Gold: The Most Precious of Metals (Part 3) 

Gold production in many countries, especially in developing or emerging markets, has declined in recent years as the global economy has largely improved since the global financial crisis. Many mining operations have shut down or downsized significantly. However, prices have been increasing since 2016 as safe haven buying has increased. In part 3 of our series on gold, we begin with a section explaining why the price of gold has been fluctuating in recent years. This is followed by a section on the history and news on gold production in each of the top gold producing economies globally in 2017 according to the United States Geological Survey as well as the 2018 economic outlook for each according to the FocusEconomics Consensus Forecast.

What drives the price of gold? 
In part 2 of this blog post series, we included a section on how gold is used to preserve wealth. Because of gold's history as a standard of value in monetary systems, it has left a lasting legacy in today's international monetary system. Historically speaking, those that have held gold have been able to survive crises. This is something that still rings true to this day. During times of economic or financial turbulence, individuals and even foreign central banks look to acquire gold for risk aversion because unlike most other commodities and asset classes, gold tends to preserve its value. This is why gold is referred to as a "safe haven asset."
People generally don't lose confidence in gold, but they do lose confidence in economies and currencies. As a result, the price of gold tends to give us an idea of when a financial crisis is about to hit. As uncertainty begins to fester and sentiment begins to turn negative, confidence in currencies is lost and investment in hard assets increases. Gold’s price, unique to most other commodities, is almost exclusively driven by demand - as demand for gold increases, so does the price.
Since gold pays nothing to its holders and struggles to beat yield-bearing assets when borrowing costs are high, low interest rates tend to support gold prices. Shifts in the value of the U.S. dollar also tend to influence the price of gold, as it is globally priced in U.S. dollars. When the value of the U.S. dollar falls, it makes gold cheaper for foreign investors and consequently helps drive up the price of gold. 
During the global financial crisis the price of gold skyrocketed. The average price of gold per troy ounce in 2007 was USD 696.77 and by 2012 it was USD 1668.69. As global economies began to slowly but surely come out of the crisis the price of gold decreased. In 2015, the average price of gold was USD 1159.8 marking a 30 percent drop in 4 years. Volatility in stock markets and uncertainty over the health of the world economy in 2016 saw prices creep up once again as safe haven investments increased. However, prices have not come close to reaching the sky high prices seen during the financial crisis.
Gold price outlook for 2018
Gold prices have risen in recent months, largely due to a weak U.S. dollar. Putting upward pressure on prices was a large sell-off in the U.S. stock market in early 2018, which supported safe-haven demand for gold. On 5 February, U.S. stock markets recorded the worst trading day in over six years. In addition, strong jewelry demand from India is adding upward pressure, along with a highly uncertain global backdrop. Moreover, recent data revealed that mine production fell in the first nine months of 2017, in part due to output cuts in China amid environmental concerns. Meanwhile, an expected tightening in global interest rates is limiting gold’s gains. Bank of England Deputy Governor Ben Broadbent commented in February that interest rates could be raised sooner than previously expected and at a quicker pace.
The global geopolitical climate should continue to support demand for gold; however, monetary policy tightening will weigh on the asset’s appeal.
With that in mind, let’s take a look at the world’s top-gold-producing economies according to the USGS including history and news on gold production in each country, followed by their current economic outlooks for 2018.

Top Gold Producing Countries 2017 -
History and Economic Outlook
The discovery of gold played a large role in Australia’s history starting with the Bathhurst Gold Rush in 1851. Gold finds in other parts of Australia following the Bathhurst Gold Rush brought millions of migrants to Australia. In the 1890s gold was found in Western Australia in Coolgardie and Kalgoorlie. According to The Australian Atlas of Mineral Resources, Mines, and Processing Centres, 60% of gold mined in Australia today comes from that region. Gold is also mined in all of the other Australian states as well as the Northern Territory.
