If you ever get a chance to go hiking near an old gold or silver mine, take advantage of it. I did this many years ago. It’s not only a great experience, but also made me the best investor in metals.
Why? Well, there is nothing like seeing the long-dead, abandoned mines with your own eyes. You visually understand that ten years ago someone calculated supply and demand – and you guessed it wrong.
This has been the case in recent years, when gold prices have fallen since 2011.
But that is about to change …
My hike was a real moment. I was at Reno for a conference. My buddy had a topographic map of the old mines in the high desert of the Santa Rosa Mountains, about four hours to the north.
We drove up, set up camp among the wormwood and the next morning climbed the steep slope of the hill to a small plateau. There we found the entrance to the mine (dynamically closed), an old wooden hut and other fallen remnants of the operation.
We also found a “power plant” mine: a long-rusty T-frame that sits on blocks. Instead of wheels he had large spindles of conveyor belts screwed to the axles!
In terms of time and technology, it’s a great distance from this old mine to the huge gold mines that permeate the pile north of Nevada.
But long multi-day cycles of supply and demand, boom and fall remain. And while few outside the industry are talking about it yet, the seeds for the next boom are already in the wind.
The reason is related to world production.
The peak of gold?
According to industry insiders, major investment bankers and others, 2015 will be a peak in world gold mining.
If you believe in common sense that a large number of offers equals lower prices, then this is bad news.
Good news? The same sources say that in 2016 and beyond, production dropped significantly.
The gold mining statistics in Nevada tell a small part of the story.
Last month, the state’s mineral division compiled gold mining statistics for 2014: it dropped to 4.9 million ounces, the lowest in 27 years.
But here’s the bigger trend: total production in Nevada actually peaked in 1998 – nearly 9 million ounces. Since then, gold mining has declined over 12 of the last 17 years.
What’s going on? In a nutshell, areas with high-grade ores were all systematically excavated. And because Nevada contributes the lion’s share of America’s gold mining, America’s production data tells a similar story.
Statistics from Australia and South Africa are almost the same. Gold mining in South Africa peaked in 1970. Australia peaked in 1997.
For a long time, production from China and Russia filled the gap.
But with falling gold prices, increasing the number of mines and gold mining companies wisely avoiding new projects, the “production break” (as some analysts call it) is finally on the verge …
The March Goldman Sachs report left “20 years of known gold reserves” in the world. The bank has noted fewer discoveries of new gold deposits since 1995.
Earlier this month, analysts at the National Bank of Canada told The Financial Post: “It’s not about when and even when a production outage occurs. It’s really a question of how companies will react.” According to the bank, world gold production will fall sharply in the next few years.
Similarly, an analyst from Grant Thornton told AustraliaMining.com that “2015 will be the peak of world gold production.”
Hidden golden buffer
So if all this is true, would you say why we haven’t seen higher prices yet?
One important reason is the impact of “gold scrap” on the world market. All of these molten earrings, bracelets and dental fillings are the main source of supply – 36% in 2011 and 2012.
But this source is steadily drying up. In 2014, only 28% of world gold supplies came from recycled sources. The World Gold Council noted that supplies of processed gold had reached their lowest level since 2007.
These trends continue in 2015. The group says refined gold supplies fell 3% and another 8% in the first two quarters of the year (compared to last year).
The supply crisis will lead to higher prices
Here’s the bottom line: it takes time for new information to hit any market. The boom and falling gold prices? This is old news, completely reduced in price for the metal and its miners.
But what do most people still not understand (and are unlikely to believe if you told them)? The golden “production break” meets the requirements. As the new data justifies the forecast, see that it will become the main new catalyst for gold prices in the coming quarters.