Thursday, June 20, 2013

After the Gold Rush?




As usual they all get it wrong. Gold is driven by demand and supply. The supply side of the equation is presently coming in at around 2700 tons per year and is likely stable at that level. In fact, all the long since known stuff is now been fully exploited and at worst, new production in the pipeline from old discoveries will tidily cover declines. The long climb in production actually peaked two decades ago.

All the gold ever mined presently sits at around 165,000 tons. Since governmental gold is roughly around 100,000 tons, since 1975, private buyers have been absorbing actual mine production for a present total of 65,000 tons. It is plausible that some of the government gold has also been disposed of without disclosure. It is then possible although unlikely that private holdings approach 100,000 tons.

From this it is clear that we can add no more that 25,000 tons of gold each decade. Yet the private market has been absorbing just that for at least two decades. Over the next two decades, we can expect the global middle class to essentially double. Thus our real demand in terms of cash is going to double and the easiest way to offset that is with gold at around $3000.

Demand itself will not go away. Gold is the metal of choice to satisfy our hoarding instinct. That will never change and has nothing whatsoever to do with anything else. All other rationalizations are merely excuses for irrational instincts.

One thing that is not obvious is that we have reached the limit of gold recovery from extremely low grade ores. It simply cannot be recovered below a certain threshold at all. We must get out there and work completely new rocks.

After the Gold Rush

Nouriel Roubini

Jun. 1, 2013

Nouriel Roubini, a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics, was Senior Economist for International Affairs in the White House's Council of Economic Advi…




VENICE – The run-up in gold prices in recent years – from $800 per ounce in early 2009 to above $1,900 in the fall of 2011 – had all the features of a bubble. And now, like all asset-price surges that are divorced from the fundamentals of supply and demand, the gold bubble is deflating.


At the peak, gold bugs – a combination of paranoid investors and others with a fear-based political agenda – were happily predicting gold prices going to $2,000, $3,000, and even to $5,000 in a matter of years. But prices have moved mostly downward since then. In April, gold was selling for close to $1,300 per ounce – and the price is still hovering below $1400, an almost 30% drop from the 2011 high.

There are many reasons why the bubble has burst, and why gold prices are likely to move much lower, toward $1,000 by 2015.

First, gold prices tend to spike when there are serious economic, financial, and geopolitical risks in the global economy. During the global financial crisis, even the safety of bank deposits and government bonds was in doubt for some investors. If you worry about financial Armageddon, it is indeed metaphorically the time to stock your bunker with guns, ammunition, canned food, and gold bars.

But, even in that dire scenario, gold might be a poor investment. Indeed, at the peak of the global financial crisis in 2008 and 2009, gold prices fell sharply a few times. In an extreme credit crunch, leveraged purchases of gold cause forced sales, because any price correction triggers margin calls. As a result, gold can be very volatile – upward and downward – at the peak of a crisis.

Second, gold performs best when there is a risk of high inflation, as its popularity as a store of value increases. But, despite very aggressive monetary policy by many central banks – successive rounds of “quantitative easing” have doubled, or even tripled, the money supply in most advanced economies – global inflation is actually low and falling further.

The reason is simple: while base money is soaring, the velocity of money has collapsed, with banks hoarding the liquidity in the form of excess reserves. Ongoing private and public debt deleveraging has kept global demand growth below that of supply.

Thus, firms have little pricing power, owing to excess capacity, while workers’ bargaining power is low, owing to high unemployment. Moreover, trade unions continue to weaken, while globalization has led to cheap production of labor-intensive goods in China and other emerging markets, depressing the wages and job prospects of unskilled workers in advanced economies.

With little wage inflation, high goods inflation is unlikely. If anything, inflation is now falling further globally as commodity prices adjust downward in response to weak global growth. And gold is following the fall in actual and expected inflation.

Third, unlike other assets, gold does not provide any income. Whereas equities have dividends, bonds have coupons, and homes provide rents, gold is solely a play on capital appreciation. Now that the global economy is recovering, other assets – equities or even revived real estate – thus provide higher returns. Indeed, US and global equities have vastly outperformed gold since the sharp rise in gold prices in early 2009.

Fourth, gold prices rose sharply when real (inflation-adjusted) interest rates became increasingly negative after successive rounds of quantitative easing. The time to buy gold is when the real returns on cash and bonds are negative and falling. But the more positive outlook about the US and the global economy implies that over time the Federal Reserve and other central banks will exit from quantitative easing and zero policy rates, which means that real rates will rise, rather than fall.

