|Several days ago we reported that as a result of persistently lower gold prices, driven down by a seemingly endless supply of paper gold (in the form of ETF selling and Bank of International Settlement "price discovery") offsetting a seemingly unbridled appetite for physical gold, not only is one of the biggest marginal suppliers of gold – Chinese producers – about to take an extended hiatus, but first one and then many "developed" gold miners are about to throw in the towel.
As UBS’ Shanghai analyst Lin Haoxiang said, "Falling prices are cutting into some high-cost private mines in China, while some big miners chose to reduce costs by reducing jobs and capital investments." As for the North American gold miner defaults, they have already started with Canada’s San Gold warning its creditors it is about to stuff them with a lot of unrepayable paper.
However the unwind plays out, it is becoming increasingly clear that just as the crude oil market is set for some violent times ahead as producers lock into the defection phase of the Prisoner’s Dilemma and flood the market with supply in an attempt to crush the weakest competition, so the gold market is set for many upheavals, the first of which, however, may be what Goldcorp defined in a recent slideshow as Peak Gold.
The only difference is that Goldcorp does not look at it from the perspective of Game Theory, where it is every miner (and their balance sheet) for themselves, but as a function of a 20 year lead-in development time following the period of peak gold discovery which took place in 1995. End result: "Gold market forecasters are expecting peak production in ~2015."
And then there are of course, the practical implications of gold miners who are living if not on borrowed time, then close to it. As the following chart of the gold industry’s "all-in sustaining costs", when one takes net debt and the interest due on it into consideration, it becomes clear why gold has managed to find the $1050-$1200 region as support: drop the price of gold below that and suddenly 90% of the entire gold industry becomes unprofitable.
None of which means that gold can’t – or want – drop below any given price, or slide into the triple digits. As we showed earlier, the new normal "markets" are so rigged – with the blessing of central banks no less – that attempting any rational predictions, especially when it comes to the one susbtance most hated by central bankers through the ages, is painfully meaningless.
And we are confident that before all is said and done, gold will surely plunge to even further manipulated lows because in the current market, where one can create paper gold futures contracts out of thin air, there is nothing to prevent just that. Which is why the following table showing gold miner net leverage will be quite useful in the years to come as the race to the prisoners’ dilemma "defection" bottom – one in which only those with the best balance sheets survive – enters the final stages.
In any event when all is said and done, gold production will be far lower in a few years than where it is now. The only question is how will central bankers orchestrate a parallel decline for physical gold, because even with all the paper manipulation in the world, the supply and demand curves for the underlying commodity can be ignored only for so long.
“Peak Gold Production” Hits In 2015