USGS Report Confirms That U.S. Gold Production Is Dropping Fast

|
 |  Includes: GDX, GDXJ, GLD, PHYS
by: Hebba Investments

Summary

The US is the world's third largest miner of gold and production has continued to fall over the last 10 years.

2014 is looking to be the lowest year of gold production for the US since the beginning of the bull market in gold.

Gold investors should be reassured by this data as it strengthens the view that current production of gold is unsustainable at current prices.

Introduction

Every month the United States Geological Survey (USGS) releases reports on the production, use, imports, and exports of most of the important minerals to US industry and security. These reports are full of important information for investors focused on minerals (in our case precious metals) and they can be found on the USGS website.

For this article we will focus on US gold mine production and examine what has been happening with US gold mine production. Obviously the US represents only a segment of world gold mine production, but it is the third largest gold producer and many of the trends we find in US gold production will probably also occurring in countries around the world. Finally, for investors interested in keeping up with the gold market on a consistent basis consider following us (clicking the "Follow" button next to my name) or join our free email list where we send out a weekly email summarizing all the important events in the gold and silver industry, including all of our latest articles and research - it's a great way to keep up with the gold and precious metals market whether you are an individual investor or economist and its completely free.

First let us discuss the importance of mine production to gold supply and demand because this is an issue that is misunderstood by many investors in the gold industry.

The Importance of Gold Mine Production to Gold Supply

We've covered this in-depth in a previous article, so please read that article to understand the details of why mine supply is very important. But in summary the two main reasons why newly mined gold supply is very important to the gold price are as follows:

1. Newly mined gold supply makes up a large portion of annual gold supply (it provides two-thirds of annual physical demand, according to the WGC numbers above).

2. It is held in the weakest hands (the gold miners) who sell that gold at the prevailing market price.

Since newly mined gold makes up a large percentage of the estimated 4400 tonnes of annual world gold supply, any significant reduction in this supply would need to be met with supply from other sources. The buyers who ordinarily find the 2700 tonnes a year of mine supply to meet their demand will have to make due with 2500, 2200, or 2000, and so forth. This differential will have to be made from existing holders of gold, who care much more about prices than the miners, and as gold drops they will be less willing to sell at a loss or marginal profit. So this supply would be unavailable to the market at low spot prices (unlike newly-mined gold, which is sold regardless of spot) as these sellers wait for higher prices -- which ultimately would significantly constrict supply.

To put this into perspective, if mined gold supply drops 10% because struggling miners cut back production, that would be around 250 tonnes (8 million ounces) of gold supply that would be removed from the market. This is equivalent to 25% of the GLD gold trust or all of the gold held by COMEX -- a large amount of supply that would have to be found from existing holders of gold. If current gold owners hold back their gold from the market and do not make up for this shortage of supply, then what we will have is deficit in the gold market and the pressure will build for higher prices.

US Mine Supply Has Been Falling Over the Last Decade

What is interesting is that even though the gold price has risen every year over the past decade, gold production has continued to decline.

Source: USGS

In 2003, the United States was producing 8.9 million ounces of gold from its mines, while last year it only produced 7.3 million ounces of gold - a drop of 20% over the last decade. This is despite an increase in the gold price from an average of $364 per ounce in 2003 to an average of over $1650 in 2012. So as the gold price has increased 400%, US mine production has actually dropped - not a very good sign for the mine supply picture for gold.

Latest USGS US Gold Production Numbers

The USGS recently issued its latest US gold production numbers and the decline continues.

Source: USGS

As investors can see May production of 17,300 kilograms was close to a 5% drop year-over-year compared to May 2013 production of 18,000 kilograms. In fact every single month of 2014 has had lower gold production than its corresponding month in 2013!

Finally, YTD total production is down 3,800 kilograms from 2013 numbers or close to 5%, or in ounce terms, a little over 122,000 ounces - about 4 tonnes of gold production that no longer exists.

What this Means for Gold Investors

This all goes very well with our prior prediction (based on industry reports) that unless we see much higher gold prices, then we will see a collapse in gold production. The buyers who ordinarily find the 2700 tonnes a year of mine supply to meet their demand will have to make due with 2500, 2200, or 2000, and so forth. This differential will have to be made from existing holders of gold, who care much more about prices than miners, and as gold drops they will be less willing to sell at a loss or marginal profit. Thus this supply would not be available to the market at any spot price like newly-mined gold and these sellers would wait for higher prices - which ultimately would significantly constrict supply.

To put this into perspective, if mined gold supply drops 10% because miners are cutting back production and struggling to survive, that would be around 250 tonnes (8 million ounces) of gold supply that would be removed from the market. This is equivalent to 25% of the GLD gold trust or all of the gold held by COMEX - this is a significant amount of supply that would have to be found from existing holders of gold.

It seems that the supply picture for gold is only getting worse and many companies are producing gold at cost or even at negative all-in costs simply to meet operating expenses. This offers investors an opportunity to buy physical gold and the gold ETF's (GLD, PHYS, and CEF) as gold production drops.

Gold mining companies such as Goldcorp (NYSE:GG), Eldorado Gold (NYSE:EGO), and Newmont (NYSE:NEM) offer value too but investors should be much more careful when purchasing these because the major reason why gold supply is dropping is because mining companies simply cannot produce as much gold at current prices (Note: we do not recommend any of these companies specifically we are merely mentioning them as options). Explorers may offer even better value since they can develop a gold project while the gold price is low and then go to production at much higher gold prices - which we believe is only a matter of time. Either way investors should carefully examine any mining companies or explorers before purchasing shares.

Gold investors should be extremely confident in their investments as we certainly do not need to have any financial crisis to push up gold prices - just a price around current levels that will continue to lead to a deterioration of production. In fact, if it wasn't for the huge unloading of ETF gold last year, we would be seeing a serious gold supply crunch and now that ETF selling seems to be over, we expect over time the gold market will become tighter and tighter.

Now, if we do have a crisis of some kind (and we believe there is a significant probability of that) then gold investors will be well protected and we could see those higher gold prices much sooner.

Disclosure: The author is long SGOL, EGO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.