COMMENTARY — Gold price moves higher

There seems to be a cyclical element in the Western world’s gold production. It took 15 years, from 1951 to 1966, for annual production to rise by 75% to 1,285 tonnes (reflecting the development of the Orange Free State gold fields in South Africa). It then took 11 years for production to fall by 25%, to 960 tonnes in 1977, as the higher prices for the metal allowed the South African producers to mine lower-grade ores.

The high prices of the 1970s and early 1980s boosted exploration for gold and led to a marked rise in production throughout the 1980s. From 1980 to 1990, Western world gold production rose by more than 80%, to 1,746 from 962 tonnes.

The growth was facilitated by new recovery techniques, such as heap leaching and carbon-in-pulp recovery, which allowed the exploitation of much lower grades of ore.

Furthermore, these low-grade ores could be won by cheap, open-pit mining rather than the very expensive, deep-level, hard-rock mining which was required for higher-grade ore.

During the past couple of years, the rate of growth of new mine production has slowed dramatically but has not actually declined — this despite low gold prices putting pressure on the profit margins, especially at the marginal South African mines. Even if the gold price rises strongly, we believe it will be at least two years before there is any significant rise in mine production. . . .

Even according to our pessimistic forecast, jewelry and industrial demand will outstrip newly mined Western world supply by about one-third (or 600 tonnes) this year. Our optimistic forecast is that the shortfall could be as much as 1,340 tonnes.

The conclusion to be drawn from this is that unless there are substantial central bank sales and/or a step-up in forward selling by producers, the market is likely to be in short supply and the price will have to rise — perhaps substantially — to induce a drop in hoarding and to prompt disinvestment.

Far from disinvestment, we envisage an upturn in investment demand this year as the mood of the bullion market swings from bear-market fear to bull-market greed.

In view of the shortfall of newly mined gold over fabrication demand, we expect the price of the metal to move substantially higher before it induces selling of existing above-ground supplies from central bankers or private hoarders.

— From “North American Gold Shares,” published by Yorkton Securities.