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Drop in Mining and Production Signals Coming Gold Price Boom

Article Image 01 - B (Dec-07-2017)
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In the late 19th century, South Africa became the world’s largest gold producer.

Unbeknownst to anyone at the time, South Africa was destined to mine 40% of all the gold produced throughout human history.

In 1884, Jan Gerrit Bantjes, a local farmer, discovered gold on his property; located in an area now known as the Witwatersrand Basin.

Not too long afterward, other farmers, either by word or happenstance, also came across the same discovery.

What they didn’t realize then was that ground beneath their properties lay the world’s largest gold reserves.

The South African gold rush began.

Within a decade, the province of Gauteng, home to the Witwatersrand Basin, transformed itself into the wealthiest of all provinces in South Africa.

It’s soon-to-be largest city, Johannesburg, rose from an obscure blip on the map to a booming and powerful metropolis.

The Basin yielded an unprecedented abundance of 2 BILLION ounces of gold. Today that would be worth $2.6 Trillion.

Peak production took place in 1970 when 1,000 metric tons were pulled out of Witwatersrand Basin. 

And although the Basin is still being mined today, the yield had declined by over 80%, having given up only 166 tonnes in 2016.

The mine had run its cycle; its wealth was having “dried-up.”

This was to be expected, hence the continuing need for gold exploration.

But here’s the problem: mining companies have not found any reserves whose potential output may be comparable to the Witwatersrand Basin.

Take it from Newmont Mining’s former head, and founder of gold giant Franco-Nevada, Pierre Lassonde:

“If you look back to the 70s, 80s, and 90s, in every one of those decades, the industry found at least one 50+ million-ounce gold deposit, at least ten 30+ million ounce deposits, and countless 5 to 10 million ounce deposits.

But if you look at the last 15 years, we found no 50-million-ounce deposit, no 30 million ounce deposit, and only very few 15 million ounce deposits.

So where are those great big deposits we found in the past? How are they going to be replaced? We don’t know.”

The main point: the discovery of gold is in sharp decline.

Data from S&P Global Market Intelligence reports that mining companies are cutting back on funds allocated toward exploration. It’s currently at an 11-year low.

One major reason contributing to this decision across the entire industry is that investors have generally lost interest in gold.

So companies have decided to curb investment into exploration and discovery.

Meanwhile, gold prices have remained flat.

But this merely illustrates a boom and bust cycle, one that has been repeating itself for decades.

Mining companies invest in exploration when gold prices are high. Upon discovering and mining reserves, the gold supply prices; prices go down.

As gold prices decline, profit margins for mining companies also decline.

Investors lose interest due to the drop in revenues which prompts mining companies to cut back on production.

And finally, a drop in production causes a shortage of supply which in turn pushes prices back up, marking the beginning of a new cycle.

So, where are we in this cycle today?

With interest rates rising, yield on the 10-year pushing above 3% (which we haven’t seen since 2014), and crude oil price steadily moving upward, it’s clear that inflation is once again on the rise, and in a big way.

Fundamentally speaking, it shouldn’t take long for stock prices to undergo a major decline. And such a plunge would infect equities markets across the globe as well.

But we may be getting ahead of ourselves. As for now, we can at least be certain that a period of inflation has begun and is just getting started.

Inflation is a serious problem. And the only thing that can hedge it is gold.

But there’s a major problem: we haven’t discovered any new gold in the last 15 years!

Gold production takes years--nine, to be exact. Years we don’t have if the coming demand for gold were to be met.

So when the demand for gold increases, there won’t be enough of it to go around.

This shortage of supply will cause gold prices to skyrocket.

And when inflation takes hold, and stock markets fall, the cost of gold will be significantly higher than it is today.

Don’t get caught on the unfavorable end of this cycle. It’s always a wise decision to have some gold exposure in your portfolio.

Gold prices rise during periods of inflation and market weakness. And the right time to buy gold is when nobody is paying attention to the big picture. That time is now.

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