Gold: Glitter or Glut?
October 1 1990 by Harry M.Conger
Gold bugs thinking glut also argue that even holders of monetary gold reserves are not indifferent to price. The Bank for International Settlement estimates that from the end of 1989 to mid-1990 the value of central bank gold holdings dropped by about $55 billion as a result of falling prices. In periods of lower prices central banks often buy gold to replace gold sold earlier at higher prices. And just to complicate matters, at the same time that the Russians are delivering bullion as collateral, they are reportedly buying gold in the forward market for future delivery.
An important supply factor to keep in mind is that, unlike other commodities, gold is not consumed. Over 90 percent of the gold ever mined is still in existence, whether in national treasuries and central banks, in jewelry or in various products.
Current production does not serve as a replacement, but simply adds to the total amount of gold in existence, estimated at about 95,000 metric tons. The economics of gold are unique and subtle.
For the past decade, gold mining has been primarily price driven. The current boom in world gold production was set in motion by very high prices beginning in 1980 when gold briefly hit a record $850 an ounce. At the same time, technological innovations made it possible to mine gold from ores where mineralization was so diffuse that they had been considered unprofitable. The resulting rise in mine production has been nothing short of spectacular. Since 1980, total world gold production-excluding
This steep rise in world production has some analysts musing darkly about the possibility of a prospective gold glut that will send prices into the cellar. However, most signs were pointing in the opposite direction even before the Iraqi invasion of
Gold mining is different from most other industries in that gold miners do not build and maintain significant inventories of their finished product. Their inventories are in the ground in the form of ore reserves. Although traders and speculators deal in contracts to buy and sell gold at some future time, in general what gold miners take out of the ground flows directly into the market. And because gold miners, however large, are virtually powerless to influence the gold prices set worldwide at daily “fixings,” 111 the only way they can increase their profit is by controlling cost of production.
When gold prices are low, miners process higher quality ore, getting the most recovery for the lowest cost. When prices are high, lower grade ore is processed. Gold mines operate at 100 percent of capacity because all
production can be sold, even though this can mean operating at a loss until the next upswing in prices. But there is a limit to this, and “pre-Kuwait,” some South African mining companies had announced significant shutdowns due to low prices. Gold will continue to glitter. The reasons are economic, political and geological. These forces will combine to raise production costs and reduce supply, especially in
While the world’s richest known gold reserves are in
Despite strict regulation, producers will suffer from growing public fears of aquifer contamination due to heap leaching, which is conducted in large outdoor pads both lined and covered to prevent cyanide leaks. Because the
Gold’s role as a store of value goes back to the beginnings of history. Beautiful, virtually indestructible, fungible, and relatively scarce, its value against other metals and currencies has varied according to circumstances over the centuries. But value it has always had.
Harry M. Conger is chairman and CEO of San Francisco-based Homestake Mining, whose 1989 revenues exceeded $500 million.