Peak Gold ???
GoldFinger1969
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Anybody with a geological degree or who follows the gold miners closely ? 
Been doing a bit of work on this lately, I was NOT a believer in "Peak Oil" 15-20 years ago and that turned out to be the right move (lot of very smart people got fooled by it mostly because of the shale revolution). Some similarities, but lots of differences. The key is focusing on gold production excluding recycled jewelry, in other words, freshly mined gold.
The concept is the same, but the underlying forces are different: mining finds minute grades of the metal, huge extraction costs, CAPX intensity very high, and past projects have destroyed shareholder value (like E&P companies, who have now gotten religion).
Anybody have thoughts on it ?
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Mining companies are busy and more profitable as price of metals escalates. Peak oil was and is a hoax. Ditto for Peak Gold.
As fuel prices come down mining is more profitable.
I think maybe look into where the company is exploring/testing?
Actually, as the price of gold went HIGHER, gold mining companies didn't make more $$$. They destroyed shareholder value for a decade as the price went higher.
That is true ... UNLESS ... a company sold forward their production at the earlier fixed price.
Back in 2009-2010 there was a lot of talk bout mining companies' "hedge books" and how those companies were closing out their hedge books and ending the practice of forward selling.
But I wonder how many companies quietly started selling forward again in the years since ?
I think the forward selling thing is miniscule and really not relevant. You had over a decade of shareholder destruction of value even with gold going up substantially. Rising CAPX...rising OPEX...cost overruns....rising extraction costs.
Barrick Gold, the model company when I followed gold and gold stocks intensely in the 1980's and 1990's, is 1/3rd the level of 2010. But gold is UP since then and way above past levels when the stock was higher.
Could that also mean that Barrick was grossly overvalued in the 80's and 90's ?
It's all about what the people want...
Wow, don't look for me to become one of your clients any time soon.
Barrick Gold was the biggest forward seller. They had a plan and it worked fairly well, for a while. They sold a lot of forward production into the market to drive down the gold price. Why would they want a lower gold price ? So that they could buy up other gold mining companies on the cheap. Then use production from those other companies to fulfill Barrick's delivery contracts. The mining industry eventually started to resist this activity and one of the things that a number of mining companies did was to end forward selling. Barrick had difficulties in producing enough gold for their hedge book, even after taking over the other mining companies.
Barrick was a highly-speculative and manipulative company that seemed more interested in "financial engineering" than actually mining gold.
A gold mining company might be able to lock in a price for their future production. But locking in the operating costs for that future production is another matter.
Not at all. The entire problem was out-of-control CAPX and a chase for gold reserves at any price the last 10-15 years, instead of a focus on profitability and shareholder value. Similar situation to shale E&Ps.
No, the reason for the forward selling was to take into account the normal contango where future prices are HIGHER than spot prices. No one company can drive down the gold price, that's the same conspiracy nonsense we heard from gold bugs over the decade. Homestake and Newmont and Agnico-Eagle and Franco-Nevada all did more M&A than Barrick -- and none had big hedging programs.
Barrick's strategy was correct for the 1980's and 1990's. It didn't work after 2000.
Mining companies that did not hedge have done better for their shareholders than companies that did.
I stand by what I wrote. Barrick intended to suppress the gold price in the relatively short term. And as one of the largest gold producing companies in the free world, they were able to do so.
I dont think we have peak gold since we haven’t lassoed in any of the gold rich asteroids yet.
It's all about what the people want...
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I have a lot of thoughts, but there is no easy answer to your question. My wife and I earned our mine engineering degrees in the late 1970's. During our working careers for a major gold company, we have evaluated dozens of gold mining projects and operations in more than 15 countries.
I will not discuss how the major gold mining companies I am familiar with conduct their operations, capital investments, reserve growth, or acquisitions because this varies significantly with upper management strategies and the gold price over time.
As far as the concept of "peak gold".
Russia, Uzbekistan, Australia, Canada, Mexico, Indonesia, Ghana, and Mali all have stable or slightly increasing gold production along with many other smaller African countries where new mines are starting.
China, the US, South Africa, and Peru may have reached their "peak" gold production and are now producing less than in the past.
Compared to 2010-2015 levels, total world gold production has increased, but it seems to have stabilized at this higher level. From 2016-2022 the annual range varied only from 3,482 to 3,656 tonnes (115 million ounces). There is no real evidence of peak production yet.
