Gold - did you know?
Where Will It All Come From?
The allure of Gold is time-less. All throughout history the beauty, preciousness and rarity of this metal has made it highly sought after. Gold continues to transcend time, and to this day is still considered the ultimate store of wealth for people in every part of the world.
These traits lead to one of Gold’s strongest fundamentals - its value as a hedge against wildly inflating fiat currencies. Paper money not backed by Gold has and always will fail as proven throughout history. In fact, the first stage of Gold’s bull was primarily driven by the fundamental weakness of the world’s reserve currency, the US Dollar.
CONFIRMED UPWARD TREND
Gold was approximately $250/oz in 2001. Today it’s a staggering amount over $1,200/oz - a fourfold increase. This has definitely confirmed Gold’s set-in-stone upward trend bull market and is no news to current readers!
GOLD SETS THE TREND
When Gold confirms interim trading trends within the bigger cyclical bull market we are currently in, its associated little brother soon follows suit in a magnified increase to its value. If Gold confirms a move higher (say 10%), Silver will move say 15% higher or more. However, please bear in mind that Gold must confirm a continuous up-ward trend for an extended period of time. If it meanders around the place, Silver will not necessarily move in lockstep on a daily basis. Traders and market participants are waiting on the sidelines to be convinced, so be warned.
INSURANCE / INVESTMENT
I will digress here slightly away from the above fundamentals. When people come to me and they want to buy Gold or Silver, I always ask the question, “Why are you interested in the precious metals?” Quite often most people confuse their reasons between two different issues:
It’s very obvious in today’s world that price action makes market action. In other words, unfortunately people take notice only when the price goes up or down! However, the precious metals are to be seen first as insurance against the repetitive historical debasement of fiat currency’s storage value of our hard-earned savings. The deception of inflation is a key fundamental to always keep note of in the protection of our savings.
Supply demand is another key fundamental to watch regard-less of the prices. Let’s say you pay health insurance for 20 years, and you are a very healthy individual for those 20 years. The money you paid has effectively become dead money in the present sense; yet one day you be-come extremely ill, and all of a sud-den you have to claim on that insurance policy. You receive the best health care modern medicine has available.
Now what was insurance becomes the best investment you have ever made, because that insurance policy has now possibly saved your life. Well, the precious metals are to be viewed the same way; we should always save in Gold or Silver as insurance first. If you ever need that insurance, there will be a transfer from insurance to becoming the best investment you ever made.
Now let’s get back to some key fundamentals from an investment perspective pointing out why we should be involved in this business.
Aaron Regent, president of the Canadian Gold giant Barrick, said that global output has been falling by roughly one million ounces a year since the start of the decade. The total global mine supply has dropped by 10% as ore quality erodes implying that the roaring bull market of the last eight years may have further to run.
"There is a strong case to be made that we are already at 'peak Gold'," he told The Daily Telegraph at the RBC's Gold conference in London. "Production peaked around 2000, and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore," he said.
Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada and Australia. South Africa's output has halved since peaking in 1970. Out-put fell a further 14% in South Africa in 2008 as companies were forced to dig ever deeper at greater cost to replace depleted reserves.
Numbers from the US Geological Survey’s recent release of final 2008 data and 2009 estimates come in at a final 2,260 metric tons (72.7m ounces). This is a 3% reduction from original estimates and 5% decline from 2007 making 2008 the weak-est production year in this entire bull market. (2009 and 2010 numbers are not yet available.) The miners actually tallied their lowest Gold output since 1995! This significant decline really demonstrates the ongoing struggles of the mining industry.
Since the beginning of this bull market, Gold has moved higher by an amazing approximate of 400%. With its price moving from the $200s to over $1000, you’d think the miners would have incentive to ramp up production in order to take advantage of these higher prices. Not only should the existing miners be encouraged, but the barriers to entry should be way down. But instead of ramping up production to meet growing demand, a startling trend has taken shape.
Since 2001 mined Gold production has fallen by 8.6%. And though the USGS’s 2009 production estimate is 4% higher than 2008, it is still expected to be the second lowest annual out-put in this well-established Gold bull market. This clear down-ward trend is foundational fundamental support for Gold prices to remain high.
If we take a look at the top ten Gold producers, they are scattered all over the globe making mine production truly a global affair.
