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Page added on January 10, 2015
Peak Gold Has Arrived
While there is a lot to pay attention to in the markets in the short term, is there a longer-term story in gold that we should be watching?
The CEO of Goldcorp (NYSE: GG), Charles Jeannes, recently put forth a case for peak gold. He argued that miners are not discovering as much of the yellow metal as in the past. This would, of course, lead to falling supplies of gold in the future and therefore a higher gold price.
We hear talk about peak oil (although not as much these days), but we rarely hear about the idea of peak gold.
A chart released by Randgold Resources (NASDAQ: GOLD) shows that while world mine production has been steady over the last couple of decades, new gold discoveries have plunged in recent years.
It’s interesting that there is not greater production and more gold discoveries, especially considering the bull market in gold from 2001 to 2012.
Economists say the best solution for high prices is high prices. This just means higher prices lead to greater supplies and less demand.
But in the case of gold pulling back over the last couple of years, it’s more a case of less demand. It’s not because of a significantly increasing supply or even the anticipation of it.
Oil vs. Gold
The prices of oil and gold have tended to be some what correlated over time. The correlation isn’t as much as with gold and silver, but there is definitely a history of oil and gold moving in tandem.
This hasn’t been the case over the last several months. Oil prices have been plummeting, while gold prices have remained fairly steady.
The reason gold and oil have tended to move together is because they are both commodities and highly sensitive to monetary policy. We talk about the supply and demand for commodities and other goods, but we also have to consider the supply and demand for money.
When there is a significantly increasing supply of money or a decreasing demand for money, commodities will tend to go up in price. If the demand for money is increasing or the supply of money is decreasing (or only increasing slightly), then commodities tend to go down in price.
We can certainly believe that monetary policy has played some kind of a role in the fall of oil prices. It was easy money that helped push the price up, so it is not surprising to see tighter money (which we now have since the latest QE program ended) push prices down.
But almost nobody was expecting oil prices to fall so hard and so fast. It is likely a combination of decreasing global demand and either increasing supplies or expected future increases in supply.
The decreasing global demand is easy to pinpoint because Japan and much of Western Europe are in recession or worse. And the Chinese economy is slowing (not counting the Chinese stock market).
The supply of oil has been increasing, which many people did not predict a few short years ago. We have been hearing that the world is running out of oil for many decades now.
Perhaps the oil that is cheap and easy to get out of the ground is running out, but new technologies are making new supplies possible, particularly with the shale oil boom.
Shale oil is more expensive to extract, but it is there, and it is real.
There is not an equivalent of shale oil for gold. If the gold price goes up to $2,000 per ounce, it’s not as if there are all of these gold mines just waiting to be dug up.
In this sense, the idea of peak gold is more intriguing than peak oil, at least for investors. We know there is a lot more oil to be used at some price. We don’t really know the same for gold.
Peak Dollars?
There is no such thing as peak U.S. dollars.
Ben Bernanke, several years before becoming the Fed Chairman, stated the following: “… the U.S. government has a technology, called a printing press — or today, its electronic equivalent — that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
On this, Bernanke told the truth. The Fed can create new money out of thin air at any time. Its only limit is its reputation and that of the dollar.
The Fed doesn’t want to go into hyperinflation because this would destroy the dollar and the Fed officials’ own power (along with their pensions that are denominated in dollars).
But other than the limits of hyperinflation, the Fed really can and will create as much money as it thinks is necessary, whether it is to bail out banks or fund the deficits Congress runs.
As mentioned before, as the supply of dollars increases, commodity prices tend to increase as well. This can be offset by increasing demand for dollars, but that cannot be sustained long term.
The virtually unlimited ability of the Fed to create money out of thin air is still the most compelling reason to own gold. Owning gold is your protection against a bad fiat currency.
The idea of peak gold is a secondary reason to own gold.
The U.S. dollar has had a strong year. It is up against most of the major currencies of the world. Of course, it is not great, but the other fiat currencies are junk. The Japanese yen in particular is now a terrible currency to own, and the euro isn’t much better.
