LAWRIE WILLIAMS: Peak gold may be irrelevant – for now
There is something of a continuing argument over whether we have reached ‘peak gold’ or not – peak gold being the time when total global gold output first plateaus and then begins to fall. Well we have quite probably reached that level, but whether it is actually relevant vis a vis the price of gold – at least for the time being – is probably another matter altogether.
Global new-mined gold production in 2017, as estimated by analysts submitting data to the World Gold Council (WGC), is seen to be 3,268.7 tonnes – all of around 5 tonnes (0.15%) higher than a year earlier so effectively the WGC analysts reckon production has just about plateaued. A significant fall in output from the world’s No.1 producer, China - down 9% - was largely counterbalanced by small rises from countries like Russia, Australia, Canada, and probably from the USA among the world’s other major gold producers, but the overall trend is now probably headed downwards. Given that most of the gold mining majors have been cutting and cancelling capital projects and reducing exploration as they concertedly strive to reduce debt levels and improve balance sheets, this process is seemingly inevitable.
But, any fall-off in annual global gold output is likely to be very small indeed until at least the end of the current decade, after which it may accelerate. There were already a few major capital projects in the pipeline when the gold price started to turn down and the miners were forced into reviewing their growth-at-any-cost strategies, and these have since been contributing to overall production - hence the growth. But the big miners have also been cutting their outputs by offloading non-core operations to smaller, and often more flexible, third parties which have been able to glean small production increases from these properties. The production downturn has not materialised either as fast or as severely as many had been predicting.
For the gold price to be affected by these production downturns in any significant manner, other sources of gold come into play and with huge above-ground stocks, as well as perhaps a surfeit of gold jewellery and artefacts, any significant price rises are likely to mobilise some of these stocks, which will put a cap on rapid price rises. Overall we do see demand growth – mostly from areas where wealth is increasing steadily, like China and India, where the general population also has a propensity to purchase and hold gold as savings and protection against inflation and currency degradation.
But, until there is a significant downturn in global production, we see ‘peak gold’ as a bit of a red herring with respect to price increases. It will contribute, no doubt, but perhaps only marginally for the time beiong. In our view gold is indeed due for price rises, but in a slow and steady manner unless some ‘black swan’ event generates fear factor buying in the West to go with steady demand increases in the East, where most newly-mined gold is headed nowadays.
Yes 2017 may well prove to be the year of ‘peak gold’ until the price rises sufficiently to stimulate re-emergence of some major capital projects currently sitting in limbo. The more limited exploration resulting from cutbacks by the majors is not really finding any big new gold deposits and even if it did, with the long lead times needed nowadays to bring a major new project into production, it would probably be towards the end of the next decade before any major new find might have an impact.
So peak gold, if indeed it is with us already, for the moment will have little effect on the gold price, but it could do in a few years’ time, particularly as global demand continues to build. But as noted, any significant gold price rise is likely to be mitigated by increased availability of scrap supplies and perhaps liquidations from official sources. We thus forecast a slow and steady rise in the gold price in the next few years, but perhaps accelerating as we get into the next decade.
15 Mar 2018
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