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The Minimum Price for Gold, Part 1
................Written independently by Jeff Nielson (click for original)
April 15, 2015
Having written for several years about precious metals, the massive threat to our financial security (from our own financial institutions), and why gold and silver represent our best protection from that threat; it’s easy to forget that there are readers who are new to this sector. For those readers; it is necessary to review the fundamentals of supply and demand.
However, even regular readers and knowledgeable investors in this sector could likely benefit from such a review, although for entirely different reasons. After nearly four, solid years of extreme, unremitting downward manipulation of prices for gold and silver; it is easy for such readers/investors to forget (or simply lose confidence in the fact) that the dramatic, upward revision of gold and silver prices is both a necessary and imminent event.
Why is such a discussion necessary for newer readers? Because explaining to these readers how gold and silver are our financial shields against the systemic financial crimes directed against us is less-than-effective if those same readers don’t also know why precious metals currently fulfill such a function (and have always done so). It all starts with supply and demand.
For new readers previously only exposed to the pseudo-analysis of the mainstream media; supply/demand analysis will be totally alien. They are used to an exclusive diet of price analysis from the drones of the Corporate media. In the real world, however, that price analysis is utterly devoid of any validity or significance whatsoever, while only supply/demand analysis yields objective and unequivocal conclusions.
It is beyond the scope of this commentary to explain to new readers why price analysis is absolutely flawed, and thus totally devoid of all legitimacy. That is a separate subject on its own, and readers seeking understanding on this point will have to refer to a previous commentary specifically on that topic. This piece will explain why supply/demand analysis is irrefutable, at least with respect to the markets for all hard assets.
The Law of Supply and Demand is best illustrated by applying this conceptual framework to a specific (hypothetical) example, in this case the market for chocolate bars. As with any market, and any industry engaged in manufacturing; there are basic fundamentals which apply to the production of all goods.
The goods producer requires “inputs”, generally broken down into three categories: infrastructure, raw materials, and labour. These inputs all represent necessary and unavoidable costs, thus to produce a chocolate bar (or any other good) requires that purchasers meet (or exceed) a minimum price for that good. That minimum price must not only cover the full cost of production, but also generate at least some modest level of profit.
Why is “profit” necessary (in our capitalist economies)? Because that profit attracts the capital which is necessary to fund the reinvestment which is required to sustain any industry. Equipment wears out, over time, and must be replaced. Improvements in technology (intended to increase efficiency) require further investments – generally substantial ones.
In the case of non-renewable resources like gold and silver; massive reinvestment (of profits) is required to find new bodies of ore to mine, to replace the ore-bodies (and mines) which have been depleted through previous operations. Any long-term price for these metals which is below the full cost of production (plus necessary margin of profit) is not sustainable, and thus below the “minimum price”.
What happens when any good is priced below that minimum price? To answer that question; we merely refer back to our hypothetical example. Suppose that (one way or another) the “global price” for chocolate bars was manipulated down to 10 cents apiece, the normal price for a chocolate bar roughly 40 years ago.
The Law of Supply and Demand tells us exactly what would happen. With chocolate bars priced at this tremendous discount; there would be an explosion in demand, as buyers could obtain ten chocolate bars with the same dollar which used to only have sufficient purchasing-power to buy one. Meanwhile, as demand for chocolate bars exploded; the supply of chocolate bars would collapse. Today, no company could come close to covering their production costs at such an enormous discount (let alone make the necessary profit), and chocolate bar manufacturers would be forced to suspend production.
Very quickly; all of the store shelves (i.e. the global inventory) would be cleaned-out of all chocolate bars. That would leave only the remaining stockpile of chocolate bars — i.e. those chocolate bars still owned by various entities, but not yet eaten. The first and most obvious point is that none of these chocolate bar-holders would be willing to sell from their own stockpile at the heavily-discounted price of 10 cents apiece.
Irrespective of any previous price-manipulation; the real-world price for chocolate bars would rise (and rise dramatically), to whatever price was necessary to get a holder to part with a good which was currently not available for sale, and thus could not be replaced once sold. That (real-world) price for chocolate bars would continue to rise until…?
The price would rise until it was high enough to justify producers returning to this industry, and resuming production. Equally important; this “new price” for chocolate bars would not only have to be equal to the “old price” (the original, minimum price), it would have to be higher than that – at least over some shorter term.
There are two reasons for this. First of all; there would be a certain amount of lag-time between the time that the price of chocolate bars reached its (new) “minimum price” and actual, new production could reach store shelves. In the interim; anyone wanting to buy a chocolate bar would have to pay a significantly higher price than the Old (minimum) Price.
