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Irrational Exuberance in Gold Price?

May 29, 2001

Frank Veneroso recently put together for GATA a review of the current situation in leased gold and the current supply/demand picture for gold as he sees it:

I wrote an article in June 2000 that made the statement "The world will run out of new gold to mine in 20 years or less!" It can be read at the following address:

Veneroso makes a case for us to believe that if current conditions persist for approximately the next 7 years that all of the remaining gold in central bank vaults will be depleted.

I have used the Veneroso numbers for his conservative case to update my work. He shows total gold usage (Demand) in the year 2000 as 4,844 tons; this consists of production of 2,568, scrap 602, and central bank leasing of 1,674. For the purposes of this analysis I am going to assume for the years starting in 2001 that these numbers will be roughly the same. I realize this will give us only an approximation of future conditions; however, I feel the analysis is instructive. If we assume the scrap component of both supply and demand will be about 600, then we can subtract this number from both supply and demand to get a rough idea of the amount of gold disappearing each year from both mine production and central bank vaults. When we do the arithmetic we find that in 2000 this figure is 4,242 tons of gold.

Veneroso in his conservative analysis concludes there is probably 20,000 tons (This number comes from total reported central bank gold of 33,000 minus the 13,000 conservative estimate of these reserves that have been leased into the market place, never to return) of gold remaining in central bank vaults that can be used to make up the yearly shortfall between mine production and total demand (Remember each year we will have about 600 tons of scrap recovered and reused that offset each other). We saw from my work the USGS says there is about 49,000 tons remaining in the earth's crust for recovery by mining operations. When we add these numbers together we come up with a total supply of gold from now to the end of time of just 69,000 tons. If you read my article you saw that from the dawn of civilization only 128,000 tons of gold has been mined. That means we have remaining only about 54 percent as much gold as has been mined throughout all of recorded history.

Now if we divide this remaining gold supply (69,000) by the yearly usage of gold from both mining and central bank sources (4,242) we come up with a figure of 16.3 years. From that time forward, all gold will be held in private hands or will have disappeared in industrial uses and can not or will not be recovered.

Does that shock anyone? It does me!

I grant you that the above analysis is an academic exercise that will not happen in the real world. As the future unfolds and as prices advance (Which appears to be inevitable) some additional supply for mining will be uncovered (This additional amount will not materially alter the situation in my judgment) and usage will drop as the price rises higher and higher snuffing out some demand (This factor will have a big impact). That being said does not, however, negate the overall message being given by these numbers. That message is simply there is a paucity of gold remaining for mining and use by humankind and that the future gold supply is definitely finite. When it is gone we will only have what remains in private hoards to draw upon when we need gold.

It is obvious to me that we can and should expect gold prices to rise as the reality of this situation spreads through the world population and financial markets. As the serious implications of this situation become more widely known, it is very likely that gold prices will rise to levels that today seem completely unrealistic.

Gold is using for heat dissipation in some cars.
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