Gold companies in many parts of the world still have significant resources already defined, that can be converted to reserves and mined as the gold price increases. However, as the gold price increases, costs inflate as well.
As you already mentioned there are higher strip ratios, additional sustaining capital is required, and these resources are usually lower ore grades, so companies can keep producing the same amount of gold, but at higher cost. Profit margins almost never increase as much as shareholder expectations.
Edited to add that peak gold production will happen when gold demand slows down and the price drops compared to the cost to produce. My guess it will happen perhaps in 5 or 10 years. A lot depends on the strength of the currencies that are involved, and if the world and central banks still see it as a store of value.
Gold production data is the most recent from the World Gold Council and may be different than info from other sources.
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You can stand by it, I'm just telling you it's wrong. Barrick hedged for their own corporate reasons, not to suppress the gold price.
They COULDN'T suppress the price even if they wanted to.Their production the last 20 years (unless you mean to go back to the 1980's) has been about 5-6 MM ounces/year. Annual production is 100-125 million ounces per year.
Throw in central bank buying/selling, South African mines, and jewelry....and Barrick can't move the needle at all.
Again, you didn't even bother to try and comprehend what I wrote.
Barrick sold forward into the market a lot more gold than they were producing annually.
And then they had difficulty later on fulfilling those delivery contracts that were locked in at lower prices.
That is why their stock price did not do so well when the gold price was rising.
Suppose you are a gold mining company. You want to buy other gold mining companies. You want to do two things: 1) drive down the value of the companies you want to buy so you can acquire them at lower cost; 2) You need to raise capital to make the purchases. By selling your future gold production, you do both.
You don't seem familiar with the concept of a relatively small change in supply having a larger impact on price (inelastic market dynamics).
An interesting discussion. Here are some of my thoughts on the history of hedging. I survived many corporate discussions about it for about 30 years.
Mining companies usually finance projects or acquisitions with debt or often with their stock. In my opinion, it is unlikely that a rational gold company would, or even could, have attempted to use hedging to independently lower the gold price, because it would lower their stock price and profitability.
When gold futures are in contango there is some value in hedging as the future price that can be locked in is higher than the current price. This strategy became popular in the 90's as a way to secure credit for corporate initiatives and to reduce cash flow risk, but yes, it did become speculative and was overdone by some companies. Central banks were also selling a lot of gold at the time which really did lower the gold price, and a lot of investment money was going into the stock market, not gold, so getting a firm gold price locked in seemed like a good idea.
However, in late 1999 when the central banks said they would limit gold sales to 400 tonnes for 5 years, the gold price shot up more than 40% in two weeks to $360. Then the dot-com bubble burst and the dollar dropped, starting a secular gold bull market. Many companies that had sold much of their gold forward were stuck selling at prices lower than spot and had huge losses in their hedge books. Ashanti Goldfields in Ghana was nearly pushed to bankruptcy and their stock price plummeted as a result of hedging about half their entire reserves or about 6 years of production. I was in Ghana during that time on a different project.
As gold climbed dramatically from 2000 to 2010 some companies were forced to buy back their underwater hedges at great cost to shareholders. Those purchases also helped the gold price climb even faster to a major top around $1,800 from a starting point of around $300. That development basically ended gold hedging and most companies have been valued more by the market in the past decade if they did not hedge.
However, I believe some of the volatility and quick drop we just saw after gold futures popped up over $2,100 yesterday, might have been from a little bit of company hedging again, as well as investment profit taking. Here is a hedging chart that shows the amazing sequence of events.
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Peak? LOL
More to come.
I agree with Schiff that silver is a particularly good buy. Just snagged (50) 2023 King Charles silvers from JM Bullion @ $2.62 over spot.
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Hi GoldFinger,
I think we should consider the fact that price is set at the margin.
Let's make a very speculative example:
There are 7 trillions units of an item being offered and 7 trillions units of the same item being asked, the price of each unit stays flat.
One day 1 unit more gets offered.
Price goes down.
That unit (0,0000....1% of the whole market) has substantially moved the price, moving it from flat to down.
That would be enough in order to counter the idea that little quantity can't move the needle.
But let's go further.