The second reason why the New (minimum) Price would have to be higher is risk and loss. Having already been driven out of business once; the producers returning to this market would only resume production once the New Price for chocolate bars had significantly exceeded the Old Price, to compensate for past losses and future risk.
To begin with; these returning businesses would have suffered financial losses from being previously forced to suspend production, and would seek to recover those losses through a higher New Price, their new “minimum price”. The New Price would also have to be higher to compensate these producers for perceived risk: the risk of being driven out of business again through price-manipulation (“once burned, twice shy”).
The important point to make here to newer readers is that this hypothetical example involving chocolate bars mirrors the fundamentals (and price-manipulation) currently taking place in the precious metals sector, in the real world. The prices for gold and silver have been manipulated below their minimum price. Producers have been driven out of business.
Demand does (greatly) exceed supply. The complete collapse of inventories of gold and silver is imminent. Thus a dramatic, upward revision of gold and silver prices is inevitable, and that new minimum price for gold and silver will be higher than the old minimum price. Naturally, the question on the minds of readers (old and new, alike) is “how high”?
Complicating the answer to this question, tremendously, is the medium of exchange which we still use (temporarily) to price all of our goods: the debauched and fraudulent paper currencies of the Western world. How rapidly is this debauched paper losing even its perceived value? A decade ago; the world’s largest gold miners were generating large profit-margins with the price of gold at $500/oz (USD). Today, even the Corporate media acknowledges that:
“$1,300 is not a sustainable gold price.”
Pricing gold at even $1,300/oz (USD) more than 2 ½ times the price of a mere decade ago is now below the “minimum price”, which is why these same gold miners are now suffering ugly losses on their bottom-line, with the price of gold bobbing above/below $1,200 (USD).
With the price of gold below its minimum price, ipso facto the price of gold must rise, to whatever new minimum price is necessary to restore supply/demand equilibrium. This is with respect to the long-term minimum price. As previously explained; over the shorter term, the price must go even higher than that long-term minimum price. That is the Law of Supply and Demand, and it is immutable.
The Law of Supply and Demand dictates that the price of gold must rise to a price somewhere above $1,300/oz (USD), and to an even higher price than that over the shorter term. So; why have “experts” like Nouriel Roubini and Dennis Gartman, and (supposedly) prestigious financial institutions like Goldman Sachs asserted that the price of gold was going to $1,000/oz, “expert opinions” which have been echoed hundreds of times by the drones of the Corporate media in their Chicken Little reporting?
Logically, there are only two possibilities. Either none of these so-called experts is familiar with the Law of Supply and Demand (and one of them was awarded a Nobel Prize in economics), or; they were/are lying to us when they insisted the price of gold should fall far below its minimum price.
Based upon supply/demand fundamentals for precious metals, and the accelerating collapse in value in the West’s dying currencies (most-notably the U.S. dollar); what is a reasonable, new “minimum price” for gold and silver? The answer to that more-challenging question will be the subject for Part II.
................Written independently by Jeff Nielson (click for original)
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What is completely missed here is that there is NO gold needed to meet the demand for today's paper gold. currently the mere promise of gold delivery in the future makes buyers happy. The supply of gold is NEVER too low. It is always the price is too low to get current holders of (real) gold to part with their holdings.
As long as the gold derivative market is functioning gold could go way below $1000. Paper promises have almost no cost to make, only the risk that there will be a demand for the real thing.
When the medium of exchange is unstable it does not make sense to discuss the POG in dollar terms. The real question is 'what is the minimum price for dollars'?
Can you fuckers PLEASE learn how to use log graphs. Graphs like this tell me nothing. What makes a log graph special and useful is that equal vertical changes represent equal relative changes. For example, going from 1 to 2 is a 100% increase. Going from 2 to 4 is also a 100% increase. On a log graph, the vertical distance between 1 and 2 is the same as the vertical distance between 2 and 4. The graph is actually usable when it's logarithmic. The large actions that happen at lower prices are more clearly depicted.
The laws of supply and demand go out the window when manipulation steps in.
they still apply, but for the number to be meaningful, one must look to the free (black) market. it has prices for everything, and factors in government interference as well.
Wait a minute. Technically, won't a gold ounce be priced in buildings?
You know, one gold ounce for this 40-floor skyscraper.
Put an exclamation point at the end of every other sentence, and this article could have been ripped from the KWN site.
Gold unlike oil is not wasted. It stays and is recycled to quite a large extent. I do not think that indian women ar burried along with their rings and necklaces. They are passed on to their daughters. 1300 is an average cost of mining. Might be that the supply from production at current 1200 is able to cover loss of existing gold (1% a year?) plus some new demand from the second and third daughter in a typical indian family. However they hardly get married more than once in a life.
