Got gold?

WINDERMERE, LAKE DISTRICT – “Get gold,” urged Spanish King Ferdinand II of his ambitious explorers in 1511, “humanely if possible, but at all hazards – get gold.”

They took the “getting gold” bit to heart. As for “humanely”, well… that wasn’t taken anywhere at all – least of all the New World.

Adam Smith decried the appetite of the Spanish conquistadors for gold as a “sacred thirst”. And drink insatiably they did, even if it meant wading through rivers of blood.

Tales of their grim exploits contain levels of gore and greed matched only by extraordinary quantities of loot. Francisco Pizarro’s ruthless ransom of the Inca alone netted him and his men nearly five tonnes of gold in the form of goblets, vases, tiles and talismans – all melted down into golden pesos before it even left the country. That’s more than all the gold mines in Europe were producing annually at the time. (And that’s not even including the Incan throne Pizarro kept for himself – a 190 lbs moulded slab of 16 carat gold.)

But Pizarro’s hoard is a mere drop in the ocean of gold which would flow out of the Americas and on to European shores in the 16th century. In the hundred years following Christopher Columbus’s expedition for the New World in 1492, the total stock of gold and silver in Europe would increase by almost five times.

Think on the enormity of that for a moment. Gold and silver were used as money across the continent back then, so this represented a 5x increase in Europe’s money supply. But this vast injection of treasure into the continent was only arriving through one country: Spain. The privileges this granted the country were colossal – but so too were its grave consequences, which we’ll come to later.

I was reminded of Spain’s titanic gold injection when reading a recent issue of Southbank Investment Daily by my colleague Will Dahl. While fresh gold supply was flowing as hot and fast as the blood of the conquistadors (and their victims) in the 1600s, we face the opposite scenario today. The flow of fresh gold is running cold.

The concentration of gold found in gold ore has been falling heavily over the past 50 years – from 10 grammes per tonne in the late 1960s to just above 1 gram today. As one David Fickling wrote for Bloomberg late last year, this ratio is equivalent to grinding up a Statue of Liberty’s worth of ore to extract one teaspoon of gold from it.

That’s not stopped anyone mining of course – quite the opposite. In fact, the world’s total gold stock has doubled during this period (since 1976 to be specific) despite ore grades declining. Miners have managed to increase the quantity of ore they dredge up to make up for its lower quality.

But it is unavoidable that the decent ore is becoming harder to find. And how reliably miners will be able to produce enough gold to keep up with future demand is a subject of debate.

Will pointed to the observations of Thomas Kaplan on the matter – a investor and entrepreneur who has become a billionaire by staying ahead of the curve in the natural resources sector. Kaplan, a “modern Renaissance man”, has been so successful investing in gold, silver, and oil that he now owns more Rembrandts than anyone else in the world. Talk about an investment portfolio… that’s one I’d kill to have.

By Kaplan’s estimate, any new gold discoveries will take a generation to harvest – so you can’t count on them to mute future gold demand. And you can’t count on existing gold mines to facilitate it either, as by his estimates the average grade of gold ore has been cut in half over the last decade, and gold majors like Barrick and Newmont have been burning through their ore reserves to keep up with current demand.

Total annual gold supply was down 4% year over year from 2019 – the largest annual drop since 2013. Gold mine supply dropped 100 tonnes in 2020, from 3,300 tonnes to 3,200 tonnes, with total annual gold supply down 4% year on year. These figures may seem small, and the WuFlu undoubtedly threw a spanner in the works for mining operations, but one must remember that gold prices are set on the margin – and even small changes in supply can have outsized effects on the price.

As Kaplan put it:

What I see within this industry is something where you don’t have new discoveries, where the majors are burning through reserves faster than they can replace them. We’re seeing that with Newmont, we’re seeing that with Barrick, we’re seeing that with just about everybody…

If Barrick is right and [gold] production is declining by about 5% a year for a number of years, we really are reaching a perfect storm.

Want to get your portfolio ahead of the storm? Well, you’re gonna love this.

One thing’s for sure to my eyes: gold’s scarcity is assured. And gold miners have a very bright future ahead of them, for mankind’s “sacred thirst” for the metal ain’t going away anytime soon. Quite the contrary: I expect investors to become increasingly thirsty as inflation rises and interest rates remain at rock bottom…

Which is why I tell you today: if you don’t own any yet – get gold. Do it humanely. But at all hazards – get gold

Next week we’ll examine how in a fitting twist of fate, the grand flow of pillaged treasure from the New World would doom the Spanish empire. For the gold they had looted was tainted – cursed

Wishing you a good weekend,

Boaz Shoshan
Editor, Capital & Conflict

Category: Investing in Gold

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