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Gold Mining In Decline?

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Gold Mining In Decline?

Just like other commodities and natural resources, the amount of gold that can be mined out of the ground each year is finite. Advancement in technology over the long stretch of human history has allowed us to dramatically increase how much of the precious metal we extract. However, there are signs that society may finally be approaching the ceiling known as "Peak Gold," where annual global gold production begins to gradually taper off.

Why the Decline?

There is no single factor that is causing concern about the future of the gold mining industry. Rather, a group of underlying trends are emerging at the same time. Their collective effect could impact gold miners around the world in just a few short years.

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First and foremost, there are less major discoveries of gold deposits than in the preceding two decades. As Bloomberg puts it, gold miners are literally running out of metal. It's simply becoming harder for mining companies to find new high-grade gold deposits; so many of the world's existing major sites with gold ore have already been accessed. This means that miners are getting lower quality ore and less total output from their gold exploration efforts.

With exploration, as well as research and development, not providing the same bang for the buck, we're likely to see companies reduce their capital expenditures (capex). In other words, new investments will dry up as gold miners shift toward getting the greatest profits out of their existing projects. This is true even for the world's biggest miners. Instead of growing their own operations, these industry giants are increasingly choosing to gobble up other junior mining companies. This year, the total value of mergers and acquisitions among gold producers (over $16 billion) has far outpaced that of any other commodity.

Mining companies' gold reserves will undoubtedly shrink as a result of these factors. The consequences follow the dynamics of supply and demand: a tighter gold supply would lead to higher prices, causing these reserves to deplete more quickly as miners sell forward production.

According to current forecasts, the annual supply of mined gold is projected to start declining after 2019. Output is expected to fall by nearly a third from its current levels by 2025. Such a turning point in history would fundamentally change the gold market going forward.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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