Peak Gold

Imagine the world without the production of gold. The end of the mining of the yellow metal. The termination of all gold mines. No more gold nuggets, no grain, no flakes. Sounds depressing, right? It would not be a world without the chemical element with the symbol Au, as fortunately a lot of bullion is held as investments coins, bars or jewelry. But still, it is hard to imagine the world without gold mining. Such gloomy visions are connected with the idea of peak gold.

What does it mean? Well, the peak is the point of greatest development, value, or intensity. Think about orgasm as the peak of sexual pleasure. Going back to more mundane things, peak gold is the maximum rate of global gold extraction. It is the point in time when the peak of bullion’s production is reached, after which it is expected to enter a terminal decline.

Has gold production peaked? Has the mining of gold reached its maximum level, now approaching zero? Let’s analyze the chart below.

Chart 1: Mining production (blue line, right axis, in tons), total supply (green line, right axis, in tons), and price of gold (yellow line, left axis, annual average, in $) from 1997 (2002) to 2016.

What can we see? There was a peak in 2001. But the mining production did not enter a terminal decline. Instead, an upward trend started again in 2008. Hence, the fears – or actually the gold bull’s hopes – of peak gold seem to be exaggerated. Many analysts forget that the most important resource in the world is not oil, copper or even gold – it is the human mind and its creativity. Even if mining decreases, technological progress should increase our ability to explore previously unfeasible ores.

Another issue that many analysts don’t understand is the supply of gold. We cannot equal the annual mining of the yellow metal with gold’s supply. And we mean here something more than taking recycling into account. The key thing is that annual mining production is a negligible fraction of the total gold stock (it’s estimated at 1-2 percent of global gold holdings). Much more gold comes to the market as a disposal of gold holdings than from the mines.

What does it mean for investors? Don’t listen to the so-called experts who have been calling for peak gold for years. Even if it occurs – which is unlikely, especially in the long run – it will not necessarily lead to a rise in the price of gold. Gold is not like other commodities, as there are enormous gold holdings in the world. Thus, the notion of a production peak in gold is somewhat irrelevant. Remember about it when investing in gold. Taking decisions based on misunderstandings and flawed or not pertinent concepts is not the most fortunate way to accumulate wealth.