsewhere.
The Gnomes of Zurich (and Beijing, and…)
For the past two decades, central banks have been dishoarding their gold at a pretty decent clip and have been a major source of the metal hitting the market.
Before 1999, each central bank was free to sell whatever amount it cared to. But in that year, the 15 largest European central banks (excepting only Britain) adopted a Central Bank Gold Agreement (CBGA). Although not a signatory, the U.S. sponsored the CBGA – allegedly to promote stability in the gold market – and adheres to it on an informal basis.
Under the five-year terms of the agreement, participating central banks are limited to selling an aggregate total of 500 metric tons (or 16.1 million ounces, if you think retail) of gold in any given year. The current CBGA period expires this September, but the agreement is widely expected to be renewed.
Since 2005, the trend has been notably down, with a particularly steep drop-off from 2007 to 2008. Among CBGA banks, 2007 sales were right at the limit, 15.9 million ounces, but that plunged nearly two-thirds, to 5.8 million ounces, in ’08. And the CPM Group estimates that 2009 will see another CBGA sales decline, to about 5 million ounces.
Central banks not only show increasing reluctance to part with their gold, some are now net buyers. Russia led the way in this department, adding nearly 2 million ounces to its holdings in 2008.
Then there is China. That country has made a lot of noise lately about its waning confidence in the long-term value of its forex holdings, primarily U.S. dollars, and has been aggressively trading them for tangible assets. Many analysts believed that the buying spree would likely include gold, but no one could say for sure. China’s internal financial affairs are rather less than transparent to outsiders.
However, the conjecture is now confirmed. In April, the People’s Bank of China stunned the markets by announcing that over the past six years, it had been quietly adding 14.6 million ounces to its reserves.
China’s announcement had little immediate effect. But considering China’s elevated position in the world economic pecking order, other governments are sure to take notice and follow its example.
How Much for the SOB’s Wedding Ring?
The supply source that’s taken the biggest leap forward in recent times is the recycling business. So-called “scrap gold” includes rings from failed marriages, earrings with missing mates, out-of-fashion bling – and anything else that’s been gathering dust in the jewelry box. Old electronics, too. A ton of discarded cell phones will yield 150 grams of gold, 30 times what a miner gets from an average ton of ore.
People are hip to the rising gold price, and they’re parting with their unwanted baubles en masse. It’s big business. TV ads soliciting scrap abound, including one during the Super Bowl; Internet recyclers have proliferated; and in some suburban neighborhoods, gold has replaced Tupperware as the focal point for social gatherings.
The flood of scrap has hardly been insignificant. CPM reports that it rose an estimated 18.9% in 2008, to 38.5 million ounces, following a 23.3% jump in ’07. Scrap sellers are bringing to market more than half as much gold as all the world’s miners.
The CPM Group does predict that the trend in scrap will start slowing, but still forecasts a rise of perhaps 5% this year, to 40.5 million ounces.
CPM gives two reasons for the projected slowdown. First, so much has already been melted down that sellers may be reaching the point where they will want to hang on to whatever’s left. And second, refineries are running at capacity and have little further capability for turning earrings into ingots.
As long as the price of gold remains high and economic distress continues, people who are hurting will keep swapping metal for dollars. And tons of scrap, melted down and released back to consumers, definitely serve as a drag on the gold price.
How much scrap will be recycled in the next few years is unknown, and so the effect on the market remains to be seen. The safest assumption is that this year will be much like the last, with gold’s ascent comparably retarded -- meaning, not much.
Conclusion
While the market will be well supplied with new gold in 2009, whether it will exceed or lag consumption is the $64,000 question. Both jewelry and industrial consumption are on the wane, leaving investment demand as the driver. It is heavy and getting heavier, as more and more people come to believe in the wisdom of having some physical metal in their possession. Or at least investing in a paper proxy such as the SPDR Gold Trust, which in a few short years has risen from nothing to the sixth largest gold owner in the world.
Gold is increasingly viewed by investors as what it’s been throughout history: a safe-haven asset whose value can be counted on in hard times. Thus we recommend to our subscribers to keep one-third of their portfolio in physical gold. But the real money is made in gold-related investments, such as royalty companies and medium to large gold producers with millions of ounces under their belt. Click here to read our report.
»
- 4200 reads
- Printer-friendly version
- Send to friend
- advertisements -
you left me hanging there bro. Great description of what has been happening but you don't answer the headline question. And your newsletter pitch looks a bit slimy - just my opinion.
Nice take on gold. Silver, to me, is even more interesting. Still, 1/3 portfolio in gold?? That is high unless we see some real evidence the curtain is gonna fall. Not there yet, so I say 10% of portfolio is gold/silver.
My 2 cents!
Pretty useless. The gang at Casey need to be more original. This info is all over the net.
