OBSERVATIONS ON WORLD PRODUCTION AND GOLD PRICE HISTORY, 1966-2008

The last table of my presentation shows total world production and the US dollar gold price for the years 1966-2008. Not only does this put the prior South African information into an overall context but it also goes back to five years before the gold price was “freed to float” in 1971.

YEAR

WORLD GOLD PRODUCTION (MT)

AVERAGE ANNUAL GOLD PRICE ($/TR OZ)

YEAR

WORLD GOLD PRODUCTION (MT)

AVERAGE ANNUAL GOLD PRICE ($/TR OZ)

1966

1450

35

1988

1870

437

1967

1420

35

1989

2010

381

1968

1440

39

1990

2180

384

1969

1450

41

1991

2160

362

1970

1480

36

1992

2260

344

1971

1450

41

1993

2230

360

1972

1390

58

1994

2290

384

1973

1350

97

1995

2230

384

1974

1250

159

1996

2290

388

1975

1200

162

1997

2450

331

1976

1210

125

1998

2500

294

1977

1210

148

1999

2570

279

1978

1210

193

2000

2590

279

1979

1210

307

2001

2600

271

1980

1220

613

2002

2550

310

1981

1280

460

2003

2540

363

1982

1340

376

2004

2420

410

1983

1400

424

2005

2470

445

1984

1460

361

2006

2430

604

1985

1530

317

2007

2380

695

1986

1610

368

2008

2290

872

1987

1660

447




SOURCES: World production from U.S. Geological Survey, Data Series 140, gold statistics compiled by K.E. Porter (ret.), E.B. Amey (ret.) and M.W. George (www.goldsheetlinks.com). Gold prices from Kitco at www.kitco.com .

Graphic for the above table



In 1981, when beginning my first study of the gold mining industry, the price of gold was in the $400-$500/tr oz range. This was little more than a year after the great speculative spike of January 1980 (from Jan. 10-Jan.28 the spot price of gold had gone from $603/tr oz up to $850/tr oz and all the way back down to $624/tr oz). Prior to 1981, I hadn't paid much attention to the gold price. All I remembered was that the price had been below $200/tr oz for nearly all of the 70's with the major runup in price starting in earnest only in 1979 and ending shortly afterwards.

With such an extreme range of recent price levels I had to ask myself which level was the correct one? Was it $100/tr oz? Was it $1,000/tr oz? At what level would gold prices find reasonable stability? The gold price had only been allowed to “float” since Nixon closed the “gold window” in August of 1971. Obviously, the price was still trying to find a comfortable level. But what was it?

By late 1983, after completing the historical and cost estimation work for the first study, I was convinced that the fundamental reason (the foundation) for the price rise of the late 1970's was a world-wide decline in gold production. For example, in 1979 total U.S. production (at 28.6 mt) was at it's lowest level of the entire 20th century, 1980 Canadian production was at a 50 year low, and South Africa's production had declined from 1,000 mt in 1970 to 705 mt for 1979. The gold price increase from $35/tr oz to $200/tr oz during most of the 70's wasn't sufficient to halt the production declines.

There were other factors involved in the 1979-1980 price “bubble” but they were “false” in a sense. The two main factors were unrealistic inflation expectations and heavy speculation in the silver futures markets due to a nearly successful “cornering” of the silver market by the Hunt brothers. Paul Volker and the CFTC quickly squashed both of these. Based on the theory that the main reason for the price rise of the late 1970's was declining world-wide gold production, then the “correct” price level should be the one that induces increases to production world-wide. In my cost evaluations of that first study, most operation's total costs were in the $250-$450/tr oz range. As can be seen by the table of world production and gold prices, that range (at least through the mid-1990's) was sufficient to cause a doubling to world production (from 1,210 mt in 1979 to 2,450 mt in 1997). Unfortunately, at least for the South African industry, by 2003, this price range had been constant (and on the low side) for over 20 years with no increase taking into account inflation over that lengthy period of time.

The world-wide production table presents one last subject I would like to address. That is the decline in production since 2001 (2,600 mt in 2001 to 2,290mt in 2008). Does it represent a situation of “peak gold” which is presently a hot topic in the gold community? My own take on this is that it is too early to tell for sure. Much of the decrease (174 mt out of 310 mt total) is South African related which I still contend can be reversed somewhat. The key in the “peak gold” argument will be production outside of South Africa. I would contend that most of the non-SA decline since 2001 is probably due to the low prices of 1998-2002 and maybe the mining of lower grades in the past few years with the much higher gold prices. I will make the point that the large increase to world production since 1979/1980 was almost all due to the development of surface mineable deposits and I do believe that production from those types of deposits really has peaked. As I like to finish all of my prognostications...only time will tell.

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