LAWRIE WILLIAMS: Peak Gold: Not there yet! – CPM Group
There have been a number of commentators out there telling us that the global gold mining industry has already reached peak output (Peak Gold), but according to Jeff Christian, one of the most astute gold analysts out there, we have not actually reached this yet. Jeff runs the New York based CPM Group metals analysis consultancy which is due to release its Gold Yearbook 2017 later this week.*
Jeff differentiates between what he calls Peak Gold and Peaking Gold. The former he describes as the concept that the world is running out of mineable gold deposits, which he refers to as ‘hokum’. There are many well known projects and deposits, he says, and also estimates and geologically based scientifically supported views that there is plenty of gold in mineable deposits yet to be discovered around the world. Some are in remote places that have not been adequately explored, like eastern Russia and much of China, the Tibetan plateau, the inner Amazon. Some are likely in plain sight, but may be uneconomic to mine, or too costly to develop, with current technology and at current metal prices.
He goes on to comment that any failure to find new gold orebodies reflects human missteps, not a lack of geological deposits. When you take current exploration expenditures and (a) deflate them for inflation and (b) adjust them for fluctuations in the quality and quantity of data parsing, you find that the amount of real money being spent on exploration for metals in general and gold in particular actually is a fraction of what it was in the glory days of discoveries in the 1980s and early 1990s. Furthermore, an increasing proportion of 'exploration' expenditures is being sucked up in costly computer modeling programs. Computer models are based on past discoveries. Just as the pharmaceuticals industry is suffering from a dearth of new drug discoveries because it has shifted from laboratory work to computer generated concepts and models, so too the mining exploration industry is consigning itself to only discovering deposits similar to ones discovered in the past. If you only look for those types of deposits, you will not find new ones. So, the failure the find new gold deposits is not a geological paucity of deposits, but rather a function of human behavior.
In terms of 'Peaking Gold,' CPM Group sees gold mine production as having actually risen by 2.5 million ounces, or 2.8%, in 2016, and to rise by another 500,000 ounces, or 0.6%, in 2017. The Group sees production peaking in the 2017- 2019 period, and then declining. While some less well versed gold market observers and marketing groups have been predicting that gold production would fall for the past several years, CPM has maintained that the peak would come a few years out. It is perhaps no longer 'a few years out' and the peak or plateau is approaching. Again, the plateau, and the decline CPM expects in global mine production beyond 2017 - 2019, reflects market forces, like lower gold prices and a lack of financing for mining, and human behavior; it does not reflect a world running out of mineable gold.
To some extent the CPM terminology is a matter of semantics. What Christian describes as ‘peaking’ gold is pretty much what many other commentators call ‘peak’ gold. But be that as it may, even under the CPM scenario this is almost on us, but not with us quite yet. It will be interesting to see what the other major precious metals consultancies – Metals Focus, which provides data for the World Gold Council - and Thomson Reuters GFMS will assess global gold production when they come out with their own gold yearbooks also due out next week. We suspect they may see 2016 output as flat, or even trending downwards by the year end, but even so any impact will not be significant in terms of gold’s supply/demand fundamentals probably until the next decade.
The cost cutting exercises conducted by most of the gold majors which have seen major cutbacks in gold exploration, and the lack of availability of capital to develop gold mega projects are bound to have an adverse impact on gold output until at least well into the next decade. But whether any such shortfall will have a significant early effect on the gold price is another matter altogether. We suspect not initially, but as demand continues to grow in Asia in particular along with population increases and the movement of more people into the more affluent middle classes there could be some strong supply/demand price impact in the second half of the 2020s. Prior to that we suspect prices will trend upwards, but perhaps not significantly so unless there is some kind of dramatic upheaval in the global financial or geopolitical situation worldwide. Many financial pundits are, and have been, predicting a massive equities market crash which could have an impact as people revert to gold as a ‘safe haven’ asset. But be warned. During the last 2007-2009 equities meltdown there was a period where the gold price also dropped pretty dramatically (by around 20% in just a few weeks) as financial institutions struggled for liquidity and needed to sell hard money assets like gold just to stay afloat. But gold did recover rapidly and had regained its former levels as equities were still bottoming out – and then surged to new highs over the next 2-3 year period. History could well repeat itself.
But back to peak gold in the annual global gold output sense. Those telling us it is already here are probably being a little premature – and initially any global decline will likely be small and not make much difference to the yellow metal’s fundamentals. But over the years the fall in output will likely accelerate and could have a significant effect on prices, but perhaps not until the 2020s.
*The CPM Group describes its Gold Yearbook 2017 as the most comprehensive source of information, statistics, and analysis on the international gold market. The report begins with a thorough review of gold market trends and fundamentals. It continues by assessing the impact of economic and financial market trends on the gold market. The Yearbook concludes with an in-depth analysis of each gold market segment, including mine production, secondary recovery, bullion and futures market activity, central bank holdings and transactions, fabrication demand, investment demand, prices, and other important aspects of the gold market. It will be available as a digital version on March 28th – for details click on: http://www.cpmgroup.com/shop/product/precious-metals/cpm-gold-yearbook-2017
26 Mar 2017