Goldman Sachs’s new report says that there are only “20 years of known mineable reserves of gold” and warns of peak gold production. What does it mean for the gold market?
Goldman Sachs expects peak production this year, based on a 20-year development cycle from peak discovery. Gold production tends to lag discoveries by around 20 years and data shows that peak discovery occurred in 1995. Since that year, new discoveries have been in a significant downward trend. Thus, 2015 may be a record year, especially that mining companies are cutting their capital spending in a response to falling gold prices in 2012-2014. Moreover, the traditionally strong gold producing countries, such as South Africa, Australia or the U.S. have seen the most declining production in recent years.
This should be good news for the gold bulls. If we reach peak production, the price of gold will have to go up, according to the law of demand and supply. However, investors should be skeptical about all news about the peak in the production of anything. We have been told several times that in the coming years we will be running out of some commodities. Remember the Club of Rome’s Limits of Growth predicting that oil was going to run out by 2011? Remember the talks about ‘peak gold’ in 2001? All of these Malthusian predictions forget about the technical progress and new extraction methods (like the shale oil industry). Actually, global gold mining has peaked four times since 1900, each peak being higher than the previous one. Everything depends on the price. Higher prices encourage miners to invest in more efficient technologies, to mine in a more difficult ground and discover new deposits.
Moreover, investors should remember that gold is not consumed, but accumulated and stored. In consequence, one year’s mining production is only a small percent of total gold reserves (about 1.7 percent). It means that a decline in gold production would not have a very significant impact on the gold market. In other words, huge inventories stabilize gold prices against fluctuations in production.
It does not, however, mean that the Goldman Sachs report is pointless. Do not underestimate the power of Goldman Sachs! The investment bank’s predictions are not always right; however, it properly forecasted the end of the bull market in 2013. Therefore, the bullish report on gold may signal that some important changes in the gold market are coming.
The key takeaway is that Goldman Sachs said that there can be ‘peak gold’ this year and the world may run out of minable gold in 20 years. Investors should take all these Malthusian projections with a pinch of salt, since ‘peak gold’ is not a new concept and its arrival is being systematically postponed. However, this report is bullish and when Goldman Sachs publishes a bullish report on the gold, it should not be ignored.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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