Global Gold-Mining Trends 2
It wasn't long ago that global gold-mine production had fallen to alarming lows. In 2008 this bellwether supply source was on the heels of a 5-year 13% decline, offering the markets its lowest output in 12 years. And this precipitous plunge had left folks scratching their heads considering gold demand was on the rise and its price was entrenched in a powerful secular bull.
Thankfully this 2008 low would mark a major turning point in global mine production. And a powerful new uptrend formed that has seen volume rocket to an all-time high in just three years. According to estimates by the US Geological Survey, in 2011 mine production was up nearly 20% from 2008, to record volume of 2700 metric tons.
As I explained in my recent essay on global gold supply, this last decade's violent production swing was quite natural. Simply put, bear/bull exploration cycles take a while to work their way through the system. In the beginning part of our current bull we saw the aftereffects of a bear-market exploration cycle. And it wasn't until 2009 that we finally started to see the fruits of this bull's exploration cycle.
With mine production now on the rise I want to take a closer look at the inner workings of this major supply source, the source within the source. Where in the world is the gold coming from? As investors it behooves us to gain an understanding of some of the forces that are driving industry trends, the same forces that may govern the decision-making process of a miner looking for gold. Perhaps this understanding would allow us to make more educated decisions when it comes to our own investing.
Over the years I've done a tremendous amount of research on all levels of gold stocks, from tiny single-project explorers to the world's largest multi-mine producers. And it is always fascinating to see where the explorers are looking, where the developers are building, and where the producers are mining.
While I can attempt to gain somewhat of a grasp of geographical trends over the course of my own stock research, there is no better way to wrap my mind around these trends than by looking at country-level production data. And thanks to said annual data courtesy of the USGS, we can gain invaluable insights into global gold-mining trends.
The first thing you'll notice in this chart is 2011 estimated production volume, measured in metric tons, for the world's top dozen gold producers. And incredibly this handful of top producers accounts for nearly three-quarters of gold's total mined supply.
Since this production data falls across such a wide spectrum, in order to capture the trends on a single chart I indexed each country's tally at 100 beginning in 2001. This indexing allows us to easily visualize production trends, showing comparable growth or decline rates for these major producers over this 10-year span. If a country is at 125, its gold production is up 25% since 2001. If it's at 75, its production is down 25% since 2001.
In looking at the raw production data, it shouldn't be too surprising that many of the largest countries by land area are on the list of top producers. While there are certain areas that have much more favorable geology than others, naturally the countries with large land masses will have a higher chance of hosting these areas.
Interestingly about 40% of the world's land mass is contained within its six largest countries (in descending order Russia, Canada, China, United States, Brazil, and Australia). And of these six countries, only Brazil is not among the top dozen gold producers (though it is close behind).
In looking at the trends of these mega countries over the course of gold's bull, it is apparent that the results vary quite substantially. And provocatively it is China and Russia that have experienced the biggest growth over this stretch. China in particular has carved out an incredible growth story, with its production volume up a staggering 92% since 2001.
If you recall, it was huge news when China had taken over the world's #1 spot in 2007, dethroning long-time incumbent South Africa. And with consistent year-over-year growth, China has been going strong ever since. Even though its government isn't exactly transparent with the data it reveals to the world, there is no doubt its growth profile has been spectacular. China now accounts for 13%+ of the global mined gold supply, and some folks believe its 355mt is a lowball estimate.
Russia has also seen impressive production growth, up 31% since 2001. And coming in with record annual production of 200mt in 2011, it has recently attained the world's #4 ranking. Unfortunately the growth we are seeing in Russia, and China, is not something that stock investors have been able to leverage much since these countries are hardly hubs for foreign capital investment into their natural-resources industries.
In both countries the majority of the mining is performed by either state-owned companies, semi-state-owned companies, or domestically-based private companies that are in bed with the government. If foreign mining companies do try to stick a toe in the pond, they are faced with tremendous geopolitical risk. And as a result, there aren't many stocks out there that offer direct exposure to China and Russia.
