Gold Outlook from 2000 to 2020

PROLOGUE

At some point during the early history of the human race, a rule came into being: "HE WHO HAS THE GOLD, MAKES THE RULES". During the last 40 years, world governments and central bankers have endeavored to repeal this rule. The reason for this is so they can foist upon the world fiat paper currencies. So far their effort is succeeding. However, their effort is causing dis-equilibrium and stress in the world financial system which will ultimately doom their effort to failure. History shows that fiat paper money always implodes over time, to be replaced by a new currency based on gold and/or silver.

THE PROBLEM

Most people who have studied and thought about the gold market in recent years have focused on important items such as: 1) above ground gold supplies, 2) mismanagement of central bank gold reserves, 3) the fact that the yearly demand for gold has exceeded yearly mine output for several years, 4) and lastly, the blatant manipulation of gold prices by world governments and large financial institutions over the last several years, in an effort to save the fiat money system which has been forced on the entire population of the world. These items are vital, but they have masked another vital piece of the puzzle. Up to now, gold market analysts have visualized an apparent endless supply of gold coming from central bank vaults to supply the needs of the world. Young central bankers came to the erroneous conclusion that this gold was no longer needed in a monetary sense, and should be worked into the marketplace for other uses for gold such as industrial uses, in dentistry, for jewelry, etc. This dishoarding of gold by central bankers has created the illusion of a plentiful supply of the precious metal with no supply problems in the future. This is a monumental blunder that will catch up with the world in the next 10 to 20 years. Why? Because of the simple truth that there is not a lot of gold remaining in the crust of the earth for future mining operations to recover. The amount remaining is less than half of the amount that has already been found and produced from the beginning of civilization. The following discussion will describe how this happened, and the consequences of this central bank folly.

No one should argue with the importance of each of the four items listed in the first paragraph. They are all valid and well documented. As long ago as the last half of 1997, I wrote an article titled "Monetary Gold Mismanagement in the Twentieth Century"¹. It was apparent long ago that world governments were wasting their gold reserves; and it was about the same time that spot and futures gold prices were no longer responding to world news events as they had in the past, or as they should have acted in a free market setting. Practically all that I wrote in that long ago article is still pertinent today, with the obvious exception of some price information and other similar items. Monetary gold has not only continued to be mismanaged since I wrote the article, the mismanagement has become worse.

WHAT HAS BEEN OVERLOOKED?

So you ask, what have we overlooked? As it turns out what we have missed is a vital piece to the long-term puzzle of future gold availability and prices. Prior to expanding on this missing link, we need to take a look at why it has been overlooked. The first reason concerns the above ground supply of gold. In the U.S. Geological Survey report on gold early in 2000², they have the following to say on above ground gold. "Of an estimated 128,000 tons of gold ever mined (Worldwide), about 15% is thought to have been lost, used in dissipative industrial uses, or otherwise unrecoverable or unaccounted for. Of the remaining 108,000 tons, an estimated 34,000 tons is official stocks held by central banks and about 74,000 tons is privately held as coin, bullion, and jewelry." It is the central bank gold that has helped create a problem. On first glance, having 34,000 tons of gold sitting in central bank vaults, approximately 27% of all the gold mined from the dawn of civilization, appears like a great overhang of supply to the present market. Add to that perception the fact that a new generation of central bankers has concluded that all this gold sitting in their vaults is useless since it does not earn interest. The new central bankers first answer to their problem of what to do with this dead gold in the vaults was to devise a scheme to loan (lease) this gold to various business entities, thereby earning a modest rate of interest. Behold, a dead asset was turned into a profit center. Part of these loans were made to primary gold producers who sold the gold into the current market, thereby depressing prices. They used the money received from these gold sales for current expenses, and planned to replace the gold out of future production. These maneuvers stimulated current consumption while reducing the amount of gold available in the future, assuming the gold is later returned to the central bank vaults from future production.