Mining is a significant primary industry in Australia and a major contributor to the country’s economic growth. During the commodities super cycle starting last decade, Australia thrived, but since the commodity bubble burst, the economy and specifically the mining sector has suffered considerably. According to The Australia Institute, 22,000 mining positions were axed between 2013 and 2015 and according to the Sidney Morning Herald, a further 2000 were cut in 2016. The job cuts in the sector give an idea of the state of the mining sector in Australia, and as the country’s third-largest export earner after iron ore and coal, gold mining plays a big part. Australia is the world’s second highest producer of gold, mining an estimated 270 metric tons in 2016 according to the USGS.   
Economic Outlook
Australia's economy looks to have been in solid shape heading into the new year. Retail sales perked up considerably in the first two months of Q4 after a soggy Q3, while employment growth was elevated in December. The robust labor market is likely fueling consumer confidence, which hit a multi-year high in January. On the downside, the residential property market has softened—particularly in Sydney—following the introduction of macroprudential measures, while wage growth remains fairly limp. This comes after a third quarter economic performance which saw healthy fixed investment, partially offset by sluggish private consumption growth. In December, the government presented its mid-year economic and fiscal outlook. It now expects a smaller budget deficit in 2017¬–2018 than previously anticipated, thanks to improved tax collection and firms’ higher profitability. The government also judged that it was still on track to meet its target of returning the budget to surplus by 2020–2021.
Economic growth should pick up this year, boosted by loose monetary policy, a rebalancing towards non-mining sectors and stronger LNG exports as new projects come onstream. Slow wage growth and high levels of household debt will, however, continue to weigh on growth. FocusEconomics panelists expect GDP to expand 2.8% in 2018, up 0.1 percentage points from last month’s forecast, and 2.7% in 2019.
Gold mining in Brazil stretches as far back as the 1690s when the Brazilian Gold Rush began. Unlike most gold rushes, the Brazilian Gold Rush lasted over 200 hundred years until the 1900s. Brazil’s gold mining activities, like many other countries, played a large part in the development of the country and its economy. Although gold has been and continues to be a very important driver for the Brazilian economy, the many years of exploitation has exhausted Brazilian gold mines. However, it is still the 12th highest gold producer in the world with an estimated 80 metric tons in 2016.
Economic outlook
Hard data for the fourth quarter suggests the recovery gained steam, after GDP grew at the fastest pace since Q1 2014 in the third quarter. Economic activity inched up in November, and industrial production grew at the fastest pace in over two years in December. In addition, the unemployment rate edged down in Q4, boding well for private consumption in the period. Early data for 2018 also points to improving economic conditions: Consumer sentiment rose to a multi-year high in January. Meanwhile, political events are dominating the discourse and generating uncertainty in financial markets. On 24 January, the Ibovespa—Brazil’s benchmark stock index—surged to a record high, after an appeals court held up former President Luiz Inácio Lula da Silva’s corruption sentence. The ruling could make Lula ineligible to run for presidency in October’s vote; however, Lula maintains his innocence and will likely keep fighting the charges. Heightened uncertainty in the run-up to the elections could generate volatility in Brazil’s exchange rate and in financial markets.
Accommodative monetary policy and improved confidence should fuel high growth this year. Keeping the recovery on track will require a reform-minded president, however, and it is difficult to judge if the election will yield a market-friendly outcome. FocusEconomics panelists see the Brazilian economy growing 2.5% in 2018, which is unchanged from last month’s forecast. In 2019, growth is seen edging up to 2.7%.
Gold in Canada is found all across the Laurentian Plateau, in British Columbia, Nunavut, and Newfound Land. Gold was first discovered in Canada in 1823 along the Chaudiere River in Quebec. Many years later the legendary Klondike Gold Rush in 1896 sparked a massive migration of prospectors to the Yukon River basin in search of gold with the dream of striking it rich. It has been called the last great gold rush. 
Since then, Canada has been a steady eddie in terms of gold output, especially for the last decade, as it has been at the top of the rankings for gold production by country. In 2014 Canada achieved a record for gold output at 152 metric tons, which marked the first time that it caught up to South Africa in annual output. The estimated output for 2016 by the USGS is expected to be even higher at 170 metric tons.
