Gold Production Overview Feb 07 Part 1

Supply

Gold is unlike most other commodities in that practically all the gold ever mined still exists mainly in the form of jewelry, coins or bullion.

Annual gold production is not increasing despite a considerable rise in price since the start of this century.

The World Gold Council has stated that supply of gold is unlikely to increase in the foreseeable future therefore no fear of the price being depressed due to over production.

South Africa is the world’s largest producer and according to Gold Field Mineral Services (GFMS) its production fell by 7% in 2005 and global production by 2%.

In 2004 global total annual production fell by 114 tonnes, the largest fall since 1945.

GFMS forecast slight increases in mine production and scrap gold for the near future.

Sources suggest gold production not expected to increase significantly in next 2-3 years.

As a result of low prices for the 2 decades prior to the start of 2000, there have been years of under investment in exploration and the development of existing mines.

Even though gold prices have tripled in the last seven years production has been unable to keep pace with demand as the main factor is the very considerable time it takes to bring new mines into production.

A recent report from a Russian news agency states that gold production in Russia in 2006 was down from 157 tonnes to 152 tonnes.

Demand

The fast growing and newly affluent countries of the world, in particular India, China, Brazil, Russia and Middle East are all evidencing a desire for gold both from their central banks and the jewelry trade.

The Chinese have traditionally had a high regard for gold, restrictions in force since 1949 under Mao have been relaxed and the public can now invest in gold.

As exchanges are being encouraged to open in a number of Chinese cities it is a reasonable conclusion that the authorities expect a vigorous market to develop.

A number of influential senior Chinese officials are calling for an increase in central bank gold reserves to hedge against a possible US$ decline

China holds a vast amount of dollars in currency and other US$ related paper assets.

30 years ago under Mao, 95% of total Chinese foreign reserves were held in gold the figure is now estimated to be only 1.3% at circa 600 tonnes.

Many other countries hold an average somewhere between 3% and 5% in gold

The US is estimated to hold over 8,000 tonnes so China has some way to catch up!

Historically gold has tended to follow and accumulate in those nations with the greatest economic power and its present flow is from the United States and Western Europe to Asia and the oil producers of the Middle East and elsewhere.

India is the world’s largest consumer of gold where the metal plays an important role in the every day lives of the people.

Gold is traditionally the most substantial part of a brides dowry and is the most common wedding gift

The Indian wedding season is from December to May when eight million marriages take place, no coincidence then that it is also the peak period for global demand.

With an increasingly prosperous and growing middle class of 250 million out of a total population of over one billion there can be little doubt that demand will continue to grow.

Currently India consumes approximately 30 % of the world’s entire annual production at circa 720 tonnes.

Consumption is expected to rise to 910 tonnes by 2010 and to 1150 tonnes by 2015 according to the Indian Chamber of Commerce forecasts.

An increasing amount of the yellow metal is finding its way to the Middle East for political reasons and fears for the value of the dollar.

For example gold imports to Dubai are up by near 40% from 373 tonnes in 2003 to 522 tonnes in 2005 and the signs are that this will continue to increase.

The growing distrust of US foreign policy in the Middle East and Asian OPEC countries is increasingly leading oil producers to demand payment in gold or euros.

If this process continues then the dollar will gradually become weaker inevitably leading to an increase (in US$ terms) in the price of gold.

Is it any wonder that the mood of the 8,000 plus attendees at the recent (January) Vancouver Gold Show was cautiously optimistic for the bull market to continue through 2007?

Watch out for Part 2 in the next few days when we look at the future for gold and try to find an answer to an unconfirmed announcement broadcast by the BBC world news on Thursday February 1st that the IMF is proposing to sell 400 tonnes of gold bullion from its reserves, and if true, its effect on the market.