On day 2, again, 11 trillions units are being offered, 11 trillions units are being asked. Price stays flat.
At 18 o'clock, 1 more unit gets offered on the market.
Price goes down for the second consecutive day.
So on for 30 consecutive days.
30 units, only! 30 units, 0,0000000...% of the whole market, have moved the needle so much: without those 30 units the price would have stayed flat the whole month, but because of those 30 units the market experienced a month long uninterrupted price decrease.
Little quantities - probably in conjunction with certain market conditions - can move a market because the price is set at the margin.
(I'm not sure if this is what @dcarr meant with inelastic market dynamics).
Good post, Goldminers.
What you wrote does make sense and I don't doubt that Barrick had SOME impact.
But it wasn't the biggest influence on gold prices. Disinflation, the end of the 1970-80 skyrocketing inflation and interest rates, fluctuating exchange rates, etc.....all this contributed to gold doing nothing for 2 decades.
Central bank sales also were a big factor, too.
Did Barrick had a modest impact ? Sure, I'll buy that. But they had to buy back whatever they sold or shorted. Peter Munk made a great call to HEDGE around 1980.....and it worked great for 20 years....but Barrick & Munk were caught once gold started to rise in 2002.
Outstanding post, Goldminers. Being in the industry you clearly saw it 1st-hand. I wouldn't disagree with anything you wrote and alot of it I tracked as an analyst, portfolio manager, and investor.
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Yes, of course, there were other market factors beyond Barrick.
Things didn't go entirely their way. But they did have some success at buying some other gold producers.
You can't have a market without two or more parties involved.
And there are always a lot of parties in the gold market.
But a change in fringe supply or demand can have an outsized affect on the price, especially if the forward-selling goes on for a while.
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Absolutely. Economics 101. But there are so many OTHER variables -- other big gold producers, South African government, China & Russia, Europe, central bank selling, etc. -- that I think saying it's definite was a stretch.
I'll give you it was A factor, absolutely.
Yup, I agree Peter. Dead-on !!
Me neither, especially as you increase the time interval. But inelasticity may be present in the very short term.
DCarr, Barrick traded at a very high P/E and it was able to buy dirt-cheap junior and mid-sized miners whose P/Es were much lower. It was financial engineering.
Central bank sales are much more important than hedging...and the direction of currencies, rates, and inflation swamps that by multitudes.
This shows the central bank sales during the period from 1990-2010 that is close the same time mining companies were also hedging. Now we are in a new cycle where the foreign central banks are buying.
It is important to remember that our Federal Reserve does not own and does not buy gold. The Gold Reserve Act of 1934 required the Federal Reserve System to transfer ownership of all of its gold to the Department of the Treasury.
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More CBs will be buying gold since so many have nothing or close to nothing.
All the negatives are turning into positives.
Fewer are purchasing US bonds, more money to buy gold
The government is incapable of ever managing the economy. That is why communism collapsed. It is now socialism’s turn - Martin Armstrong
Neither follow gold miners or have degree in geology. But, I'd like to add to my post count because I'm spending hundreds of thousands of dollars per year buying and selling what they're talking about and digging for.
Probably you are referring to Homestake Mining and Placer Dome Gold.
I'm not sure this was their main motive, the main point of their short selling.
If that would be the case, every major company within every commodity market could do the same. And I don't think they'd have been able to pull it off (e.g. to pass the regulators scrutiny) without help from above.
Maybe they were acting as agents of central banks, as they indirectly admitted during the Blanchard lawsuit.
According to Gata "Barrick moved to dismiss the Blanchard lawsuit on the grounds that the suit had failed to include as defendants some indispensable parties whose vital interests are at stake, the central banks; that the central banks, having what is called sovereign immunity against suit, simply could not be included in the suit; and that the suit therefore had to be dismissed."
No, if you check the quarterly or monthly TIC data it's been pretty constant over time. Changes in the composition, sure.
Japan was the biggest holder in the 1980's and now they are again as China has sold Treasuries (mostly to strengthen the Yuan).
I vaguely remember those (bogus) lawsuits. The bottom line is that the Gold Bugs didn't want CBs to sell their gold, either directly or through a hedge operation. That's NOT how markets work.
As for the conspiracy thing....that's like saying that McDonald's hopes that a study comes out claiming eating hamburgers causes cancer....then they can buy up all their competition on the cheap.