Gold is in an upward channel until the US Federal Govt brings its books into fiscal balance and stops borrowing and printing money like lunatics in order to pay bills that it should not and cannot afford. With Europe and Japan doing much of the same thing, well, it's not really a credible debate. When it becomes part of a larger monetary basket, you do not want to be short.... heads up all you bullion banks like GS. Also, the fact that the largest emerging economy, China, has purchased gold is a heads up to the shorts but more so due to the categorization they hold their gold under. They booked as a monetary asset, a reserve asset. Jeffery Christian from the CPM group noted this as well earlier this year. If that is not a screaming shot across the bow for anyone that doubts their views and intentions on gold, which by the way means money in Chinese, you're in deliberate denial.
One would be wise to have gold in either inflationary or deflationary environments. Gold was soaring in 2008 due to dollar weakness-but the gold miners were not making much money with high extraction costs.The gold bugs always swan on about the weak dollar and gold as a hedge-but in reality gold has a purchasing power that is not nominal. It buys pretty much a constant amount of commodities-cows or wives. That's the "real price" of gold-which always soars in a deflation because GOLD stops becoming a money hedge and becomes MONEY.
You can see how the Central Banks freak out when gold makes headway against fiat currency-because it's the only insurance against government ineptitude.
If you see deflationary action(strong dollar) later this year, snap up smaller miners with good exploratory prospects. Gold may not do well against the dollar but miners will be one of the few industries that make money.
If hyperinflation ramps up(unlikely with a credit implosion)just buy gold bullion or coins-the miners will be under duress with high labor,fuel and other costs.
Just my opinion...Good luck to us all!
Sorry....to further correct your thesis on gold in a deflationary period. A lot of gold is held by investors who also hold commodities (for investment purposes). The problem with this is they hold a lot of stuff on margin. In a deflationary period, you see the price of the underlying commodites decrease, so when they have to sell things to meet margin calls, what do they sell? They sell their gold in their portfolios, as GOLD is a store of value...... Yeah it channels up and channels down, but pretty much.....it channels. So, here we have gold misbehaving due to the selling of the commodity to raise cash. The hedgefunds and speculators will increase supply on the market, hence...lowering the price.
Gold is only a hedge against inflation in the fact that it is a store of value. The only demadn for gold that is created is by gold bugs themselves. So technicaly I will say, it is a hedge...... But as an investment during inflation....not likely. Want to buy something in inflation....buy oil....buy copper. Thewe are commodities that see their usage increase during the good times, therefore demand increases and supplies diminish. Supply and demand...that is what pricing is all about folks and it is Eco 101.
My view....deflation is staking hold and still has further to go. Cash is king...get long the dollar. Think about it. last year....you were paying $147 a barrel of oil. Deflation kicked in. Now you can buy 2 barrels and change for that price. Last year you were paying how much for copper??? Now how much copper can you get fdor that price? What about housing? $700K for that mcMansion. Now you can buyone/get one for that price.
See...you are doubling your purchase power.....by having CASH.
What a waste of time. Worthless gold bug mumbo jumbo. 33% of my assets in physical gold? Are you kidding me?
One third in gold, one third in frankincense, and one third in myrrh?
Oh, snap!
Here's what got me:
Not a single word of justification for this claim -- but without it, the balance of the analysis is pretty hollow.
One-third in louis vutton bags? And are they so ugly that, if you carry one, you feel so embarrassed that you put a paper bag over your own head, like Iv's icon does?
I have to agree with shaza,
the "report" doesn't report more than "common internet knowledge", but nothing that really goes deep nor includes an in-depth analysis of the current fiscal, monetary and economic environment into the price expectations.
The stated 33% of Gold in a portfolio make only sense when one expects a hyperinflationary environment, that might be triggered by the crash of the bond markets. Since I don't understand how they are or can be manipulated also this is a tough guess.
Nevertheless, I believe that all governments in the world will prop up their banks and the key industry, financed by new governmental debt. But when this will lead to the necessary collapse of the key nations, especially the US, is tough to guess - I would be delighted to get some arguments regarding this scenarion.
Ert
For some reason, every financial blog on Earth, sans one, has ay least one daily shill du juor literally screaming, " Buy Gold!!'. Same 'ol repackaged "rationale" day after numbing day, ad nauseum. Anyone who wants to have gold gets it; it has never gone to zero ( Until now- hah! ); it has been a store of value since time immemorial; gosh, those Indians just can't get enough; blah blah blah.
So, the only blog not to have these commercials, the best blog, can be excused this one time.
You are so above this TD. Stick to Gold-man.
Speaking of Goldman ( from The New Yorker ):
The Times.
Internal Memorandum No. 8121b
ATTN: Employees of Goldman Sachs
We did it. Bottom of the ninth, down by three, bases loaded, and we cranked another grand slam to the moon. They may have shot Lennon, but nothing can kill the Beatles.