Despite the rise in the U.S. dollar, the gold price has held up reasonably well. Imagine the run gold could have if the U.S. dollar started going down again in relation to some of the other currencies.
Central Bank Inflation
Is there peak gold that will become evident in the years to come? We can’t really answer that.
But we do know there is no peak dollar, as the Fed can essentially create as many as it wants.
There is also no such thing as peak yen or peak yuan or peak euro. Investors worldwide are going to discover that they can’t trust the money that is issued by their own governments and central banks.
For this reason, we should expect the demand for gold to go higher in the coming years. When all of the major countries in the world are debasing their currencies at a staggering rate, people will be left with few alternatives.
We should not even be surprised if the Fed goes back into money creation mode if the stock market goes down enough or the U.S. economy falls back into recession. Do you really think Janet Yellen and the Fed are going to sit on their hands if the U.S. economy shows significant signs of weakening?
You should bet on more central bank inflation with gold in your portfolio. If this idea of peak gold is true and new supplies start to diminish, then it will just be icing on the cake as more people demand gold.
Until next time,
Geoffrey Pike for Wealth Daily
24 Comments on "Peak Gold Has Arrived"
trickydick on Sat, 10th Jan 2015 11:03 am
I’ve been buying the Silver ETF, SLV. I would rather buy physical, but the transactions costs and the spread are just too much to stomach. If I have to pay that both ways, it will cut into the profit margin too much. Yet, getting some physical silver, for use as currency during a SHTF scenario, is still on my to do list.
I also just realized you can buy copper coins in a variety of sizes. Those could come in handy. And a bag of old US coins that contain 90% silver would also be very cool to have. I have a small collection of historical coins and bills that I use to try and educate my kids with.
I’ve been watching the Hidden Secrets of Money video series: http://hiddensecretsofmoney.com/videos/episode-1 It’s all the same information we’ve all heard before, except that he adds in his own take on the swindle of paper money.
He refers to the Greek devaluation of ~500 B.C., don’t quote me on the dates. But there is a reference to a Greek play (The Frogs) where they talk about the ‘old money’ and the ‘new money’ and how the country seems to be filled with and run by ‘people of low birth’.
The bottom line is that this devaluation game and swindle by the ruling class against the middle class has been going on for thousands, not just hundreds of years, as I’d previously thought. I mean, I knew of the Roman devaluation, but I thought maybe that was just an anomaly.
The ONLY defense for us working class folks is to continuously accumulate precious metals. And hold on to them. I once bought gold at $425/oz, but didn’t have the rest of my financial situation nailed down and had to sell it. At a minimum, precious metals should be a big portion of your portfolio. Real estate should be in there as well. Bonds and stocks shouldn’t be the whole portfolio.
dave thompson on Sat, 10th Jan 2015 11:23 am
Gold and silver have no value if I have the food/shelter necessary to survive in a worse case scenario. However it could be a hedge in a market crash of fiat currency. Choosing to eat my food or to own gold is an easy choice to make, if food is scarce, you can keep your gold.
Karel Capek on Sat, 10th Jan 2015 12:44 pm
Peak gold … a myth.
It may well be true that terrestrial gold mines are not being formed. But, there are vast quantities of gold, both soluble and insoluble, in the oceans. By one well reasoned estimate, the sum of all gold in the Earth’s core could cover the entire planet with approximately a meter of the yellow metal … but a fraction of that seeping through sub-oceanic crevices could make for a very nice nest egg.
After that, we might look to the skies.
In short, there’s plenty of gold. The trick will be harvesting that wealth. And platinum. And other rare earths.
Davy on Sat, 10th Jan 2015 12:56 pm
Tricky, your electronic traded precious metals are still digital. I understand why you are buying them but they still can vanish. Physical is important as a store of physical value. The storage and transactional cost are high. Who knows what that value will be but precious metals have always had value. I would own some physical gold and silver. Do not value it just take it off the portfolio so to speak. Treat it as a nest egg. I might mention physical gold transaction cost discourage spending the gold. It is a good way to encourage savings.
