The supply of gold is unlike other goods and assets due to its nature as a rare precious metal. There is only a certain amount of gold in the world, and while easy to mine gold deposits have increasingly been exhausted throughout human history, new technologies and the rising price of gold has allowed gold miners to dig deeper into the earth’s crust and explore areas that previously would have been unprofitable to consider and this is partly why 75% of all gold ever mined has come in the last century. Another factor to consider when thinking about gold supply is that practically all the gold ever ‘produced’ still remains available in some form, resulting in 170,000 tons of gold that can act as supply at any given time given the right price. Still, it’s hard to ignore the fact that the supply of gold is facing real challenges in modern times when hoarders of gold become more enthusiastic about its future prospects (less likely to give it up) and new supply becomes increasingly hard to come by.
Gold Mining Supply
According to a recent study by the Metals Economics Group, gold exploration spending has increased four fold when comparing the 2000-2003 average ($640 million) to the 2007-2010 averages(2.74 billion). Yet, looking at the new gold finds in the past several decades, we can see a decline occurring in recent years, even with the price of gold going up. Furthermore, the grade of gold mines are decreasing over time.
In 1970, South Africa controlled 62% of the gold mining supply in the world (79% if we take out the communist bloc which didn’t readily sell its gold). Today, China is the biggest threat to “cornering the gold market” with strict laws to keep its gold within its borders as well as aggressive gold resource acquisition strategies in different parts of the world through the purchase of gold mines. Still, gold mining is well spread-out, taking place on all continents except Antarctica, with no nation having a larger than 14% share of gold mining supply.
As of 2010, China has a 13% share in mining production, followed by Australia (10%), United States (9%), Russia (8%), and South Africa (8%) but China’s aggressive strategy and wish to potentially turn the Yuan into a reserve currency suggests China will hoard more and more of the world’s gold and constrain the gold supply going forward. Overall, gold mining production has been stagnant over the past decade as the chart below shows, and with the inelasticity of gold production (new mines take 10 years to get up and running) this suggests that a supply crunch could be forming if demand continues to pick up.
Recycled Gold Supply
Besides gold mining, the main source of ‘fresh’ gold supply is through gold recycling. Gold recycling can be rather cyclical, with people electing to cash out for their scrap gold in times where the gold price is high. Since 2009, gold recycling has accounted for 40% of yearly gold supply. That percentage promises to remain high as long as gold continues to gain value, with even tiny amounts of gold in old electronics being sought after by a new breed of gold recycling/scrap buying companies.
Central Bank Gold Supplies
Until 2009, central banks were steadily unloading their gold reserves seemingly content to keep the US dollar instead. This accounted for 15% of gold supply through most of the past decade. The last several years has seen a huge shift away from this behavior and central banks once again value gold highly and instead of being a source of supply, have turned into net buyers and hence part of demand. BRIC countries (Brazil, China, India, China) especially are hungry for gold in the pursuit to strengthen their reserves which was overly reliant on now apparently unstable foreign currencies like the US Dollar and the Euro. With central banks have roughly 1/4 of all the above ground gold in their possession, this new trend represents a major fall in the overall availability of gold.
If we’re not already there, we are fast approaching peak gold with supply likely to face pressures in the years ahead. The rise of China as a gold hoarder, the central banks’ new found demand for gold, falling exploration finds, rising input costs are all real factors present today. If you add to that the possible demand increases in the future – it becomes easier to see the real possibility of a new gold rush.