And, population of women grows faster than mine production. Demographic demand and decline in new supply on top of devaluing fiat is a true fact.
I don't give a damn "how much" gold will rise to in western fiat currencies...I only want TIMING.
When...
2017
oh, that's easy. eventually
"Having been totally wrong for several years about precious metals, the massive threat to our sanity (from our own self-interested prognosticators), and why gold and silver represent our sole focus from that threat; it’s easy to forget that there are readers who are new to this sector. For those readers; it is necessary to review the fundamentals of guess and blame."
There, fixed it.
Oh, and I almost forgot: verbose Burma Shave. (only the fogies will get that one.)
You tattled on yourself.
Looks like someone bought at $1800 looking to ride to the moon. Bitter?
Any man knows that an ounce today weighs the same as an ounce weighed then.
In fact, that's exactly the same as an ounce will weigh when the game is eventually over and one with a bitter taste is in your mouth will be you... stood naked in the cold with nothing in your hand except for your tiny little walnut balls.
Good primer on supply and demand as applied to PM. What is shocking but true is that even supposedly sophisticated investors are willing to be slavishly locked into pricing analysis alone (probably at least partly a consequence of the now epidemic dominance of high frequency trading systems with the larger players), when they should also temper their decisions with a healthy respect for what used to be called fundamental (or value) analysis - which your article addresses.
Of equal concern is a topic that has already been heavily addressed in the alternative media but effectively ignored (for obvious reasons) in the main stream media – that is how is the PM price manipulation you mention being legally accomplished. And the answer is it isn’t legal, at least according to the spirit of the laws regarding position size limits for futures trading that are intended to facilitate ethical price discovery. Pseudo federal funds being directed by central banks (and their proxies, money center banks) are engaging in transactions that are in gross violation of position size limits (and possibly insider trading laws?) that were put in place exactly to prevent this behavior. In short, it’s not OK for the Hunt Brothers to corner the silver market, but it is OK for the Fed to do the same thing in the name of the public’s [read cabal’s] interest. After all, we need to prop up the dollar. Really? Whose interests does that serve? Certainly not those of our domestic manufacturing industries and the jobs they represent (including the mining industry you mention).
Each time the CFTC (now also apparently beholden) has been approached to address this issue they buckle for “mysterious reasons”. For example, a major money center bank has claimed in its defense that its enormous synchronized automated “stop busting” naked short PM futures contract trades, are “simply the combined effect of our many customers' desire to SIMULTANEUOSLY hedge their PM positions” [my paraphrasing] while knowing full well that the spirit of the position size limit rules is violated if the holdings of multiple customers' accounts are comingled for trading purposes. That is the reason the position size limits were instituted in the first place – to prevent anticompetitive and abusive concentrations of holdings that enable this type of activity.
Looking forward to your future installments.
NO it's not at all.
It totally ignores the paper side of the market and the influence on "supply and demand" that a bottomless source of gold emits from in this system.
You mean a bottomless supply of "gold"? The supply of gold is finite, and the supply of "gold" will vaporize when participation in it does.
I'm in no hurry for it to happen, but it'll happen.
Yes, thankyou. right on.
This is not the chart porn you are looking for.
I don't agree. One migh argue this is a minimum price but that's not the full truth. There is no minimum and the last influence is the price to produce it. One migh argue most gold was produces in a time where it may just have cost 1 Dollar or below. We don't know really. What really is the purchaisng power of one USD? We simply do know for today and maybe a few 50 years ago. But assume we'd be in 1600, what worth would the current "worth" of the Dollar? Well you could not buy a lot of things in the past, they are new inventions.
And as you can see the gold price can go down also and it does not matter how much it has cost to produce the gold then. Yes we do have price manipulation, but what we do not have is quantity manipulation. There is just so much gold in the world, not more or just so much more one can produce in one year. And even if the current selling price is lower then the prices to produce it. It does not matter. And still the gold producer do produce. So according to you they must go out of business or close the working. But do you see that?
I don't. I also dare to ask what really it the price for oil? How much really is the price of production? Obviouisly some can live with the lower prices, and yes many other go out of business, but not all oil producers will stop producing. That't the same for gold. So let us assume from all the debts of the usa 17 trillions, 90 % go bust. Suddenly there is much less paper out there, which we calll money. But still the gold masses are there. So you can see the price for gold can go down. It's always a question on how much paper is really there. Let us assume the wages would also go down by 90 % and so we can "produce" gold for 130 USD instead of 1300 US as of today. So there is no minimum really. It's always a question of quantities.
