We often hear about ‘peak gold’, i.e. the maximum level of the global production of the yellow metal. According to some analysts, the gold supply already peaked in 2016 or it is likely to peak very soon, offering hope for gold bulls. We do not agree with them. The notion of a gold peak is flawed and should not be a basis for investing in gold.
And here is why. It’s extremely difficult – or even impossible – to determine the peak in gold production, as the level of mining depends on many factors, including a future discovery of new deposits and technological breakthroughs. Look at the chart below.
Chart 1: The mining production (blue line, right axis, in tons), total supply (green line, right axis, in tons), and the price of gold (yellow line, left axis, annual average, in $) from 1997 (2002) to 2016.
As one can see, the level of mining production has been rising since 2008, despite continuous calls for a ‘gold peak’ (for example, Goldman Sachs warned against a gold peak in 2015).
However, such analyses are based on estimates of “X years of known mineable reserves of gold”. The key word here is “known”. In reality, the level of known reserves also increases over time due to new discoveries and better technology. Everything comes down to price – mining of gold will not simply end when we will deplete all relatively easily accessible deposits. It will be continued but at higher costs. And higher gold prices (we assume here for the sake of discussion) would trigger searches for more deposits, exploration of previously unfeasible sources and developments in new technologies which could increase our ability to mine gold similar to the shale technology in the oil market.
If you want an example, look once more at the chart above. There was a peak in 2001. But the mining production entered an upward trend again in 2008 because of factors we have just mentioned. Hence, even if we see a gold peak, it does not necessarily imply a long period of decline in gold supply.
And there are even more important problems with the idea that gold peak will be bullish for gold investors. First, the decline in gold mining does not equate with a decrease in the total supply of gold, as there are plenty of scrap gold which could be recycled (in 2016, recycling accounted for 28% of gold supply).