Gold & Supply
Eric HommelbergThis is chapter III of the Gold drivers 2005 report and focus on a declining Gold production coming years. A declining Gold supply only increases the pressure on a already tight physical Gold market . According to Newmont CEO Pierre Lassonde you can add $7.5 dollars to the price of Gold for every 100 ton of Gold taken out of the market.
Gold production is approximately 2500 ton a year nowadays and projected to fall down to 2000 ton a year this decade. Alarm Bells were being raised everywhere since 2002 but it took a long time before falling Gold production got some media attention. Nevertheless it seems that the awareness is growing :
Mineweb.com reported on falling Gold production Nov 24 :
The pressure is on for physical gold.
London (Mineweb.com), Nov 25, 2004
"Demand is growing and production is falling. That is according to the latest gold supply and demand trends published by the World Gold Council covering the third quarter released this morning (November 25) and which show a contraction in supply against growth in demand."
"The figures, compiled for the World Gold Council by GFMS Ltd indicated that supply contracted sharply during Q3, dropping by 22.4 percent to 828t, against 1066t in the third quarter of last year." END.
The fact that a declining Gold supply could have a serious impact on the price of Gold coming years is gaining more credibility lately. Dow Jones News Service quoted Merril Lynch Gold fund manager Evy Hambro on falling mine output and its impact on the Gold price.
Dow Jones News Service
Falling mine output over the coming years
Wednesday, November 10, 2004
SYDNEY -- Merrill Lynch Investment Managers have a favorable outlook for gold, underpinned primarily by emerging pressures on supply, a leading member of the firm's London-based natural resources team said late Tuesday.
Amid "relatively static" demand, falling mine output over the coming years and the potential for a reduction in European central bank sales stand to prolong the rally in U.S. dollar gold prices, Merrill gold fund manager Evy Hambro explained during a visit to Sydney.
Already in 2002 a study published by Beacon Group Advisors forecasted a decline of Gold production of 35% for the following 5 to 8 years. (see graph below)
The reason for this was a lack of Exploration during the 1997 - 2002 period. During this period Exploration budgets had been cut by 67% simply due to the fact that Exploration programs weren't profitable with a Gold price below $350 / ounce. No Exploration means no new Gold deposits ! It's as simple as that !
Now let's focus on the Alarm Bells being raised since 2002 :
April 2002 : AngloGold
AngloGold also sounds alarm on Gold supply !
Gold Mining companies have warned that supplies of the precious metal are poised to fall sharply. The latest producer to sound the alarm bell that the industry was running out of Gold faster than it could replace it was world number two miner AngloGold, which predicted that the big discoveries of the past 20 years would run dry.
Sept 2002 : Denver Mining Conference.
Gold Executives this week gave anecdotal and numerical evidence of trends the industry has long hoped would boost what has been an ailing industry. Those trends include steady drops in yearly global output of Gold as Miners merge or "mothball" properties that can't turn a profit at Gold's current price of $322 an ounce !
Sept 2002 : CBS Market watch.
Global Gold output is seen falling 3% this year. It's biggest drop since 1976
Sept 2002 : Reuters
Gold output on slippery slope. Production levels at Gold Mines might not be sustainable because of depleted reserves at mature North American Mine operations and a fall on new mines on steam.
October 2002: The Australian Institute of Geoscientists.
The decline in Australia's Gold Industry continues.
Declining Exploration in Australia's Gold Industry is continuing to hurt production, with Gold dropping a further 8% in the year to June 30.
Then in March 2003 the strongest warning regarding dwindling Gold reserves came from Barrick's Exploration VP Alex Davidson who said :
"Big mining companies need to spend more on exploration, or else, at current annual production rates, reserves will be depleted in 10 years, he said. It can take six to eight years between making a discovery and starting mine production, and "we're not currently funding exploration at a level required to replace reserves," Davidson said."
A declining gold production can't be reversed easily :
Newmont president Pierre Lassonde said (August 2003) :
"The 20-year bear market in gold has weeded out marginal gold producers and significantly curbed exploration and production.". "If gold was $1,000 an ounce, it still takes four to seven years to open a mine," END.
Barrick CEO Greg Wilkins said more or less the same, he said (Nov 2004) :
"The average lead time for a large discovery to go on-stream with production was around five to seven years but that seven to 10 years was probably more realistic. ". "The industry isn't going to be able to respond immediately to higher gold prices. It is going to take a long time." END.
Trevor Steel, partner at Baker Steel Capital Managers told delegates at a two-day Euromoney gold seminar recently :
"The way I like to think of it is that the gold industry is in overdraft. It's been relying very much on discoveries that were made many, many years ago and it is not replacing the reserves it is mining every year,"
During 2004 it became clear that indeed the gold producers are struggling in order to keep up with production, the following headlines tells it all :
Thursday February 12, 2004
AngloGold saw reserves fall by 9.2-m ounces last year
AngloGold's Geologists failed to replace all the ounces it produced last year.
Monday February 16, 2004
Ashanti Announces Gold Production Lower Than Forecast
Tuesday March 2, 2004
SA gold output 4,9% lower in 2003.
Friday March 12,
Gap in Gold Production Looming
Friday April 2, 2004
Harmony Gold cuts production by 6%
Sun May 23, 2004
Aussie gold output hits record low
Friday June 18 2004
South African gold production tumbles 8.3% in first quarter
Thursday July 8, 2004
Gold supply down in Peru by 6.3%:
Wednesday July 7, 2004
Barrick Gold production declined to 1.28 million ounces in the second quarter from 1.47 million ounces a year earlier
Tuesday August 24, 2004
Australian gold output falls 16% in June qtr compared to June qtr 2003
Monday September 13, 2004
Gold miner Cambior Inc. (CBJ.TO: Quote, Profile, Research) on Monday said it expects gold production will decrease over the next four years
Thursday December 09, 2004SA's gold production down
Johannesburg - South Africa produced 85.7 tons of gold in the third quarter of 2004, the Chamber of Mines said on Thursday.
Producer dehedging is another factor which contributes to a decline of available mine supply. Producers turned to net de-hedgers last year and will continue at the rate of 300-400 tonnes a year. Although many analysts argued that producers would be stepping up their hedging activities again because of the rise in POG, exactly the opposite happened. Gold companies only increased the speed of de-hedging and thereby reducing the net supply even further.
Hedging died when the King of Hedgers Barrick Gold gave up their favorite Hedging game. They announced last year to stop Hedging and said that they won't do it no more for the next ten years.
Barrick Gold terminates it's Hedging program
LONDON - In what had every appearance of being a damage limitation exercise, Peter Munk, chairman of Barrick Gold, made an unscheduled return to the Gold Investment Summit here to announce his company had given up hedging - and would do no more for the next ten years. END.
Would do no more for the next ten years, maybe they're bullish on Gold ?
The table shown below says it all, mine supply is going down, de-hedging is picking up steam . Total supply ytd 2004 compared to ytd 2003 is already down 15%.
source : World Gold Council
It should be obvious that no matter what the Gold price does in short term, Gold production is going down coming years thereby adding pressure on a tight physical Gold Market.
Note : Readers interested in the entire Gold drivers 2005 report (8 Chapters) can drop a mail. I'll send the report in PDF format (all finished chapters) ASAP.
December 20, 2004
Email this Article to a Friend