World gold suppliers count on strong investment demand

When someone talks about gold supply and demand, it’s best to remember that throughout history, the precious metal never seems to have been out of fashion.

What made gold attractive centuries ago — its glitter, scarcity, malleability and non-tarnishing durability — still rings true today, although the “scarcity” factor may soon undergo a challenge.

Not that anyone is ready to predict an oversupply. Like the analyst quoted above, few people seem to doubt the world’s ability to absorb the projected 12%-20% increase in gold supply to 1990.

Yes, supply is an important variable, says a gold-price forecaster, but it won’t be a factor until “the whole environment turns unfavorable for gold.”

The increase in total gold supply will still be less than the world’s paper money supply turned out by governments, says a Toronto analyst.

Investors are only just starting to diversify into gold, says an American analyst, who sees any rise in the gold supply being gobbled up by demand.

Still, if there ever was a time for too much gold on the world’s markets — it’s interesting to note that in terms of jewelry, industrial and other uses, total global supply of gold has exceeded total demand since 1982 — the next few years could be crucial. Technological advances

Figuring into the equation are all the advances in technology, from the use of satellite remote sensing to identify potential metals deposits to less expensive and more accurate laboratory methods for testing ore samples, growing popularity of low-cost heap leaching, and new financing methods which allow the “juniors” to bring their finds into production instead of waiting for the larger mining firms to say “if” and “when.”

Consider also some of the world’s yet-to-be developed discoveries, such as the Porgera deposit in Papua New Guinea, which is estimated (see The Northern Miner Magazine, Aug/87) to contain 86 million tons of geological reserves grading 0.11 oz gold per ton and which could turn out 17 tons of gold per year once production begins, possibly in 1991, and the Tundra deposit in Canada’s Northwest Territories, possibly, with an estimated 20 million tons of reserves, the country’s largest undeveloped gold resource.

And then there is the southwest United States, where, among other areas, the Carlin trend in Nevada, the site of much recent exploration, is said to contain more than 25 million oz gold mineable by the lower cost, open-pit method. All the activity in that part of the U.S. has led one newsletter wag to wonder whether the entire state of Nevada could be heap-leached for gold] “South Africa” factor

Countering any possible surplus in gold are developments in two areas of political importance, namely South Africa and the communist bloc of nations. South Africa in 1986 accounted for about half of the non-communist world’s gold output (1,281 tonnes in all) but that share of total production is down from about 60% in 1964 and about 65% in 1982. Any gain in production recorded by Canada, the U.S. and Australia might easily be matched by a possible further decline in South African output. As for the communist bloc, recognized, after South Africa, as the second largest supplier of gold to world markets, published sales figures indicate no discernible pattern over the last few years; Shearson Lehman Brothers, for one, in its 1987 gold review, forecasts a drop in communist bloc sales this year compared with 1986.

Shearson also makes a telling point in writing about gold’s historical value and alternative investments. “Improvements in production methods and technological advances should lower the cost of mining the metal over time but this should be countered by the exhaustion of high grade deposits and the need to utilize lower grade, higher cost orebodies,” says the review. Price of gold

Certainly the price of gold, currently running in the $460(US) range, is a significant factor in the search for the precious metal. With most of the bigger mines in the western world reporting production costs of less than $300 per oz (the Golden Giant mine at northern Ontario’s Hemlo area reported a 1986 cost of $109), the opportunity for making money is enormous. And spurred by tax incentive schemes, in Canada, at least, where flow-through financing has permitted investors tax breaks for backing mining exploration, junior firms have prospered.

Also boosting the push for gold is a form of fund-raising involving gold loans, through which mining firms may borrow gold from a bank at a nominal lending rate and sell the bullion on the open market to obtain the cash needed to open the mine. Once the mine is operating, the lending institution is repaid from the gold production. The idea of gold loans was apparently tried first in Australia before its adoption in North America.

Toronto gold-price forecaster Martin Murenbeeld, allowing that supply is an important variable, says there are dozens of other considerations and the supply factor alone won’t bring the price down.

A world recession, in 1989 or 1990, he suggests, might be the deciding factor. “I anticipate gold would come down in price, which the supply factor would then depress further,” he says. In balance

Consolidated Gold Fields, in its 1987 gold review, says net purchases by central banks and government investment authorities offset any supply/demand imbalance last year. “Purchases by these bodies removed some 180 tonnes of gold from the supply side of the equation, and therefore the supply to the private sector remained in reasonable balance with demand,” says the review.

James Blanchard of New Orleans, in the financial services business, sees no oversupply problems developing. “It may seem like a lot but it really doesn’t bother me,” he says. The key is investment demand, he says, which will continue to grow and absorb any possible over- production of gold.

Author Timothy Green, in his latest book, The Prospect for Gold: the view to the year 2000, tells of the price of gold being under $350 when he began his research for the book, and the price topping $450 when he finished a year later. While the price has been moving in a narrow range of late, many analysts are predicting a rise in the yellow metal to $500 and better by the end of this year.

Most of the world’s new gold finds its way into jewelry, and the precious metal also has application in industry and in the manufacture of medallions and minting of coins. Mr Green reminds his readers that demand for gold by these traditional uses has stagnated in the 1980s and he points out how important investment demand will be in maintaining the demand/supply balance. The higher the price, the more the burden should shift to investors.

Troubled times are good for gold. Fear of inflation and rising interest rates, the weak U.S. dollar, Third World debt, problems in South Africa and fighting in the Persian Gulf make investors nervous. Gold, as Mr Green so aptly puts it, “is the lifebelt for all seasons, especially the dangerous ones” and “the only universally accepted medium of exchange.” The world’s supply of new gold won’t grow forever and may well start levelling off in the 1990s, which suggests any problems of oversupply, real or imagined, could be relatively short-lived.