Peak Gold and Inflation: A
Marc Davis, www.BNWnews.ca
onset of accelerating inflation, matched with a global decline in gold
production, will underpin high-flying gold prices for years to come.
So says John
Embry, a world-renowned long-time gold advocate and the chief investment
strategist at Toronto-based Sprott Asset Management, which runs the Sprott Gold
and Precious Metals Fund.
rears its ugly head and future demand for gold promises to overwhelm mine
supply, gold’s price will launch a parabolic rise from current levels in the
near future,” he says. “Gold has much, much further to go.”
of various forms of government debt by the printing of large sums of money,
disarmingly referred to as ‘quantitative easily,’ is proving to be the catalyst
for accelerated inflation, he says.
Thus, if inflation gathers momentum, long-term
interest rates will rise, which in turn should speed up the weakening of the
anemic US dollar, Embry reasons. Furthermore, gold is increasingly asserting
itself as a powerful inverse proxy to the dollar. This makes the yellow metal
the ultimate safe haven alternative to holding US ‘fiat’ money (a currency that
is not backed by anything of tangible value), he adds.
Then there’s the
fact that most of the world’s major deposits are virtually mined-out and new
ones are becoming harder to find and more expensive and politically problematic
to bring on-stream, Embry says.
So the rally in
bullion prices is far from over, contrary to what some market pundits are
suggesting. It has is merely in a consolidation phase before its next up-leg,
Embry says. In fact, gold’s price still has a long way to go before it even
comes close to matching its peak price during its last major bull run, when it
hit an intraday high of $875 on January 21, 1980, he adds. To do so it would
have to rise to around $2,300 on an inflation-adjusted basis.
Hence, inflation, a debased US dollar and shrinking
global output will soon converge to act a springboard for gold’s ascendency well
above the $1,100 level, Embry says. “At that point, investment demand will
explode on a worldwide.”
Even the president
of the world’s largest gold producer is now dropping hints about the
implications of a growing below-ground supply squeeze on gold’s pricing. Aaron
Regent of Barrick Gold (TSX: ABX) (NYSE: ABX) recently told a gold investment
conference in London that major gold mining companies are continually struggling
to replace mined-out reserves.
“There is a strong
case to be made that we are already at peak gold," Regent said. "Production
peaked around 2000 and it has been in decline ever since. And we forecast that
decline to continue as it is increasingly difficult to find ore."
certainly seem to underscore Regent’s argument. Indeed, global gold output has
been dwindling by about 5% per annum since it peaked in 2000-2001, even though
bullion’s spot price has quadrupled since then. In the world’s mature gold
fields the situation is even worse. For instance, in North America output has
dropped over the last decade from 17.06 million ounces in 1998 to 10.59 million
ounces in 2008 – an extraordinary 60% plunge.
Consider the fact that the world’s top trio of
producers -- Barrick Gold, (Anglogold Ashanti NYSE: AU) (LSE: AGD) and Newmont
Mining (NYSE: NEM) (TSX: NMC) -- each generate between 5 to 8 million ounces of
gold per annum. That means that at least one new multi-million ounce deposit
needs to come on-stream every year just to replace this output. That simply is
Hence, the prospect of a looming below-ground supply/demand imbalance is being
enthusiastically regarded by most gold development juniors as a call to action.
A good number of them are already relishing the prospect of monetizing their
discoveries within the next several years and expect to reap the rewards of a
rising tide market for bullion prices for many years to come. Also, a handful of
them are already capitalizing on gold’s 21st century renaissance as an
attractive lifeline investment in the wake of the collapse of the derivatives
world’s first new producer to be able to sell its first gold bar for over $1,000
is Timmins Gold Corp. (TSX.V: TMM). The small Vancouver-based company
commissioned its open-pit heap leach (inexpensive to run) San Francisco mine
late last year. Just last week it announced the commencement of full-scale
production, and is now on-track to generate an output of 80,000-100,000 ounces
per year of gold at a cash cost of around $412 per ounce.
gold producers are aiming for even better inaugural profit margins by
capitalizing on what they believe will be even higher bullion prices by the time
they start doing gold pours against a backdrop of accelerating inflation and
even lower global gold production numbers.
In fact, some of
them will be salivating over the prospect of profit margins that are almost
unheard of in other industries. For instance, one newly-minted publicly traded
company, Extorre Gold Mines (TSX: XG) believes that its extremely high grade
Cerro Morro deposit in Argentina has the promise to be one of the industry’s
most lucrative mines.
The company is
targeting a gold resource of at least a couple of million ounces -- similar to
the mines around it. To date, Extorre has outlined a preliminary near-surface
resource base of over 600,000 ounces that is amenable to open pit mining (a
quarry-like operation). What makes this particularly significant is that the
grades are over half an ounce per tonne of gold, which translates into the
prospect of a very cost-effective mining operation. The company reports 3 drills
are turning 24 hours a day and an updated resource estimate is due before the
Mr. Eric Roth, Extorre’s recently appointed CEO,
compares Cerro Moro to the rich El Penon Mine in Chile. This world-class gold
deposit became a company-maker mine for mid-tier Meridian Gold Inc., which was
later taken over by the major mining company, Yamana Gold Inc. (TSX:YRI) (NYSE:
have the assurance that major central banks have finally become the catalyst for
higher bullion prices. However, until recently, they were the nemesis of the
gold sector. In fact, since the 1990s these “arrogant and incompetent Western
central banks systematically dumped” up to 1,000 tonnes of gold per annum in an
effort to suppress its spot price, Embry says. But 2010 marks the advent of
central banks doing an about-face to become net buyers, he adds.
This is because they have discovered that “their
manipulation of the free market has failed,” and that gold is the only
instrument that will protect them against the debasement of their nations’
currencies, as well as their US dollar holdings.
bank officials the world over are waking up to the fact that their predecessors
acquired gold reserves in the first place to stave off currency devaluations.
And that impetus is once again taking on a heightened importance against a
backdrop of “continued economic and currency uncertainty, and inflation
concerns.” This is the conclusion of a recent report by the London-based World
“In the official sector, we expect to see a
continuing trend of central banks diversifying their dollar exposure in favor of
the proven store of value represented by gold," the report adds.
Disclaimer: Marc Davis does not directly
or indirectly own shares in any of the companies mentioned in this article.