Inside the Gold Production Problem - TheStreet

Inside the Gold Production Problem

Gold prices reached an all time high this year of $1,226 and in the last decade prices have soared from $250 to over $1,110 an ounce. What is driving prices higher? Inflation fears, a weakening U.S. dollar, increased investor demand making gold its own asset class; all of these are variables contributing to gold's higher prices. One thesis making headlines recently is slowing global gold production. Gold production has been in steady decline since 2001 shrinking supply as demand grows supporting higher prices.
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NEW YORK (TheStreet) -- Gold prices reached an all time high this year of $1,226 and in the last decade prices have soared from $250 to over $1,110 an ounce. What is driving prices higher?

Inflation

fears, a weakening

U.S. dollar

, increased

investor demand

making gold its own asset class; all of these are variables contributing to gold's higher prices. One thesis making headlines recently is slowing global gold production. Gold production has been in steady decline since 2001 shrinking supply as demand grows supporting higher prices.

See how global production is slowing and how that will impact gold prices in 2010 and beyond>>

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Historically South Africa has been the largest producer of gold in the world followed by Russia. Although production saw an uptick in the 1990's from countries like the U.S. and Australia, world gold production has been in steady decline since early 2000.

Gold production covers a large area of Africa, but the majority is in South Africa. The country also produces silver, mercury and fluorspar, a mineral made of calcium floride.

Gold production in South Africa peaked in 1970 at 1000 tons annually as gold prices climbed above $100 an ounce. Production has been in rapid decline ever since.

South African reserves and production decline at a similar rate after spiking in 1970 to a high of 1000 tons annually. Reserves indicate how much physical gold the country has in its banks. Production is currently still declining while reserves have remained consistent since 1990 as the country holds onto more gold to diversify its holdings.

Gold production in Ghana, on the west side of Africa, has been increasing since 1990 reaching an annual high of over 80 tons. However, analysts expect that in 2020 production will rapidly decline.

Gold production in the U.S. has expanded to mines outside of California with a significant number found in Nevada, Alaska and Arizona.

U.S. gold production took off as gold prices made their first bull run in the 1970's-1980's as prices reached $625 an ounce. Simultaneously, annual U.S. gold production reached a high of over 350 tons. But in 2001 gold production and prices reversed their correlation. U.S. production slowed dramatically as gold prices entered its current bull market this time hitting an all time high of $1,226.

From 1981 through 2007, the U.S. produced 210 million ounces of gold with Nevada producing 146 million ounces of the total.

Canada and Latin America are also strong producers of gold as well as silver and other precious metals.

Canadian gold production appears to have an inverse relationship to gold prices. As gold remained flat, production spiked in the 1940's and remained strong for 20 years. Production then slipped during gold's first bull market in the 1970's-1980's. Production ramped up again in the 1990's as gold struggled in the $300-$500 range. As prices skyrocketed since 2001, annual Canadian production has slipped from its high of 180 tons.

Australia is another huge gold producer. According to reports, the world's biggest gold nugget was found down under in 1869. It weighed approximately 163 pounds.

Australian gold production grew steadily at around the same time gold entered its first bull market in the 1970's-1980's. As gold prices dipped back down to the $250 level, however, Australian gold production hit a high of over 300 tons. Australia's gold production has been in decline since 1999.

Brazil gold production tracked gold prices' L shaped bull-run in the 1970's-1980's very closely. Brazil production peaked in the late 1990's at over 100 tons annually after which production slipped dramatically to 40 tons. Inversely gold moved from almost $300 to $1200 an ounce.

Gold production in Peru is more nascent than other countries but has seen a rapid rise from 1970 until 2005 as gold prices spiked. In the mid 2000's annual production in Peru reached a high of over 200 tons. Production has since declined.

Mexican gold production has been slowly rising since the 1970's so far reaching an annual high of 40 tons. Analysts' forecasts are that production will keep growing before tapering off in the mid 2020's. Annual gold production is not expected to exceed 120 tons.

Chile gold production has rapidly risen since the 1970's to a high of over 50 annual tons in 2000. Although production has slowed in this past decade, expectations are that gold production will keep climbing to over 70 tons annually in the mid 2020's before slowing.

Russia is a huge gold producer with 21 deposits under development.

Annual Russian gold production is hard to track, but the majority of sources indicate that production grew steadily between the 1950's and 1990. All sources indicate that production plummeted after 2000.

Uzbekistan annual gold production increased in the 1990's to 100 tons annually. Production is expected to decline rapidly in the mid 2010's.

Gold has reportedly been produced in China since 1091 B.C. and the country remains an ardent producer. China's central bank has also become a net buyer of gold in the past 10 years as it diversifies its reserves. China currently holds over 1,050 tons in gold and is rumored to increase its reserves to 10,000 tons in the next 10 years. China not only produces gold but copper, silver, lead and zinc - metals key in industrial production.

Annual China gold production has not hit its peak yet. It is currently producing close to 300 tons a year. Production is expected to peak in mid 2010's and then slowly decline.

Indonesian gold production spiked in the mid 2000's to over 160 tons annually. Production has slowed to under 100 tons a year but is expected to ramp up and hit another peak in 2020 of about 170 tons after which annual production is expected to slow.

Papua New Guinea's annual gold production also has more room to run in the short term. Production has been increasing since 1970 to a high of over 70 tons a year. Production is expected to reach 90 tons annually by 2020 and then decline through 2060.

Global production is slowing in the major gold producing countries. Although some countries have more room to run in the next 30 years, overall global tonnage is steadily decreasing. Stay tuned for TSC's next gold slideshow where we examine the relationship between slowing production, gold prices, population and the U.S. dollar.

Watch my video with James Turk, author and founder of GoldMoney, who thinks gold will hit $8,000 but argues that gold production has nothing to do with prices. See what fundamentals he thinks are really driving gold.

Ignore Gold Production Numbers

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Written by Alix Steel in New York

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