This is the second part of our series looking at the fundamentals of the demand and supply forces for gold. Our earlier piece reviewed the global demand for gold.
In this review we look at the supply of physical gold into the market.
Gold is a naturally occuring mineral and becomes a valuable commodity only after it is mined and smelted.
It has been prized and mined by almost all cultures since recorded history because of its unique properties.
But in that period only 167,000 tonnes have been extracted worldwide, 90% of it since the great Californian gold rush. That is not a lot - because gold is very dense it would fit in a building of 20m3, one 'small' highrise.
Gold is one of the most well-prospected minerals. The Canadian Natural Resources government department published its 'Open File Report 4893' in 2005 surveying the total world inventory of gold mines, and that report noted official reserves of a bit more than 36,500 tonnes* and potential resources of another 47,500 tonnes* - that is, another 84,000 tonnes to be mined. There have been new discoveries since then of course.
Today, while prices are high, mines are bringing to market about 2,750 tonnes per year.
In fact, in just the past ten years to the end of 2011, more than 22,000 tonnes have been mined - equivalent to almost 14% of all gold mined in recorded history.
And the pace of recovery is rising.
Of course, it is not known what the level of remaining reserves really are, but 'total reserves' are thought by some to be as high as 180,000 tonnes - about 65 years of extraction at the current rate and about double the amount listed in the Canadian survey.
The other main source of market supply is from from recycled gold scrap - previously mined gold in jewellery and industrial components that are re-smelted and returned to the market.
Rising prices have clearly had a positive impact on encouraging this trade.
The sum of these two sources represents the total primary market supply, and over the past two years, much more than 1,000 tonnes per quarter enters the pool of available world gold supply.
But there is another important influence of overall supply, and that is the sales of official govermental holdings. Governments can be either sellers or buyers from their holdings. Governments hold large quantities, and the release or building of these stocks influences global supply significantly. Until 2008, governments were net sellers; but from 2009 onward they have been net buyers. What is interesting however, is that until now the volumes released of bought have been relatively low. Overall, official holding are about 30,000 tonnes and even a heavy trading period would only represent less than 0.5% of their holdings - and usually much less.
Total gold supply from all sources, even with this official activity factored in exceeded 4,000 tonnes in 2011, and this was up 15% per year from a decade earlier.
The supply of gold has been growing, and is expected to keep growing over the next five years of so. It takes about five years to bring a new mine into production, and the sharp rise in price for gold started in 2007. New mining ventures committed then were on the basis of a gold price that was less than US$500 per oz - today it more than three times that price and this has opened up a much wider range of reserves that would be economic. There is an industrial mining 'gold rush' underway which will bring significant new supply to market.
In our next and final review, we will assess the overall impact of supply and demand, and review how the price is reflected in these trends.
More data and resources are available at the World Gold Council's website.
* = the extractable gold, not the gold ore.
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14 Comments
Very interesting article.
As physical supply improves after refineries returned from the new year break, premiums on gold bars in Hong Kong eased to $1-$1.50 an ounce above spot prices, from $1.50-$2.50 last week.Volatily is only growing stronger as euro zone concerns remain.
Oh well, interesting times to be living in :)
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New Zealanders are called "Kiwis" therefore we call "Silver Kiwi" just to point that it was made in NZ.
.999 and .9999 are 2 purity standards. NZ Mint was one of the first to adopt the .9999 purity. It is not unusual to find .9999 purity standard in silver, the Canadian Maples are also .9999 fine silver.
NZ Silver Fern bullion and Maples are unique because of its high-quality silver (.9999 pure). It is not easy to make a fake silver coin besides it is really easy to tell that it is fake: all you gotta do is weight the coin with a troy ounce scale. -----------------------------------------Say 100k tonnes still to be extracted + 167k already in supply, at $16,000oz. Thats about $13.7trillion of physical gold total available. A lot more then I thought. Some people must be sitting on a mountain of gold. Still if gold was ever monetized (which would never happen) it would have to be equal to global GDP, so about $7.200oz. Very interesting.
