The gold elephant in the room: Dwindling supply

Andrew Topf | April 28, 2012 | 8:28 pm Energy Precious Metals Europe Gold 

Scott Wright of Zeal Intelligence made some illuminating comments this week in his post about the dwindling supply of gold. Wright makes the observation that up to a decade ago, gold miners were easily able to keep up with the demand for the yellow metal for two reasons: central banks were net sellers of gold, which added to the supply of the mined metal; and gold mining companies dug up enough gold to keep up with investment and jewellery demand.

Since the gold price took off about 10 years ago, the supply equation has changed. For one, central banks are now buying more gold than they are selling. The world’s central banks added a combined 439.7 tonnes last year – an almost 50-year high. Just this week, central banks took advantage of a 3% dip in the gold price to stock up on their gold reserves. As we reported:

Led by Mexico and Russia, central banks from 11 countries and the Eurozone added a combined 57.9 tonnes of gold in March.

Mexico raised its reserves  by 16.8 tonnes, Russia added 16.5,  Turkey 11.5 tonnes, Kazakhstan 4.3 tonnes, Ukraine 1.2 tonnes, while other ex-Soviet republics including Tajikistan and Belarus added less than half a tonne.

In percentage terms Argentina made the biggest bet on gold, upping its reserves of gold by more than 10% to 61.7 tonnes over the month.

The only sellers were the Czech Republic which reduced its bullion reserves by 4,500 ounces.

Second, the amount of recycled gold is also trending down. The reason for this? The high gold price, combined with the global recession, at first prompted many consumers to hawk their gold, but that phenomenon is pretty much over. According to Wright, 2011 recycling was down by 2%, and the trend is likely to continue in coming years.Third, gold miners are still trying to make up for years of depleted production. In the 1980s and ’90s, when the gold price was low, gold mining companies struggled with low margins and had a hard time replacing reserves. That has only recently begun to change. As Wright points out, in 2009 we started to see gold production exceeding 2400mt for the first time in three years, and has been rising ever since on the back of high bullion prices. However, new gold mines can’t be made to magically appear; the geological and engineering constraints around finding new reserves means that a new find usually takes a decade to move from discovery to production. So gold producers need to be both exploring and developing new mines in parallel with existing operations. That bodes well for gold miners and explorers, Wright predicts:

In this scenario mined supply will continue to be heavily relied upon to meet demand.  Not only will the miners need to continue to pump out volume, they’ll need to continue to put significant capex into securing production and reserve renewal.  Many more deposits will need to be discovered, and many more mines will need to be built.

Continue reading at Zeal

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2 Comments

  • dlshope

    I am so amazed that most everyone in my small circle of acquaintances doesn’t see the importance of storing any of their wealth in the form of precious metals. When most of the world finally sees the gold and silver light they will pay dearly to get on board.

  • Linzeytoole

    There is more gold than market can handle, as investors and large corporations as well as investment houses have been buyi ng up warehouses for the last several years and storing the gold, which has become a big business charging clients for the storage.

    comment on shortage is biased bull

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