Resource World Magazine

78 www.resourceworld.com A U G U S T / S E P T E M B E R 2 0 1 7 Epilogue by David Duval I n 1956, M. King Hubbert, a geologist for Shell Oil, predicted that US oil production would peak in 1970 which turned out to be partly true when crude oil production peaked that same year, not to be eclipsed again until the shale boom began. Now a similar dire prediction is being made for gold which, unlike oil, is not a fuel source and in fact retains its chemi- cal properties forever, justifying its title as the "eternal metal." That's both good and bad in a market sense as all the gold that's ever been mined still exists and a large part of it is available for sale in the marketplace. The resurgence in shale oil produc- tion was based on the implementation of a major technological innovation – hori- zontal drilling – which, when combined with hydraulic fracturing or fracking, dramatically increases the productive capacity of oil-bearing formations, the best examples being the Marcellus Shale of the Appalachian Basin and the Bakken Formation of North Dakota. Don't expect that any such market- altering innovation will spike gold output, the last real innovation being the broad application of heap leaching to low-grade gold ores. In recent years, automation has played a significant role in driving unit costs down, especially in open pit opera- tions, but much of this was a prerequisite to justify the mining of low-grade, margin- ally economic ores. Perhaps a good analogue for gold's pro- duction future is the case of South Africa – once the world's largest gold producer by far. The country produced over 1,000 tonnes of gold in 1970 but output has since fallen to below 250 tonnes. Declining grades, higher costs associated with deeper mining, militant labour unions, political instability, along with an industry con- solidation that saw marginal mines closed, have all contributed to the nation's declin- ing gold output. The investment climate in Africa has also deteriorated, particularly in South Africa and Tanzania. Reports also suggest that 2016 saw global mine production fall for the first time since 2008 and according to Thomson Reuters "few new projects and expansions [are] expected to begin producing this year, and those in the near-term pipeline are generally fairly modest in scale, hence our view that global mine supply is set to continue a multiyear downtrend in 2017." The world's largest gold producer is China although little if any Chinese gold production is said to leave the country. China has also become the world's largest gold buyer. While gauging Chinese gold output can be challenging, evidence sug- gests that China has been the only major producer to increase gold production in the past few years. There are obvious reasons for this trend including the fact China has distinct pro- duction advantages over other countries, namely a much easier regulatory climate for new mines. This is simply not the case in the West where the time frame from dis- covery to commercial production in some cases is 15-20 years. That being the case, it would appear that new gold production free of regulatory time constraints will be from countries with less burdensome regulatory environments. In general, these countries are not seen as being receptive to foreign investment. Canadian gold mining companies in particular have been placing a renewed emphasis on reducing production costs which in most cases means mining higher grade ores at lower annual production rates. Bigger has not always proven to be better as companies like Barrick have learned to their detriment following the development fiasco at its Pascua Lama Project on the Chile/Argentina border. Reducing debt loads, much of it asso- ciated with asset purchases (which in the case of Kinross involved taking a $7 billion write-down for its Tasiast Mine in Mauritania), has also been a prior- ity for gold mining companies. This has often come at the expense of exploration budgets to replace reserves depleted by mining. Given the lead time to commercial production in the West, this has poten- tially ominous implications for future global output. Analyzing future gold production, demand, and price upside is highly sub- jective and any such analysis usually fails to take into account trading aberrations in the marketplace for gold which is known to be manipulated (especially in futures markets) by big banks and other nefari- ous players. Yet against this backdrop there remains an acute shortage of gold with reports that the largest refiners are working 24/7 to meet demand. Physical gold is becoming scarce, difficult to source and mostly spoken for, says gold analyst/ author James Rickards. Rickards believes that gold's uptrend, which began on December 15, 2016, remains intact and is "set for a rally above US $1,300 per ounce, which would exceed the prior high of US $1,293 per ounce on June 6." He also sites key economic indi- cators including slowing auto and retail sales, disinflation, lower labour force par- ticipation and many other indicators that are turning negative in concert with US Federal Reserve tightening. n Peak Gold assumptions clouded by market forces

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