By Doug Horning,
Editor, Casey's Gold & Resources 

Gold started the summer doldrums looking strong and has retreated since, but what are its prospects for the rest of the year and beyond? That will largely be determined by the interplay between supply and demand; let’s take a look at the supply side.

Reports of dwindling supply are accurate in some areas; however, the story is not that simple. Unlike most metals that are consumed in industrial use, most of the gold ever mined is still around. Gold is forever. Thus newly mined, refined, and fabricated gold is not all that’s entering the marketplace; there are multiple ways of meeting demand. Here’s a look at each.

Breaking Rocks

Imagine that you could turn back the calendar to late 1848, as word was beginning to spread about the gold discovery at John Sutter’s sawmill on the South Fork of the American River in Coloma, California. Would you have loved gold enough to be one of the 49ers who responded to its siren song?

Those were heady times. The Golden State – though it wouldn’t officially receive its apt nickname until 1968 – had a seemingly endless supply of yellow metal, much of it just lying in remote creek beds, waiting to be scooped up. The French Ravine in Sierra County yielded single nuggets of 426 oz. in 1851 and 532 oz. in 1855. By 1869, the record was a monstrous 1,893-ounce specimen from the Monumental Mine in the Sierra City district.

The days of fabulous discoveries are not entirely gone. As recently as 1980, Kevin Hillier, a lucky Aussie following beeps from a metal detector, dug up a nugget that tipped the scales at 876 troy ounces. And in Ruby, Alaska, in 1998, bulldozer operator Barry Clay was stunned to see a 294-ounce nugget roll off the dirt pile ahead of his blade.

Modern commercial producers, though, aren’t looking for fist-sized nuggets, or even the fingernail-sized flakes that many 49ers hoped to find at the bottoms of their pans. Today, a major gold strike might grade out at 5 grams per ton of rock, and economical recovery is routinely done at significantly lower levels.

The easy-to-get stuff is largely gone. With demand rising, miners are struggling to produce ever more gold from ever-lower grades of ore. And they’re falling behind.

The CPM Group’s 2009 Gold Yearbook, one of the bibles of the industry, notes that world gold production peaked in 2001, after increases in 14 of the 15 prior years (despite a vicious bear market). Production increased only fractionally in 2001, to 82.1 million ounces, and has declined in five of the seven years since. And substantially so, with 2008 production coming in at only 74.6 million ounces, a more than 9% drop.

There are a number of simple reasons for the production decline. The older, more productive mines are playing out; newer mines tend to be lower grade; fresh mega-discoveries have become rare; cost of extraction has soared; environmental regulations are more stringent; and greedy governments demand a growing slice of the revenue pie.

South Africa has been particularly hard hit. After ruling the roost for nearly a century, it dropped to second place in production, behind China, in 2007; and into third, behind the U.S., last year. South African output topped out in 1970, at 32 million ounces, and has since fallen off more than 75%. Some miners now must burrow two miles underground to bring up something usable, and the country appears about played out.

Though the U.S. does hold the #2 spot, at 7.6 million ounces in 2008, it too has experienced a long slide. From the 1998 peak of 11.9 million ounces, it’s fallen every year but one, for a 36% overall decline.

There are some bright spots. Russia, still mostly unexploited, continues slowly but steadily ramping up production, delivering 5.9 million ounces to market in 2008. And China’s industry is growing by leaps and bounds. It captured world leadership in 2007 and cemented that position last year, with production of just over 9 million ounces.

In addition, there are some very large, well-defined deposits waiting to come on line. Kinross/Barrick’s Cerro Casale project in Chile, with 23 million ounces of gold reserves, is scheduled for a 2012 commencement; Barrick’s Pueblo Viejo in the Dominican Republic (20.4 million ounces) is slated for 2011; Newmont’s Boddington Expansion (13 million ounces) is targeted for the third quarter of this year.

But other elephant-sized discoveries are problem-laden. NovaGold/Barrick’s Donlin Creek project in Alaska (30 million ounces) is so remote it may never be economical; Barrick’s Pascua Lama on the Chile/Argentina border (18 million ounces) has been beset by anti-mining NGOs; and Las Cristinas in Venezuela (16.9 million ounces) probably will be developed only if Hugo Chavez is in the mood.

Considering the present state of the industry and the limited opportunities for developing new mines, we think it likely that gold production will fail to meet consumption for years to come. Either the price must rise to mute demand, or the shortfall must be made up from elsewhere.