Economic Outlook
Monthly GDP growth stalled in October on a decline in oil and gas output, a surprise flatlining of the Canadian economy on the heels of a significant tapering in the third quarter. Despite cooling substantially from last year’s roaring first half, the economy has continued performing robustly, notching notable gains in recent months. Unemployment hit a more than 40-year low in December as the labor market tightened further on record-setting job gains in the September–December period. As a result, real wages were up markedly from a year earlier. On the trade front, TPP-11 is expected to be signed in March; the multilateral deal has become an important hedge for the government as it navigates NAFTA renegotiations with the U.S. and Mexico.
GDP growth is expected to continue moderating towards potential this year as higher interest rates and the property market cool-off weigh on household spending. Downside risks from the possible scrapping of NAFTA will loom heavily on the economy over the short term. Business investment, infrastructure spending and extractive exports should increasingly drive growth over the medium term. FocusEconomics panelists expect GDP to grow 2.2% in 2018, which is unchanged from last month’s estimate, and 1.8% in 2019.
China is the number one producer of gold in the world. The USGS estimates that China mined 455 metric tons of gold in 2016. Since gold began to be mined in the 1970s, gold production in China has rapidly increased. China finally overtook South Africa in 2007 as the world’s top gold producer. China’s major gold production regions are generally located in the east of the country, in the eastern provinces of Shandong, Henan, Fujian, and Liaoning. Most of the gold mined in China stays within its borders to produce jewelry. The demand for gold in the west over the last decade has decreased while Chinese demand has increased dramatically. In 2014, China was the top gold consumer in the world at 27.9% of global consumption, just ahead of India at 26.5%.
Although China is the world’s top gold producer, it is expected that Chinese mining companies will begin to explore potential acquisitions of international gold producers to meet demand and reduce dependency on international gold producers. China’s insatiable appetite for gold also led to a new price fix in Shanghai last year in an attempt to start a regional benchmark priced in Yuan to increase its influence in the global gold market.  
Economic outlook
Despite early signs of a loss of momentum in Q4, the Chinese economy showed its strength once again and posted another solid reading for the quarter. GDP expanded 6.8% annually in Q4, matching Q3’s result and leading the economy to rise a strong 6.9% in the full year 2017. While resilient private consumption and service activities continued to drive growth in Q4, the economy greatly benefited from strong global demand. Conversely, investment growth continued to moderate in Q4 amid the government’s efforts to curb pollution and overcapacity in certain industries. Since the economy is doing well, the government will likely speed up the implementation of some of the reforms that were unveiled in the December Central Economic Work Conference. Further details will be disclosed at the March 2018 National People’s Congress.
Economic growth will decelerate this year due to a cooling housing market, the government’s tighter environmental regulations and moderating external demand. While the deceleration will be part of the government’s plan to achieve a more balanced economic model, renewed tension with the U.S. over trade disputes and a disordered financial deleveraging could prompt the economy to slow down abruptly. FocusEconomics panelists forecast that the economy will grow 6.5% in 2018, which is up 0.1 percentage points from last month’s forecast. In 2019, the economy is expected to grow 6.3%.
Ghana has been a major producer and exporter of gold dating all way back to precolonial times when gold was exported from present-day Ghana to Europe via trans-Saharan trade routes. Gold mining was mostly alluvial until the 1860s when modern mining techniques were first implemented to extract gold.
Many years later, Ghana is now Africa’s second largest producer of gold behind South Africa. Southern Ghana is considered to be one of the world’s best regions for gold mining, however, despite still being one of the world’s top gold producers, output of the mineral has dropped significantly in recent years. Much of this has been attributed to the fall in gold prices after the global economy began to look healthier following the crisis. With the decline in mining activities followed increased layoffs in mining operations while even illegal gold miners in the country were giving up. Nonetheless Ghana is still the 11th largest producer of gold globally, the USGS expects the country to have produced 90 metric tons in 2016.
