When it comes to renewable resources, there are a few things you can’t count on. Chief among them, of course, is oil. There’s only so much oil reserves sitting yet-untouched around the globe. Eventually mankind will have to embrace a replacement for oil in heating, production, and transportation industries. Another resource on the decline that might be harder for mankind to let go of is gold. The United States Gold Bureau cited National Bank analyst Steve Parsons in running with a headline “Is the World Running Out of Gold.” Parsons first predicted a so-called “production cliff” in gold production in 2013. He believed gold output would peak around 2016 and enter a sustained period of decline.
Is the world actually running out of gold? The answer depends on terminology. No, the world is not running out of gold in the way it is running out of fossil fuels. Once tapped, refined, and burned, oil is gone. Once mined, refined, and sold, gold isn’t technically gone. What the world is facing in the coming years is the potential for a shortage in gold production. When you buy gold bars online or gold coins, you may find yourself holding onto that gold for years (if not decades). The gold still exists, but it may not make its way in and out of the precious metals market if production slows.
So the question now becomes; what’s behind the sudden concern for gold? Let’s look at the factors at play in this scenario to better understand why some industry analysts are sounding the alarm bells.
Discoveries of New Gold Deposits have Slowed
The past 130 years of human history have resulted in the discovery of massive gold deposits around the globe. The Witwatersrand Basin in South Africa is one example of a massive gold deposit, as are Nevada’s Carlin Trend and Australia’s Super Pit. However, these facilities are facing the end of their life cycles (in the distant future). With these massive deposits no longer producing at the same level, new deposits would be required to sustain global appetite for gold.
Unfortunately, the deposits found throughout the world in 70s, 80s, and 90s are not being matched with equal discoveries in the 2000s and 2010s. In each of the decades closing out the 20th century (70s, 80s, and 90s) unbelievable amounts of gold were discovered. Consider this:
- At least one deposit containing 50+ million ounces of gold was discovered in each decade
- At least 10 deposits containing 30+ million ounces of gold were discovered in each decade
- Countless deposits of 5 to 10 million ounces of gold were discovered in each decade
So, what about the 2000s? There are have been no 50+ million ounce deposits discovered in the last 15 years. No 30 million ounce deposits have been discovered. Only a handful of 15 million ounce deposits have been discovered. Overall, the discussion around the potential for the world running out of gold focuses on two factors: less exploration and aging mines.
Less Exploration is Occurring
Since reaching a peak in 2011 and 2012, gold prices have remained high, but have been steadily falling. In response to slipping prices for gold, mining companies have slashed their exploration budgets. In early 2017, the total exploration budgets for companies involved in the mining sector (nonferrous metals) dropped to $.69 billion. That represents the lowest combined exploration budget in 11 years and a fourth straight year of falling budgets.
On average, it takes roughly seven years from discovery of a deposit to active mining. Those years between discovery and active output are taken up with feasibility studies, project approval, and other regulatory impediments. As a result of fewer discoveries being made and falling productivity at aging mega-facilities, the industry faces a potential shortfall when aging mines slow and new mines aren’t yet online.
Aging Mines Around the Globe
The world’s most productive gold mine, historically, is the Witwatersrand Basin in South Africa. Discovered in the 1880s, the mines at Witwatersrand have produced more than 40% of all the gold ever mined in human history. This vast treasure trove of gold helped transform the nation, making Johannesburg one of the largest and most populous cities in the world, and giving South Africa the most stable, advanced economy and government in Sub-Saharan Africa.
However, the last time Witwatersrand was humming alone was in 1970. Miners there dug up more than 1,000 metric tons of gold in that year, but production has been steadily declining in the years and decades since them. In fact, South Africa has plummeted from its top spot as the world’s greatest gold refiner to the fifth place behind China, Australia, United States, and Russia. Last year, South Africa produced 167.1 tons of gold, an 83% dip from 1970. Surely the other four can make up that shortfall though, right?
Well, Australia is currently second in gold production globally, but its largest mine is also reaching the end of its life. Since the late 1990s, with the exception of a few peaks, gold production has been slowly dropping at sites like its famous Super Pit. US production, though on a slight upward spike at the moment, is also on a long-term dip in the 21st century. What about the new global leader? What is China doing?
On the surface, China provides a bright spot in global gold production. Miners at the Mponeng mine, which is the world’s deepest mine at 2.5 miles, are still following veins of gold deeper and deeper. However, this comes at great expense. The deeper the mine goes, the more expensive it becomes to recover the gold contained within.
Production in all of these countries is further hampered by a few other factors. Tougher regulations in the developing world and in post-industrial nations makes it more difficult for mining companies to pull out all the stops in pursuit of gold. Additionally, gold deposits being discovered now increasingly feature gold veins that are incredibly difficult to access. The so-called “low hanging fruit,” which is gold deposits that are easy to reach, are few and far between. The oil and gas industry faced this issue in the early 2000s, but fracking was developed and enhanced to allow companies to go after those deposits with lower costs.
There is no “fracking” option available for mining operations, meaning that gold deposits stuck in hard-to-access areas are bound to remain there until the industry can find a solution that doesn’t involve immense expense.
Not All Doom and Gloom
With all the bad news taken in and digested, it’s not all doom and gloom for gold. China’s second-largest producer, Shandong Gold Group, reported the discovery of a gold deposit in eastern China this year that reportedly contains between 380 and 550 metric tons of gold. Seabridge Gold of Toronto recently discovered a gold deposit in British Columbia, uncovered after retreating glaciers exposed the gold, that reportedly contains an astonishing 780 metric tons.
There is certainly potential for gold discoveries to rebound in the coming decades, but companies need to be able to (or willing) put more money into exploration and discovery. Additionally, current recovery technology needs to advance to allow for less expensive access to the existing gold deposits which are hard to reach. Until such a time as this happens, there is a good chance that supply and demand will face an imbalance that pressures gold prices higher.
Buying gold is always a good hedge against economic uncertainty, but with the potential for rising prices and uncertainty over the supply of gold, the next few years could see increased gold buying if prices edge upward in the face of declining supply.
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