The world's second-largest gold producer, Australia, has seen a modest 5% bull-to-date decline by 2011's tally. And its trend tracks quite well with the global production trend over this time. Australia's output consistently faded to 2008, off about 25% from 2001, and ever since it has been trending higher to where it is nearly back to par.
Investors have had great success with Australian mining stocks, especially early on in this bull. But there have been some issues of late that may put a damper on this gold powerhouse's plans to continue growing and attracting investment capital from the mining companies.
Unfortunately Australia is really struggling with controlling its mining costs (labor, energy, lower grades, etc). And to make matters worse, its government has been incessantly picking on this bread-winning natural-resources sector. Not only has it been disproportionately jacking up taxes/royalties, it has put into place policies that have been dissuading exploration. It will certainly be interesting to see if Australia can continue to grow production in the years to come. And this will no doubt have an effect on the flow of investor capital into Australian-centric mining stocks.
As for the two North American land giants, their gold-mining trends have been ugly over the last decade or so. Incredibly both the US and Canada have seen output fall by nearly a third to 2011's respective tallies of 237mt and 110mt. Their mature gold-mining infrastructures were just decimated by the secular bear that preceded our current bull.
Up until the 1990s the US and Canada's gold-mining industries operated like well-oiled machines, with the miners consistently putting forth sizeable capital towards exploration and development. Exploration was successful in renewing and growing the reserves that were being mined. And continual expansion and new development sustained and even grew production.
But with the bear laying waste to the price of gold into the 1990s, the US and Canada saw huge declines in spending. And unfortunately it doesn't take long for a pullback in exploration and development capex to put an industry behind the curve in reserve renewal and next-generation development.
This lack of investment in the 1990s spiraled into systematic infrastructure neglect. And naturally when mines run out of gold, and there is not a sufficient pipeline of next-generation development, volume can decline quite rapidly. And this is not the type of situation that can be remedied overnight. Even though spending started to pick back up in the 2000s, the lagging effects of the bear were felt well into our current bull.
Considering the large volume coming out of the US and Canada, their sharp declines took a lot of gold off the market. And ultimately these North American powerhouses were two of the biggest culprits of the global mine-production shortfalls that bottomed in 2008. Thankfully things have finally rounded the corner for these two major producers. As you can see, their trends are turning upwards.
While the US is experiencing its own renaissance, thus offering investors more and more quality options on the stock front, Canada's gold rush is something to behold. If you wade through the vast pool of gold stocks, it won't take long to realize that the Great White North has become one of the top destinations for juniors and majors alike. The gold miners have descended upon Canada in droves, and they've been wildly successful in making huge new discoveries while also reviving past-producing districts that were shut down due to economics rather than depletion.
Not only does Canada's vast expanse have incredibly favorable geology, the miners can usually go about their business without too much risk on the geopolitical front. Canada is well-renowned as being mining-friendly. And the proof is in the pudding with 2011 production up a whopping 21% year-over-year to Canada's highest output in 5 years. Investors have a lot of high-quality options to choose from in Canada.
Outside of extra-large production from the world's extra-large countries, size doesn't really matter as much for the rest of gold's top producers. The world's 7th through 13th largest countries by size don't even make the list. And with such countries as Ghana (82nd largest) and Papua New Guinea (55th largest) in the top dozen, it is clear that other factors trump size.
As mentioned geology plays a key role in the geography of gold production. And no country may have better geology than South Africa. SA's incredibly-rich Witwatersrand Basin has produced over 46k metric tons of gold (about a third of all the gold mined in the history of the world) from its massive high-grade vein systems. And as a result this country had long been the world's top gold miner, responsible for over two-thirds of global production as recent as 1970 (nearly 1000mt).
But as you can see from its latest production tally and the directionality of its trend, South Africa has experienced a huge fall from grace in the global gold-mining scene. Incredibly SA's gold production has been lopped in half over the course of this current bull, putting big decliners US and Canada to shame. At 190mt it has experienced an 80%+ drop in production from 1970 levels, to its lowest output in nearly a century.
