$1,300-$1,400 Gold Is Unsustainable In the Long-term – Here’s Why (+2K Views)

1. how gold deposits are created,
2. the major types of gold deposits to know,
3. how much gold is left in the ground,
4. all-in cash costs per ounce of gold,
5. the global gold supply – past & future and
6. who owns the gold.

So says Jeff Desjardins, President of Tickerscores.com, in edited excerpts from his original article* entitled The Definitive Guide To Global Gold Supply.

[The following is presented by Lorimer Wilson, editor of www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Desjardins goes on to say in further edited excerpts:

1. How Gold Deposits Are Created

…Gold mineralization typically occurs when it precipitates out of hot fluids and is deposited into host rock. Gold, initially dissolved in hot water deep in the crust and under immense pressure, is transported and deposited upwards as the water travels up cracks and fissures towards the surface.

2. The Major Types of Gold Deposits

Deposits come in many different forms:

• Placer deposits are formed when erosion exposes veins of gold. The gold, because of its density, eventually is moved by earth’s forces such as water and gravity. Gold nuggets found with gold panning are created in this manner.
• Volcanogenic Massive Sulphide (VMS) deposits are formed at or near the sea floor by underwater volcanic activity. They can be a significant source of copper, zinc, lead, gold, and silver.
• Epithermal deposits are created close to surface and are deposited by hot fluids. These occur typically in areas where magmas are able to move high in the Earth’s crust. Gold, silver, copper, and other metals are found in epithermal deposits.
• Porphyry deposits are the single most important source of copper and molybdenum today. Also sometimes containing gold, they form when a column of magna rises and cools in two stages, trapping rich localized zones of minerals.
• Carlin-type deposits occur chiefly in Nevada, where the gold is “invisible” to the naked eye by being disseminated throughout the sedimentary rock. Almost always, these are hosted in carbonate rocks.
• Orogenic deposits form during (“mountain forming”) events when tectonic plates collide. The gold, along with other minerals, is often precipitated in quartz.

There are other types as well, but the above deposits are the most common sources of gold today.

3. a) How Much Gold Is Left In the Ground?

According to our 2013 World Gold Deposit Rankings, a report which summarized all gold deposits in the world over 1 million ounces,

• the total amount of gold left in the ground is a total of 3.72 billion oz (115,700 tonnes)
• of which, based on a best estimate provided by Natural Resource Holdings, only 1.82 billion oz (56,600 tonnes) is recoverable assuming only 70% become mines and a 70% metallurgical recovery rate.

For comparison’s sake, in 2013 there were 3,019 tonnes mined according to the World Gold Council. Over the entire history of mankind, it is estimated that around 174,100 tonnes have been mined...A quick calculation of these above numbers…[reveal] that if gold is mined at the current rate of 3,000 tonnes per year and no new discoveries were to be found, we are out of gold in 19 years. That…[will] not be the case, but it raises the big question:

b) How Much Gold is Being Discovered?

The graphic below from Metals Economics CIBC, although missing data for 2013, gives you an idea of the trendline for big discoveries:

c) How Much Is Being Spent On Exploration?

The amount of gold being discovered has dropped dramatically in spite of exploration spending growing consistently (besides a blip in 2009) for over 10 years, reaching an all-time high of $6 billion in 2012. See chart below for details.

d) What is the Grade of Gold Being Discovered?

The median gold grade of the world’s biggest gold operations has also been in a declining trend for some time. Though, I suspect this may have temporarily reversed in 2013 and 2014 with many companies…[closing] their mines because of the lower gold price.

According to the more recent World Gold Deposit Rankings report…producing mines are estimated to have an average grade of 1.18 g/t and undeveloped deposits have an average grade of 0.89 g/t. The average grade of producing mines is actually 33% higher than that of undeveloped deposits.

4. All-In Cash Costs Per Ounce of Gold

The most important metric from a producer standpoint is the all-in cash costs per ounce of gold. This is the total representative cost of mining an ounce of gold. It not only includes the direct operation costs, but everything in the background that allows that operation to happen such as G&A, expenditures to develop or expand new mines, and more. From a gold supply perspective, the trend of all-in costs is very important to watch.

