Gold Research Analysis
Every gold bug has heard it at least once: “you can’t go back to a gold standard because there isn’t enough gold.”
The gold bugs subsequently recall their various gold facts and the number of tonnes ever mined on planet Earth. They visualise that all of the world’s gold in a cube can barely cover the size of a tennis court. And then they cross-reference that with the hockey stick graph that is the human population and begin to rethink—would every man, woman, and child really have enough gold?
And yes, there isn’t very much gold for every human being. Precisely—gold has value due to the very scarcity that the statement claims is its pitfall. So, gold is valuable not because of its abundance, but because there is so little of it.
Therefore, it is important to understand the nature of its supply, the countries that supply it, and what variables affect its production.
As opposed to merely turning on a switch on a printing press, the supply of gold is limited to the sweat and toil of physical labor. It has to be explored for, mined, and processed. In fact, after a gold deposit is discovered, mines could take up to several years to construct, costing anywhere from 10 million to a billion dollars. Due to these constraints, the supply of gold cannot respond rapidly to fluctuations in demand. In other words, global mine supply is what economists would call “inelastic,” and is generally predictable, as shown below:
So if the gold price does not substantially affect production costs, what does? For the most part, rising production costs.
This includes higher labour costs, higher energy costs, and lower grade ores, which are ores with a smaller concentration of gold. However, it is worth mentioning a rising industry trend as miners try to take advantage of soaring gold prices—de-hedging, a process where producers settle forward sales obligations, reducing the volume of forward sales, and consequently reducing the amount of global mine production available. This is according to one of the most reliable sources of global gold production data, the British Geological Survey’s World Mineral Publication, that reported seven countries—China, USA, Australia, Russia, South Africa, Peru, and Indonesia—produce more than 100,000 kilograms of gold annually, which equals 60% of world mine production.
Lastly, investors rarely think about the “cost” of civil unrest, a cost that is neither tangible nor can be accounted for on a balance sheet. Whether you want to call it “civil unrest risk” or “insurrection risk,” amid global populist uprisings, rising unemployment, and debt concerns, a violent protest by locals can cause considerable damage, as experienced recently by the world’s sixth largest gold producer, Peru. With a rich precious metals history, Peru produces approximately 200 tonnes of gold a year and is also the largest silver producer in the world – a title previously held by Mexico – according to BullionStreet.
Russia, having its heyday in 1989 with 304 tonnes, is the fifth-largest producer with 201 tonnes in 2010.
After dominating gold production for decades, South Africa lost its number one place in 2007. It is now the fourth-largest producer, down 6.4% from 2009 to 192,000 kilograms. The British Geological Survey attributes their decline in production to the mines’ maturity and declining reserves. At the same time, production costs and accidents have been on the rise.
Like Russia, the United States is traditionally dominant, but has recently lost ground to new producers and has declined by 13% over the last five years. The US is the third largest, producing 230 tonnes in 2010.
China is easily the world’s largest consumer of the metal, but we often forget they are also the world’s largest producer. For the year 2010, it produced 345 tonnes. Its output has increased by 62% since 2001 and it routinely breaks its own records for annual gold production.
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