Jan 12, 2007

Gold Production is Flat with Higher Prices Ahead in 2007

Gold Production is Flat with Higher Prices Ahead in 2007

By Roger Wiegand
January 11, 2007

“As global gold production peaks, prices advance toward our forecast 2007 high of $850-$873. In 2005, reported production was 2618 tons. Production for 2006-2007 is for something nearly identical as we shift from old major producers to new ones. World Gold mine production by country is shown on our third graph. All charts are by courtesy of GFMS, Ltd." -Traderrog

There are three key growth spurts on this chart and all followed market shaking events.

In 1906 we experienced what I consider the first modern day market event know as the The Panic of 1906. J.P Morgan and his bankers’ stepped-up and provided cash for stock brokers to continue business. Had this quick emergency help not appeared, those markets would have vaporized. Note the gold growth rising right after 1906 on this chart.

After a peak in gold production near 1910-1912 gold production retreated and bottomed near 1920 with 500 metric tones. Just a few years earlier production was above 700 tons. In 1920-1921 we had a short mini-depression after World War I which also witnessed the worst influenza outbreak in history killing over 20,000,000 people world-wide. Many American soldiers having survived European battle returned home to perish of the flu.

In 1922, the economy improved, the roaring twenties took off and so did gold production rising from roughly 600 metric tons and staying near that number until the crash of 1929. In 1928-1929 central banks openly worried about not having enough gold to back their currencies, the global markets crashed and then gold production rose like a rocket.

From 600 tons in 1929, gold mining more than doubled producing over 1,250 metric tons in years 1939-1940. This new, very high peak was followed by World War II and 1940-1945 gold production sank from over 1,250 back to the 750 metrics tons where it began in 1930-1931. At the war’s end in1946, we see an obvious gold production rally until 1949 where it dipped again with the police action in North Korea. Production resumed again in 1953 with a peak near 1970 as the Vietnam conflict seemingly stalled gold mining cutting production from the high of near 1500 tons to less than 1,250 tons. The early 1970’s also endured stagflation and a sinking stock market with sideways gold production under 1250 tons.

These events were followed by the largest production increase of all in 1980 from 1,240 to nearly 2,250 tons where out-put paused for three years during our first Iraq conflict. This was followed by a production increase from 1994 to a double-top peak price at 2,600 tons. Next, we experienced a normal A-B-C corrective wave coupled with the Nasdaq stock crash of 2000. Gold numbers were sideways to even near 2,500-2,600 tons after year 2000 and are not growing even with a price increase from $250 to over $600 per ounce.

This Pie Chart Shows Division of Gold Production by Nations

Top Six Locations Listed Indicate Trend Up for Short Term. The rest are flat to down including Africa, USA, Australia and South Africa. Those listed with declining production were the largest previous providers.

Our next chart is quite startling as it indicates the drop in gold production by country from 1980. Note the 2001-2002 peak followed by clear gold mining production declines. “Gold mining fell from 2,621 in 2001 to 2,519 in 2005” as reported by Natalie Dempster, Investment Research Manager at the World Gold Council. Based upon previous dates and events the decline would appear to be caused by recession and the Iraq war but pressures to find more LARGE reserves are not being successful. Meanwhile, gold prices have skyrocketed.

Note Canada, Indonesia, Other Asia, and Russia had Mild Up-swings in 2004. Meanwhile Others from Peru on Down this List are all in Production Decline.

Chart courtesy of GFMS, Ltd.

What are the Reasons for a Peaking and Decline in Gold Production?

We think one very obvious and well know reason is the inability to find any more huge elephant gold mines. Gold is found all over the world but not in very large, sustainable locations providing senior gold miners with a long term 40-50 year production plan.

Gold miners need to make a profit and today we are seeing several roadblocks some of which are quite formidable making this industry difficult to operate.

Nation resource risk created by dictators and greedy politicians dipping into profits and/or outright nationalization is a major gold mining problem. After years of work and millions of investment miners find themselves at the mercy of these semi-legal and illegal takings which are escalating.

With gold mining dormant for nearly 20 years we are now missing an entire generation of experienced employees from all skill-sets throughout the business. The older folks are nearing retirement and we have a personnel blank spot from ages 35 to 55.

These are the middle group young enough to produce at their experience peak and not ready for retirement. They are highly productive and mostly missing from gold mining.

Exploration budgets are expansionary in some larger companies. However, without experienced workers available, certain projects are delayed, shelved or scrapped altogether. Further, some exploration companies are reluctant to raise more capital with new shares as they prefer not to dilute their capitalization base.

As in the oil and gas industry several gold mines in recent years were closed as being marginally productive. Profits were not strong enough to continue operations. With increased inflation in operations costs today, most of these mines will remain closed.

Precious metals miners are excited to open new operations with these higher prices but you cannot snap your fingers and open a mine. Brand new mine locations especially the larger ones can take 8-12 years for production to commence. Smaller mines can begin more quickly but if in the newly discovered category, they require eight years as a probable minimum. Open pit operation start-ups are faster but not that much faster and re-opening former operating mines requires the permitting process to start all over again adding several new layers of paperwork not formerly encountered.

Natalie Dempster’s report further suggests 2006-2010 gold mine production might grow just 3% with a cumulative annual increase of only 410 tons. Her report also mentioned modern start-ups over past years were averaging six years but everything takes more time at the present. Newly reported operations costs are 46% higher than two years ago.

Even if an explorer discovered the Mother Lode in a mining friendly nation and all involved governments bent over backwards to help and speed the approval process, we cannot see how any new substantial production can arrive for several years. Our current precious metals boom has been recognized for five years. We forecast it to continue for another 12 years or longer. For most of the next 12 years we have no new substantial gold production that can be quickly extracted from the ground, refined, sold and delivered in large quantity.

A first year economics student can tell us where gold prices are going-straight to the moon with largely unsatisfied gold and silver supply against greater demand. With shaky fiat currencies and stock markets and burdensome personal and governmental debts smart traders are loading their trading boat with gold and silver. They are buying physical precious metals, paper stocks and futures, finding any way they can to participate in this incredible opportunity. –Traderrog

*****

Roger Wiegand is Editor of Trader Tracks recommending trades for gold, silver and energy markets using futures, commodities, stocks and options.

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