Come to think of it...maybe THAT'S how they sold all those trillions of hamburgers I see advertised ???
Goldminer, just curious since you were an insider at the party: did the high-ranking execs, CEO, or CFO's ever admit that every time they planed these huge CAPX expansion projects they (1) came online when prices were lower and (2) had HUGE CAPX and OPEX cost overruns ?
You basically had 2 decades of shareholder destruction.
Exactly
US government debt is a small portion of TIC.
Foreign buyers of US Government debt have greatly dropped as a result of Ukraine situation showing that the US will not hesitate to weaponize it's currency.
The government is incapable of ever managing the economy. That is why communism collapsed. It is now socialism’s turn - Martin Armstrong
No, it's the most important part for bond market investors. Other sectors lack the size and liquidity. Stocks are not counted.
No, check the data, not someone just opining without facts:
https://fred.stlouisfed.org/series/FDHBFIN
No one likes to admit they might have made poor investment decisions. I participated in hundreds of NPV and cost analysis projections life-of-mine for various projects. Greenfield projects are inherently risky. Ore body definition and recoveries are based on somewhat limited core drilling, sampling, and 3D geologic model interpretations. Metallurgists have to develop recovery curves based on small scale testing, that may or may not replicate the larger plants being designed.
Mining and processing costs, equipment costs and requirements, ore and plant recovery, mined grades versus models, labor and G&A costs, community support requirements, land acquisition, government tax or royalty requirements, environmental reclamation, sustaining capital, diesel, explosives, electrical costs, refining costs, other commodity costs and inflation, etc., are the estimates that enter into the equations.
Of course, on the revenue side there is the big "what gold price" do we assume for the future years that you use for the discounted pre-tax NPV analysis. Then the financial component estimates have to be included, taxes, finance costs, do you issue shares, borrow, use cash flow, hedge, etc., all come into play.
After all this, if a projected NPV does not meet the projected return the first time, management often will tell the teams to all go back and "improve" the numbers until it does. Managment wants to increase or sustain production because shareholders reward more reserves, geologists want to get incentivized for finding the ore, project teams want bonuses for completing the new construction. When so many people want to get a project approved, a rose-colored-glasses mentality can develop. Crystal ball type analysis is not always successful. The results you describe of cost overruns are not uncommon in many projects, not just gold mining.
However, there are very big wins that don't get as much attention. Once a plant has been constructed and mine equipment has been purchased, they become a sunk cost. If the ore body is in a good geologic location and more ore is found in the vicinity from positive drilling results, or because the gold price goes up, you can do profitable mine expansions. What you initially thought was going to be a relatively small low return 7-year project might become very profitable, and last 30-40 years or more, if things work out. The Nevada Carlin Trend and Yanacocha in Peru are great examples of very successful mining operations that started small.
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WSJ disagrees.
Historical buyers of US bonds and their holdings were not my point. My point is they are now hesitant to buy and in some cases reducing their holdings. FED and US funds (social security, etc.) will now become the major buyers of last resort.
Would not be surprised to see income tax refunds take the form of loans to the US government. LOL
The government is incapable of ever managing the economy. That is why communism collapsed. It is now socialism’s turn - Martin Armstrong
Thank you Goldminers
They always say the three most important factors to consider when investing in a mining company are management, mgmt and mgmt.
You mentioned the rose-colored-glasses mentality, so this is something a good management will avoid.
Beside that, in your view what are important aspects of a good management in a mining company? (not asking for an exhaustive answer, just mentioning a couple would suffice)
That analogy does not fit in the slightest.
Barrick knew that they could depress the gold price (TEMPORARILY) by selling several years worth of forward production in a span of a year or two. They also knew that the gold price would recover once they stopped the forward selling.
Your analogy would be like Barrick telling everyone that gold was highly radioactive.
They didn't want gold to go down in price permanently. They only wanted it stay down until their hedge book was fulfilled, then go back up again. And they didn't advertise what they were doing.
Selling gold forward on COMEX is one thing (generally that is regulated to some degree).
But how "regulated" is a private contract to sell gold ?
Suppose Barrick sold gold to a specific private buyer at a favorable price to the buyer, with immediate payment but delivery terms a year or two forward ? How would that have been "regulated" ?