It would be much wiser to use something states can not manipulate as with the paper money procduction, and it would be really service for every one to no manipulate the price for money. But you know that's not the way it is and what the politician world-wide would want.
It's always an error to claim there exists something like a minimum price which argues from the side of the producer. It does not matter. If the producers go bust, the same amount of gold will still exist but someone will be poorer, but he will just be able to get the current price on some market. They have no choice but to accept it, or if they can they can hold it. But to day there is a new minimum price is still wrong....
What you call money is massively controlled and manipulated downward in purchasing power, always! It is this way because this is how the elite and the politicians want it to go. they always manipulate in down to steal the wealth of the poeple. They control the purchasing power!
But with gold, We the People control the purchasing power! With supply and demand, not so much the demand for gold but to get out of the dollar!
If we the people could reach the tv watchers, we could force the price of gold to sky rocket, and the purchasing power of dollar to collaspse the TPTB always manipulate it downward for there own best interests. They of course do not want to lose the control of the price of Gold!
In June of 1967 France withdrew form the agreement, and requested a large sum of their gold.
Every chance the .gov gets an opportunity to debase the currency they will!
They will steal your purchasing power, this is why gold is the only MONEY!
The sooner people realize this the better.
Gold may pay no interest but it also pays no tax!
If I were to trade a good or service for gold there would be no bank, no ie... "paper trail".
If I were to trade you a cucumber for a turnip there would be no tax no .gov interferance. but as soon as we trade something for dollars " currency that they can control and tax" we are taxed because there was a paper trail, a "bank"
Start trading something for gold, it can be like I trade an hr of my time for an hr of yours. but we trade with gold, so much per hr. no paper trail no tax. less need for dollars means less people want dollars, the purchasing price and power of dollars diminishes and the price of gold increases.
barter and trade, and trade gold, no taxes paid means a collapse of TPTB.
We have all the power!
What you call money is massively controlled and manipulated downward in purchasing power, always! It is this way because this is how the elite and the politicians want it to go. they always manipulate in down to steal the wealth of the poeple. They control the purchasing power!
But with gold, We the People control the purchasing power! With supply and demand, not so much the demand for gold but to get out of the dollar!
If we the people could reach the tv watchers, we could force the price of gold to sky rocket, and the purchasing power of dollar to collaspse the TPTB always manipulate it downward for there own best interests. They of course do not want to lose the control of the price of Gold!
In June of 1967 France withdrew form the agreement, and requested a large sum of their gold.
Every chance the .gov gets an opportunity to debase the currency they will!
They will steal your purchasing power, this is why gold is the only MONEY!
The sooner people realize this the better.
Gold may pay no interest but it also pays no tax!
If I were to trade a good or service for gold there would be no bank, no ie... "paper trail".
If I were to trade you a cucumber for a turnip there would be no tax no .gov interferance. but as soon as we trade something for dollars " currency that they can control and tax" we are taxed because there was a paper trail, a "bank"
Start trading something for gold, it can be like I trade an hr of my time for an hr of yours. but we trade with gold, so much per hr. no paper trail no tax. less need for dollars means less people want dollars, the purchasing price and power of dollars diminishes and the price of gold increases.
barter and trade, and trade gold, no taxes paid means a collapse of TPTB.
We have all the power!
Sorry, but I do try to avoid the word money for any paper currency. I just mentioned it, because of the sheer amount of paper makes difference in price. If there's just a tenth of all the dollars around the price for Gold will be a tenth of it's price today. What I realyl do not understand are the downvotes. It seems the people have not read the entry or I've phrased it incorrectly.
The base line I wanted to state. There does not exist a thing like "minimum price". I do not understand how anyone can assume such a thing would exist.
That there is not interest on Gold is in that form wrong. You can lend gold and ask for interst in gold also. It's just if the other side does not fullfill this, the courts will make Fiat-Money an acceptable payment. The problem is that every state agency does it's best to hold to the Fiat-Money currencies.
Gold is not money. It is the best wealth asset man knows.
Not a monetary asset either. Just a wealth asset, like a mona lisa.
Sure and Mona Lisa is fungible too? Don't get ahead of yourself.
True that gold has been demonetized by the powers, but how long does that last?
you answered yourself- of course being universally fungible is one of the reasons Gold is THE premier wealth asset and not a Mona lisa.
You made my point without realizing it :).
Yeah and that's why's it's a good form of money, so we agree and you have completely contradicted yourself after initially claiming that gold is not money :-)
cept, Gold is not money because money is credit/debt and Gold is not credit/debt.
