Gold supplies won’t run out

A week ago, Eugene King, a Goldman Sachs European metals and mining analyst, wrote in a research note that the world has about 20 years each of minable reserves of gold, diamonds and zinc. He further stated that there were only about 40 years of reserves left of platinum, copper and nickel. In a Goldman Sachs slide show released last year, the company stated that 2015 would be the peak year of newly mined gold production.

Such statements are inaccurate in multiple directions. While it is true that gold mine output in South Africa has been on the decline for several years, new mines have opened in other parts of the world. As one mine developer told me years ago, most of the world has not yet been explored for recoverable commodities, including gold. At first, geologists explored the most convenient locations or those close to established mines. As advancing technology and rising prices permit, geologists expand their search to less accessible areas (“Places where no one has yet gotten around to checking out.”).

As a commodity gets scarcer, prices tend to rise. Higher prices tend to reduce demand and also make new sources (i.e. new reserves) of the commodity economically practical to recover. Therefore, if, for example, gold’s price is set in a free market, higher prices will reduce demand and expand supply compared to current levels. Theoretically, just this action and reaction would extend minable gold reserves.

There is a current example from the oil market going in the opposite direction that proves this point. As the price of oil has fallen, the reserves of major oil companies have decreased. No, the oil hasn’t gone anywhere. Instead, the costs to obtain some of the existing oil would be higher than current prices. Therefore some oil is not now profitably recoverable, and for now, cannot be counted as reserves. However, if the price rose, some or all of this oil would again be counted as available reserves.

Let me share a real life example of how the definition of reserves can change. Almost 10 years ago, I toured the Bunker Hill mine near Wallace, Idaho. The mine had produced silver, lead and zinc, but had shut down when the value of the metals in the ore did not cover the costs of mining it.

After it shut down, the prices of lead and zinc rose almost tenfold and silver tripled. A new buyer purchased the mine. As he showed me the operation, he pointed out a seam close inside the mine entrance. He told me that the lead, silver and zinc in that seam would only yield $12 per ton of ore at the time the mine closed. Since it cost $40 per ton of ore mined, the seam was never worked. Yet, at the time I toured the mine, these same metals would yield $70 per ton of ore. That meant that the metals in that seam could now be counted as part of the mine’s reserves. The reserves did not change because of a discovery of new seams to develop. Rather, reserves increased because the value of a known seam had soared.

Another reason that King’s analysis is faulty is that it does not take into account technological advances in the future that will make it possible to access sources of supply that are not economically available today. For example, a French and an Israeli company are each preparing to recover gold from wastewater. By their calculations, if accurate across the US and not only in their study samples, there is about $13 worth of gold per person per year that gets dumped into the sewer system. Most of this is from industrial rather than consumer sources. Perhaps one day it will be economically feasible to recover this large supply of gold in many parts of the world. There are even trace amounts of gold in ocean waters.

Thinking even further into the future, another potential new source of commodities would be asteroids. The probability is more than zero that someday it will be possible to attach a solar-powered sail to an asteroid and move it over a period of years to a safe place nearer to Earth to totally break down into its component parts. A typical asteroid one kilometer on a side, would have trace amounts of platinum, for instance, that would add up to a quantity of platinum greater than the entire amount of platinum mined in history to date. Just think about how much gold could be recovered from a single asteroid.

Another angle that this “expert” may not have considered is the greater efficiency in the use of scarce commodities over time. The use of gold for electrical contacts, as one example, consumes a lot less gold by weight than was used for the same purpose 20 years ago. Work on such improved efficiencies is expedited if the price of the related commodity rises quickly.

In sum, unlike Eugene King, I just don’t see that gold supplies will ever be exhausted.
Decades ago, the late Julian Simon foresaw the growing abundance of commodities for all of the reasons I have listed. He has since been proven right.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns).His Numismatic Literary Guild award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).