In the first part of this series; several fundamental principles of economics (and markets) were stressed. Supply/demand analysis is not merely objective, and logically/mathematically irrefutable; it is the only basis upon which the market for any hard asset can be analyzed. Conversely the price-analysis constantly parroted by the Corporate media is utterly devoid of any significance or legitimacy – in the corrupted crime-scenes of today which we call our markets.
Part I explained, through a simple and unequivocal hypothetical example, how supply/demand fundamentals would (and must) assert themselves, in spite of even the most extreme or relentless manipulation of a sector (by any means). This is based upon the elementary reality that in a world of physical goods, there are fixed production costs, and thus a minimum price for that good.
As illustrated in the hypothetical example; if that minimum price is breached (downward), this must result in the total depletion of inventories, and that total depletion of inventories must result in a dramatic, upward revision of the price, in spite of any manipulation, as only a much higher (legitimate) price could instigate a resumption in supply.
There was, however, one assumption hidden within that analysis (which essentially was supply-based analysis): demand. What if demand for a particular good dropped, or even collapsed? In such a scenario; analysis regarding “minimum price” would no longer apply, because the economic definition of “price” is the intersection-point between supply and demand – a meeting of buyer and seller.
If demand is not sufficient to support a minimum price; there would not be an increase in price (sufficient to economically justify a resumption of production). Rather, we would simply have a dead market/sector, with no producers because there was not enough economic interest (i.e. demand) in that good to justify further production.
Fortunately, we don’t have to worry about this consideration, at all, with respect to gold and silver, since not only is demand eternal, for the world’s oldest-and-best money, it is rising. One would never know this from the pseudo-reporting of the Corporate media. In their fantasy-world; demand for gold and silver is unpredictable (at best), or anemic (at worst).
What is the basis of this gigantic discrepancy between the “reporting” (i.e. propaganda) of the Corporate media, and reality. These charlatans exclusively “report on” and “analyze” the paper-gold market, and the paper-silver market. Regular readers are familiar with the two, ultimate fundamentals of the paper-called-gold market, and paper-called-silver market. First of all these two faux “markets” are at least one hundred times as large as the real markets for gold and silver. Secondly, the paper-called-gold and paper-called silver “markets” are 100% frauds and shams.
Reporting on “demand” for these faux-markets which are a hundred times larger than the real markets is not simply inaccurate. It is entirely irrelevant, to the point where such drivel cannot even be incorporated into any analysis of the real fundamentals of the gold and silver markets.
In the real world; we have dramatic (and seemingly permanent) upward shifts in demand. The skyrocketing demand for gold (specifically) has two, separate points of origin. First of all; as Western bankers debauch – and destroy – the world’s paper currencies (and at an accelerating rate), the sane populations of Asia are funneling ever-greater quantities of their own wealth out of that paper (where it can be stolen via “competitive devaluation”) and into gold and silver, which it is immune to the crime of currency-dilution.
Not surprisingly; the creators of all these fraudulent, paper currencies (our central banks) are doing the exact, same thing. What should people do when the manufacturers of Fords all start buying Toyotas? You should buy a Toyota. What should you do when the manufacturers of our paper currencies start dumping those currencies to buy gold? You should buy gold (or silver).
Central banks around the world soaked-up a whopping 1,000 tonnes of gold in 2014 and 2015 as they fled their own paper, averaging 500 tonnes per year. Conversely (before the Western central banks had finished squandering our nations’ gold); Western central banks were dumping 500 tonnes of gold per year onto global markets. With a commodity where total, annual mine-supply is roughly 3,000 tonnes, a 1,000 tonne per year upward swing in demand (just by the world’s central banks) is enormous – to put it mildly.
In any legitimate market, such explosive demand would have produced a “bull market” (and bull-market prices) sufficient to rival the fraudulent, paper bubbles which the banksters have manufactured in their own “markets”. Thus if we factor (real) demand into our equation; our analysis about “minimum price” also goes out the window – because demand this extreme guarantees an equilibrium price far above any minimum price.
Since the purpose of this exercise is to construct such a minimum price; no more will be said about demand, except to note that it is equally supportive to the silver market, but for significantly different reasons/fundamentals. Suffice it say that fundamentals for silver (on the “demand” side) are at least as strong as those for gold, if not stronger.
Knowing these are markets which are (at the very least) fully supportive of any “minimum price”; we can return to this analysis, with confidence in the result. As noted even within the Corporate media; $1,300/oz (USD) is not currently “sustainable” for gold, meaning we know that the minimum price is significantly above this level. How far above?
