June 20, 2024

Global Gold Production Set For Major Decline As South African Mines Close

Global gold production could drop sharply as South African miners plan to dismiss thousands of workers for illegally striking.  South African precious metal miners have been beset by labor unrest for months as workers protest low wages and dangerous working conditions.  The latest disruption came Wednesday as South Africa’s largest gold miner announced plans to dismiss about 12,000 workers.

South Africa’s biggest gold miner by output, AngloGold Ashanti Ltd., said Wednesday it will begin a process to dismiss about 12,000 workers, following in the footsteps of other mining companies desperate to end crippling strikes.

If AngloGold follows through on its threat, it means more than 35,000 mining workers at several companies have been dismissed for illegally striking in recent weeks. The mass firings have prompted criticism from unions and the government, but so far have not provoked a repeat of the violence that sparked national labor unrest in South Africa in August.

Several major South African gold and platinum producers are struggling to end weeks of wildcat strikes that have halted thousands of ounces of gold and platinum production and caused billions of rand in lost revenue.

Gold production problems in South Africa run deeper than merely resolving a labor/management dispute over low wages.  The cost and effort to mine gold has grown exponentially as the easy to reach grades of gold ore have been depleted.  Miners have had to dig much deeper to reach low grades of ore with a corresponding increase in extraction costs.  South Africa, once the leading country in gold production has dropped to fifth place.

Courtesy wikipedia.com

In 2006, South Africa produced 272,128 kilograms of gold, but by 2011 output had plunged by 30% to only 190,000 kilograms.  With workers no longer willing to work for what amount to slave labor wages, along with declining ore reserves, gold output from South African mines will continue to decline dramatically.  SBG Securities analyst David Davis says “Almost all of the gold mines on strike are mature.  These mines were going to have to be restructured and downsized anyhow in the next 12 to 36 months.”

Further reductions in future global gold supply will continue based on the constantly increasing costs of mining lower grade ores and the lack of major new gold discoveries.  According to the US Geological Survey, gold production decreased in every year from 2001 to 2008, a remarkable statistic in light of the huge increase in gold prices during that period of time.  Gold sold for only around $300 per ounce in 2001 compared to today’s price of over $1,700 per ounce.

Over the past three years from 2009 to 2011, gold production increased as miners went all out to take advantage of surging gold prices.  According to the World Gold Council, mine production rose from 2,611 tonnes in 2009 to 2,822 tonnes in 2011.  The previous production peak for yearly gold production occurred in 2001 at 2,600 tonnes.  As the current situation in South Africa shows, much of the recent increase in gold production came as mining companies desperately worked old mines to depletion while paying workers as little as possible.   Those days are now over and South African gold production will continue to plummet.

Ironically, gold production soared from 1981 to 2000 as gold declined in price from $750 per ounce in 1981 to under $300 by the turn of the century.  Gold miners were forced to produce as much gold as possible to stay in business as revenues constantly declined due to the drop in the price of gold.

Absent major new discoveries of large gold deposits, gold mining production could decline substantially in future years.  Declining supplies, along with massive currency printing by central banks worldwide, will create the perfect storm for a continuation of the decade long bull market in gold.  Note to Ben Bernanke – no, you can’t print gold.

Investor Gold Demand Hits All Time Record – China and India Grab 61% Of Total Gold Mine Production

Investor demand for gold during 2011 hit an all time high, fueled by soaring demand in China and India.  Total gold demand by China and India during 2011 amounted to a staggering 61% of all gold mine production last year.

The 2011 Gold Demand Trends report issued by the World Gold Council show a huge increase in gold demand and a small increase in global gold mine production.  This continues a trend that has been in place since 2001.  Despite an almost 600% increase in the price of gold since 2001, global gold mine production has increased by only 7.7%.

Typically, a large increase in price will bring forth additional supplies as producers rush to take advantage of higher prices.   This has not happened with gold due to the depletion of existing gold reserves and the inability of miners to discover and develop new gold deposits.  The continuing increase in gold demand and the lack of new supply will eventually result in gold prices higher than most people can imagine today.

Highlights of the Gold Demand Trends report are summarized below.

  1. For the first time ever, on a dollar basis, gold demand hit all time record highs at $205.5 billion, representing 4,067.1 tonnes of gold.
  2. Investor demand for gold hit all time record of 1,640.7 tonnes, up 5% from the previous year.
  3. Demand for gold by China soared 20% last year to 769.8 tonnes and demand by India, despite currency weakness, was 933.4 tonnes.  It is expected that China will become the largest gold market in the world during 2012 based on continued record setting demand.
  4. Global gold production increased by only 4% last year to 2,809.5 tonnes.  The combined gold demand of 1,703.2 tonnes by China and India consumed 60.6% of all new gold mine production.  It is projected that the supply of new gold will remained “restrained” for the foreseeable future.
  5. The desire to protect wealth accounted for surging gold demand in Europe as the European Central Bank engages in a massive money printing campaign to prop up the insolvent banking system.
  6. Central banks continued to buy gold during 2011, increasing total purchases to 440 tonnes, up by 77 tonnes from last year.
  7. The amount of gold available to meet demand is being restrained not only by low mine production but also by reduced supplies of gold from recycling.   Despite a 28% increase in gold prices last year, the supply of recycled gold declined by 2% to 1,611.9 tonnes.  According to the Gold Council, this implies that “market supplies are drying up and that consumers may be holding on to their gold in the expectation of higher prices.”
  8. Investors are showing a strong preference for physical gold as seen by the investment flows into bar and coin compared to ETF demand.   Demand for gold bar and coin during 2011 totaled 1,486.7 tonnes compared to ETF demand of only 154.0 tonnes.
  9. Gold demand by ETFs increased in the 2011 fourth quarter over the comparable period last year, but total demand during 2011 of 154.0 tonnes was far below ETF gold demand of 367.7 tonnes during 2010.

The Gold Council bullishly notes that the gold market is unique in that it is driven by a “diverse set of factors” and multiple sources of demand.

Gold Dispensing ATMs, Hedge Funds Buy Gold, World Gold Production

With gold now reaching it’s highest price of the year, gold related stories seem to be popping up in more places. Here are a few gold related articles and blog posts from the past week that are worth the read.

German firm plans gold ATMs to meet growing demand

It seems like other countries are always creating new ways to make gold easier to purchase amidst growing demand. India started selling gold coins in post offices around the country. Now Germany, Switzerland, and Austria will have gold dispensing automatic teller machines in various public locations. In the United States, the response to high demand has been to ration the supply of gold.

Hedge Funds Making Big Bets on Gold

Hedge funds are waking up to gold. Paulson & Co bought 31.5 million shares of the gold ETF worth $2.8 billion. Stephen Mandel’s Lone Pine bought 26.5 million shares worth $2.4 billion.

Bullion Premiums Now Normal

As I have explored in some other recent posts, the premiums for gold and silver have been contracting recently amidst the rising prices. Premiums are now back to normal for most gold and silver coins.

Gold production in the world

A recently published piece examining gold production in 2008. World gold production peaked in 2001 and has been on the decline ever since. Also, there have been some interesting shifts in top gold producing countries.

Money Magazine, gold, and hedge funds

Watching Money Magazine as a contrary indicator. They recently pass off gold as a “speculative play” that has delivered “lousy returns” since its below the peak reached in 1980. They conveniently ignore gold’s 300%+ return since 2000.

Gold’s Extremists

Is it just me, or does it seem like mainstream publications all start publishing negative gold stories when the price starts rising? Forbes trots out some analyst zingers, “fundamentals not supportive”, “crowded trade”, and “ripe for correction”. Excuse me while I go buy some more gold.