Sunday, 9 August 2009

How do we argue the case for gold mining?

The output of the world’s gold mines fell by 4% last year, according to estimates in a new report from the GFMS, a consultancy. More than half the 88-tonne fall in production was accounted for by a slump in gold mining in Indonesia. Supply from South Africa, once the world’s largest producer, fell by 14%—the biggest drop since the Boer War. Last year’s fall was partly owing to new safety procedures, which helped reduce the industry’s fatality rate. Skills shortages and power cuts also affected operations. Australia’s output fell by 14%, too, amid reports that some fledgling mining firms faced closure because of scarce credit. Of the world’s six big producers, China, Russia and Peru all increased output last year. The total amount produced last year was 2356 tonnes.
As everything we use is either mined or grown, it is generally easy to argue the case for mining most commodities, but not so easy for gold.
It has been estimated that 158,000 tonnes of gold has been mined over history, of which around 65% has been mined since 1950. Although gold is used in jewellery (about 70%), and has industrial uses, such as dentistry and electronics (around 11%), about 13% of annual production is used for investment, and around 20% of all the gold in circulation is held by central banks. Think about it- that is 13 years world production of gold at current mining rates.
In a note entitled No more space for Gold Bars, Swiss news website 20 Minuten Online reports that Swiss banks are running out of secure storage space for gold bullion held by investors and institutions in their vaults. Fears of hyperinflation, the economic downturn and the success of gold index funds (ETFs), which are supported by physical gold, has led to a run on precious metals investment - and in gold in particular, and in the necessary secure storage space in which to hold it.
One Swiss bank, earlier this year, reported that it was having to relocate some of its stored silver bullion to another site to make room for gold. The Zurich Kantonal bank put this down to the success of its gold ETF.
The website reports another Swiss investment banker despairing "We have the need to store more gold for our clients but are finding it difficult to find secure storage facilities". Gold storage makes high demands on security which is what is making the gold holding task more difficult. Few banks will divulge exactly where their gold is stored for security reasons. Another banker reported that his bank still had space but that it is beginning to run out.
When you consider that a 12.5 kilo gold bar occupies only about the same amount of space as a large carton of milk, we are talking lots of gold here! How do we justify to laymen the vast technological and human effort in mining gold from deep undergroung, refining it, casting into bars, and then storing them underground again? Hope to have comments.


  1. I think gold will become more valuable as inflation increases and USD drops.

  2. I have had similar thoughts about gold but more from the extraction end: very low grades and the extraction techniques used. Hopefully some time in the future we will see a completely different system.


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