Gold has performed exceedingly well since last Wednesday’s much-anticipated rate hike. It shot up about $25 Wednesday alone. Today it’s up another three bucks, to $1,233.
The most common argument for gold is fairly well-known. Trump’s massive new spending proposals will goose inflation, meaning higher gold prices.
But while most investors focus on the potential for increasing gold demand, few consider if supplies will be able to meet that demand. And if supplies can’t keep up with demand, that should lead to much higher gold prices.
After three years of drifting lower, gold prices began to recover last year. Still, despite last year’s move in gold prices, the world’s top 10 gold mining companies were focused more on cost cutting. The result was a decline in gold production from mines run by majors.
And Ivan Glasenberg, CEO of mining giant Glencore, says that “there are no new big mines being built in the world today.” That’s because the industry downturn between 2012 and 2015 — the Mining Zombie Apocalypse, as I like to call it — caused miners to slash exploration budgets, in essence storing up trouble for the future.
Thus, it’s worth taking note of a recent article at Mining.com by Frik Els — with whom I spent a week in the Yukon last summer.
Frik dissects a recent report by Thomson Reuters about how primary global gold output declined in 2016. Specifically, Mining.com sums up the report: “World gold mine supply fell by 22 tonnes, or 3%, year on year according to the GFMS Gold Survey, to 827 tonnes in the third quarter of 2016.
By all indications, mine supply contracted in the fourth quarter of 2016 as well.
That means 2016 was the first year of a fall in mine production since 2008.
And according to the Thomson Reuters report, there are “few new projects and expansions expected to begin producing this year, and those in the near-term pipeline are generally fairly modest in scale, hence our view that global mine supply is set to continue a multiyear downtrend in 2017.”
Sounds a lot like that Glasenberg quote from above.
Looking ahead, the gold mining industry remains challenged by the legacy of fewer discoveries, meaning that you can’t mine what you haven’t discovered. And most of those discoveries are of lower ore grades. Plus, tight economics and quirky legal and regulatory environments in many countries hamper gold production.
Add it all up and you have a recipe for falling production.
But demand could pick up dramatically in the days to come. There’s so much uncertainty in the world right now, from a potential debt ceiling crisis here in the U.S. to questions about the Trump presidency.
Geopolitical tensions are rising around the world, especially in Asia, where North Korea’s testing missiles and China’s flexing its muscles in the South China Sea. Upcoming elections in France and Germany could also be strong factors.
One global event could send gold prices soaring. The mining space will move even more when that happens.
In the mining space, share prices of many fine explorers, developers and producers had moved sideways recently, if not down. But that just means that there are bargains to be had.
This is a space to be watched very closely. – Byron King
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