Time For Gold - Part 2

by: Arie Goren

After the dramatic decline in the price of gold by 36.9%, from its all-time high of $1,923.7 an ounce on Sept. 6, 2011, to $1,213.5 an ounce on June 27, 2013, the price has rebounded by 13% to $1,371 on Aug. 16. Is this six-week uptrend going to continue? In my opinion, there is a good chance it will. I base my opinion on the fundamental parameters of this precious metal -- demand, supply, and reserves. In Part 1, I summarized the global demand for gold. In this article, I will discuss the tendency of gold supply, gold mining costs, and gold reserves.

Mine Production

The total world gold mine production rose from 2,555 tonnes (82.2 million ounces) in 2003 to 2,856.8 tonnes (91.9 million ounces) in 2012, while the compound annual growth rate (OTCPK:CAGR) was at 1.25%. At this point, the growth rate was much less than the growth rate of the world gold demand, which was at 5.94% over the same period.

Click to enlarge images.

Production of Gold Recycled

The total world gold recycled production rose from 980 tonnes (31.5 million ounces) in 2003 to 1,590.7 tonnes (51.1 million ounces) in 2012, while the CAGR was at 5.53%. Gold recycled accounted for 27.7% of the world gold supply in 2003 and for 35.8% of supply in 2012. While the increase in the price of gold during the years 2008-12 has made its recovery more profitable, the decline in the gold price this year caused a decrease in gold recycling. As a matter of fact, world gold recycled production in the second quarter of 2013, 308.3 tonnes (9.91 million ounces), was the lowest since Q3 2009 and represented only 30% of the world gold supply in this quarter.

World Proven Gold Reserves

According to the U.S. Geological Survey's 2013 report, the aggregate unmined known reserves of the entire world's gold mining companies are equal to 52,000 tonnes (1,672 million ounces). Considering 2012 mine production of 2,856.8 tonnes, it means that there is an underground gold left for only another 18 years. However, if that was the case, gold prices should have soared into the sky. The best estimate at the end of 2012 was that around 165,000 tonnes (5,305 million ounces) have been mined in all human history, and more than half of humanity's gold has been extracted in the past 50 years.

It is true that the world's richest deposits are being depleted in an accelerated rhythm, new discoveries are relatively rare, it is difficult to find gold in commercial quantities, and it also takes time, typically five years, and plenty of money to bring mines into production. Nevertheless, while examining USGS's reports since 1995 we can see, as presented in the chart below, that although each year about 2,500 tons of gold are being mined, gold reserves are left almost unchanged. It means that new discoveries and the development of old mines take place at the same pace as the total mine production. Hence, it seems as if 20 years from now gold reserves will still be the same.

Source: USGS.

Cost of Mining Gold

The chart below taken from Barrick Gold's (NYSE:ABX) -- the world's largest gold producer -- May 14, 2013, presentation emphasizes that the average gold mining grade has dropped 22% between 2001 and 2011 to about 1.5 grams of gold per tonne of gold ore. This means that it is necessary to process 28% of ore to get the same quantity of gold.

The chart below, taken from the same presentation, shows that the cost of mining gold has more than tripled between 2004 and 2012.

The chart below, taken from Barrick Gold's 2012 fourth-quarter results presentation, shows in detail the company's cost of producing gold in 2012, which totaled $945 an ounce with total cash costs of $584 an ounce.

Main Gold Miners

The table below presents the last price, the market cap, and the five-year average gross margin for the 10 largest, by market cap, gold miners traded in the U.S. stock markets.



Last Price

Market Cap ($millions)

Gross Margin Five- Year Average

Goldcorp Inc.





Barrick Gold Corp




Newmont Mining Corp





Yamana Gold Inc





Randgold Resources





Franco-Nevada Corp





Kinross Gold Corp





Eldorado Gold Corp





Anglogold Ltd





Agnico Eagle Mines






After analyzing the latest gold supply and demand trends, we can see that the growth rate of the world gold demand -- which was at 5.94% -- is much higher than the growth of the world gold mine production, which was at 1.25%. In addition, the average gold mining grade has dropped 22% between 2001 and 2011, and the cost of mining gold has more than tripled between 2004 and 2012. Looking ahead, supplies of gold will tighten as a result of project deferrals, difficult capital markets, reduced exploration expenditures, and greater geopolitical and community-related challenges. Supply from scrap has already shown signs of significant decline. All these factors, in my opinion, support a higher price of gold, and I recommended investing in gold now with a long-term perspective.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.