Gold Market Update

April 3, 2002

Let's see, since our last update:

  • The New York Fed President said the US Dollar is a little overvalued. The US Treasury Secretary said he supports a strong US dollar policy.
  • New York traders watched Comex spot gold close the week above $300 for the second time in two months, also the second time in two years. The Head of the German Bundesbank said he wants to sell gold in 2004 to buy stocks.
  • An Argentinean can now buy a Peso for 34 US cents. A Republican President implemented onerous trade barriers.
  • Many Japanese investors continue to show a preference for gold over paper. Consumer confidence in the US jumped to its highest level since August 2001.
  • A high profile bond fund manager warns of the dangers inherent in an over-leveraged balance sheet. Wall Street economists and CNBC talking heads forecast a strong recovery.
  • Some folks get it. Some folks don't.

In our June 2001 update, we reported that, according to Standard Equities, gold production could decline by 35% (900 tonnes) by 2009. Nothing has changed in the gold mining world that would alter this estimate. In fact, a recent trip to the Prospectors and Developers Association of Canada (PDAC) conference reinforced our view that newly mined gold production has peaked and will now begin to decline at an accelerating rate for years to come. Each year miners, geologists, and prospectors gather at the PDAC in Toronto to display their wares, renew acquaintances, exchange ideas, contemplate deals, and drink more than they should. It draws several thousand participants from around the globe, and has become the premier event of its kind.

Despite the stellar performance of gold shares over the past year and the perky bullion price, new exploration plays were very few and far between. Exploration companies rely on funds from investors and larger mining companies, however, since 1997 the funding needed to generate new exploration and the next generation of mines has been miniscule at best. Bulyanhulu, Sadiola, Veladero, Pierina, and Geita are all world class gold deposits that are being mined or developed by major mining companies. All were found by junior exploration companies during the 1993 to 1996 global exploration boom. The majors are notorious for their lack of exploration success. Their forte is development, mining, and expansion. This begs the question: given the lack of funding for exploration, who is looking for the next 119 million ounces - the gold that is depleted through mining each year? Many of the junior gold companies at the PDAC conference were promoting properties they have hung on to through the bear market. Properties that didn't quite make it in the last cycle. Others have acquired cast-offs from the majors that were deemed too small or too difficult to develop at prices below $300.

Mineable gold deposits are extremely hard to find, and profitable deposits even harder. There is no doubt that if gold prices stay in the $300+ range for an extended period, funds will be made available to the exploration sector. However, the time it will take to find new deposits when starting from scratch will be measured in years. Add to that about five years to drill, plan, finance, and develop a mine and the lead-time can easily add up to a decade. Most of the majors have a limited number of projects on the shelf that will be developed if and when they are convinced that the long-term gold price will hold above $300. However, we estimate that this added production will only stem the decline, not stop it. Meanwhile, we expect that fabrication and investment demand combined will continue to grow at the 1.8% average annual rate (2.1 million ounces) of the last ten years. No one knows whether the Central Banks will continue to sell their gold in sufficient quantities to fill the supply/demand gap. In 2000 there was a shortage of tech stocks. In 2001 there was a shortage of natural gas. In 2002 there is a shortage of single family homes. Shortages provide investors with unique opportunities to achieve extraordinary gains. They also carry the potential for gut-wrenching losses if the investor is late and the duration of the shortage is over estimated. There may never be a shortage of gold, but the possibility looms, along with the possibility of winning or losing a fortune.

The Incas thought gold represented the glory of their sun god and referred to the precious metal as “Tears of the Sun.”