In the early stages this seemed to work for all concerned, but greed on the part of the central bankers and on some of the businesses borrowing the gold turned what started out to be a benign operation into a Pandora's Box of problems. A gold carry trade similar to the yen carry trade of yesteryear ³(which blew up with disastrous results) evolved, and the gold carry trade is likely to blow up in a similar fashion with even more disastrous results. Another complication developed along the way, when world governments and central banks determined that gold prices were a problem for them in controlling public sentiment and decided to do something about it. They saw all of this gold in their vaults, which was sitting idle at times when gold prices spiked on news of world financial or war related chaos. These price spikes were troubling to them, since it made the citizens nervous. Why not devise a plan to loan some of this gold to business firms who would sell into these price spikes and neutralize them. This they did with great success. So much success that they in reality turned gold into just another commodity, which was in surplus supply and which was falling in price (Or so they would like us to believe). Who would want gold when it did not respond to a crisis as it had in the past, and especially when it was falling in price and in addition, did not earn interest? The central bankers were so pleased with their scheme that they started believing their own false ideas and propaganda. All of this mischief occurred because of the above ground supply of gold in central bank hands, which appeared large and burdensome. This activity focused attention on the wrong idea and kept the overlooked item in obscurity until now. It is the old magic trick, where the magician induces you to look where he wants you to look, while he performs his magic in another area. In the current case of the central bankers, their magic is working on a temporary basis, but with tragic future consequences. Space will not allow me to go into more detail on this subject in this article. The reader can obtain more information on this topic, as well as the other items listed in the first paragraph, at websites listed in Endnote⁴.

THE FINANCIAL WORLD IS SLOWLY COMING TO REALIZE

THERE IS A GOLD MARKET PROBLEM

The financial world is slowly coming to the realization that because of central bank folly, coupled with the greed of business entities, much of this 34,000 ton supply has been removed from central bank control, and much of this gold will never find its way back to central bank vaults. The reason? Much of this gold has found its way into commercial uses and is no longer in a form or position to be returned; essentially spreading much of the central bank gold throughout the world, for use in various and sundry gold applications. This entire sordid mess has been exacerbated by the artificially induced low price of gold fostered by official world government manipulation, which has served to increase the yearly consumption of the metal. The traditional gold business has been so distorted by all of these machinations that many prudent market observers believe the entire scheme is about to blow up, causing serious negative consequences not only in the gold industry, but also throughout the world financial system.

YEARLY GOLD SUPPLY AND DEMAND NUMBERS

We now need to review the recent supply/demand numbers for gold. Turning to the USGS official publications⁵, we find they list worldwide mine production for gold at 2,460 tons in 1998, and 2330 tons in 1999. The average for these two years is close to 2,400 tons, so we will use this figure in our analysis. On the demand side, the World Gold Council⁶ had this to say recently about gold demand: "Gold demand remained strong during the first quarter of 2000. Total demand of 795.2 tonnes maintained the level of the first quarter of 1999, when demand went on to set a record for the full year." According to the WGC's latest publication, the average annual gold demand worldwide for the last five years has been 2,938 tons, with 1999 usage at 3,280 tons. We should note that the WGC states in the literature that these numbers are not complete, because they only include statistics from countries they feel have reliable numbers. An estimate for the total world demand would be at least 10% higher than these numbers. In this analysis, we will use a conservative number for world usage of 3,000 tons; fully realizing this figure is probably low by several hundred tons. When we compare these numbers, 2,400 tons of supply and 3,000 tons of demand, we come up with a deficit of 600 tons annually (Other sources project this deficit to be over twice this amount). This deficit has been covered from central bank holdings.

JUST HOW MUCH GOLD REMAINS TO BE MINED?

We have set the stage for the introduction of our missing link. Which is simply, how much gold remains unmined in the crust of the earth for future mining operations? For this number we go again to the USGS⁷. Their most recent official publication states that there remains only 49,000 tons of gold available for future recovery. This should turn on a lightbulb in our consciousness. Let's examine why!

