Is the gold pric of today `good as gold’?

For at least 6,500 years, gold has been treasured for its beauty and rarity. The enormous amount of labor put into gold production since prehistoric times has yielded cumulative world production of gold of only some 130,000 tonnes. This amount may seem like a lot of gold, but it amounts to a cube of pure gold only 18.9 metres on each side. A relatively small percentage of this gold has been lost to humankind over the years in shipwrecks, long forgotten gold hoards, abrasion wear of coins and jewelry, dental gold, unrecovered gold plating and the like. We still have nearly all the gold ever produced.

Almost 75% of the world’s cumulative gold output has been produced during the first 90 years of the 20th century. At current world rates of production, the world’s stock of already-mined gold is increasing at about 1.6% each year.

Some 7% of the world’s cumulative gold production has come from Canadian mines and placer deposits. Canada’s gold production, which amounted to 159.5 tonnes in 1989, accounted for almost 8% of total world gold production in that year. The preliminary estimate of Canadian gold output for 1990 is 165 tonnes. Only in 1940 (165.2 tonnes) and 1941 (166.3 tonnes) did Canadian gold production exceed this amount.

With the price of gold fixed by the U.S. government at US$35 per troy oz. from 1934 until the late 1960s, Canadian gold output declined, after 1941, slowly at first until about 1960, and then more rapidly as ore reserves at existing mines (mostly discovered between 1900 and 1937) were depleted; few new gold mines came into production to replace them. Canadian gold output bottomed at only 50.6 tonnes in 1980.

Once the U.S. government allowed world market demand to set the price of gold, the price began to rise. It peaked briefly on Jan. 21, 1980, at C$994 per oz., equivalent to C$1,624 in 1990 dollars, or almost four times the price at the end of February, 1991.

The price of gold remained high through most of the 1980s, but dropped by almost one-third in 1988 and 1989. This decline seriously affected the production economics of many of the gold mines and other gold deposits that had been discovered during the gold exploration boom of the 1980s. It also made exploration for new gold deposits a much less attractive venture than it had been throughout the 1980s.

During 1990, gold averaged C$450, down from C$592 in 1987. In the first two months of 1991, the gold price averaged C$434. The gold prices reached in the past three years seem low relative to the prices in most of the 1980s. However, it is interesting to look at price from a longer-term perspective.

Although Canada was apparently not officially on the gold standard, the value of the Canadian dollar was held from 1867 (and before) at a level relative to the British pound and U.S. dollar (which were both on the gold standard) that maintained the gold price at C$20.67 per oz., with the exception of the periods 1918-1923 and 1931-1933. After the U.S. government raised the price to US$35 per oz. in January, 1934, the annual average Canadian dollar gold price remained within the range C$34.99-35.10 from 1935 until the start of the Second World War.

During that war, the Canadian dollar was fixed at US$1.00 = C$1.10, so the gold price in Canada was effectively fixed at C$38.50 per oz. In 1946 gold averaged C$36.75 and in 1947, C$35. By 1947, inflation in Canada had reduced the purchasing power of the Canadian dollar to only about 70% of its 1939 equivalent. Looked at another way, the price of gold was the same C$35, but production costs had risen by roughly 40%. As a result, gold mining communities were threatened with mine closures.

The Emergency Gold Mining Assistance Act (EGMA), which came into effect on June 15, 1948, was designed primarily to assist high-cost or marginal gold mines to continue in operation so that such mines could continue to maintain their dependent communities. The maximum assistance payable in 1948 amounted to C$16 per oz., although some profitable mines were not eligible for assistance. In that year, the assistance actually paid for eligible production amounted to an average of $3.30 per oz. Over the 24-year period (1948-1971) that EGMA assistance was paid, the maximum available assistance ranged from C$8.22 to C$16 per oz., remaining at C$10.27 per oz. for the last 14 years, but few mines received the maximum.

All the gold prices discussed so far are expressed in the actual dollars of the year (that is, in “current dollars”), but to compare situations from year to year, adjustments must be made for the effects of inflation, with each year’s average gold price converted to “real” or “constant” dollars.

The accompanying graph depicts changing Canadian dollar gold prices (with and without maximum EGMA assistance) in current dollars and also in 1989 (constant) dollars, over the period 1867 to 1990. Complete analysis of the implications of these prices for Canadian gold mining would also have to take into account changing production costs, considering not only inflation but also changes in labor costs, technology and differing characteristics of gold deposits being mined. Such an analysis is beyond the scope of this article.

The most significant conclusion to be drawn from the price graph is that although the average price of gold during 1990 (C$450 per oz.) is below the annual average prices of gold during the period 1979 to 1989, the 1990 average was still significantly higher than in any year since 1867 (and probably well before then), and significantly higher than it was during all of Canada’s previous periods of vigorous gold exploration, gold discovery and gold production. Donald Cranstone is with the mineral policy sector of Energy, Mines and Resources Canada, Ottawa.