In this manner, Barrick would obtain funds to take over other mining operations, so as to bolster their production and meet the delivery obligations.
gold miners are not following the move up with gold for one reason: Inflation is driving their production costs through the roof.
The government is incapable of ever managing the economy. That is why communism collapsed. It is now socialism’s turn - Martin Armstrong
Companies should have management personnel who have many years of actual mine, plant, project, metallurgical, exploration, and environmental knowledge. The directors should have diversified career experience to share, and the CEOs should not be surrounded with "Yes" men. Important that upper management has the objectivity and humility to listen to the mid-management people who say NO sometimes. Like Buffet, who was very successful, needed Charlie the "abominable NO-man" to prevent him from some purchases. They need to ask questions and be excellent listeners, adaptable and aware of the ups and downs of the business, be goal and team oriented, and have a strategic vision.
Critical that management understand the importance of people in the communities where they work, pay close attention to all environmental risks, and operate with respect for the land and the communities nearby. In other words, they need to have a deep understanding of the need for a social license to operate. This also requires good communication and relationship building skills.
As far as mergers, companies should look to acquire smaller companies that have good land positions in areas that have not been fully explored. Taking risks is often OK if there is significant upside potential. There should be a focus on profitability, and both internal and greenfield growth. It is important not to waste capital resources acquiring mature companies with production winding down, that will also have to start massive environmental reclamation, and have low upside.
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Okay, that was an exhaustive answer
Thank you @Goldminers
Hi DC,
I'm not saying that the game you describe is impossible or that it didn't happen, just that
a) it could be pulled off by every one of the dominant companies within every commodity market.
b) In case of public trades - e.g. Comex - we have public data. Do you have data corroborating the game you describe? Being private transactions, taking place outside regulated markets, I hardly think so (but I have no problem in being proved wrong).
c) I think we were talking about Barrick influencing the market price of gold. Private transactions - transactions taking place outside public markets - like the ones you are describing have hardly a bearing on the official price of a commodity.
Imo
True, but Central Banks can not only sale, they lease too, and then the borrowers - usually bullion banks - can short sell.
I.e. CB can directly and indirectly increase gold sales.
Under certain circumstances CB leasing can have a bigger impact on the price than their sales per se, e.g. when the borrowed/short sold ratio at the bullion banks is 1:100.
If - exceptionally - the borrowing entity is not a bullion bank but a mining company - whose short selling is called hedging - then maybe - that's my point - hedging can - under certain circumstances... for limited periods of time... - have a bigger impact than Central Bank sales.
Talking about Barrick, it seems that they were able to "hedge" (sell short) so much metal - and pass the regulators scrutiny - because they could borrow metal from the Bank of England.
Again Gata: "Wilkins (Barrick' CEO) neglects to mention that while the Bank of England was selling its gold, Barrick was borrowing hundreds of tonnes of central bank gold and selling them short into the market, assured that the company need not repay the gold for 15 years or more, if ever."
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And there you have it.
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Dcarr, Barrick destroyed shareholder value. That's the bottom line.
Their hedging worked when other CBs and retail were sellers (1980's and some of 1990's). It didn't work last 20 years.
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You accuse others of making stuff up.
You wrote: "[Barrick] COULDN'T suppress the price even if they wanted to."
You made that up, based on faulty assumptions and without doing any research.
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Question: If Barrick was hedging gold in the past, are they part of the anti-Gold Conspiracy to depress the price ?
Aside from the fact that lending out gold is dependent on contango, interest rates, and other variables....this rationale to "dump" gold is 100% BS according to the GATA folks.
The reason why the Bank of England had to dump gold was not to depress the price, it was because they were under the gun LEGALLY to shore up financial reserves that had been depleted by the BOE's ill-fated EMU fiasco years earlier. People forgot about it, but if you were a currency trader, this was OLD news.
This is why the conspiracy idiots and some of the Gold Bugs have no credibility: they come up with cockamamie BS when the reason given for the sales was known almost a decade earlier (the bet George Soros won with the BOE).
I realise now that I don't know the difference between the concepts of hedging and short selling.
Until now I naively associated hedging with mining companies and short selling with bullion banks.
Maybe It's just a terminological non-issue, maybe they are synonyms, I don't know, but if someone has some input on this, please do