LAWRIE WILLIAMS: Peak new-mined Gold already with us - WGC?
According to the latest iteration of the World Gold Council (WGC)’s quarterly Gold Demand Trends report, Peak Gold already came about in 2019 – at least as far as new mined gold is concerned. However this despite the fact that the WGC calculated that overall gold supply last year actually rose. This was because higher gold prices stimulated a strong rise in recycled gold, more than counterbalancing the apparent 1% decline in new mined gold production.
It has been predicted for some time that new mined gold production will start to fall – mainly because of a lack of new major discoveries as many companies cut back on exploration expenditures as part of a drive to reduce costs as well as a lack of availability of capital to implement big new gold mining projects. Meanwhile production from existing operations will have been falling due to reserve and resource depletion and declining gold ore grades. Indeed counter-intuitively the higher gold prices of the past year may have even contributed to an overall output decline as gold mining companies moved to work lower grade sections which have now become economic to mine due to the rising price, but without increasing process plant throughput. It should be taken into account that dollar strength has meant that the gold price in some producing countries moved to an all-time high in local currencies in which most domestic costs are incurred while gold revenues remain dollar-based which has contributed to this process, as well as leading to some increased hedging to lock in the higher prices.
Sure higher gold prices may well stimulate exploration expenditures, but new gold output cannot be turned on like a tap. It may take ten years or more from new gold deposit discovery to bringing a new mine into production as companies have to negotiate many hurdles – political, geological, metallurgical, logistical and environmental among them – before a new mine go-ahead can succeed.
Given we are only one month into the new decade, the Gold Demand Trends analysis should be considered preliminary – more definitive figures will only come out in April and May when major precious metals consultancies like Metals Focus (which supplies data to the WGC), Refinitiv GFMS, the CPM Group and others release their comprehensive annual analyses. It should also be recognised that the WGC analysis of H2 production does not agree with that of Refinitiv GFMS which reckoned H2 global new-mined gold output rose by 2%! These figures too have to be seen as preliminary and we await perhaps more up to date global mined gold output figures when the various consultancies produce their full reports in a few months’ time.
The actual figures in the Gold Demand Trends analysis are as follows: Total gold supply for the year was up 2% on the figure for 2018 to 4,776 tonnes – with the higher figure seen as attributable to the impact of the higher price on gold recycling and also, to a small extent, on its impact on net hedging. Gold recycling was estimated to be at its highest level since 2012 – up 11% year on year. Howev er as far as new mined production was concerned, the WGC estimates that this fell 2% in Q4 to its lowest Q4 level since 2016 which meant that new mined gold output was down in every quarter of 2019 in comparison with the previous year. Full year new-mined gold production was estimated at 3,463.7 tonnes – around 1% lower than in 2018 and the lowest level of mined gold output since 2008.
So Peak Gold in terms of new mined output may already be with us, although these preliminary figures from the WGC do not yet show a significant fall and may well be reversed by the major consultancies when they produce their definitive annual assessments in a few months’ time. But they are an indication that gold output is no longer growing, and the likelihood that annual production is all downhill from here on and will probably decline further as time goes by.
It should be noted, though, that even if there is a fall in new mined gold output as the WGC suggests, this would be insufficient to have any substantial impact on gold’s fundamentals. More important will be whether central banks continue to buy gold at the current rate (there are signs that this may be tailing off a little), gold ETF investment continues to grow and the apparent decline in demand from the top two global consumers – China (particularly given the Wuhan coronavirus is likely to put a dent in GDP growth) and India. A continuing small fall in new-mined production may be irrelevant in terms of the overall global supply/demand pattern. As always perception of gold as a safe asset will determine whether the price will rise or fall in the years ahead.
02 Feb 2020