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.
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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