Complicating such analysis, tremendously, is the fact that we cannot trust the data we are fed by the gold miners, especially the large gold miners – who, themselves, are mere “pets” of the One Bank. The problem? Their supposed “all in” costs of producing an ounce of gold are not “all in”, not even close. Conveniently omitted from the bottom-line of all such calculations are one very important line-item: “acquisition costs”.
The world’s largest gold-miners, who actually produce the lion’s share of global mine-supply each year do very little organic exploration-and-development on their own, because these mining corporations don’t know how. They rely upon the smaller gold mining companies, generally the Junior Miners, to do their exploration, and much of the development of these projects for them.
At that point; these predatory behemoths swoop-in and buy the property, or (more often) the entire mining company, at which point all the exploration & development personnel are no longer retained. In legitimate markets; these acquisition costs can rival the (astronomical) capital costs of constructing the actual mines. Obviously omitting such a significant cost from their calculation of “all in” production costs robs those numbers of any legitimacy.
Currently, with these Junior Miners (like the metals themselves) suppressed to some tiny fraction of their actual value; why aren’t we seeing the predatory Senior Miners cannibalizing these miners, like children devouring their Halloween candy? Because the relentless, illegal suppression of gold (and silver) prices means that the market caps of these larger predators are nearly as withered-and-desiccated as that of the Junior Miners. They are toothless tigers.
Lacking a direct means of estimating the minimum price for gold (i.e. its marginal cost of production), we are forced to rely upon more indirect means. The obvious starting point is to note when activity and profitability began dramatically falling-off in the sector. Obviously any sector which is shrinking rather than growing must be priced below its minimum price.
In the case of the gold (and silver) sector; we have a very clear demarcation point. The sector stopped growing almost immediately after the price of gold turned lower from its interim high of over $1,900+/oz (USD). The extreme momentum within the sector (generated by the explosive rally of the previous two years) caused many projects already in motion to continue to proceed, but the “health” of the sector began deteriorating even with the price of gold still within shouting distance of that previous $1,900+/oz peak.
Our starting point is that as of the Spring of 2011 (the peak of the previous precious metals rally); the minimum price for gold was somewhere between $1,900/oz and $1,300/oz, and (as the empirical evidence clearly shows) much closer to the former number than the latter number. But this is still “static analysis”: a simplistic approach which doesn’t account for the changing dynamics within markets.
Engaging in “dynamic analysis” (i.e. analysis which does account for change); we have two more important variables to factor into our calculation of the minimum price for gold – in the Spring of 2015. The first of these factors is “peak gold”: the rapidly declining grades of available ore, as nearly all of the world’s rich and/or easily-accessible ore bodies have been depleted.
One of the reasons why gold miners who were making solid profits mining gold in 2005 (at $500/oz) are losing money in 2015 with gold at roughly $1,200/oz is they are running out of high-grade, or even medium-grade ore to process. With these withered husks unable to cannibalize smaller miners in this artificial depression; the “reserves” of these miners are collapsing.
This is one of the reasons why (as mentioned in Part I), the new “minimum price” for gold would have to be higher than the old “minimum price” for gold – even if nothing else had changed in the world. These large gold miners, providing the bulwark of global supply would require several years of very substantial operating profits to rebuild their reserves (with lower-grade ore), and thus restore some semblance of health to the sector, and their own operations.
The second factor (as also noted in Part I) is the rapid collapse in value of these dying, Western currencies – even as our corrupt governments pretend there is “no inflation”. It is when we combine those two factors we understand why companies which were profitable in 2005 (at $500/oz) are coughing-up large amounts of red ink in 2015, with gold at $1,200.
Given the speed at which this debauched paper is losing value; this makes any precise estimate of a minimum price for gold today impossible. It also means that the “minimum price” for gold in 2015 will be lower (substantially) than the “minimum price” in 2016, and so on. On this basis; we can now state with confidence that the (temporary) 2015 minimum price for gold is somewhere above the previous “peak” of $1,900+/oz.
How far above $1,900/oz? Lacking real/precise data on inflation, and lacking real/precise data on the miners’ “cash costs”; it is impossible for anyone to produce a number with any greater precision than that. What then, is the purpose of this analysis? Simple.
Any time that a reader sees any (supposed) “analysis” of the gold market which does not incorporate and assume a price of gold at least at-or-above $2,000/oz (USD, 2015); that reader will immediately recognize the piece as utter drivel – and not waste any more valuable seconds of their lives in consuming such trash.
Courtesy: Sprott Money News
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