Peak Gold Could Play Big Role In Mining Industry Over The Next Decade

Photo: Peak Gold Could Play Big Role In Mining Industry Over The Next Decade

The concept of 'Peak Gold' has been getting more attention over the last few months.

Much like the idea of peak oil, many industry insiders think that as time goes on, there will be less gold coming out of the ground. Part of this has to do with the lack of any major discoveries over the last few decades, but another factor may be the neglect that the exploration sector has suffered through over the last few years.

It is worth remembering that there are still areas of the world that remain under explored, and as the famous discovery of gold in South Africa's Witwatersrand Basin shows us, one big discovery can change the entire gold market.

It is estimated that 40% of all the gold mined in human history came from the Witwatersrand Basin, and it is always possible that there is another gold rich region waiting somewhere out there. One area that has been surprisingly positive for metals production has been Mongolia, and over the next year gold production from the Oyu Tolgoi mine is set to double.

Mixed Views

While peak gold is a hot topic, it isn't the consensus view by a long shot.

A recent report from BMI Research states that they see gold production rising steadily over the next decade, driven by higher prices, and better operating margins. The report sees global production growing by at least 20 million ounces over the next eight years, and this stands at odds with the theory of peak gold, at least on the face of it.

As the recent announcement by Turquoise Hill, the Rio Tinto controlled company that owns the majority share of Oyu Tolgoi demonstrates, there is still a lot of gold out there to be discovered. In addition to the Oyu Tolgoi mine, a number of other companies are having great success with their exploration programs in Mongolia.

Canadian listed Erdene Resource Development found out that their Mongolian project was holding far higher amounts of gold than they thought initially, and Aussie listed explorer Xanadu Mines has been blowing out expectations at their Kharmagtai copper-gold project.

Unlike Sub-Saharan Africa, where it is dangerous to invest for a number of reasons, Mongolia is very stable, and more than happy to allow the development of new mining operations. Mining operations now comprise 25% of the GDP of Mongolia, and are responsible for around 80% of Mongolian exports.

The Allure of Scarcity

It is interesting to consider how the public at-large views gold.

Rick Rule has expressed the opinion that because gold isn't consumed, due to its high value, lower production levels are a concern to producers, but won't effect buying habits, and thus price.

On the other hand, the CEO of Franco-Nevada, Pierre Lassonde, had this to say on the matter of a declining gold supply, “Production is coming off, and that means the upward pressure on the gold price could be very intense.”

The real value of the disparity between the two opinions forces us to consider how humans view scarcity. The last time there was a major change in the above ground stocks of gold and silver was the “discovery” of the Americas, and this served to create a headwind for gold and silver prices for quite some time.

Though in those days, because gold and silver were money, the influx of new metal was reflected in rising inflation rates, as loads of fresh “money” chased a relatively stable amount of goods and services in Continental Europe.

In the case of the Spanish conquest of Central and South America, the supply of new metal hit the existing market with rapidity. But today, the situation is somewhat reversed, and also has a monetary twist that didn't exist in the 1500's.

While the rise in population over the last few decades was gradual enough to be rather benign in the public mind, what is hidden to many is how quickly the standard of living is rising across Eurasia is rising. This is where the real price driver could reside, because in the East, gold is seen as money.

The western mind has forgotten that until the 1970's, gold was the reason that the financial system had an anchor in reality. There was always a bit more of it above ground every year because of mining operations, but for the most part, the amount of gold was fixed.

What never figured into the equation for anyone up to this point is what would happen to gold's price if production fell to negligible levels, or conversely, how much people would be willing to pay in order to add new gold to the above ground stocks from low grade deposits.

The Core of the Issue

The value of an object, or means of transaction, is ultimately a phenomena, not a result of a process. While price discovery happens as a result of a quantifiable process, the underlying belief in value that is bestowed on the object, debt, or algorithm is beyond quantification.

Why is gold convertible to local currencies in most countries on the planet, and why has it been used since the dawn of time for money?

No easy answers are available, but we can say with relative certainty that gold has been valuable in most cultures, and today this remains the case. This may all seem like a philosophical indulgence, but it is extremely important when it comes to how peak gold could affect the metal's price in a world where there isn't as much of it being produced.

One of the things that most veteran precious metals investors agree on, is that the long overlooked junior gold miner space is probably going to be a good place to look for value in the coming year.

Regardless of how peak gold affects consumer buying habits, there will always been a need for the major gold miners to replenish their reserves. The upcoming Vancouver Resource Investment Conference will give you access to more then 250 mining companies, many of whom are involved in the gold and silver space.

There will also be presentations from famed investors like Rick Rule, Jim Rickards and Frank Holmes. If you decide to register before the event, your admission will be free. This year's VRIC happens on January 21st, at the Vancouver Convention Center West, right in the heart of beautiful Vancouver. There aren't many events in the world that bring together this level of knowledge and talent, and we are thrilled to see what happens this year!