Did you see this when I posted it last time?
http://www.drschoon.com/articles%5CAEFMonetaryVersusNonmonetaryCommodites.pdf
Sounds like the time the Hunt Brothers cornered the silver market. If we hit liquidation again, physical markets will not recover in our lifetime. For me, I'm not speculating, in that I'm not trying to turn a profit. It's just a place to store my labour, that is possible to use in times of crisis, or can be handed down to my kids. Even if silver went over 1k, whats the point in selling? Unless you are desperat.
I think freegold is possible, as a way for govts to settle their foreign debts, but could only happen after a liquidation event. Where physical disappears from the open market, and gold becomes priceless. It could then be used to settle debts, and the value would be determined by the size of the debts and the amount of gold held by the debtor. It's just a theory, but more likely then a gold standard IMO.
You are doing exactly what Exter worked out. http://en.wikipedia.org/wiki/John_Exter
Given the circumstance in world economics, particularly Europe, then I guess more people will move toward the bottom of the pyramid in search of security rather than growth/profit.
How quickly can the asset classes at the top become compromised is the moot point, and do you try to guess the entry points for the lower classes.
Somehow I don't think Exter had conceived of electronic money when he composed his pyramid, or how far leverage could extend.
Personally I don't think there is anything more secure than your own labour, your own abilities to contribute something positive.
USGS has the reserves vs current production at around 20 years with only 50,000 in reserve.http://minerals.usgs.gov/minerals/pubs/commodity/gold/mcs-2011-gold.pdf
However the definition of reserve does accept the measure is fluid.
Mr Chaston,
With all due respect I think your analysis is somewhat overly simplist. I wonder if you have considered the below points;
1. The price of gold (as often quoted) is determined by derivative paper contracts on the London Bullion exchange and on the COMEX, the total value of these contracts per year is over usd6 trillion, therefore making much of your physical mine supply and actual jewellery demand arguments invalid. Over 90% of what they trade is just paper which has no physical backing. If the buyers of the paper contracts where to stand for delivery the gold price would go to the moon and a default would occur.
2. The last gold bull run ended 1980-81 when 15% of americans owned gold investments. Today it is barely 1% and the demand isn't just from America and Europe.
3. The CPI inflation adjusted gold price in todays dollars is around usd2500, which the current gold price is significantly below. If you use wage inflation/purchasing power then the previous high would relate to usd7-8000 an ounce, far above where it is now.
4. To bring China's gold held for foreign reserves upto international avergae levels would require them buying 6,000 tonnes. China has said it wants to move away from USD and the Euro is now not proving any better.
5. Just before Christmas the FED did a currency swap of 1 trillion to 'rescue' Europe. Just by itself this is double the entire gold reserve of the USA (the largest holder of gold). Because of this 2012 will appear better than many expect, as this amount will no doubt be leveraged up.
6. Gold is the obvious choice for a new world reserve currency, except at much higher prices. By the time the trillions of $$$ yet to be printed are printed (and they will be) no country will want to hold paper without gold backing.
Perhaps you could do an article on why central banks and the IMF do hold gold as a reserve asset and why JP Morgan said early last century that 'gold was money, nothing more, nothing less, everything else is credit'. Or perhaps why the future of human freedom rests on gold as money - see the article by Hon. Howard Buffett (Warren's dad).
Regards,
Here is the link to the article by Hon. Howard Buffett, US Congressman from Nebraska.
http://www.fame.org/pdf/buffet3.pdf
I think he makes some interesting points, especially in light of recent events over the last few years.
The issue of gold and its role is far more than what your article covers. I think you should do more research also around the issue of gold leasing by central banks, including its role in setting the LIBOR (London Interbank Offered Rate), also look at the reason why gold is traded on the currency desks (not commodity desks) of the major banks.
My point is just that if gold is not a 'normal commodity', 'normal commodity anaylsis' isn't going to work out.
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