Top Spot for Gold

The annualized value of gold mined globally has just gone above iron ore for the first time since 2003. Taking estimated production for the two metals in 2015, and their prices in mid-January, the annualized value of mined gold is currently over US$113 billion, compared with barely US$90 billion for iron ore. (Note that both metals are still well behind the mined annual value of coal.)

This follows the 43% decline in average iron ore prices between 2014 and 2015, with average gold prices down only 8%. In the first six weeks this year the iron ore price continued to fall but gold prices have strengthened. The value of mined iron ore remains above copper, which is valued at an annualized US$83 billion, but the gap has closed dramatically over the past few years (see graph).

From 2000 to 2004 there was little difference in the mined value of iron ore, gold and copper. All three metals started appreciating in value in 2005 to 2007, with iron ore then accelerating to a mined value of over US$340 billion in 2011, before starting a four-year decline.

The value of mined gold is reflected by the industry's enthusiasm to find and extract the precious metal compared with the other metals. In its Corporate Exploration Strategies report, SNL Metals & Mining estimated that less than 1,800 companies had an exploration budget of over US$100,000 in 2015. These companies had an aggregate non-ferrous exploration budget of US$8.8 billion, down 18% on 2014. Animpressive 45% of this dwindling search for metals was allocated to gold.

Gold also dominates the mining industry's deal-making activity, accounting for 45% of the number of deals in the September 2015 quarter, and 64% of the overall value of US$10.1 billion (SNL Metals & Mining is still assessing data for the December 2015 quarter). 

In companies with annual revenue of under US$500 million, 16 of the 23 financings in December 2015 were by gold explorers/producers, with the gold-related value representing 73% of the lacklustre overall total of US$115 million. This seems a disproportionate effort, and simple market theory suggests that the gold price is already plenty high enough to stimulate activity. Indeed, we are still at a historically high gold price in real terms.

Inflation data provided by the Bank of England (which tracks such things back to 1270) suggests that gold traded south of £300 per ounce for most of the past 200 years. The most persuasive date is almost 300 years ago, when Isaac Newton fixed sterling by valuing gold at £4.26 per ounce in 1717. That valuation, in current money terms, is equivalent to under £400 per ounce, say US$570 per ounce.

I don't know if Britain valued gold too lowly for most of the past 300 years, or if the U.S. dollar is about to collapse. Either way, it seems odd that gold is now valued above such important metals as iron ore and copper.