Fifth, some argued that highly indebted sovereigns would push investors into gold as government bonds became more risky. But the opposite is happening now. Many of these highly indebted governments have large stocks of gold, which they may decide to dump to reduce their debts. Indeed, a report that Cyprus might sell a small fraction – some €400 million ($520 million) – of its gold reserves triggered a 13% fall in gold prices in April. Countries like Italy, which has massive gold reserves (above $130 billion), could be similarly tempted, driving down prices further.

Sixth, some extreme political conservatives, especially in the United States, hyped gold in ways that ended up being counterproductive. For this far-right fringe, gold is the only hedge against the risk posed by the government’s conspiracy to expropriate private wealth. These fanatics also believe that a return to the gold standard is inevitable as hyperinflation ensues from central banks’ “debasement” of paper money. But, given the absence of any conspiracy, falling inflation, and the inability to use gold as a currency, such arguments cannot be sustained.

A currency serves three functions, providing a means of payment, a unit of account, and a store of value. Gold may be a store of value for wealth, but it is not a means of payment; you cannot pay for your groceries with it. Nor is it a unit of account; prices of goods and services, and of financial assets, are not denominated in gold terms.

So gold remains John Maynard Keynes’s “barbarous relic,” with no intrinsic value and used mainly as a hedge against mostly irrational fear and panic. Yes, all investors should have a very modest share of gold in their portfolios as a hedge against extreme tail risks. But other real assets can provide a similar hedge, and those tail risks – while not eliminated – are certainly lower today than at the peak of the global financial crisis.

While gold prices may temporarily move higher in the next few years, they will be very volatile and will trend lower over time as the global economy mends itself. The gold rush is over.

World Gold Production 2013

Apr 22, 2013 Posted by: Dr. Thomas Chaiz


In 2012 world gold production reached 2,700 tonnes of gold (USGS) - slightly higher than production in 2011 and marginally higher than 2,600 tonnes of gold in 2001 (previous highs). This increase masks major changes in the structure of production costs for gold mines around the world. In 2001, for 2,600 tonnes, an ounce of gold was worth $271. In this past year it was worth $1,669. For 3.8% of additional production, the price of an ounce of gold has risen 615%.

China is the world's largest gold producer in 2012 with 370 tons produced. It remains at the forefront since 2007. Its production has increased threefold since 1991 and by fifty times since 1980. This increase in Chinese gold production is not miraculous. Its 1980 production was largely ignored by the rest of the world. China has been a major producer of gold for centuries, this increase is the result of the "formalization" of its production and the modernization of its mines.

The second largest producer is Australia with 250 tonnes of gold. Gold production in Australia is slightly higher than its low in 2008 with 233 tons but below its peak in 1998 with 312 tons of gold.

USA is third with 230 tonnes of gold. The situation in the United States is similar to Australia. Their production is slightly above the low of 2008 (223 tons of gold) and below the peak year of 1998 (366 tonnes of gold).

With annual production of 205 tonnes of gold, Russia is the fourth largest gold producer in the world. Despite steady growth since 1998, Russian gold production is still below past levels of production from the Soviet Union.

South Africa is the fifth largest gold producer in the world with 170 tonnes. This represents only 17% of the past production from 1969 to 1970, which was 1,000 tonnes of gold. 1,000 tonnes of gold is the historical record, no country in the world has never produced as much gold in a single year. South Africa lost its crown as the leading producer of gold in 2007 after a century of rule.

Sixth, the gold production of Peru is close to that of South Africa with 165 tons of gold produced in 2012.

Gold production in Canada was 102 tonnes, it is the seventh largest producer of gold. Despite a small increase this year, today's production rates are well below the 166 tonnes of gold produced in 1998.
Eighth position goes to Indonesia with 95 tons of gold. This level is far below its peak production of gold in 2006 at 203 tonnes.

Production from these eight major gold-producing countries continues to decline. They represent more than 59% of world gold production against 92% in 1970. Today, gold produced from these eight major countries and more than a hundred smaller countries is required to match the record production from South Africa in 1970.

The inexorable decline in gold production in South Africa and the stagnation/decline from historical producers such as USA, Australia, Canada, Peru and Indonesia have lead to radical changes in the structure of production costs. The growing trend towards the fragmentation of world gold production has many consequences, for example, a decrease in the resilience of gold mines in the event of lower gold prices. In other words, less profitable mines will close faster if a decline in the price of gold continues.

From 2008 to 2012 world gold production increased from 2,260 tonnes to 2,700 tonnes of gold. Gold production was driven by an increase in demand and a temporary decrease in production costs due to the 2008 crisis. We currently have a reverse situation, the price of an ounce of gold is in a weak position (average annual decline in 2013) while production costs have increased.

If these trends continue, mine closures as a result of lower gold prices and higher production costs should initiate a decline in world gold production for 2013.

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