Last Updated : 02 February 2009 at 16:00 IST
Peak Gold: The depleting world of Yellow Metal
While the price of gold has gone up every year since 2001, global production of gold has been falling in comparison to the demand. Gold production in South Africa, the largest producer of gold, peaked in the 1970s. Brazilian gold production peaked in 1982, Canadian in 1991, Australian in 1997 and US in 1998. All these countries together produce around 40% of the global gold.
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MUMBAI: You have heard of Peak Oil, as the world is increasingly debating the maximum rate of oil production because oil reserves are depleting in comparison to the rising demand for energy. But have you heard of Peak Gold?
Similar to Peak Oil, we have these days a Peak Gold phenomenon whereby demand for gold is increasing; but the production of the yellow metal is coming down and biggest gold discoveries have already been done.
“While world's mines are depleting their reserves, particularly their high grade ore, the remaining supplies of gold are becoming harder to find,” says reputed gold analyst Jon Herring. Demand for gold reached 1,133 tonnes in 2008, an 18% increase from the previous year. In dollar terms, this represented a 51% increase to an all-time record $31.8 billion.
Gold prices are zooming these days. It rose to $926 per ounce last week, prompting analysts to predict that gold prices will easily touch $1000 in a month or two thanks to the global economic meltdown and the free-fall of currencies across several nations led by the US dollar.
While the price of gold has gone up every year since 2001, global production of gold has been falling in comparison to the demand. For instance, gold production in South Africa, the largest producer of gold, has peaked in the 1970s. Brazilian gold production peaked in 1982, Canadian in 1991, Australian peaked in 1997 and US in 1998. All these countries together produce around 40% of the global gold.
New discoveries of gold are becoming smaller and companies are struggling to maintain existing gold reserves thanks to high cost of production. In spite of an estimated $18 billion in exploration expenditure over the past five years, the quality and number of new gold deposits dropped, says a research analysis from the Metals Economic Group.
Interestingly, probably, you have not have heard of any new gold reserves discoveries in the recent past. The Metals Economic Group says there has only been four world class gold discoveries in the last 15 years. Also, in the last 15 years, top five gold producing companies in the world have each produced between 3.5 and 7 million ounces per year.
Thus, while demand for gold has been increasing day by day along its price, production or supply of gold has been falling.
So where are the new supplies of gold going to come from? Herring says mining is a depleting business and if a company does not replace the reserves it sells each year, that company will someday cease to exist. “The major producers are voraciously hungry for new gold reserves. But they can't go out and find them by themselves. The best exploration geologists no longer work for the big companies. They work for and own the smaller, more nimble outfits - the junior resource companies. In fact, of all new discoveries, 75 percent are made by the juniors,” points out Herring.
According to Herring, in 2008, the gold exploration industry was decimated due to the worldwide bear market. “They are selling at a greater discount to gold than they were even when the gold bull market began, when gold was roughly $600 cheaper than it is today. In fact, many of these companies are trading well below their cash value. The bull market in gold is fully intact and only shows signs of heating up in the years ahead. The demand for the metal is at record levels and growing. Production has been falling steadily for nearly a decade. And the major mining companies are starved for new reserves and they do not currently have the resources to discover them on their own,” adds Herring.
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