Economic Outlook
Ghana's economy experienced a momentous turnaround in 2017, escaping the grips of subdued growth in 2016 that was brought about by lower oil production coupled with a tight monetary policy stance dampening overall economic activity. Boosts to oil production amid the oil price rally, and recovering domestic demand aided by increased monetary accommodation against a backdrop of slowing inflation, helped propel annual GDP growth to 9.3% in Q3. PMI data for Q4 suggests that while private sector activity remained buoyant at the close of the year, it lost some ground compared to the previous two quarters, likely translating into a moderated pace of economic growth in the quarter. Despite the substantial strides made in 2017, the economy is still at high risk of debt distress with an elevated debt-to-GDP ratio, threatening long-term financial stability. Reigning in the heavy debt burden and putting it on a sustainable course will be one of the government’s top priorities for 2018.
Higher oil production and tighter control of expenditures should lift revenues, while domestic demand should pick up amid moderating inflation, driving robust economic growth. Headwinds to the outlook stem from financial sustainability of state-owned energy enterprises and a high outstanding volume of non-performing loans plaguing the banking sector. FocusEconomics panelists expect GDP growth of 7.1% in 2018, which is up 0.3 percentage points from last month’s forecast, and project it to moderate to 6.1% in 2019.
Indonesia is home to one of the largest gold mines in the world, the Grasberg Mine. It did not technically open until the 1980s, but can trace its origins with the Ertsberg mine, which was first discovered in the early 1900s, but didn’t officially open until 1973. The Mine is thought by some to hold the largest gold reserves in the world and contributes the majority of Indonesia’s gold production. The Grasberg mine has been the site of numerous attacks by the Free Papua movement beginning in the 1970s. Papua, Indonesia’s eastern-most province, has been a hotbed for an independence movement among inhabitants of the province, which has prompted the Free Papua Movement to make numerous attacks on the mine over the years. The mine is owned by a foreign company, which has many Papuans resentful, as they believe it profits disproportionally from the region’s natural resources without giving much back. Nonetheless, the mine employs over 19,500 people in the area.
Pollution and environmental harm are another source of resentment toward the mine, which many believe is contributing heavily to pollution to surrounding rivers, land surfaces, and groundwater.
Apart from the Grasberg mine, Indonesia is in the midst of a modern gold rush, where it is estimated that, quite remarkably, illegal gold mining is producing more within the borders of the country per year than the estimations of Grasberg’s yearly output. According to a New York Times report, corruption and even more pollution are at the heart of the illegal gold mining in Indonesia.
The crucial ingredient in the purification process of the gold by illegal mining operations is mercury, which has environmentalists and other health experts concerned around the world. Many of the small-scale illegal gold mining operations are funded by businesses located in the country’s capital city, Jakarta, which pay local authorities off to allow them to continue the practice. Although illegal gold mining is not taken into account in the USGS survey, Indonesia’s estimated gold output in 2016 by the USGS is thought to be 100 metric tons, making it the 10th highest producer in the world by yearly volume.
Economic Outlook
Indonesia's economy appears to have ended 2017 on a solid note, with growth expected to have edged up for the second consecutive quarter in Q4. Retail sales accelerated in November and consumer confidence picked up in December. However, strong growth in imports in Q4 caused the trade balance to fall, despite double-digit export growth. The economy is expected to have hit a milestone last year, growing to over USD one trillion dollars in nominal terms. Despite the increase, Finance Minister Sri Mulyani Indrawati stated in January that government revenue came in below target in 2017 due to low tax revenue. However, lower-than-planned government spending kept the budget deficit at 2.6% of GDP, only slightly up from 2016’s 2.5% of GDP shortfall. On the political front, President Joko Widodo reshuffled his cabinet in January, replacing his chief of staff and the social affairs minister. The shakeup was widely expected as some of Widodo’s staff will run in regional elections this year, and the move should not affect economic policy.
Buoyant investment growth and healthy household spending should fuel a modest acceleration this year. FocusEconomics panelists see GDP expanding 5.3% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is seen growing 5.4%.
