Precious Metals Fundamentals: The Numbers Don’t Lie, Part I - Jeff Nielson

Recent commentaries which have discussed precious metals have focused on the precious metals “market” – meaning the paper-trading that the bankers and Corporate media call “a market”. Sophisticated readers understand that this fantasy world has almost nothing to do with the real market for gold and silver physical metal.

As we learned from Jeffrey Christian in 2010 (in an admission which he would love to take back), in this world of fraud, only 1% of “gold” and “silver” trading is actual metal. All the rest of this trading is paper.

Don’t look for real numbers on precious metals fundamentals from the World Gold Council or the Silver Institute either. These are banker-operated propaganda outlets , with the sycophantic senior gold and silver producers acting as their front-men. These sites get their crooked numbers from the same Corporate media which pretends that the bankers paper-trading represents the real gold and silver market.

Prices are once again being manipulated lower in this paper-trading. The blind, deaf and dumb Corporate media is once again pretending that there is nothing outrageous about this downward manipulation of prices. Readers require a reminder of the dominant fundamentals of the real, physical market for these metals:

1. Precious metals prices are below the cost of production. This is entirely unsustainable.
2. Precious metals supply deficits have been very large, for a very long time. This is entirely unsustainable in the near term.

In establishing that gold and silver are currently priced below the (full) cost of production, it’s easiest to start with the silver mining industry since the evidence is so obvious and extreme. We know that silver is artificially priced below the cost of production for one simple and unequivocal reason: actual silver mines ( “primary” silver mines) produce only a small portion of the total amount of the world’s annual silver supply, and only the world’s very richest deposits of silver can be mined at a profit.

Silver mines currently produce only about 25% of the total amount of silver produced each year. All of the rest of the world’s supply is mined as a byproduct of other metals mining. Silver is the only major metal on the planet where the (vast) majority of supply comes as a byproduct .

This has never happened before in history. For well over 4,000 years, we have always gotten the vast majority of our supply of silver from primary silver mines . It is only in the last 30+ years (with the price of silver pushed to a 600-year low) that we have become dependent on silver byproduct production for the majority of our supply.

It is absolutely unsustainable to supply a metals market on byproduct production alone. More will be said about this later.

The silver market has been in a permanent supply deficit because of strong demand and anemic supply, for at least 30 years. This is unprecedented in the history of commodity markets. Why has there not already been a supply-default in the silver market?

1. Because silver is a precious metal, humanity had accumulated vast stockpiles of silver over a span of 4,000+ years. Those stockpiles are nearly exhausted .
2. As previously noted, silver is still produced in substantial amounts as a byproduct of other metals mining.

The silver market has never emerged out of supply deficit, not even from 2009 – 11 when the price briefly surged above $40/oz. And even before the bankers pushed the price of silver back below $20/oz in the last half of 2016, the global supply of silver had already started to fall. This Bloomberg headline from April 2016 is illuminating:

Silver Supply Trouble Shows Why Rally Momentum Is Building

That article warned that by April it was already obvious that mine production was going to fall for the first time year-over-year since 2011, with supply ultimately 2% lower on the year. We’re now seeing a forecast of mine supply falling by an additional 4% in 2017. This is cumulative with the 2% drop in 2016.

What price level would it take for primary mining to once again account for the majority of supply, making the silver market once again sustainable on the supply side?

In the 30+ years since the bankers nearly exterminated the silver mining industry by manipulating prices to a 600-year low, it has become impossible to provide a precise answer to that question. The minimum price needed to provide supply/demand equilibrium (through primary and byproduct mining) would be some number well above $50/oz . Of equal importance is that this price must be maintained for many years since the “mining cycle” (the time to put a deposit into production) can easily exceed ten years.

Perhaps a more relevant question for many readers is this: what is a rational, fair-market price for silver today? With the price manipulated to such an extreme degree for so many years, even here precise metrics are difficult. A previous commentary pegged a fair price for silver today at $1,000/oz , based upon the historic wages of workers, paid in silver.

Demonstrating that the price of gold is below the full cost of production is somewhat more complex, since readers who are less sophisticated about mining fundamentals will not completely understand what this means. When most readers think about the full cost of gold production they think of the “cash costs” of individual mining companies.

However, this is an elementary calculation which doesn’t even begin to account for the full cost of gold mining. It is only the incremental operating cost for producing an ounce of gold. It doesn’t account for the capital costs of constructing the mine. It doesn’t account for the capital expenditure of buying the project, since most “gold mining” companies don’t actually do their own exploration.

Many of these gold mining companies now produce a number which they call “the all-in cost of sustaining production”. It’s supposed to represent the full cost for that mining company to remain in existence over the long term. It doesn’t .

As mentioned earlier, the large mining companies who are responsible for the vast majority of annual mine supply no longer do their own exploration. If they had to do so, their “all-in costs” would be substantially higher because exploration is expensive.

Instead, mining exploration is farmed out to the junior exploration companies. These are the mining companies who find all of the world’s gold. Here the fundamentals become less murky. These companies suddenly saw their access to capital dry up in 2011, as soon as the price of gold sank below $1,800/oz (USD).

Since that time, these mining companies have experienced the most-severe depression since the price of gold was below $300/oz more than 15 years ago. Gold exploration companies experienced a minor revival in 2016, as the bankers (briefly) allowed prices to rise. That was only sufficient to allow mining companies to begin to resume exploration operations – and on a dramatically reduced scale.

Only the most-promising high grade gold deposits are presently able to attract the funding necessary for serious exploration. The catch here is that almost all of these deposits are too small to be of interest to the world’s senior gold miners. These lazy corporations only want to have to administer a relatively small number of gigantic mines.

With mining costs having risen substantially since 2011, the equation is simple. It would take a gold price in excess of $2,000/oz, sustained at that level for many years, just to bring real health back to the junior exploration sector – the backbone of the gold mining industry.

Without such a revival in the junior exploration companies, none of the world’s senior gold miners will still be in existence 20 years from now. There will be no gold left for them to mine.

This is only ½ of this equation: providing readers with unequivocal fundamentals from the supply side as to why gold and silver prices must rise dramatically. The fundamentals for precious metals on the demand side are even more dramatic since they demonstrate why gold and silver prices must rise dramatically in the near term. This will be the subject of the concluding installment of this series.

Jeff Nielson is co-founder and managing partner of Bullion Bulls Canada; a website which provides precious metals commentary, economic analysis, and mining information to readers and investors. Jeff originally came to the precious metals sector as an investor around the middle of last decade, but with a background in economics and law, he soon decided this was where he wanted to make the focus of his career. His website is www.bullionbullscanada.com.

The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.