Gold supply is reliant on new gold reserves being found regularly, but as large-scale mining uses up the finite gold resources of Earth, there are signs that new discoveries are becoming fewer and far between.
The currently high gold price should make its mining increasingly attractive. However, underground gold reserves held by the major mining consortiums continue to be low and falling.
Major mining companies have two ways to remedy their shortages; they must either discover new underground sources through exploration or acquire them through the takeover of small mining companies.
Fewer new gold reserves are being discovered, and current reserves will only last so long.
New reserves are becoming increasingly harder to find as resources are used up, and exploration is costly. Consequently, major take-overs in the mining industry are accelerating. This trend began even before the coronavirus pushed up the gold price to its current record levels.
US, Canadian and Australian based miners with world-wide interests have been involved in a flurry mergers and acquisition. Barrick Gold bought Randgold for $18 billion in 2018 for example, while Newmont Mining bought Goldcorp for $10 billion in 2019.
Recently, Wallbridge Mining paid a 46% premium for Balmoral Resources. Chinese based Shandong Gold Mining Co and Zijin Mining Group Co Ltd have also made a wave of global acquisitions, raising fears about the Chinese miners' close connections to its government. Citing amplified risks to their economic and national security, Australian and Canadian authorities have stepped in to regulate further buyouts and investment from Chinese miners.
According to S&P Global Market Intelligence, in the past decade, 18 of the 20 top gold producers have been involved in acquisitions.
Between them, the 20 top gold producers spent on average $51.3 billion on acquisitions. In the same period, they spent less than a third, just $18.2 billion, on exploration. Despite the high gold price, currently S&P is citing a 29% drop in exploration budgets this year.
The drop is in part due to exploration difficulties during the Covid-19 pandemic. Despite this, many commentators on the mining industry are critical of the lack of investment in exploration and discovery. During the last 10 years only 11 of the top 20 gold miners reported shares in new gold discoveries.
The price of gold has risen sharply during the global pandemic. However, it has taken a long time for this to filter into the price of mining stocks. Investors have been quick to buy the physical precious metal as a safe haven during this economic crisis. They have however been justifiably wary about buying mining stocks. These notoriously come with possible management issues and geopolitical factors that continue to affect the mining industry.
The soaring price of gold may make exploration more affordable and attractive to the major mining consortiums, encouraging them to invest in exploration. If not, a continued lack of underground reserves will only further add to the price of gold as supply becomes more and more constricted in the years to come.