We previously mentioned that from the dawn of civilization only 128,000 tons of gold has been mined. Of this amount, only about 108,000 tons remain (For a discussion of gold throughout recorded history, see Endnote⁸). We just learned that from now until the end of time we have only 49,000 more tons of gold available. That is a frightening revelation. We are consuming gold at the rate of 3,000 tons per year. That means we only have about 16 years of gold available until we run out of gold to mine. What happens then? Doesn't this information make it apparent that it is the height of folly for world governments to be currently wasting our gold reserves? Isn't it also obvious that it is again the height of folly to have an official policy to depress the price of gold when this only increases consumption and moves forward the date when we run out of gold? I think so. An artificially low price of gold increases consumption while simultaneously decreasing production due to unprofitable mining operations. A crisis is brewing, and few people are aware of what is happening. They are focusing on current above ground supply (Which is likely smaller than they believe) and are not looking to the future. This is a perilous error, which will be made even worse by another factor we need to introduce at this point in our discussion, namely, population growth.

THE INFLUENCE OF POPULATION TRENDS

Of all the changes the 20th century has seen, none is more far-reaching than the explosion of human population. One hundred years ago, 1.6 billion people lived on Earth. In 1999, world population reached 6 billion. There has been more population growth since 1950 than during the preceding 4 million years. Population growth accelerated during most of this century. It took all of human history to reach a world population of 1 billion in 1804. It took 123 years to reach 2 billion in 1927, 33 years to reach 3 billion in 1960, 14 years to reach 4 billion in 1974, and 13 years to reach 5 billion in 1987. Adding the sixth billion, a milestone that United Nations demographers calculate occurred in October 1999, took just 12 years. The growth rate has started to slow, but world population still rises by 78 million each year, the U.N. Population Division says. That's like adding a city the size of Philadelphia, every week.

All these people consume a lot of resources. For example, in 1900, only a few thousand barrels of oil were used each day worldwide. Today, humanity uses 72 million barrels a day. Fifty years from now, there will be 8.9 billion people on Earth, according to a United Nations "most likely" projection. The obvious conclusion one can and should reach from all of the foregoing data is that there will be a diminishing supply of gold for a rapidly increasing world population. Something will have to give, and it will probably be the price of gold. A reasonable conclusion is that gold will advance in price in future years to levels which will astonish us.

PER CAPITA GOLD SUPPLY

To place the picture in proper perspective, we have converted the gold supply into ounces from tons, then divided the approximate total supply number for gold by the approximate number of people in the world using 1999 data. This presents us with a per capita supply of gold at the present time of 0.58 ounces, less than one ounce per person. Granted that many of the 6 billion people in the world are too poor to either afford or need gold. Opposing this fact is another fact that offsets it. Much of the world is getting richer and this stimulates more demand from this group. Another factor is legal changes allowing more people in the world to own gold where they previously were prohibited from gold ownership. A significant case in point is China. They have very recently changed their gold ownership laws to allow Chinese citizens to own gold. This is a significant development. There are approximately 1.4 billion Chinese people who can now own gold. Granted again that many of these people are too poor to buy gold, but on the other hand there is a rising middle class in China who can afford gold ownership. Add to that fact another fact that Orientals in general love precious metals, and you can see the potential for an explosive situation. India, a relatively poor country, never the less is known to have within its borders a very large stock of gold and silver owned by the people who prize this ownership highly.

Let's examine these numbers a little more. Let's assume that only one third of the people living on our earth are wealthy enough to own gold. That leaves us with two billion people. Using this population figure with the 108,000 tons available gives us a per capita number of about 1.7 ounces of gold per person. When you consider how much gold is required per capita for industrial use in computers, telephones, other electronic and industrial uses, and lastly for jewelry, it illustrates just how little is available. 1.7 ounces of gold will not produce a very spectacular piece of jewelry. In addition, if all 1.7 ounces is used for jewelry, there will be none left for other uses. Are we getting the picture? There is not a tremendous amount of gold available currently, the future supply is finite and not large compared to what is available now, and we are mismanaging the gold resources available to us. This is not either a pretty or a healthy picture.

WHAT WILL THE SKEPTICS SAY?

