What is Gold up to?
Having disappointed its fans for many years in a row with low prices, gold3/4 like oil3/4 seemed to stage a comeback in recent months. Gold and oil originally of entirely different uses, have historically often served interchangeably. In spite of a large difference in the time of appearance, they have both at some time or another served the purposes of war, blackmail, prosperity and power.
For both cases extraction is a one-way process. Oil, once burned, does not return underground to replenish itself. Similarly for gold; once processed and owned, it rarely finds its way back to earth. Furthermore, natural replenishment takes too long for the former and is impossible for the latter. For that reason speculation about and estimation of reserves have become a popular game and there are all too frequent revisions and updates.
Although they are inanimate, we can look at the surfacing of these substances as if they were "populations" growing to fill3/4 or empty3/4 a "niche." The niche may be the amount of the precious material mother earth has in store underground for us. Alternatively, the niche may simply be the amount of the substance in question for which we have a well-defined need. These niches do not have infinite capacity. The argument that human desire for energy and gold is insatiable may be simplistic. Oil as a primary energy source is already losing ground to natural gas (as mentioned in last month's discussion), and that is happening well before reserves run out. As for gold, there have been micro-niches of different usages coming in and out of fashion all along: art, dentistry, electronics, the space industry, and others. Materials which can substitute for gold3/4 sometimes better suited for a particular use3/4 are continuously invented. It is not clear that the need for gold will continue to increase indefinitely.
If the production of gold and oil proceed so as to strike a continuous balance between supply and demand, it must follow a natural path. Evidence that a path is natural is its similarity to an S-shaped curve, which would indicate that the rate of growth is proportional to the part of a niche still remaining unfilled. Production of gold and oil is indeed found to behave like this.
I studied the world production of gold by plotting the cumulative amount of the metal extracted since 1850. This date can be thought of as the beginning of contemporary gold mining, since the prior annual rate of world production was "insignificant", more than a factor of ten smaller. However, natural-growth curve of a different size and scale probably describes well gold production from antiquity to 1850.
Exhibit 1. Cumulative gold production worldwide (data and S-curve fit) beginning in the middle of the 19th century.
Exhibit 1 shows the data points to accurately outline the first half of an S-shaped curve. The projected ceiling of gold production is approached toward the end of the 22nd century. Even if gold is no longer being found in America, the world production keeps increasing on the average to reach the maximum rate of annual extraction in the 2020s, which will thus become a kind of golden era, see Exhibit 2.
Exhibit 2. Annual gold production worldwide. The astute reader may see a smaller-scale cyclical pattern (possibly a self-correcting mechanism) according to which production is likely to go down in relative terms during the next 5 to 6 years.
The 2020s was supposed to be a golden period anyway. The long economic cycle of Kontradief's (discussed at length in Predictions) says that this period will witness a boom of "decadent" prosperity, similar to that of the 1960s. It makes sense that gold adds its shine to it!
What about the Price of Gold?
Production levels and prices are not related in an obvious way for any product. If gold is anything like oil, we may look at the latter for clues on how its price relates to production.
It was demonstrated in Predictions that the discovery of oil reserves was strictly parallel to the production of oil, in a mechanism where extraction of oil stimulated exploration for new reserves. From the beginning of oil, exploration-being expensive-was pursued only to the extent deemed necessary at the time. The production and the discovery curve turned out to be remarkably parallel, with a constant separation of ten years. Such a rigid linkage between production and discovery, witnessed for over a century, is proof of an underlying regulatory mechanism based on a closed feedback loop.* In feedback loops causality works both ways. Finding more oil may result in increased production, or alternatively, increases in production (via demand) may provoke intensification of efforts to find more oil. In any case, the strict regulation says that we discover oil reserves ten years before we consume them, not earlier or later.
It should be emphasized that no conscious decision has been involved in producing this equilibrium. On the contrary, so-called experts, misusing statistical information, have often forecast imminent doom, with oil shortages and even utter depletion within the next few years. Gold experts expressed similar speculations in recent years about imminent catastrophes in the operation gold mines. The similarities between oil and gold could be used to conclude that production levels for gold adjust themselves continuously so as to meet the demand described by Exhibit 2, and that makes such catastrophe speculations unfounded.
For oil the fact that demand (expressed via the production curve) and the supply (expressed via the discovery curve) went hand-in-hand allowed its price to remain generally invariant (topic of last week's monthly discussion). It has been pointed out that the price of gold is also invariant on a large time frame. A kilogram of gold bought a car early this century and roughly it still does so today. The gold production curve albeit bell-shaped could be compatible with a non-varying price (other than inflation) over the long term.
In conclusion, we may say that while the price of gold may remain roughly constant (around $10,000 per kilo) on the long term, the hay day of gold production is still to come, and so would be the long-term prospect of the gold-mining industry. Gold may keep its place in investment portfolios (as a hedge against market crashes), but gold-mining stocks can become an increasingly attractive investment for the next couple of decades. And since the growth of production follows an S-shaped curve, the process is natural and consequently reliable.