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In commodity market analysis, the phrase “the best cure for high prices is high prices” often resonates. The basic premise is that as prices rise, the market reacts by increasing supply and reducing demand, ultimately leading to a price correction. However, a closer examination of the gold mining sector reveals a different narrative. Contrary to this principle, gold production tends to decrease as prices climb, resulting in what economists refer to as a “backward-rising” supply curve. This phenomenon can be traced back to the early 1970s, particularly in South Africa, the world’s dominant gold producer at the time.
From 1970 to 1975, South Africa produced about 77% of the free-world’s gold, yet its gold output dropped from 1,000 tonnes to 652 tonnes, even as prices surged from $36 to $154 per ounce.
South African gold mines prioritized extracting low-grade ore, which was profitable at the prevailing price, causing production to decline as gold prices rose—an anomaly known as the “backward-rising” supply curve.
Global gold production fell by 25% between 1970 and 1975, despite an unprecedented rise in gold prices, largely due to South Africa’s mining policies and physical limitations.
Roughly 10% of gold production comes as a by-product of base metal mining, making gold output in some regions dependent on copper and lead markets rather than gold prices.
Gold concentrations in ore deposits are uneven, and when prices rise, it becomes profitable to mine lower-grade ore, although physical limitations prevent a significant increase in overall production.
From 1970 to 1975, approximately 77% of the free-world’s gold came from South African mines. This concentration of production made the policies of South African mining companies critical in shaping global gold supply dynamics. Unlike other commodities where higher prices incentivize producers to ramp up production, South Africa’s approach to gold mining created an unusual market response.
During this period, South African mining companies operated under a specific policy that prioritized mining the lowest-grade ore that could be extracted profitably at the prevailing gold price. This practice meant that as gold prices increased, instead of boosting production, South African mines extracted less gold. The physical limitations of mining deeper, more costly ore bodies further contributed to this trend. As a result, a peculiar supply curve emerged, where higher prices did not yield an increase in output, but rather the opposite.
The economic principle behind this backward-rising supply curve is relatively straightforward but stands in stark contrast to the behavior seen in most commodity markets. South African mines, facing escalating gold prices, opted to leave higher-grade ore untouched, instead focusing on mining lower-grade ore profitably. This decision was rooted in the belief that the remaining ore could be extracted at an even higher profit margin if prices continued to rise. However, the physical and technical constraints of mining also played a significant role. As gold deposits became harder to access, production slowed, even as prices skyrocketed.
To illustrate this dynamic, one can look at the production figures from South Africa during this period. In 1970, South Africa produced 1,000 tonnes of gold. By 1971, production had declined to 976 tonnes, and the downward trend continued: 900 tonnes in 1972, 848 tonnes in 1973, 750 tonnes in 1974, and 652 tonnes in 1975. These figures starkly contrast with the global gold price, which rose dramatically from $36 per ounce in 1970 to $154 per ounce in 1975. Despite this unprecedented price increase, South African gold production fell by nearly 35% over the same five-year span.
The president of Homestake Mining Company, operator of the largest gold mine in the Western Hemisphere at the time was quoted during an interview published by the Pacific Coast Coin Exchange in 1974.
“Well, we always work as near as we can to our hoist and mill capacity-about 6,600 tonnes of ore per day. With higher gold prices, it’s become profitable for us to mine lower grade ore. So while the amount of ore we process remains about the same, actual gold output is lower. For instance, during 1972, our gold output declined 20% from 1971. Yet our income and profits are considerably greater than a few years ago. The situation is similar for gold mines in South Africa. Over the years I expect gold production will continue to drop the faster the price of gold rises, the faster the drop. If gold were at $300 per ounce, I think gold production would be something like a half or third what It is now.”
While South Africa’s output was declining, gold production in other regions remained relatively stable or followed different patterns. In the rest of Africa, gold production held steady during this period. In Latin America and Oceania, production increased, while in Asia, it fell moderately. The United States and Canada saw a more pronounced decrease in their gold production. Overall, there was a 25% reduction in free-world gold supply from 1970 to 1975, even as gold prices rose at an unprecedented rate.
This decline in global supply, coupled with the soaring demand for gold as prices rose, created a perfect storm that pushed prices higher. But this reaction was not uniform across the globe. In countries like the United States and Canada, where gold mining was not as dominant an industry as in South Africa, the decline in production was more gradual and less tied to deliberate policy choices. Meanwhile, in regions like Latin America and Oceania, the rise in gold prices spurred increased output, albeit not enough to offset the drop in South African production.
The backward-rising supply curve observed in South Africa was not merely the result of corporate strategy. Several other factors influenced gold supply, making the relationship between price and production more complex than in other commodities. One of these factors is that about 10% of global gold production comes as a by-product of base metal mining, such as copper and lead mining. In these cases, the output of gold is largely influenced by the demand and supply conditions for the base metals, rather than gold prices alone. This further complicates the picture, as gold production from these mines might not respond directly to rising gold prices in the same way as dedicated gold mines.
Additionally, the uneven distribution of gold concentrations within ore deposits adds another layer of complexity to the supply equation. Gold deposits are not homogenous; some sections of a claim may contain high-grade ore, while others contain gold in much lower concentrations. When prices are low, mining companies focus on the higher-grade ore to maximize profitability. However, as prices rise, it becomes economically viable to extract lower-grade ore, which was previously too costly to mine. This shift in production strategy is one reason why the backward-rising supply curve exists: companies can now afford to mine ore that was previously uneconomical, but the physical limitations of mining technology and infrastructure prevent a significant increase in total output.
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The backward-rising supply curve observed in South Africa was not merely the result of corporate strategy. Several other factors influenced gold supply, making the relationship between price and production more complex than in other commodities. One of these factors is that about 10% of global gold production comes as a by-product of base metal mining, such as copper and lead mining. In these cases, the output of gold is largely influenced by the demand and supply conditions for the base metals, rather than gold prices alone. This further complicates the picture, as gold production from these mines might not respond directly to rising gold prices in the same way as dedicated gold mines.
Additionally, the uneven distribution of gold concentrations within ore deposits adds another layer of complexity to the supply equation. Gold deposits are not homogenous; some sections of a claim may contain high-grade ore, while others contain gold in much lower concentrations. When prices are low, mining companies focus on the higher-grade ore to maximize profitability. However, as prices rise, it becomes economically viable to extract lower-grade ore, which was previously too costly to mine. This shift in production strategy is one reason why the backward-rising supply curve exists: companies can now afford to mine ore that was previously uneconomical, but the physical limitations of mining technology and infrastructure prevent a significant increase in total output.
This backward supply curve phenomenon is not exclusive to South Africa. In a 1974 interview published by the Pacific Coast Coin Exchange, the president of Homestake Mining Company—operator of the largest gold mine in the Western Hemisphere—echoed similar sentiments. He highlighted the unpredictable relationship between gold prices and production, emphasizing how factors such as ore grade, technical limitations, and the interplay of base metal markets all played a role in shaping the global gold supply.
Even with rising gold prices, producers often faced logistical challenges, such as deeper mining shafts, more expensive energy costs, and the need for more advanced equipment to access hard-to-reach ore bodies. These challenges limited the ability of gold mining companies to respond to price signals in the same way that oil or agricultural producers might. As a result, the global gold supply chain experienced volatility that was driven by more than just price dynamics.
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