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Peak Gold

2012 January 29

We’ve been warned before. Four decades ago this year, five scientists from the Massachusetts Institute of Technology published an influential set of predictions regarding the sustainability of human progress. Titled Limits to Growth, their report suggested the world was heading toward economic collapse as it exhausted the natural resources, such as oil and copper, required for economic production. The report forecast that the world would run out of new gold in 2001 and petroleum by 2022, at the latest.

Bloomberg Businessweek: Everything You Know About Peak Oil Is Wrong (Charles Kenny)

Putting aside the accuracy of the claim about the timing for a 2001 gold peak (I have heard that Limits to Growth contains no references to specific resources or specific predictions of their peaks), I recall reading that gold peaked a few years back in articles such as this one …

Global gold production has been in steady decline since 2002. Production in 2007 was around 2,444t, down 1% on the previous year.

Google Cache: www.mining-technology.com/features/feature1721 (27 March 2008)

Did those reports of a gold peak bear out?

I found some global price and production data on gold at a USGS website: http://minerals.usgs.gov/ds/2005/140/gold.pdf.

Unfortunately, that only extended to 2009. The USGS had some additional data and estimates for 2010 and 2011 in a separate report: http://minerals.usgs.gov/minerals/pubs/mcs/2012/mcs2012.pdf

I grabbed the 2010 and 2011 ave annual gold prices from Kitco and used an inflation calculator to adjust that for 1998 constant dollars.
http://www.kitco.com/charts/historicalgold.html
http://www.usinflationcalculator.com

My compiled data file is here:
http://rhinohide.org/econ/gold/usgs/data/usgs-gold.txt

So, in answer, the previous 2001 peak in global annual gold production might have been broken in 2011. The USGS provides an estimated production which is greater for 2011 than for 2001. Even if production falls short of the estimate, production has been increasing steadily for the last 3 years.

It’s not difficult to understand why gold production is increasing in recent years. Even in 2008, the high prices were attracting attention and the prices have only continued increasing since then.

The high price of gold is however encouraging more adventurous projects, be they more challenging financially, geologically, geopolitically or all three. New projects for gold and other resources are mushrooming throughout Africa, China, the Middle East and the former Soviet Union; all areas where sovereign risk is potentially very high. …

… “The rush is on – with a boom like this you produce as much as you can,” says Morar. Large numbers of juniors have entered the fray in the last few years and there are now more than 2,000 mining companies throughout the world with some degree of exposure to gold.

In Australia, a number of troubled projects look set to gain traction, while BHP Billiton reported recently that it had confirmed significant new gold reserves in its Olympic Dam Mine in South Australia.

The dynamic seems straightforward. “Traditional” mines can profitably produce at a particular grade of ore. At some point, diminishing returns result in a peak in production. Supply falls, prices rise. New, higher prices encourage use of lower grades of ore, development of riskier mines and the deployment of more expensive technology. Production recovers but at a higher price point.

It seems to me that the recent history of oil has seen a similar trajectory.


Addendum:

The high price of gold is fueling increased production among the world’s major gold producers, making previously uneconomical projects profitable, and the newly extracted gold is expected to hit the markets in the 2015 to 2020 period, says Jorge Beristain, Analyst at Deutsche Bank Securities Inc.

“If investors start to form a belief that gold will at least sustain in the $1,700 to $1,900 range in the next few years — that really does change materially the outlook for these equities,” Beristain said. “The thought process for a lot of investors prior to the summer spike was that gold was somehow going to reach a ‘peak’ level and then collapse.”

Beristain points to Newmont Mining Corp. (NEM) as one of the major gold producers ramping up production in the coming decade. NEM also has instituted a dividend tied to the price of gold, making the ROE more attractive to investors in the meantime.

“In May of this year [Newmont] came out with a new six-year growth plan to start to grow their output,” Beristain said. “By 2016, Newmont expects to ramp up production by about 2 million net ounces per year versus today’s 5 million ounces. But that’s going to be very second half loaded and post-2015 time frame.

High Gold Price Fuels Production, 40% Increase Expected

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