South African gold output has plummeted 80%, and it’s just one part of a much bigger story. As central banks hoard bullion while mines shut down for good, we’re in a new era of gold supply. Here’s what happens next…
By Peter Reagan
Your News to Know rounds up the most important stories about precious metals and the overall economy. This week, we’ll cover:
- South African gold production has declined by 80%
- Silver reaches highest price in 13 years — but it’s not enough!
- Iran’s gold imports mask inflationary crisis, not military expenditures
Forget peak gold prices — where will any gold come from in 30 years?
This recent report on South Africa’s gold production really surprised me. Maybe it’s my age showing, but if you say “South Africa,” I immediately think: Nelson Mandela, apartheid and gold Krugerrands. South Africa virtually invented modern gold bullion coins way back in 1967.
For much of the 1970s, it was the only gold coin that didn’t come with a numismatic premium. By the early 1980s, 90% of all gold bullion coin sales worldwide were Krugerrands. (Alas, it’s true that the IRA approved precious metals list doesn’t include the Krugerrand.)
From the beginning, the South African Mint and Rand Refinery worked together. To mint Krugerrands from South African gold, mined and refined in-country.
But there’s not as much South African gold as there used to be…
I think this is meant to be reassuring:
This does not mean there is no gold left in the ground. PwC reported in 2023 that South Africa still had 68-million troy ounces of gold reserves, the equivalent of 27 years of production.
The challenge, as we’ve discussed from time to time, isn’t a nation’s gold reserves so much. It’s where those gold reserves are:
…the costs of mining gold in South Africa has become significant. To reach gold deposits, miners sink shafts to incredible depths.
This makes extracting gold increasingly expensive. This cost is then compounded by the country’s rampant costs of electricity and water…
Deeper mines are more expensive to develop, more labor intensive and must be continually cooled, ventilated and pumped dry – even when no ore is extracted. Just paying the electric bill costs as much as 20% of overall operating expenditures. Higher all-in sustaining costs (AISC) mean it’s simply not economically feasible to mine some gold deposits.
South Africa isn’t alone. I’m not just talking about mining challenges here, but overall gold supply.
Many nations, including BRICS members Russia, China and Nigeria are increasingly buying up domestically-mined gold. (China doesn’t even allow domestically-mined gold to leave the country.)
BRICS member India aggressively imports gold, since they have virtually no gold mining industry. And we’ve discussed the Central Bank of India’s efforts to “monetize” privately-owned gold. (Turkey, while not a BRICS member, it certainly acting like one in terms of its central bank gold buying and importing.)
All this to say that gold has become an obsession for a growing number of nations. That voracious demand is meeting reality – that it’s increasingly difficult to provide new supply.
In South Africa alone, more than 700 gold mines were shut down in 2022 for all the reasons we discussed above. It’s impossible to estimate the global number of gold mines that have closed over that same period – but here’s what we do know:
- Roughly 80% of global gold reserves have already been extracted
- The remainedr is harder, deeper, and more expensive to get (and increasingly kept off-market by central banks)
We are well past “peak gold” supply!
The report on South Africa estimates the nation has 27 years of gold reserves left at current production volumes. Coincidentally, almost 27 years ago (specifically in 2001), gold began its current run – as of today, to a twelvefold increase in its price.
And that happened with no squeeze on the supply side. Mining was much cheaper and easier than today, and no one worried about exhausting underground gold reserves. Remember that gold is a long-term investment, so much so that 27 years is a useful timeframe to use for gold’s performance.
Now, project 27 years ahead. When South African mining has fully dried up. When #1 and #2 gold-mining nations Russia and China are both fully focused on increasing their own gold stockpiles, rather than selling gold on the global market…
What will happen to the price of gold then?
Silver hits 13-year high (but we’re still waiting for the real gains)
If you own silver, and you see headlines like Silver jumps to highest level in 13 years, I bet you get excited. I know I do! But you can’t read the article without a sour taste of disappointment…
Because that 13-year high price is $36. Not $40, which would mark the start of a real run in silver, or $50, that would suggest the beginning of a gold price catch-up.
Just $36.
The fanfare just isn’t deserved, is it? A $36 price is mostly meaningless — except that it’s the highest in 13 years.
That means silver’s price has been lagging for 13 years. I just don’t see any reason silver shouldn’t have hit $40 or $50 a decade ago.
