Long-term gold rally eyes a five-fold price hike

A fresh record pushed the market above $2,000 an ounce

Photo: Photo: Finance.yahoo.com

The fundamental picture for all precious metals and especially gold has never been better. Governments worldwide have been committed to suppressing interest rates on money funds and printing cash to solve their debt problems. Eventually, they will be forced to default or devalue - it is that simple!

Moreover, central banks around the world have aggressively eased monetary policy, and governments have implemented fiscal stimulus at unprecedented pace and scale to mitigate the pandemic-induced global recession. Long-term US real interest rates have fallen to negative levels and the amount of government bonds in negative yielding territory has risen.

Precious metals prices continued their three-month long uptrend amid the Covid-19 pandemic. Demand for gold has been buoyed by safe-haven buying and global policy support in response to the pandemic. Silver and platinum have benefited from a rebound in industrial activity following an easing of containment measures. Precious metals prices are expected to average 13% higher in 2020 relative to 2019 on expectations of strong demand due to heightened global uncertainty and ultra-low real interest rates.

Upside risks to this outlook include a second Covid-19 wave causing a sharper-than-expected global slowdown. Increased investor demand for gold coupled with a constrained supply has led to high prices and a bullish market, which has been operating despite these pressures on the supply chain.

On the longer term, gold tends to form major bottoms every eight years. The last low was seen in 2016. The next one should come in 2024. So, what can we expect over the next several years?

Analysts predict a steady price growth over the next years ending with price tags close to the $7,500 limit and even edging to the $10,000 limit. However, a speculative mania or great depression could push prices even higher. Buyers today should be happy 10 years from now.

While the latest price hike was driven by gold traders, it begs the question about the supply of the precious metal, and when it will eventually run out. Gold is in hot demand as an investment, a status symbol, and a key component in many electronic products. But it's also a finite resource, and there will eventually come a stage when there is none left to be mined.

Experts talk about the concept of peak gold - when we have mined the most we ever can in any one year. Some believe we may have already reached that point. Gold mine production totalled 3,531 tonnes in 2019, 1% lower than in 2018, according to the World Gold Council. This is the first annual decline in production since 2008.

“While the growth in mine supply may slow or decline slightly in the coming years, as existing reserves are exhausted, and new major discoveries become increasingly rare, suggesting that production has peaked may still be a little premature,” says Hannah Brandstaetter, a spokesperson for the World Gold Council.

Even when peak gold happens, experts say the years immediately after it are not likely to see a dramatic decrease in production. Instead, we could see a gradual depletion of output over a few decades. “Mine production has flat-lined, and is likely on a downward trajectory, but not dramatically so,” adds Ross Norman of MetalsDaily.com.

Mining companies estimate the volume of gold that remains in the ground in two ways: reserves - gold that is economic to mine at the current gold price, and resources - gold that will potentially become economic to mine after further investigation, or at a higher price level.

The volume of gold reserves can be calculated more accurately than resources, although this is still not an easy task. To put that in perspective, around 190,000 tonnes of gold have been mined in total, although estimates do vary. Based on these rough figures, there is about 20% still to be mined. But this is a moving target.

New technologies may make it possible to extract some known reserves that aren't currently economical to access. The most recent innovations include big data, AI, and smart data mining, which can potentially optimise processes and bring down costs. Robotics are already being used at some sites, and are expected to increasingly become standard technologies in mine exploration.

The largest single source of gold in history has been the Witwatersrand Basin of South Africa. Witwatersrand accounts for roughly 30% of all the gold ever mined. Other major sources of gold include the extremely deep Mponeng mine in South Africa, the Super Pit and Newmont Boddington mines in Australia, Indonesia's Grasberg Mine, and mines in Nevada, US.

China is currently the world's biggest miner of gold, while Canada, Russia and Peru are also major producers. In terms of companies, Barrick Gold's majority-owned Nevada Gold Mines is the single largest gold-mining complex in the world, producing about 3.5 million ounces a year.

Though new gold mines are still being found, discoveries of large deposits are becoming increasingly rare, experts say. As a result, most gold production currently comes from older mines that have been in use for decades. Large-scale mining is extremely capital-intensive, employing lots of machinery and expertise to mine vast areas on and below the surface.

Today, around 60% of the world's mining operations are surface mines, while the remainder are underground ones. “Mining is getting harder in the sense that many of the large, low-cost mines, and older ones such as in South Africa, are nearing exhaustion,” adds Ross Norman. “Chinese gold mines, on the other hand, are much smaller, and therefore have higher costs.” There are relatively few unexplored regions left for gold-mining, although possibly the most promising are in some of the more unstable parts of the world, such as in West Africa.

While gold in the ground may be hard to quantify, it's not the only source. There is also gold on the moon. However, the costs associated with mining it and transporting it back to earth are significantly higher than the value of the gold. “Whilst it exists, it would never be economically meaningful to mine it,” says space expert Sinead O'Sullivan. “You would lose an infinitely larger amount of money mining it than you would gain by selling it.”

Similarly, there are some known gold deposits in Antarctica that may never be economical to mine, due to the continent's extreme weather conditions. Gold is also scattered along the ocean floor, but is also considered uneconomic to mine. One factor gold has on its side though is that, unlike other non-renewable resources like oil, it can be recycled. So we will never run out of gold, even when we can no longer mine it.

A large amount of gold is used in electronic products that are widely viewed as disposable, such as mobile phones. The amount of gold in the average phone is worth a few pounds. Efforts to recycle gold extracted from electronic waste are already well under way.

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