When do we reach peak gold?

Last year, global production of gold mines fell by 4% to 3400.8 tonnes. It was the second decline in a row, as production was also lower than the record level of 3,561.3 tonnes in 2018 a year earlier. Do we have Peak Gold reached the level at which annual gold production ceases to increase? Or will the higher gold price further boost the search for new gold veins? In this article, we will provide an overview of the current state of affairs in the gold mining sector.

As we wrote earlier, 2020 was a Record year for the gold mining sector. Due to the corona measures, production decreased, but due to the rise in the gold price, the sector achieved record margins. The price of gold rose by 25%, while the Production increased by only 1.8%. As a result, the average profit margin reached a record level of $828 per troy ounce. So last year it became very attractive to mine gold and look for new gold veins, but is that enough to take the total production to the next level?

Gold mining sector production falls again, has peak gold been reached?

Fewer and fewer discoveries

The Gold price has increased sharply in recent decades. Since 1971, the price of gold has risen by an average of 8% per year. As a result, it is still very lucrative from an economic point of view to search for new gold veins. However, this is not so easy in practice, because the number of large discoveries of new gold reserves has decreased considerably in recent decades.

According to figures from S&P Global Market Intelligence, a total of 278 major discoveries of at least 2 million troy ounces have been made over the past 30 years. Of those, 132 — nearly half — were done in the 1990s. In the following decade, there were only 93, while in the period from 2010 to 2019, only 25 major discoveries were made. In the last three years, there has even been Not a single major discovery of at least 2 million troy ounces. Despite the rise in the price of gold over the past two decades, it is proving very difficult to tap into new gold reserves.

In Australia, the country with the third largest gold mining sector in the world, such a gold reserve of more than 2 million troy ounces was last mapped in October 2013. This new mine began only since 2019 gold on a large scale. The previous major discovery in Australia dates back to 2005. It wasn't until eight years after its discovery that production began with the opening of the new Tropicana my.

Eight to ten years

This brings us to one of the biggest challenges in the gold mining sector, namely the time it takes to build a new mine. On average, there are eight to some years between the discovery of a new gold vein and the moment when a new mine goes into production. Combined with large fluctuations in the gold price, this creates additional uncertainty. The cost of exploration, the search for new gold reserves, has increased over the past decade. Doubled. Many discoveries have also been made in times when the gold price was higher, so it is not always profitable to start a mine. To do this, one has to make an estimate of the gold price over the longer term. This determines whether the investment is attractive.

According to the World Gold Council, the gold price must remain at a level of at least $1,500 per troy ounce for the next thirty years to maintain the current level of production. With a lower price, part of the global production will no longer be profitable, while with a price increase, more mines can be opened. Of the 278 major discoveries made in the past 30 years, about 135 have been made in the past 30 years, according to S&P Global Market Intelligence Not yet in production. These mines are not yet profitable enough under the current market conditions or are still in the start-up phase.

Gold mining sector cost curve (Source: World Gold Council, Metals Focus)

Has peak gold been reached?

Due to last year's record margins, the gold mining sector will try to further expand its production. In South America and Africa, for example, there are still many underground reserves that can be mined. It will also be interesting for mines and investors to invest more in exploration and exploration companies. Despite the lack of major discoveries, the production of the gold mining sector can still increase due to numerous smaller discoveries.

Last year, the gold mining sector was still suffering from the corona measures, which meant that the Global Manufacturing was lower. As these measures are relaxed, mines will return to normal production. Combined with all the new investments, gold mine production could still surpass the previous peak of 2018 in the coming years. However, we should not expect a rapid increase in mine production. Most of the easily extractable reserves have already been depleted and it takes a lot of time to open a new gold mine.

A possible decline in global gold mine production is not a problem for the gold market. Nearly 200,000 tons of gold have been mined throughout history. Of these, a significant proportion consists of Gold bars, Gold Coins or jewelry. Only a small part of the above-ground stock is processed into products such as electronic devices. Even if gold production declines, there is still more than enough precious metal to meet global demand.

This contribution was made from Geotrendlines