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Solid gold in the shape of Japan's Mount FujiYURIKO NAKAO

The idea of peak oil has helped light a fire under the price of petroleum, but now, another peak theory has emerged, this time involving gold .

Many precious metals analysts and gold miners are taking a cue from the claims that global oil production will exhibit a peak, and then begin an inexorable decline accompanied by sharply higher prices. They're starting to say the same concept applies equally well to bullion and may lead to outsized investment returns from buying the yellow metal.

Believers in peak gold say that mining has a number of uncanny similarities to oil extraction.

Just like the slow output declines and dwindling reserves observed at aging oil fields, many of the best gold deposits are exhibiting the same sort of geriatric tendencies, with their highest grades extracted long ago.

Another resemblance is that in both industries, the pace of new elephant-sized discoveries has decreased, despite rapidly expanded exploration budgets and the spur of sharply higher prices, which in gold's case have risen about 350 per cent since the metal's bull run began in March, 2001, when prices were under $260 (U.S.) an ounce.

While the jury is still out on whether oil production has reached its ultimate high point, world gold output reached its record level in 2001, and has generally fallen since then.

The peak gold debate

"There are a lot of people that subscribe to [peak gold]" comments Jason Goulden, researcher at Metals Economics Group, a Halifax-based firm that tracks trends for the mining industry, but doesn't take a formal position on the debate over whether gold output will enter a long period of decline.

Others aren't so reticent about saying that peak oil has a close cousin in peak gold. "I think it's similar to oil," says Ronald-Peter Stöferle, international equities analyst at Erste Group Bank, an Austrian-based bank.

"Peak gold is only one part of my really positive scenario" for the metal, Mr. Stöferle notes, adding that he believes gold could ultimately double from current price levels, to $2,300 an ounce, the inflation-adjusted high it attained way back during the inflationary days of early 1980.

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Besides dwindling output, Mr. Stöferle is basing his bullish call on the traditional view among some investors that the yellow metal is a refuge in times of financial uncertainty over debt and paper currencies.

Some of the same people who've pioneered and popularized peak oil have also recently turned their sights on the precious metal, giving the idea further credence.

Jean Laherrère, an influential petroleum engineer who presciently predicted the end of cheap oil in the late 1990s, last year posted a 66-page report on the Oil Drum, a peak oil website, discussing whether global gold output will follow the same scenario being outlined for oil. He speculated gold reached its maximum output back in 2001. Mr. Laherrère could not be reached for comment.

A copycat move?

The notion that oil supplies would eventually peak and then fall was first advanced by U.S. geophysicist M. King Hubbert, who accurately predicted in the late 1950s that U.S. oil production would max out around 1970, and then go into permanent decline. The prediction was based on models that show the production at individual oil fields always traces a bell-shaped curve, with rapidly increasing output for a time, followed by a plateau, and then a gradual, permanent decline as reserves are exhausted.

Because oil is consumed and can never be recovered once burned, it's a scarier prospect than having dwindling gold output. Almost all the gold ever mined is around in bars, coins and wedding rings, and could be recycled, if need be, so the world will never really run out of the yellow metal.

The argument for peak gold has some peak oil advocates viewing it as a copycat move, a self serving justification for hopes of higher prices.

"I'm sure that you'll find that many in the resource industry will claim that they are now on the back side of their own Hubbert curve," says Jeff Rubin, former chief economist of CIBC World Markets, who has written a book about the end of the cheap oil era.

Sharp fall in output

According to the peak oil theory, as long as big new fields are being continually discovered, the date when maximum output occurs will be postponed.

In the gold market, the trend in recent discoveries has been disappointing. Metals Economics tracks new large gold deposits of more than two million ounces, and in recent years, the pace has been meagre.

Of the 62 major discoveries made from 1997 to 2008, almost half were found in the first three years - from 1997 to 1999.

"There used to be discoveries of four or five a year. Now, there are maybe one, two max a year," says John Ing, a mining analyst at Maison Placements Canada Inc. who is another believer in peak gold.

Those contending peak gold has already arrived also point to the sharp fall in output among many of the major producing countries. South Africa, long the top global producer, peaked back around 1970, and has been falling ever since. In more recent years, production has generally been declining in Canada, the U.S., Australia and Russia.

Some of the slack has been taken up by China, the new top producer, but there is skepticism the country can keep growing production.

Mr. Ing says many gold deposits there have poor reserves and are being rapidly depleted. "Their No. 1 ranking is very, very tenuous."

"The world as we know it does not need gold," he says. "The global economy could run perfectly well without gold if we decided to go to a total fiat currency. But the fact is that the world economy does not run without oil."



One investment implication of peak gold is that it makes big producers unable to replace mined out reserves relatively less attractive than promising juniors sitting on newly discovered ore bodies. It also makes companies with new deposits takeover targets.

Investors "are shying away from the big caps and the mid caps now because of the lack of growth," mining analyst John Ing says. Typical of the trend away from big producers, he notes, was the sale last month by NovaGold Resources Inc. of $175-million in new stock to two savvy hedge funds, Soros Fund Management and Paulson & Co. The Soros Fund is run by billionaire investor George Soros,dubbed the man who broke the Bank of England in 1992 through a massive sale of British pounds, while John Paulson made a killing off the collapse in the U.S. housing market.

Novagold's major attraction is its stake in Alaska's Donlin Creek, one of the world's largest undeveloped gold deposits.

Mr. Ing says investors can pick up gold reserves in the ground through junior companies at the equivalent of $100 to $200 an ounce, a far cheaper way to play the trend to higher prices than buying bullion around its recent retail price of $1,150 an ounce.

If your view of the future is driven by concern about inflation, then Novagold is a good hedge, writes Lou Schizas


A less golden future

World gold production peaked in 2001, as a result of declining output in a number of major producing countries. The trend has caused some analysts to speculate that gold output is in a long-term decline, similar to the theory of peak oil that has been applied to falling petroleum output.

Total gold production in 2001 was 2,600 tonnes

, , , , , Big Four*

* South Africa, United States, Australia, Canada

2008 mine production

Total: 2,260 tonnes

China /12.2%

U.S. / 9.9%

S. Africa / 9.8%

Australia / 9.6%

Peru / 7.4%

Russia 7.0%

Canada / 4.2%

Indonesia / 3.8%

Uzbekistan / 3.6%

Ghana 3.4 %

Other / 29%


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