I feel certain there are skeptical readers who are saying to themselves we have heard these scare stories before for other materials, and humankind has been smart enough to overcome the problem and find more supply. That may happen in the case of gold, but I doubt it. Gold is a rare metal and that has made it a precious metal throughout history. It is hard to find gold in the natural world and most, if not all of the easy to find gold has been found. What remains is found either deep beneath the surface or in ores containing very small amounts of gold. These resources are often in remote and hostile areas. All of these mean a costly extraction process. These facts suggest that the remaining 49,000 tons will only become available at higher gold prices, when mining companies can earn a profit on the gold produced. Currently, many gold companies have gone bankrupt, others are holding on but are in a precarious position, all this contributing to smaller gold production in the short-run, lowering the per capita supply of gold as population continues to increase. This is not a condition that can continue indefinitely.

WE LIVE IN A DYNAMIC AND RAPIDLY CHANGING WORLD

The world is a dynamic place. The problem described here will take many twists and turns as we proceed to the day when there is no gold left in the ground to mine. Mining methods will improve. Geologists will find a little more gold to mine, but at ever increasing cost. Other materials will be substituted for gold, but because of the intrinsic qualities of gold, this substitution process will be difficult if not impossible. The important points to take away from this discussion are these. The gold supply available on planet earth is finite. Based upon reliable data, we can forecast a range of dates (10 to 20 years out) when we will run out of new gold to mine if present trends continue. Therefore, current trends will not continue indefinitely. Changes will have to be made to alter the trends. Most reasonable scenarios suggest one of these changes will of necessity be a higher price of gold going forward. This will have the twin effect of lowering consumption and raising production.

SUMMARY

The world has focused on the above ground supply of gold and the fact that much of this gold is currently held in central bank vaults. They have come to the erroneous conclusion that these supplies are burdensome and are worthless when allowed to remain unused in the bank vaults. The central bankers and world governments have devised flawed plans to correct what they perceive as a problem. This will prove in the future to be a monumental error, especially when combined with the knowledge that future supplies of gold are finite and can be shown to likely last only for another 20 years or less. The world is going to run out of new gold, and the road to that time will see a slowly accelerating realization that any old or current gold supplies are going to be increasingly more valuable, coveted, and hoarded. It will be far from the first time that the world has witnessed an apparent over-supply turn into a shortage. History has many examples of these occurrences. They usually end badly.

A FINAL THOUGHT

At the beginning of this article, an ancient rule was quoted: "HE WHO HAS THE GOLD, MAKES THE RULES". The working of this rule has won out over the contrary efforts of all government efforts over the last several thousand years. Evidence suggests to this author that the rule will work again and the current effort to push gold to the background and fiat paper currencies to the forefront will fail.

There is one additional Endnote⁹ worth mentioning.

DISCLAIMER

The author is not an investment advisor. The information contained in the above article is designed to provide information in regard to the subject matter covered, and not as specific investment advice. Readers are cautioned to consult with their own counsel, investment and financial advisors before making any decisions based on the content of this article. The article is provided solely for educational purposes and to call the attention of the reader to the issues discussed. The author shall have neither liability nor responsibility to any person with respect to any loss or damage caused, directly or indirectly, by the opinions expressed or content provided. Great effort has been made to provide accurate and timely material. There may be mistakes, both substantive and non-substantive, and the nature of the subject matter is changing continuously. The author has relied on the data obtained from the sources listed. If the source data is in error, that error has been passed through to this article. The author shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, directly or indirectly, by any material contained in the article.

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Endnotes:

Monetary Gold Mismanagement in the Twentieth Century https://www.gold-eagle.com/editorials/jmiller121497.html

http://minerals.usgs.gov/minerals/pubs/commodity/gold/300300.pdf

http://members.home.com/tinyeung/sbm/carry4.htm

https://www.gold-eagle.com/editorials_00/hathaway052700.htm

https://www.gold-eagle.com/editorials.html

http://www.gold.org/, http://www.goldensextant.com

http://www.prudentbear.com

http://minerals.usgs.gov/minerals/pubs/commodity/gold/index.html#myb

http://www.gold.org

http://minerals.usgs.gov/minerals/pubs/commodity/gold/300300.pdf

http://www.gold.org/Pages/Misc1f.htm

 

Go to this site and download the file named GDBC located at the top of the home page (119 pages in pdf format). http://www.gata.org/index.html

 

© Copyright 2000 by Joseph M. Miller – All Rights Reserved

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