There is no good argument to make for a gold-to-silver ratio that’s been over 100 regularly. The historic average since the end of the gold standard is just 55! Today, the ratio of 90 is still nowhere near reversion to the mean…
A positive side is that this price gain didn’t follow a huge spike in gold price – but rather seems to be organic. As the article informs us, silver’s 20% year-to-date gain is lesser than gold’s 28% year-to-date gain, which is also odd.
Silver historically outpaces gold during bull runs, so to see it lag behind gold is surprising. And concerning, too… (I won’t to try your patience with a rant about silver price suppression.)
The percentage gains sort of mask how low the prices are compared to what they should be. When we hear things like “20% year-to-date gain” or “highest level in 13 years”, we might think: “Oh, wow.”
In doing so, we would be forgetting that a $36 silver price compared to gold’s $3,300 price is completely and utterly irrational. Historically speaking, today, with a gold-to-silver ratio of 55, the price of silver should be $60/oz.
Worse, we are constantly being told that a weaker global economy is behind silver’s lag, due to silver’s widespread industrial use. But how was demand for solar panels and electric vehicles in the 1980s, when silver hit $50? How was it during various points in history when the gold/silver ratio was a normal 55?
It didn’t exist. Silver doesn’t need industrial demand from a value standpoint. Industrial demand simply depletes overall supply, already down 15% in 2024 vs. prior year. These deficits are resulting in demand exceeding supply by over a million ounces annually!
Again, this isn’t actually needed for silver to catch up. All that the industrial side is doing is opening the door for much higher prices once silver fully returns to its historic role. Reversion to the mean gold-to-silver ratio of 55 is the first step. A wild price explosion is the second – $100? $200 silver? It’s certainly possible.
For now, as has been the case for a great many years, silver remains an incredible and historically unprecedented bargain. Suitable for the value investor generally and for diversification within a Precious Metals IRA specifically.
Why does gold cost twice as much in Iran?
Iran occupies a strange spot on the global list of economic train wrecks.
Iran is one of the few nations that can legitimately claim that U.S. sanctions have utterly destroyed its economy. (Cuba, North Korea, Syria and Venezuela belong in that same bleak club.)
But this claim has been trotted out since the Carter administration. Iranian leaders have claimed for 50 years now that only the U.S. is to blame for citizens’ poverty and lack of economic access. .
Keep that in mind when reading this article. At first glance, you might get the idea that Iran’s economic troubles and the 100 tons of gold imported to the country in a year come from military conflict.
As the article notes, gold prices in Iran’s local currency rose by more than 80% over the past year, compared to the global benchmark rate of 45%. But what does that global benchmark rate consist of? All countries besides Iran? Because gold has performed the worst in the U.S. dollar, and the further we branch out, the more it has gained. We can start with Britain, then move to Japan, and then onto emerging markets, Venezuelan bolivar or Turkish lira, if we really want shocking numbers.
The dollar-equivalent of gold’s price in Iran: $5,000/oz.
Shocking, isn’t it? But when reading pieces like these, it’s important to remember that this inflation of the local currency wasn’t caused by sanctions (or threats of sanctions), Trump tariffs, the Federal Reserve or anything of the sort.
It was caused by domestic monetary mismanagement.
If we look worldwide, you can see that Iran isn’t even the worst of a bad bunch…
- Venezuela: 400%
- Zimbabwe: 172%
- Sudan: 72%
- Turkey: 51%
- Argentina: 50%
- Ghana: 45%
- Haiti: 44%
- Suriname: 43%
- Iran: 42%
Now, there are a number of different ways a nation can back itself into economic self-destruction. The nations on the list have one thing in common – a rapidly devaluing currency. And there are lots of reasons governments take this course. For citizens, the response is almost always the same: Buy gold if you can afford it. Buy silver if you can’t. (That’s why Istanbul Gold Refinery (IGR) mints silver bullion bars as small as 2.5 grams…)
From March 2023 to March 2024, Iran “bought” over 100 tons of gold, which is a fancy way of saying money taxed from the people. The same people who are scraping by as their local currency’s purchasing power wants, and their costs of living skyrocket. (That’s been the theme globally, even in developed nations, over the past few years.)
As we have previously noted, quite a few central banks are hoarding as much gold as they can while letting their sovereign currencies spiral toward zero. Iran’s story, just like that of any other nation, is its own central bank’s fault.