Gold can not expand/contract as needed like fiat money can. (unless silly humans proceed to create paper gold to augment "supply")
I define money as 1. Medium of exchange. 2. Unit of account. 3. Store of value. There is no prerequisite for a central authority to control the supply of money. It's a nonsense to tell me that money is credit/debt and it's a popular fallacy to say that the supply of money needs to be controlled by a central authority or that the supply needs to be expanded or contracted. Gold is a good money and has functioned perfectly well as money for thousands of years. bye :-)
Nowdays fundamentals like demand and supply have little to do with markets.
Kinda like an old radio serial...
"Tune in next week for the climax!" (how much they guess the price should be.)
i take issue with the chocolate bar/gold bar analogy in that a chocolate bar manufactured 200 years ago cannot be dredged out of some vampire oligarchs den and resold into the market today should the price rise dramatically. Oligarchic hordes of old gold can and likely will add a significant price dampening supply.
Having said that, if TPTB want to use a gold price reset to extinguish the preposterous levels of debt, it will go well above $10 000 per ounce, overnight. And I dont see anyone anywhere on the internet contributing ideas that will resolve the debt problem other than a gold reset, except for old school jubilee (debt waiver) - in which gold might hold its value while everything else - real estate included - will likely drop up to 90% in value.
Any other ideas? Anyone? Hyperinflation aint happenning. The structure of current QE is bottlenecked.
So if you are holding cash put half in Precious metals. that way you benefit from either jubilee or gold reset.
"Hyperinflation aint happenning. "
YET.
It is coming. Will come. The dollarz are out there, just they havent come home yet.
There's golabal deflation going on and everyone is running to the hardest currency (king dollar) when they reverse course, as always happens, if public foreign support doesn't re-materialize, then we will promptly see all those homeless dollars (sometimes called petrodollars) try to run home to the good 'ol US ofA and that folks, is HI.
If gold holds it value while everything drops 90%, that is the same as gold increasing in value. Is it not?
Yes that's the case and the raise is around 34 times the USD quantity you have to have to buy an ounce of gold
If you do make a calculation that meens somewhere between 8 - 9 % price raise every year ! And that fits IMHO not to bad with the amount of money "generated" out of thin air every year. Of course there was not ever in history printed to much money as of today. Still the price is not exploding. It seems the people do still believe that central banks have enough gold to sell to keep the price low.
We just have to wait and see what the future brings. But asume some countties in the EUR weill go bankrupt. And suddenly all the pledges will have to get fullfilled. It's totalyl obviously to me that you'd better have some gold and silver to get over the coming break-downs.
It's not the question if it's the questio when. This when can be from a year to fifty years. Nobody knows, anyway you have to admit the lies from the central banks are ever increasing massivly since 2008. The question is how long will most trust this lies? I for my part have not the slightes idea.
THIS:
"So if you are holding cash put half in Precious metals. that way you benefit from either jubilee or gold reset."
Need more headers, some graphs, break up the monotony...
@jbilyj:
Note that again in this article, Jeff's inline links did not transfer to ZH. Folks should read the original version on the Sprott website.
Any gold article that talks "supply and demand" out the ass, yet fails to realize, let alone mention XAU and the effect that bottomless source of gold has on "supply and demand", well, then that guy is clueless.
And the article is clueless.
Hey guys, below is a precious metals purchase calculator. It helps you buy the dips if you buy on a regular basis. It's a free download and certainly worth at least playing with and seeing if it could work with your strategy.
Precious Metals Calculator
I've tested it out and it works great, certainly better than dollar cost averaging.
jeff needs to stop rehashing rehashed talking points. he needs to take time off from the constant repeat of the same old message[s]. almost as if he has trolled the internet for days and than thinks that changing the words and sentences around he has created something new and exciting.
If you can do better, go for it.
Any gold article that talks "supply and demand" out the ass, yet fails to realize, let alone mention XAU and the effect that bottomless source of gold has on "supply and demand", well, then that guy is clueless.
And the article is clueless.
Agreed... but don't think for a moment that means bullion should be avoided.
Grab that gold with both hands and make a stash.
Don't fold.
The minimum price for anything is zero, but your pricing in magic money in a manipulated market so whatever number it is priced is just a lottery ticket.....
"The minimum price for anything is zero..."
Well, it used to be that way but not any more. The minimum price for borrowing is now negative in some places.
See lottery ticket.....
won't bother with part 2...3...4?
do you folks bother to vote on the articles? i feel that it has an impact. case in point is "simon says" we should all buy swamp land in bumfuck where ever. he was posting nonsense right and left and now has backed off. i also wonder if the tylers are aware of that some article writers seem to have a cadre of up voters always giving the same top highest [five] vote and same amount of voters, again [five]. there are three or four.