If you go back to Economics 101, you know that producers are ultimately not able to keep producing gold if their all-in cost is higher than the price they can sell it for. In the most recent quarter:

• the majors mostly had all-in costs ranging from $1,000 to $1,300 (Goldcorp came in at $1,072/oz, Newmont at $1,258/oz, and Barrick at $1,347/oz)
• the 32 smaller gold producers (under $2 billion market cap) from our Tickerscores data came in at came in at $1,390/oz. of which 17 of them have a cost lower than the current gold price. In the long-term, having all-in cash costs below the average gold price is unsustainable. Either the supply must contract, or the miners must improve efficiency of operations to get their costs

5. The Global Gold Supply – Past & Future

a) Gold Supply Over Last Five Years

The supply of gold, in the simplest terms, is composed of total mine supply (mine production + net producer hedging) and recycling. Here is a summary of both over the last five years:

	2009	2010	2011	2012	2013
*Total Mine Supply	2332	2600.2	2850	2824	2969
Recycled Gold	1672	1640.7	1649	1591	1371
**Total Supply	4004	4240.9	4499	4415	4340
*Total mine supply = Mine production + net producer hedging
** Sum of mine production and recycling. Does not include net sector sales

Central Banks Influence

There are also some factors that can vary year-to-year, either adding to excess supply or demand. For example, the official sector (central banks) throughout the 2000’s was selling their gold, creating extra supply. However, in 2010, this trend reversed as the official sector became net buyers, led by countries in Asia and the Middle East. In 2013, central banks bought 369 tonnes of gold to their reserves.

ETFs Influence

Buying for ETFs such as GLD, IAU, SGOL, PHYS and others were sources of demand for many years as the gold price increased. However, in 2013 this reversed, and for the first time in years the ETFs saw net outflows of 880.8 tonnes.

The Paper Market

The above charts and figures are on the physical supply – however, the vast majority of gold today is actually traded in the paper market. This is an important distinction: in these transactions, physical gold is never actually delivered. The paper gold market is so big that there is actually more traded in it per day (on average) than the amount of physical gold mined per year. While it is big and liquid, it is also where most of the levered buying is.

6. Who Holds The Gold?

a) Gold Production

Below are the world’s biggest producers. Note that the top 10 producers only produce 28% of global gold supply in a given year. A big reason for this is that China consumes all the gold it supplies, and it is the #1 producer each year with around 15% of global production.

	Production (Fiscal 2013)	% World Total (2013)
Barrick	203.2	6.8%
Newmont	143.6	4.8%
AngloGold Ashanti	116.4	3.9%
Goldcorp	75.6	2.5%
Kinross Gold	74.6	2.5%
Newcrest Mining	59.8	2.0%
Gold Fields	57.3	1.9%
Polyus Gold	47.6	1.6%
Yamana Gold	32.4	1.1%
Eldorado Gold	20.5	0.7%
	830.8 tonnes	28.0%

b) Gold Resources

Below is gold resources in production vs. in pipeline for all companies with more than 30 million oz gold and at least one mine in production.

c) Gold Production & Gold Reserves By Country

Country	Tonnes Production (2013E)
China	437.3
Australia	259.4
Russia	237.8
United States	226.9
Peru	182.2
South Africa	168.8
Canada	128.3
Mexico	101.2
Ghana	97.8
Indonesia	94.8

	Gold Reserves (Tonnes)
United States	8,133.5
Germany	3387.1
Italy	2451.8
France	2435.4
China	1054.1
Switzerland	1040.1
Russia	1035.2
Japan	765.2
Netherlands	612.5
India	557.7
Global Total	31,890.70

Moral of the Story

If I were to sum up my thoughts on gold supply, I think the moral of the story would be this: There are several factors that point toward increased pressure on gold supply in the future:

• decreasing grades,
• high all-in cash costs,
• a lack of new discoveries and the fact that
• gold supply can be easily disrupted. There are many possible events that could catch the “status quo” off guard and would change the supply situation in a blink of an eye. A few examples of potential events: China announcing updated gold reserves, geopolitical black swans, the ongoing investigation of gold price manipulation, and any revelations from the German gold repatriation.

Conclusion

For all the above reasons, we believe that gold staying between $1,300-$1,400 is unsustainable in the long-term. The price might drop down temporarily, but the economics don’t lie. Miners have to turn a profit in producing gold, and they can’t do it at the current price if gold grades continue to decline and new discoveries aren’t found and put in the pipeline.

[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

* http://seekingalpha.com/article/2105003-the-definitive-guide-to-global-gold-supply

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