Although Mexico has historically been known for its silver mining, it is also a major player in gold production. Gold has been mined in Mexico for over 500 years, and although the country has a long history of mining for precious metals, there are still large deposits of precious metals that have gone untouched. Recent developments in mining technologies are now making it possible to get to some of those untapped deposits while Mexico’s political environment is largely considered to be favorable to mining activities, meaning that Mexico will likely be one of the top-gold-producing economies for the foreseeable future.
However, gold mining in Mexico has not been without controversy. Many mining corporations that are present in Mexico are foreign, such as McEwen Mining Inc., which recently had a refinery robbed and looted by armed gunmen late last year. This was the 3rd attack of this kind in 2015. Kidnappings are also an issue, with workers disappearing and turning up dead days later. This recent flurry of attacks highlights the perils of mining in Mexico and the security issues may present downside risks to the mining sector in Mexico in the future.
Mexico is still a world leader in gold production with an estimated volume of 125 metric tons in 2016.
Economic Outlook
The Mexican economy grappled with the effects of high inflation, tighter monetary conditions and fiscal consolidation in the last quarter of 2017. A preliminary GDP estimate showed growth clocked in at 1.8% in Q4, only slightly above the 1.5% increase, a four-year low, recorded in Q3. Incoming economic data for the quarter suggests household consumption growth moderated from the previous quarter but remained resilient. Retail sales shrank at the sharpest pace in nearly four years in November, but solid labor conditions led the unemployment rate to dip to its lowest in over a decade in December. In addition, fixed investment data up to November suggests the government continued to scale down infrastructure projects in the fourth quarter, weighing on overall growth. Leading data for January is similarly discouraging, with consumer sentiment deteriorating and PMI indicators painting a mixed picture of the manufacturing sector.
Upcoming general elections and lingering uncertainty surrounding NAFTA talks will continue weighing on the economy in H1. Growth should, however, gather momentum in H2 as political noise wanes, inflation eases and the peso firms, which would allow Banxico to turn more supportive of growth. The FocusEconomics panel expects growth of 2.2% in 2018, which is unchanged from last month’s estimate. For 2019, analysts see growth accelerating to 2.3%.
There is no question that Peru is a mining country with the country’s mineral deposits having been mined going back over 1000 years. One drawback to Peruvian mining is that many of the mineral deposits are located in the areas that are fairly inaccessible in areas of high elevation in the Andes. Peru’s government is pro-mining and open to foreign investment, playing a limited role in the oversight of the country’s mining industry. Much like the mining industry of Indonesia, pollution is a big concern in Peru, especially from illegal mining, which is rampant. Similar to illegal gold mining and production in Indonesia, the use of mercury is widespread. According to the USGS, Peru is the 7th largest producer of gold annually, having producing an estimated 150 metric tons in 2016.
Economic Outlook
According to available indicators released by the Statistical Institute, economic growth remained unimpressive in the last quarter of 2017. The indicator of economic activity (IMAE) slowed in both October and November; in December, export growth softened further and annual growth in government investment spending moderated from the previous month. Moreover, the unemployment rate in Metropolitan Lima increased for the second consecutive month in December, likely weighing on household spending. That said, the mining sector recorded another month of solid year-on-year growth, and yearly credit expansion accelerated. Moving into 2018, while consumer confidence continued to worsen in January, business sentiment rebounded healthily, which bodes well for investment going forward. On top of that, the political situation remains uncertain. In January, a group of ten lawmakers headed by Kenji Fujimori split from the right-wing Popular Force party (FP), declaring they would support President Kuczynski. As a result, the FP lost its absolute majority in the Congress, which could make Kuczynski’s political sailing smoother.
This year the Peruvian economy should pick up steam: Rising wages and employment gains are expected to spur household spending, while a ramp up in infrastructure spending will underpin fixed investment. Moreover, the country should continue benefiting from the recovery in commodity prices. The main downside risk to the outlook remains political uncertainty. FocusEconomics panelists see GDP expanding 3.7% in 2018, down 0.2 percentage points from last month’s forecast, and 3.8% in 2019.