Dave, if I were in a collapse situation and I had a surplus of apples if you wanted some I would take gold in trade. I disagree with those who down play gold as a trade item for food in a food shortage situation. There will always be surpluses that need a currency to facilitate trade besides just bartering food for food.
Richard A. Kerr on Sat, 10th Jan 2015 1:27 pm
Gold peak production of 2000 was followed by an undulation of the past few years that was a response to the price runup. Gold is on an undulating plateau with no relief in sight. Too bad you can’t frack for gold.
Richard A. Kerr
Solarity on Sat, 10th Jan 2015 1:34 pm
One silver quarter should always buy one loaf of bread, or two pounds of apples, as it did around 1950. Containing about one-fifth ounce of AG, it has the same value today, being worth about $3.20. Fifty silver quarters is equivalent to about an eighth ounce of gold. So an eighth ounce of gold should buy one-hundred pounds of apples! Trading gold for apples will be a difficult transaction.
John on Sat, 10th Jan 2015 1:37 pm
You do both. Store food and physical gold. When dollar collapses, physical gold, silver will be used as money.
GregT on Sat, 10th Jan 2015 1:53 pm
An ounce of gold bought a man an attire worthy of doing business in during the Roman Empire, it still does so today.
In 1972 the price of a brand new Corvette was around $5000 US dollars, an ounce of gold was around 70 bucks. It took approximately 72 ounces of gold to buy a new Corvette.
In 2015 the price of a brand new Corvette is around $85,000 US dollars, an ounce of gold is 1200 bucks. 72 times 1200 equals $86,400.
Although gold can be subjected to market forces, it is generally fiat currencies that fluctuate in relationship to Gold. An ounce of Gold is an ounce of gold, fiat currencies always lose value over time.
GregT on Sat, 10th Jan 2015 2:40 pm
Tricky,
Copper has also maintained it’s value over time, but does not meet one of the key requirements for a currency. It is not portable in any quantities worth lugging around.
“I mean, I knew of the Roman devaluation, but I thought maybe that was just an anomaly.”
We used to use silver in our currencies here in NA. In the late sixties our governments started reducing the amount of silver in our coinage. A hidden tax. Most people didn’t have the slightest idea what that meant, they still don’t. In 1971 Nixon slammed shut the Gold window. Our currencies have been on a steady devaluation ever since. There is only one currency that has withstood the test of time. Precious metals. All other currencies have eventually collapsed.
paulo1 on Sat, 10th Jan 2015 2:50 pm
I had this discussion with a friend this morning who is always looking for ‘the one’; the one investment he can obtain that will take him into a secure retirement. I told him I am the wrong person to ask as I don’t trust anyone elses hype.
It is the old story of the ant and the grasshopper. He has all the toys and warm vacations, I have land, tools, guns, and money in the bank. Food. He is waiting for gold to rise and wonders if he should buy some more? I simply say I am the wrong person to ask for advice.
Fiat currency degrades with inflation, no doubt about it. But invested safely it seems to keep up and it is always possible to add to savings and investments. Plus, in a deflationary environment, which we seem to be heading for, cash is king.
Davy on Sat, 10th Jan 2015 3:11 pm
Solar, you are using subjective values in a bias way. Like I said who knows how much value gold will have in a collapse but it will have some value regardless I can assure you. I currently look at a 1/10 oz gold coin as a $100 bill. In a collapse it may be whatever someone gives me for it and there will be someone. 100lbs of apples makes 6 gallon of cider. Is that reasonable? 20 1/10 oz coins fit in my money belt. That is 2000 lbs of apples per your calculation. Try hauling that around.
GregT on Sat, 10th Jan 2015 3:12 pm
“Plus, in a deflationary environment, which we seem to be heading for, cash is king.”
Absolutely, but deflation ultimately leads to hyper-inflation. Timing is everything.
https://gold-forum.kitco.com/showthread.php?93752-Deflation-Precedes-Hyperinflation-Long-Answer&highlight=deflation+leads+to+hyperinflation
Davy on Sat, 10th Jan 2015 3:13 pm
Paulo, I would definitely have some physical cash too because someday the atm may not work. I would also be concerned about bail-ins at some point stealing your deposits. A problem with cash alone is will it be useless someday.
