FAIR USE, etc., A couple of items to note: Note the "upward adjustment in discarded above ground gold in Table 1" that had to be massaged to make the CB gold supply last another 20 years. And secondly...LOOK AT THE PROOF BY INFERENCE of a LID on US FEDERAL RESERVE GOLD SELLING currently in place since the WASHINGTON ACCORD. Thx for the headszup, Alex.
In the end, bank on gold
By Trevor Sykes---04/20/2000
The good news for the Australian gold industry is that the long-term future looks highly promising. The bad news is that they don't know when the long-term is going to start - it may be six months but it may equally well be six years. So the gold miners are in the position of a horse in a drought - they have to live until the grass grows again.
The reasons for long-term hope lie in the tables (below) presented to the Australian Gold Conference this year by Ronald Cambre, chairman and chief executive officer of Newmont Mining Corporation.
The first table shows the supply and demand of gold in 1999, as measured by Gold Fields Mineral Resources, and Newmont's best guess at the figures in 20 years' time. The 1999 figures show total demand for gold last year outstripped supply by 900 tons. That differential was filled by sales of gold from central banks (notably the Bank of England's programmed sell-down) and lending by central banks to cover producer hedging.
http://www.cmc.net/~hyppo/aucompar.htm
This is not a new scenario. For most of the last decade the Gold Fields survey - generally respected as the best available for the gold industry - has shown gold demand as exceeding supply. Despite that imbalance the gold price steadily declined through those years and is now at historic lows. Depending on how the real price of gold is measured, adjusted for inflation, it is getting back to the equivalent of the $US35 an oz levels that prevailed under the Bretton Woods agreement.
The supply-demand imbalance, therefore, has been absolutely irrelevant to the gold price for the past decade at least. So why should we start taking notice of it now? The answer is because the imbalance is reaching serious proportions and appears likely to grow to the point where it will impact. The 900 ton shortfall last year is three times the annual production rate of Australia, which is one of the world's
largest gold producers.
The two key drivers for the future will be fabrication demand and mine supply. Fabrication demand is mainly for jewellery, with lesser amounts being used for dentistry and industrial applications, particularly computer chips. Fabrication demand grew at a compound rate of 11 per cent in the 1980s and slowed to 4 per cent in the 1990s. Cambre's forecasts for growth to 2020 are based on a growth of 3 per cent, putting total demand by then at 7,250 tons a year - a 75 per cent increase on last year.
That growth rate could be achievable - at least in the short-term - as lower gold prices encourage consumption. Cambre forecasts that the expansion of e-commerce will enhance jewellery sales in the developed world, while growing populations and improved economies in the Far East, India and China should support continued growth in those traditional markets.
Meanwhile, mine supply is drying because of several factors. Cambre has forecast it to grow at 1.4% a year, but thinks that is an optimistic rate. At present the world's biggest producers are South Africa, the United States, Australia and Canada - all of which have problems.
South Africa's mines have traditionally been high-cost because they ran fat on cheap labour. Now they are stripping out many of the labour and management costs but they cannot escape the higher cost of having to drive ever deeper into the earth for economic gold.
South Africa's deepest mines are now looking at going down to 5,000 metres, or nearly three miles below the earth's surface. The temperatures are searing, which means they will need strong ventilation, refrigeration and probably remote control mining techniques. Even at lower levels, South African mines are often chasing narrow one-metre seams and high-grading their mines to survive.
The Australian and North American gold miners suffer handicaps which are strikingly similar. All the oxide ore near the surface, which can be excavated at low cost in open pits and treated easily in carbon-in-pulp plants, has been won.
Increasingly pits are going deeper and mining is going underground, which is higher cost. Also, as the mining descends further into the orebody, the oxides run out and gold has to be extracted by more complex treatment from sulphide ores.