29% of global supply
13% of global supply (North America)
South Africa 210t
13% of global supply (Africa)
9% of global supply
8% of global supply
With the above statistics we can calculate that the top ten Gold producers produce approximately 72% of total Gold supply.
Let’s say you and your family live in a desert with no water, and all you have is a supply tank full of about 50,000 liters of water to sustain you. Each day you draw down from the water tank thus slowly but surely depleting your water supply. Eventually the day will come when your water supply is so low that you will have to venture out from where you are and secure more supplies of life-sustaining water or your family’s survival will come into serious question. The same applies to an aircraft flying at 39,000 feet. Eventually the pilot will have to land the aircraft to take on fuel; either way the aircraft will come down voluntarily or involuntarily regardless! The same goes for excessive spending over financial income; eventually the shortfall must be dealt with.
The same is true for Gold producers who are now looking toward the junior Gold explorers for potential acquisitions to develop and begin creating new production.
Without exploration there’s simply nothing to produce in the future, which is fairly self-explanatory. The top ten Gold producer’s main production supply geographical regions are spread diversely. So let’s look at where the junior explorers are exploring geographically to gain an idea of where future production will be coming from in the decades ahead.
South Africa 1%
Asia is the world’s largest Gold producing continent, yet only 7% of the junior population owns a project there. Africa is the second largest producer, yet only 9% of the juniors are exploring there. Brazil (50t) and Chile (40t) are just outside the top ten, placing South America right on North America’s heels for the third largest producer, yet less than 1 in 5 juniors explore there. And at 4%, Australia is a virtual no man’s land for these juniors.
WHY IS THIS SO?
North America is the big winner on the junior exploration front. An incredible 73% of all juniors have at least one project in the world’s third largest Gold producing continent. Why North America, and why aren’t the juniors exploring for Gold proportionate to where it is being produced?
North America might not be in vogue with some of the readers, but we are talking about future production, not current production! As you can see, this continent is by far the most popular locale for junior exploration.
The US and Canada have long been top-ten gold producers, so it is natural for explorers to look for gold in this mineral rich part of the world. Mexico is no slouch either. In fact, at 50t produced in 2009, Mexico has more than quintupled its gold output over the last 20 years. There’s also supporting data that the junior explorers are venturing further south into South America.
A number of factors go into explaining why the juniors are not exploring where the top ten are producing from, and geopolitics is one of the major factors. While there is a certain level of geopolitical risk in every country, those with higher risk pro-files are least likely to see foreign investment on the exploration front. This is a big reason why Asia and Africa have such disproportionate profiles.
Governments and business simply don’t mix. When they be-come involved in the free market process, they have a reputation for unprofitable results about 99% of the time. Here’s an example from Australia just recently posted on the AFE RSS news feed with leading comments by AFE’s Alex Stanczyk:
Australia looks at 40 percent tax on mining profits
“Ouch! Leave it to government to destroy entrepreneurial incentive. I suspect that these folks aren’t the only geniuses who see a booming industry to loot. Hopefully this doesn’t gain much traction. Take from those who produce, and give to those who do not! A recipe for disaster!” – Alex Stanczyk
Australian mining law offers little incentive for junior exploration. Australia’s current tax system only benefits exploration from miners already producing gold, not juniors undertaking green fields/grassroots exploration. This is deterring junior exploration, and many analysts believe the resulting lack of significant discoveries will strain this country’s pipeline in the future. As Alex states above, “A recipe for disaster,” and it is!
CONFIRM THE FACTS
I trust this information gives you an idea of where the world’s future supply will be coming from in the decades ahead. I am trying to help you think about the fundamentals over just taking note of prices. You see the fundamentals have to be looked at and checked first; the fundamentals confirm what the prices will eventually be regardless of the day’s current price. The fundamentals of supply/demand tell us if this is a good business to be involved in the days ahead. I have learned over the years to stop taking what people say as fact without confirming the facts myself. Too many people simply listen to the noises and sounds coming out of people’s mouths. Do your research and confirm the factual evidence from multiple sources before going on what you feel, or on what sounds influentially good or reads well.
I like the wisdom of a great and learned man whose acts have influenced millions of people’s lives to model their own characters upon. Jesus of Nazareth spoke these words 2,000 years ago, “Therefore by their fruits you will know them.”
Until next time,
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