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Within the gold mining sector, we are hearing more and more voices that Peak Gold is near, the moment when the global production of gold mines will reach its peak and start a downward trend. The reason for this is that fewer and fewer new discoveries are being made, while existing gold mines are slowly but surely being depleted.
Goldcorp's managing director, Ian Telfer, also expects global gold production to reach a peak soon. He has forty years of experience in the sector, but in that time he has never had to deal with the prospect of declining production. In an interview with the Financial Post he had the following to say about it:
"If I can tell you something about the gold mining sector in one sentence, it is that I have seen the production of gold mines increase robustly over the past forty years. Well, this year or next year, it's going to go down, or it's already going down. We're already close to peak gold."
Peak Gold is a term that is being used more and more often in the gold mining sector, because it is demonstrable that fewer and fewer 'new' gold reserves are being found worldwide. There is probably more than enough gold in the ground, but the question is at what cost you can extract it.
Due to the drop in the price of gold a few years ago, investors have become more reluctant to invest large amounts of money in exploration, the mapping of new underground reserves. At the same time, operational mines had to cut back on their exploration activities in order to reduce the cost per troy ounce. These cuts have made the mines more efficient in the short term, but the result is that far fewer new gold resources can be tapped at a time when production from existing mines is falling.
The big gold mining companies such as Goldcorp, Barrick Gold and Newmont Mining are already finding that they are struggling to break old production records. Thanks to new exploration and mining techniques, mines with lower grade ore are becoming profitable, but with a gold price of $1,300 per troy ounce that mainly moves sideways, it is risky for the mining sector and for investors to make large investments.
Fewer and fewer new discoveries in the gold mining sector (Source: World Gold Council)
It is a misconception that gold becomes scarcer when the production of gold mines decreases. The fact is that the total above-ground gold supply increases every year with what the mines extract from the ground in that year. According to the World Gold Council, about two-thirds of the total above-ground gold reserves of about 190,000 tons were excavated after 1950.
Actually, gold has become less and less scarce in recent decades, but due to the growth of the world population, the increase in prosperity and inflation, the gold price has risen explosively. In 1950 you paid $35 for a Troy Ounce Gold, today it's about $1,300. That's an average annualized return of 5.46%, at a time when the amount of above-ground gold tripled.
The fact that it is becoming increasingly difficult for gold miners to find new reserves does not mean that the sector is in trouble. As long as there remains a lot of demand for the precious metal from various quarters (investors, central banks, households), this will eventually have to translate into a higher Gold price.
If the supply of 'new' gold decreases, this will have a price-pushing effect on all gold in the world. A rising price will also attract new investors in the mining sector, making more budget available to make new discoveries.
According to Goldcorp's CEO, there are also plenty of opportunities in the geographically more remote areas and in the countries with a less stable political climate. Such projects obviously have a higher risk, but can reward investors with attractive returns.