Unfortunately South Africa has experienced a perfect storm of factors that has doomed its gold-mining industry. Lower grades, expensive labor, a country-wide power crisis, major currency issues, and a clueless government are among the many factors that have led to skyrocketing mining costs and widespread interruptions and closures of operations. SA is now an industry laughing stock, falling to #5 in the global rankings.
For these reasons and more, South Africa is seeing very little outside capital investment in its gold-mining industry. And this leaves investors with very few choices outside of SA's domestically-based majors that have been taking it on the chin for so many years. Unfortunately these majors and a handful of other SA-centric publically-traded miners have become the pariahs of the gold-stock circuit.
Thankfully some of the aforementioned countries and others have been picking up South Africa's slack. And as you can see, Ghana and Mexico have quickly made names for themselves on the global gold-mining scene. Over the last decade Ghana has quickly grown to become Africa's second-largest gold producer. Its miners have found great success tapping the famous Ashanti gold belt and newer parallel structures that are being discovered in the southern part of the country. And this has resulted in a huge upward trend that has yielded a 47% increase in production.
This normally mining-friendly country has long been an African anomaly with its stable democratically-elected government embracing foreign investment. And investors have seen some huge gains in some of the elite Ghana-centric gold stocks that have successfully discovered and developed gold deposits. Unfortunately the government has gotten a bit greedy, and has recently announced a big tax increase as part of its 2012 budget. This may turn off some investment and slow its rate of growth, but the future is still bright within Ghana's vastly underexplored gold belts.
Mexico's gold-mining growth has literally been off the charts. With 2011 production coming in at an estimated 85mt, it has seen a whopping 254% increase in output. Long known for its silver (the world's top producer in 2011, accounting for nearly 20% of global mined supply), Mexico has quickly become a mecca for the gold companies.
Mexico's large mineral belts have seen artisanal exploration and development for half a millennium, dating back to the days when the Spaniards sailed ashore. These historic workings have drawn out a virtual treasure map for modern-day explorers, resulting in numerous discoveries. And thanks to a mining-friendly government, these discoveries have translated into major production growth. Stock investors have a plethora of high-quality options that focus on this large Latin American country.
Speaking of Latin America, the lone South American country in the top dozen is Peru. And as you can see, Peru's output has been countertrend to the majority of the top players in recent years. Thanks to major development at some of the large deposits flanking the Andes, Peru had seen sharp growth out of the gates in this bull (50%+ by 2005). But for a variety of reasons (pipeline issues and geopolitics), production has steadily been declining.
Even though Peru has seen overall 9% production growth since the beginning of this bull, its nearly 30% decline since 2005 has scared off many investors. And believe it or not, other than the stocks of the majors that are operating a few large mines, there are only a handful of primary-Peru stocks available for investment.
As for the other countries that populate the bottom rung of the top dozen, investors shouldn't get too excited over their trends regardless of the direction. Indonesia's gold-mining industry is a mess as indicated by its violent zigzagging across the chart. A big chunk of its production is a byproduct of major copper mines, and the gold companies trying to tap Indonesia's rich deposits are up to their elbows in geopolitical shenanigans.
Both Uzbekistan and Papua New Guinea get the majority of their production from just a handful of large mines. Like Russia and China, Uzbekistan doesn't welcome foreign investment. And while there are some options for investors in PNG, high-quality choices are very limited.
Overall these global gold-mining trends reveal quite a bit as to where in the world the mined supply of gold is coming from. And as investors, understanding both the long-term and interim trends of gold's major producers can be quite useful. We can use this snapshot to dig into country-level dynamics, which will ultimately guide our research and feed our decision-making process.
