Peak Gold? Maybe So

By Dr. Jeffrey Lewis   Aug 4 2010 3:35PM

It was just a few years ago that the world was realizing that Hubbert's Peak, a forecast set some decades prior, was proving to be incredibly true with oil. While no one expects that oil will ever disappear in its entirety, we know that at the rate it is used, cheap oil may be gone forever. Will gold have a similar fate? Well, one industry insider believes that may be the case.

Peak Gold

In a recent interview with Reuters, Peter Munk, chairman of Barrick Gold, said that he believed the new wave of growth for mining firms isn't in single metal mines. Gone are the days that a mining company could buy acreages of land to find just one valuable metal. Instead, companies are shifting to mixed metal operations due to the fact that the purest lands are now used up, and companies are forced to dig deeper and extract lessened amounts of metals to sustain profits.

In An Ideal World

Mining companies would greatly prefer to dig for a single metal at a time. One metal in one area, with an acceptable ratio of content to dirt, is preferable. For example, should a company be able to pull out 5 grams of gold per ton of dirt, the mine will be wildly profitable. This type of ratio is good enough to develop consistent profits, and the companies can keep digging until every last piece is brought to the surface. 

The problem is, however, that those types of mines are gone, and mixed metal operations are the last stop for sustained growth. Mixed metal mines are less profitable, thanks to the difficulty in sorting, as well as accounting for the potential profit and loss due to operations. 

While there is still plenty of gold and silver to be found, the simple fact that these mixed metal mines are even on the radar indicates that the days of rampant production are over, and mines are being forced to look for smaller and smaller deposits of multiple types of metals to remain consistent in their growth rates. All in all, the supply of gold and silver in the ground is becoming freakishly low.

Terminating Future Contracts

One other startling piece of the interview was that Barrick Gold has officially ended all forward delivery contracts and will opt to sell at market price, rather than prices dictated for future prices. This means that the price for gold mined in September 2011 will be priced in September 2011, not at what the September 2011 futures prices are in 2010.

To unwind all these positions, Barrick Gold put up a hefty $5 billion, indicative that it expects rising prices from this day forth. Therefore, knowing that the chairman of Barrick Gold says the only room for growth is in previously undesirable operations (likely due to supply problems) and Barrick is staking its financial stability on higher, not lower, prices, where do you stand?  It should be clear by now that gold and silver still have a long way to run.

Dr. Jeff Lewis

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Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-R eview.com