LAWRIE WILLIAMS: Peak gold impact on prices as exploration continues to tank
The first full day of the Denver Gold Forum raised some interesting views on whether peak gold may already have been reached – and if so the likely impact of even a small production downturn on the gold price.
In an opening keynote presentation, David Cox of SNL Financial which inter alia researches mineral exploration and mine production trends told an early morning audience that global gold production would indeed decline this year, if only by around 2% - and continue to turn down until perhaps there is a major gold price upturn which might stimulate new projects and expansions. And even then it would take some time for the industry to turn itself around production-wise, if indeed it ever does, given the length of time taken to bring new capacity on line and the lack of any major new discoveries. SNL’s conclusion that the start of the production downturn will begin this year runs counter to the opinions of the major mainstream analytical groups which had all been seeing a continuing gold output increase, albeit a very small one, in 2015. When questioned on this in a Q&A session, Cox averred that the SNL calculations would have been more up to date than those of the mainstream analysts which would have been estimated much earlier in the year.
While the overall mood of this year’s Denver Gold Forum may indeed be more positive than the past three years’ precious metals price performance might suggest – well the mining companies wouldn’t be in it if they didn’t think there was great upside potential ahead – Cox and SNL’s overall analysis of mineral exploration activity – and that of gold exploration in particular, showed what has been in effect a pretty downbeat few years for the explorers, with activity turning down every year since a 2012 peak, with activity being very quick to react to the declining price trend. The major gold miners have been making some big cutbacks, particularly in greenfields exploration, while the juniors, which had hitherto provided the greater part of exploration activity, were struggling with lack of funding and were mostly more concerned with cash preservation and staying afloat
What this analysis suggests is that global gold production is potentially moving into a period of long term decline with the mining companies no longer having the new gold resources available to them to replace aging assets due for closure or where grades are falling off. Coupled with the huge lead times in moving a potential project from exploration through to production it could be many years, if ever, that miners get back to the gold output levels seen over the past couple of years.
Peak gold – or crest gold with annual output having plateaued over a several year period as another delegate put it – may thus already have passed. The same delegate who works for one of the big mid-tier gold producers also expressed the view that although gold output may be beginning to fall it will have little impact on the metal’s price performance as this was more affected by gold trading and sentiment. However this view was very much counter to that of a lunchtime panel discussion on paper gold where the participants all held the opposite view and saw declining mine production of gold being absolutely key to a change in sentiment which would affect positively the longer term performance of the metal price.
The panel presentation on paper gold was very well attended – with the fact that it is paper gold which appears to have been setting the price – and also responsible for some of the downward spikes seen by many gold bulls as proof of market manipulation. None of the trading element on the panel saw manipulation as being in evidence putting these pricing anomalies down to being part of the vagaries of algorithmic high frequency trading which can hugely exaggerate market movements. However, none were really able to give a convincing explanation in these terms for the big July 19 downward spike which took place almost simultaneously on COMEX and the Shanghai Gold Exchange when Western markets were closed and activity was extremely thin. Someone had to have made the initial trades after which the algos took over and took the price down vertically before generating some partial recovery. The panel commented that elements of the market might use muscle to try to move it in a direction which suited them they did not see this as part of nay bullion bank/central bank conspiracy to suppress the price.
Interestingly even the traders on the panel all professed to be strongly bullish longer term on gold, but also all felt the price could yet fall to new lows before making a strong recovery.
Nonetheless some of the explanations of how the markets actually worked were enlightening – but perhaps not so much so as to convince the out and out gold bulls that markets were not being manipulated so as to depress gold and silver prices. There was also an explanation on how the COMEX approved warehouse stock position worked, but not sufficiently so to clear up what proportion of eligible gold stocks is actually available to be converted to the registered category to prevent a possible default given the huge recent decline in the registered stock position. The principal comment seemed to be that so little of COMEX trade is actually in physical metal, that the low registered stock position was largely irrelevant.
However coming back to the panel’s views on what might really stimulate the gold price to turn around, a fall-off in new mined production seemed to be top of the tree here. There appeared to be at least a partial recognition that physical gold might be in a period of very tight supply given the continuing Asian demand and if the gold traders started to see falling supply in an already tight market, sentiment could turn around rapidly and instead of seeing the downward price spikes which have so vexed gold investors, these might start being replaced by algo driven upwards ones. There was a recognition that the trading element and the producing element lived in two totally different worlds, with neither truly understanding the other.
But what has to be a little worrying for gold (and silver) investors there was this almost unanimous view that we could yet see further sharp price downturns – to $1,000 or even below – before a very big correction comes into place stimulated by supply shortages. They did not believe that a bottom had been reached – despite the discussion being opened with the display of a chart which did suggest to many technical analysts that a bottom had indeed been reached already. The next few days market activity may tell.
22 Sep 2015 | Categories: Gold