To answer this question is not straightforward. As the gold-sceptics keep reminding us, gold pays no coupon and no dividend, it does not offer a running yield, so traditional measures of ‘fair value’ do not apply. But gold is money, and just as the paper ticket in your wallet does not pay interest, neither does gold. Gold is a monetary asset that has functioned as a medium of exchange and a store of value for thousands of years, around the world and in almost all societies and cultures. Many modern economists believe that gold has now been successfully replaced with state paper money, such as paper dollars, paper euros, paper yen, and so forth. Holding gold is therefore redundant. The present crisis is a stark reminder that this faith in fiat money is misplaced.
Of course, it is unlikely that gold would trade precisely at that price. At any moment in time, the price of gold will reflect many other factors, too. There are, first and foremost, expectations as to future inflation. Then there are potential concerns about the stability of the banking system, or geopolitical considerations. Additionally, a lot of gold has been mined since 1933, and in particular since 1950. Furthermore, we can debate whether official CPI statistics are really a good measure of the dollar’s declining purchasing power. As Mises has explained, there is no such thing as a clearly identifiable and measurable purchasing power of money. Every index that is being used is a compromise, and we know that the US government has repeatedly changed its methodology of how to calculate the debasement of its own fiat money. It would be reasonable to assume that the market has a superior way of assessing the dollar’s loss in purchasing power and that this would then be the true driver of the gold price, rather than the government’s official measure. Then there is the question if $35 is the right staring point. Before all privately held gold was confiscated by Roosevelt’s executive order in April 1933, the dollar was fixed at $20 dollars an ounce. $35 dollars was simply a new, administratively set price.
We start in 1970 when the gold price was massively undervalued. The golden shackles had come off in the US domestically 37 years earlier when relentless paper money printing had commenced, albeit at first at a somewhat moderate pace. However, in blatant disregard for economic reality, the official gold price was kept at $35 an ounce, which by 1970 had become a joke. Remember that the US state banned its own citizens from investing in physical gold (the currency that the country’s own constitution had decreed!), and that restrictions on private ownership of gold or on exporting and importing gold remained in place in many countries. Still, many foreigners could exchange dollars for gold, not least the central banks, and they did, which began to put further upward pressure on the gold price. In the 1960s, Western governments formed the gold pool – first secretly, then openly – to manipulate the gold market and to keep a lid on gold. (Yes, dear reader, the governments of the ‘free’ and ‘capitalist’ West banned their citizens from holding the world’s oldest monetary asset and were for years engaged in outright large-scale market manipulation to make their fiat monies look good. Be under no illusions what these ‘democratic’ governments will be prepared to do when the present system is on its last leg!)
has pointed out, at 1980 gold prices the 260-million-ounce gold hoard of the US government (at least that is the number that I have in my head) would have covered the entire US monetary base (between $133 and $144 billion in 1980 – those were the days!) The gold price thus reflected the prospect of an imminent return to a gold standard.
Indeed, Ronald Reagan campaigned on a promise to investigate a return to gold and upon being elected president he set up a gold commission to do so. The 17-member commission decided almost unanimously against a return to hard money and voted to keep the paper dollar. I say ‘almost unanimously’ as two members objected to this verdict. They were Lewis E. Lehrman and ….Rep. Ron Paul from Texas!
These were the ‘good Greenspan years’. Real short-term interest rates were positive, bank reserves grew slowly, the yield curve was flat and the dollar fairly strong. There was a new belief in entrepreneurship and innovation, particularly in information technology. NASDAQ boomed. Productivity gains seemed high and there seemed to be no limit to growth. The business cycle was declared dead; the New Economy had arrived. In any case, growth was not manufactured by the government through deficit spending and money printing. The US was top dog, politically, economically and ideologically.
Today, inflation is still fairly contained and without the Fed’s ultra-generous reserve policy there would even be deflation. But the Fed has no room to maneuver. The Fed has to stay super-easy to support an incredibly overstretched and bloated financial system, a system that is addicted to cheap credit much more than anything in 1980. If this easy policy leads to rising inflation or even rising inflation expectations, the Fed will be in a heap of trouble. If they hike rates they pull the rug from under a system that is on constant life support.