I admit things looked bleak for a minute there. We had to convert to a bank holding company and were forced to accept a taxpayer bailout. It felt un-American. Terribly unbanksmanly. But we accepted the money, knowing that we could magically weave it into a much larger mountain of money.
We had a few hard months there, didn’t we? They regulated our corporate jet so that we could no longer use it to fly from hole to hole on the green. Dave had to drain his money pool to half capacity. I stopped injecting gold into my blood. They don’t call it a recession for nothing. One day, we’ll look back on the year we received only five-figure bonuses and laugh.
Wanting to celebrate our renewed success is natural, but it’s important that we don’t go crazy here. Remember, ten per cent of the non-bank country is unemployed, and even those who are working have “real” jobs, where payment is proportional to the creation of a “product” or a “service.” Those poor bastards. So I ask that, in celebrating our raping of the stock market, we show restraint in the following ways:
Furthermore, to avoid drawing criticism from the press, this year the bonuses, expected to be comically large, will be distributed in blood diamonds, which can be easily concealed in a briefcase so it looks like we’re working.
I’d like to thank everyone who made this possible—for a second time. Respect to President Obama for keeping us in the green. Thanks to the big guy upstairs (me). And let’s not forget all the ordinary Americans, who, for some unfathomable reason, have refused to put us behind bars. We are literally taking money out of their wallets. Seriously, with these returns we are making Madoff look like a little kid with his hand caught in the cookie jar. Amateur!
Yours in money,
Lloyd Blankfein, C.E.O., Goldman Sachs
Gold is going to go parabolic soon enough friends. Did you know COMEX and TOCOM are settling delivery notices with ETF shares.
Mark it here dude, gold will peak in Jan 2011, price will be a function of supply, fear, central bank policy, and government ineptitude.
http://www.gata.org/node/7586
Saw that. Gartman even noted it. What an utter racket. CRIMEX for sure. Only those willfully dismissive would deny that the GLD and SLV are nothing more than attempts at price mgnt. These folks probably also believe we haven't put anyone on the moon yet either. You could hold their nose to it and they would still claim they can't see it. Imagine, you take possession of a futures contract in gold and they send you GLD shares??? WTF is that? As Gartman states, if you order wheat, you expect to be delivered wheat. Just think if you take possession of a future contract in wheat they they give you shares of an agricultural ETF?? If you order gold, you expect gold. Pure and simple a racket to manage prices.
Oh good grief, not a promo piece by Casey Research. I've always thought of those guys as high end stock promoters, who charge their clients a ton for their research while apparently simultaneously representing resource companies who need market awareness. Just my opinion, of course!!!
::__________________________________
Been around this market a long long time. I loved gold as a contrarian investment from 2002 through 2007. Even 2008 was good for precious metals. Lately, however gold & silver are totally manipulated sucker plays. How many times has Ted Butler been wrong? How many times has there been an imminent gold or silver 'shortage', talk of empty Comex vaults, contango or other 'must buy now' alert which sent all the doomers running to load up on physical at huge commission costs? Meanwhile the boyz at GS were waiting with their shorts, ready to wipe out the true believers, and crush the futures traders. Sorry to be such a cynic. Nothing against gold, I just don't care for losing money. People get too emotional about precious metals lately. Not a good basis for investing; clouds the judgment.
::__________________________________
Yes, I know there's a shortage of physical gold on the market, and sure, Goldman Sachs and the IMF have done a great job suppressing the price of gold. So what? Welcome to the totally rigged casino market. Financials are overvalued as well. Why not talk to all the FAS or SKF traders who are sitting on enormous losses? Betting that "this time" it will be different, and precious metals will go parabolic is a great all-or-nothing Vegas style bet. While you guys have been loading on gold, smart traders have done well buying copper and aluminum futures or trading options on copper, aluminum or steel stocks. Copper is not as suppressed because it doesn't make central banks look bad. On the contrary, when copper is running, it's assumed (correctly or not) that growth is expanding. Copper also immediately reflects any weakness in the US dollar, unlike gold lately. Food/agro is another shortage play which I believe will play out this fall in the wheat, corn and soybean markets. Even cotton has been a steady gainer
::__________________________________
I posted a history of supposed silver shortages here, just for laughs. Talk of imminent silver shortages goes back to the turn of the 19th century. Go ahead, flame away.
http://marketaddicts.net/wordpress-mu/2009/07/18/silver-shortage-look-at...
::__________________________________
If you truly believe the world is coming to an end, load up on distilled alcohol. It will numb the pain, help you make friends in a mad-max world, and is a better instrument for barter, lol. jmho!
I am a gold bull, myself, but its hard to disagree with what you say. Follow the tape. DOn't get spiritual about your investments. If you want to play gold - rent the rallies and buy the selloffs. MAintain a core position if you like.
However there are factors converging like never before...we shall see.
There's just one question I have: why are all the gold promoters selling gold (or at minimum marketing desparately for others to buy gold)? Seems like they're looking for greater fools.