GregT on Sat, 10th Jan 2015 3:33 pm
I think that where a lot of people get confused, is they are looking at gold from in investment point of view. Gold has historically been a hedge against inflation or a store of value (wealth).
Pay off debt, ( not necessarily a mortgage) purchase arable land, tools, and provisions, and always have at least a one months supply of cash on hand. If extra cash lying around invest in whatever your risk tolerances are, but remember, you pay your money and you take your chances. I know a few who have done very well in the markets, I know of more who have lost their shirts.
DiscoPants on Sat, 10th Jan 2015 5:05 pm
My precious metal of choice is 308 165 grain
Davy on Sat, 10th Jan 2015 5:17 pm
Disco, that is a great investment and one that solves the problems of the risk of home storage. I am going to get another 1000 rounds of 308 soon.
DON on Sat, 10th Jan 2015 6:34 pm
you are all right. Gold is gold and has been for 3000 years, paper money isn’t worth what it is printed on. I buy spendable 99.9, 24 carat, Londan bullion Exchange certified, gold. From a company that is second to none in this field. Also, I hold my own GOLD.
Contact me if you like
GregT on Sat, 10th Jan 2015 6:45 pm
I roll my own 308. Too costly here to buy, besides my 308s are both bolts. I run 7.62 x 39 in my SAs, love the round. Need to pick up more buck shot.
Also have around 100lbs of lead and I cast my own HPs in 9mm.
Go Speed Racer on Sat, 10th Jan 2015 7:46 pm
If 72 ounces of gold will buy a Corvette for $86,400, but the Fiat currency always loses its value? What if a Fiat is worth less than a Corvette? Can I buy a Fiat with Fiat currency? 🙂
Makati1 on Sat, 10th Jan 2015 9:11 pm
Watching Time Team on YouTube excavate a castle moat in the UK and finding a large gold coin under 1000+ years of dirt and mud was interesting. That it came out of the ground shiny and new as the day it was lost showed me one of the reasons it is in demand. It is one of few metals that is not harmed by it’s surroundings or age.
I do not own any gold, other than a few class rings, but I may buy a few 1/10 oz coins if I have the cash left over from building our farm.
Speculawyer on Sat, 10th Jan 2015 10:41 pm
“CEO of Goldcorp (NYSE: GG), Charles Jeannes, recently put forth a case for peak gold.”
Well, he has no conflict of interest does he?
GregT on Sat, 10th Jan 2015 11:46 pm
It most certainly does look like peak gold production was reached in 1990. I suspect though that people will keep mining gold for as long as it is profitable to do so. Unfortunately for many miners at the moment, the cost of extraction is higher than the spot price of gold.
For many of the people in Zimbabwe right now, panning for gold is the only way for them to be able to afford food. You might not be able to eat gold but…………..
https://www.youtube.com/watch?v=7ubJp6rmUYM
Mike999 on Sun, 11th Jan 2015 10:07 am
Solar, rooftop solar is a better investment now.
Especially in the bottom 10 southern states.
The Fed can expand the money supply, but you won’t see inflation unless those funds get into circulation, and the bailout of the banks isn’t in circulation, so no inflation. The bailout of the banks was specifically to make them whole, immune to short sellers. And that’s what the Fed accomplished, they protected the existence of the banks.
Gold is a Dead Weight Investment, in that it’s an inflation and currency hedge, but does not grow like stock. Gold is a drag on your investment portfolio, just like bonds.
Maximum growth is 100% stocks, till the day you die.
A portion of your portfolio should be making yourself “prep”ed. But, don’t depend on a crisis to get rich.
Mike999 on Sun, 11th Jan 2015 10:13 am
Modification: 100% invested in stocks is for real men.
If your a pussy who sells during recessions, depressions and crashes, then stay out of stocks. Stick with gold.