Why Changes In Gold Production Don’t Matter

By Steve Saville, GoldSeek

Introduction

Most analyses of the gold market consider the annual change in the amount of gold produced by the mining industry to be an important determinant of the gold price, with bulls regularly supporting their case by citing the mining industry’s inability to ramp up production and bears sometimes claiming that increasing mine production will eventually weigh the gold price down. Our contention, however, is that the annual supply of newly-mined gold is so small relative to the existing aboveground supply that changes in mine production should be ignored when assessing gold’s prospects.

We warn you that the following discussion is quite lengthy (by our standards), but we wanted to cover most aspects of this important topic — important, that is, for anyone who genuinely wants to understand the gold market — in one hit.

The aboveground gold supply (and why it makes sense to analyse gold as if it were a currency)

The gold that gets produced each year doesn’t get consumed; rather, it gets added to the existing aboveground stock. This means that the entire aboveground stock represents potential gold supply. In this respect, gold is more like a currency than a commodity.

Now, we realise that not all the gold that was ever mined is currently in a readily saleable form, but a substantial chunk of it is. To be more specific, it has been roughly estimated that around 150,000 tonnes of gold have been mined throughout history, about two-thirds of which has been mined since 1945. Of this 150,000 tonnes, we estimate that around 108,000 tonnes* are held for monetary/investment purposes. Monetary/investment (MI) gold includes official gold holdings (the gold kept by central banks and the IMF), privately-held bars and coins, the gold held by ETFs and closed-end funds, and monetary jewellery (24-carat jewellery that is held solely as an investment or a store of value). This 108,000-tonne figure is, in our opinion, a rough but reasonable estimate of the MINIMUM amount of gold in readily saleable form, and clearly dwarfs the 2,400 tonnes of gold produced by the mining industry over the past year.

Analysing the gold market as if new mine supply dominated the supply side of the equation would be like analysing the dollar market as if the only dollars that really mattered were the new dollars that came into existence over the past year. The fact is that a new dollar created today will become an indistinguishable part of a total supply that includes every dollar created, but not yet extinguished/destroyed, up until today, and it is this total supply, combined with the associated demand for this total supply, that determines the dollar’s price. Moreover, it could be argued that the gold mined each year is less important to gold’s supply-demand balance than are the dollars created each year, because new dollar supply typically constitutes a much greater percentage of the existing stock than does newly-mined gold supply. Specifically, whereas the total aboveground supply of saleable gold increases by about 2% every year, the total supply of dollars sometimes increases at a double-digit rate and rarely increases by less than 5%.

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