Are We Nearing Peak Gold?
It was July 2008, and I waited in line in the blistering Phoenix summer heat to fill up my Honda Accord at the gas station. For the first time ever, it cost more than $60 to fill up my 15-gallon tank.
At the time, the steady rise in the price of oil to $145/barrel was widely attributed to “peak oil” – the point at which global oil production peaks and thereafter can only go down. The peak oil theory originated in the work of geologist M. King Hubbert, who in 1938 predicted US oil production would peak in 1969 and that global reserves would peak in 2010.
When I got home, I watched the news. An analyst from Goldman-Sachs has predicted oil prices could rise even higher – perhaps even to $200/barrel. I already had a hefty position in energy stocks and was tempted to buy more.
Fortunately, I resisted that temptation. By the end of 2008, global oil prices had fallen all the way to $34, and the values of my energy stocks had taken a big hit. But for a few weeks, it cost less than $20 to fill up my trusty Accord.
Over the next few years, as prices recovered, global oil production started to rise. After declining 2.6% in 2008, production rose steadily. And in 2018, global oil production for the first time came to nearly 100 million barrels/day.
I’m now hearing the drumbeats predicting a peak in the production of another commodity: gold. Richard Torné, lead economist for FocusEconomics, recently stated that we may now be “in the final gold peak seeing that gold is a mineral that has been exploited for millennia and all major deposits for gold have likely been found.”
It’s true that gold production is declining in some regions, notably South Africa. Once the world’s largest gold producer, South African gold production fell 14% in 2018 from the previous year. What’s more, most of South Africa’s gold mines are unprofitable at current prices.
Pierre Lassonde, cofounder and chairman of Franco-Nevada, the first publicly traded gold royalty company, wrote in 2017 that fewer and fewer large gold deposits are begin discovered.
According to Lassonde:
If you look back to the 70s, 80s and 90s, in every one of those decades, the industry found at least one 50+ million-ounce gold deposit, at least ten 30+ million-ounce deposits and countless 5 to 10 million-ounce deposits. But if you look at the last 15 years, we found no 50-million-ounce deposit, no 30-million-ounce deposit and only very few 15 million-ounce deposits.
What’s more, low gold prices have forced gold mining companies to slash their exploration budgets. “It doesn’t really matter what the gold price will do in the next few years,” Lassonde says in an interview with Money Talks. “Production is coming off, and that means the upward pressure on the gold price could be very intense.”
Well, maybe. When Lassonde made these comments in October 2017, gold was in a trading range of $1,271 to $1,305 for the month. In January 2019, gold prices ranged from $1,281 to $1,322. Clearly, the upward pressure on gold prices Lassonde spoke about hasn’t happened, at least not yet. And despite the fall-off in gold production in South Africa, world gold production has increased every year since 2009, although the rate of increase has slowed in recent years.
But if gold prices do start rising, gold production will as well. And that could occur even though fewer massive gold deposits are being discovered.
That’s because technology is massively changing the economics of mining. In 2014, Mining Technology magazine highlighted 10 new technologies that it believed could transform the mining industry. These technologies, such as three-dimensional laser scanning, are already being used to facilitate gold mine design, identify the most promising ore bodies, and monitor tunneling and mining machines.
State-of-the-art technology is always expensive when it’s first being developed. But the oil boom proved that the cost of one enhanced recovery technology – fracking – fell dramatically as it was more widely used. Indeed, with fracking, oil producers in the Texas Permian basin can produce oil at a profit with prices of $50/barrel – even less in some cases. Yet as recently as 2014, energy analysts at Morgan-Stanley Bank estimated the breakeven point for “unconventional plays” like fracking was around $76-$77/barrel.
The fracking revolution taught us another lesson as well. Technological innovation can vastly improve the recovery of a commodity in regions that were thought to be long past peak production. For instance, between 1985 and 2005, oil production in Texas fell nearly 60%. A headline from 2007 in The New York Times said it all: “High prices, but tapped-out oil fields in Texas.” But since then, fracking has allowed Texas to reach production levels approaching the record highs of the 1970s.
Technological innovation can also expand the recoverable gold in mines that were once thought to be played out. That’s already happening in California, where mining companies are jockeying to recover the gold left behind in the original Gold Rush in the 1850s.
Even if I’m skeptical of the peak gold hypothesis, I still think gold deserves a prominent place in your portfolio. As the world’s oldest form of money, gold has a 5,000-year track record of holding its value. It’s the ultimate protection against Uncle Sam’s long-term manipulation of the dollar, the Fed’s quantitative easing experiments, and the possibility of a sudden dollar devaluation.
Just don’t expect to get rich quickly because of peak gold.
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