We Don’t Know How To Replace The Great Big Gold Deposits From The Past

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We Don’t Know How To Replace The Great Big Gold Deposits From The Past
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Pierre Lassonde, chairman of Franco-Nevada, expects production in the gold mining sector to decline significantly and foresees a price push for the yellow metal.

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Few people have achieved more success in the mining business than Pierre Lassonde. The savvy Canadian is the co-founder and chairman of Toronto based Franco-Nevada (FNV 101.24 0.38%) and pioneered the royalty business model in the gold mining sector based on the model used in the oil-and-gas industry. For investors this strategy has paid off golden returns. Today however, Mr. Lassonde points out that the gold industry hasn’t made any large discoveries for years which will put heavy upward pressure on prices in the years to come. He also thinks that US President Donald Trump is good for the yellow metal and that investors will fare better with gold than with stocks.

Mr. Lassonde, after a few difficult years gold seems to get its shine back. What’s next for the gold price?

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Right now, there is more demand for paper gold than for physical gold. For instance, when you look at the refineries in Switzerland they will tell you that they’ve got the bouillon but they’re not busy. It’s not like a year and half ago when they had no stock and the gold bars basically were flying off their shelf the minute they were produced. So the pressure is in the paper gold market, the futures market.

What’s the reason for that?

Part of the recent strength of gold is what I call a risk premium on the world. There is a lot of speculation that has to do with the tensions around North Korea and President Trump. I don’t have a personal relationship with Mr. Trump but I know the man a little bit. When he was elected, my prediction was that he was going to tie up the US administration in a knot because he’s totally unpredictable. Nobody knows where he’s going and you cannot run a country that way.

And what does this have to do with gold?

Anyone else in the Oval Office would not make such outlandish statements as Mr. Trump makes. Gold (Gold 1304.67 0.05%) is benefiting from that. After the US election, my prediction was that the dollar was going to suffer from Mr. Trump being in office. The price of gold is intimately related to the dollar. Gold is essentially the »anti-dollar»: If the dollar is strong, gold is weak and if the dollar is weak, gold is strong. So what we are seeing now is exactly what I have expected: a lower dollar and therefore a stronger gold price.

So where do you think the gold will go from here?

My view has been between $1250 to $1350 per ounce for this year and then slightly ramping up next year to around $1300 to $1400. But for gold to get into the next real bull market we need signs of inflation. So far we haven’t seen them. The Federal Reserve and other central banks have piled up huge reserves. But there is no inflation because the money is sitting within the banks and they are not lending it. Therefore, you don’t get a multiplier effect. But what happened recently in the US – the one-two punch with respect to the hurricanes »Irma» and »Harvey» – is going to require an enormous amount of reconstruction. This could finally move the needle on inflation. Also (ALSN 138.1 0.58%), Europe is doing much better. So at some point I suspect we are going to see inflation start to pick up a little bit.

What does this mean for the mining industry?

First of all, at a gold price of $1300 the industry by and large is doing well. I tell my peers: »If you are not making money at $1300 you should not be in this business.» So it’s a good price and you should be making good money. But the industry has had to shrink a lot. When the gold price dropped to $1000 at the end of 2015 everybody in the business was too fat. So the industry laid people off, consolidated, shrunk and many junior companies have been wiped out.

What are the consequences of that?

Production is declining and this is going to put an enormous amount of pressure on prices down the road. If you look back to the 70s, 80s and 90s, in every of those decades the industry found at least one 50+ million ounce gold deposit, at least ten 30+ million ounce deposits and countless 5 to 10 million ounce deposits. But if you look at the last 15 years, we found no 50 million ounce deposit, no 30 million ounce deposit and only very few 15 million ounce deposits. So where are those great big deposits we found in the past? How are they going to be replaced? We don’t know. We do not have those ore bodies in sight.

Why aren’t there any large discoveries anymore?

What the industry has not done anywhere near enough is to put money back into exploration. They have not put anywhere near enough money into research and development, particularly for new technologies with respect to exploration and processing. The way our industry works is it takes around seven years for a new mine to ramp up and then come to production. So it doesn’t really matter what the gold price will do in the next few years: Production is coming off and that means the upward pressure on the gold price could be very intense.

Read the full article here by Christoph Gisiger, Finanz und Wirtschaft

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