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:
- Precious metals prices are below the cost of
production. This is entirely unsustainable.
- 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?
- 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
.
-
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.
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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.
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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.