The higher costs of both underground mining and more complex treatment are being defrayed by the application of cutting-edge technology. Nobody in the world is ahead of Australians in the application of high technology to gold mining. One of the rewards has been to extend the economic life of relatively low-grade underground orebodies. However, the easily found orebodies are also vanishing. Nearly all of the currently known gold deposits in Australia were originally found by old-time prospectors from surface geological expressions. Future discoveries will be like that of Bronzewing in Western Australia, an orebody invisible at the surface which was detected through sophisticated soil chemistry followed by a concentrated drilling program.
Companies today are in survival mode and few would have the stomach or funds to countenance the sort of exploration needed to find Bronzewing.
The falling gold price has shrivelled exploration expenditure. Tougher environmental, permitting and native title regulation in Australia and North America can also take some of the responsibility. J.B. Were, which has probably done more consistent research on the mining industry than any other broking firm in Australia over the past decade, reckons gold exploration last year in Australia amounted to $400 million, which would mean it has fallen by half in the past three years.
Robert de Crespigny, executive chairman of Normandy Mining, points out that the exploration statistics are worse then they look because they do not differentiate between brownfields and greenfields exploration.
Exploration drilling seeking extensions to a known deposit (brownfields) is lower risk and higher reward than wildcat (greenfields) exploration in the bush. Greenfields exploration is generally agreed by mining companies to be at a very low ebb at present, partly because of the falling gold price but also because of native title.
Australia entered the third millennium with relatively high gold reserves of 80 million ounces. But they are also being mined at a relatively high rate. Broadly, the lead time between exploration and production is around 10 years. The high exploration rates of the middle 1990s should sustain the big low-cost mines through most of the present decade & brownfields exploration should keep them going a bit longer. But somewhere out there one of two things must happen: either the price of gold rises or production dries up because exploration is not bringing any fresh mines on stream.
Terry Burgess, managing director of Delta Gold, says the larger gold companies are spending less on exploration than they were five years ago. He also points out that the number of pure resource exploration companies in Australia has fallen from 270 to 70 in the past 18 months.
Gold production rates in Australia are around 300 tons a year and have been falling slightly for the past three years. According to ABARE, they will reach 250 tons by 2010. Cambre says North American production has almost certainly peaked.
South America looks the most prospective continent for gold, with a pro-mining attitude, political stability in the main regions of Chile, Brazil and Argentina (a little more risk in Peru) and probable large deposits still to be found. However, South American production is unlikely to fill the gaps left by declining production in the other major regions over the next decade or so.
The other possible sources of gold supply are Africa, Russia, China, Indonesia and Papua New Guinea, all of which have question marks over their political stability.
This makes Newmont's forecasts (guesses) in Table One particularly interesting. If supply and demand keep following their present trends, the deficit by 2020 will be running at 2,700 metric tons a year.
The accumulated deficit over the 20 years between now and then will have mounted to 33,515 metric tons. As Table Two shows, that is almost exactly the amount of gold now held by central banks and other official institutions such as the International Monetary Fund and the Bank of International Settlements.
http://www.cmc.net/~hyppo/aucompas.htm
One factor which has driven the gold price down in recent years has been central bank gold sales and - even more potently - the fear of them. Table Two shows that if the supply/demand imbalance continues for another 20 years no central bank in the world will have an ounce of gold left. The only way that prediction could come true would be if gold were devalued to the point predicted by Lenin, who wanted to see it used as a building material for public lavatories.
It just ain't gonna happen. In the short-term a moratorium has been placed on gold sales by the Washington agreement under which 15 European central banks have agreed not to sell their gold holdings for five years.
Importantly, those banks have also agreed to cap their gold lending at levels prevailing in October last year. The US, Japan, the IMF and BIS have all undertaken to abide by the Washington agreement too.
That leaves a little over 5,000 tons of gold held by central banks who are free to sell - and a limit on the amount of gold that will be provided to finance forward sales over the next four-and-a-half years.
Even if the Washington agreement doesn't hold, on the Newmont forecasts the central banks will have exhausted their gold reserves in 20 years' time and the simple laws of supply and demand should ensure that the price will have to be a lot higher than it is now. If the Washington agreement does hold, the price should start rising in a couple of years' time.
All we need is for the horses to stay alive until the grass grows again.
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