The Case for Long Term Gold Investment
It almost seems like peak oil all over again. The word on Wall Street is that gold supplies are thin, and after a 10 percent decrease in gold mined in the past decade, it looks like the yellow metal may be more rare than we think.
That Dirt Has No Gold
Since 1950, gold mines in the United States, Canada and Australia have experienced a grave shift in the amount of gold that could be produced per ounce of ore, from 12 grams per tonne to an average of 3 grams today. Though capital investment and machinery have made the process more efficient, gold mining certainly isn’t very profitable at low prices, indicating that the bottom may be closer to today’s top.
Market Leaders Moving
Harmony Gold has said it may close as many as two large-scale mining operations because they have been forced to mine deeper at an expense that does not warrant the operation at today’s prices. Barrick Gold, another gold mining leader, is busying paying off its hefty futures bets in gold delivery having accepted prices in the 1990s that are well below today’s market prices. This winding down in operations and in futures holdings suggest that supply is going to be further limited and that gold has plenty of room left to run.
The Gold Paradigm
Unfortunately for gold miners, each increase in the depth of a mine exponentially increases the price they pay per ounce to remove it from the earth. Barrick Gold, for example, has seen its average production price per ounce of gold fall to $456 per ounce in recent years, but only due to a change in energy prices. Should energy prices rebound (energy is one of the biggest overhead expenses) gold miners will be pinched and ultimately forced to cut out high-priced mines, again limiting supply.
Laying it all out there
Gold production is decreasing at a rate of 1 million ounces annually, despite prices that are four times higher than a decade ago. It is certain that the cheap gold is long gone, new production is coming on the line at extremely high prices, leaving miners with the choice of mining at what would be thin profit margins or avoiding the risk in search of easier to access gold. At any rate, the supply line should not be sinking with a price that is 300% higher unless it is true that we are, in fact, running out of gold.