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Oil, Gold, & The Reflation-Deflation Battle
As Stifel's Barry Banister explains, Gold vs. oil symbolizes the struggle between reflation (oil up) vs. deflation (gold down).
Gold is an alternative to Fed “money.” If Fed money rises in value, gold deflates.
Conversely, oil is a global GDP-commodity (although WTI, shown below, is depressed by U.S. production).
We believe the gold-to-oil ratio (GOR, gold/oz. divided by WTI oil/bbl.) is “deflation relative to reflation."
If GOR reverts to its average of 16x from 28x now, either gold falls symbolizing deflation, or oil rises symbolizing reflationary traction... or more simply oil outperforms gold (which may explain the extreme correlations that are evident on any major move in one or the other of these assets)
Positioning among the leveraged community remains extreme in both...
Charts: Bloomberg
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But, but, but, THEY* said gold was supposed to SOAR
Why is it only a conspiracy when the price of gold/silver DROPS?
* THEY = sellers and funds promoting gold and silver
I like silver. Fuck gold, and here's why.
Problems with gold versus silver start with the unit cost ratio versus silver.
Almost all gold mined is still in existence.
Paper gold has not been as mercilessly manipulated as silver paper because of the influence of institutional and governmental gold asset holders.
Silver mining has dwindled to incidental recovery as a by product of copper, nickel, and lead mining - pure silver mines were played out for the most part over one hundred plus years ago.
Cost of mining today is easily 30% higher than current spot price per ounce.
Down turn of economy will not deter the most significant modern day usage of consumer electronics - the smart phone. Silver is the most efficient conductor of electricity on a unit cost basis.
Economic recovery of silver in consumer electronics is not feasible, even in China. Economic recovery of silver used in most other modern day applications of silver is not feasible either.
The ten percenters will never stop wanting new consumer electronics, and they survive down turns to the economy just fine it seems.
Add in the newer industrial uses of silver that also shrug off economic issues out of necessity - medical wound dressings, water purification filters, etc., and you have a continuing demand for a metal whose annual production has been falling for decades.
So, you have an indispensable metal being consumed by industrial use constantly, declining in mining production, and under supply pressure to serve both the industrial and monetary silver markets.
Take away the paper manipulation of 2 - 300 times the available physical silver available in the market, and there's a problem with price discovery for the real deal versus fantasy paper silver that never existed.
Lastly, the uncertainty of a major economic event always moves people to seek out safe haven for their hard earned money. Fiat currency has a history of failure for thousands of years, a near perfect track record of failure.
Silver and gold have a five thousand year history of recognized value in times of uncertainty, more so than any other commodity you can name that is portable, incorruptible, stable, and internationally recognized.
To summarize, with silver spot trading for substantially less than the cost of production, I see no down side to investing in it as a safe haven.
If the whole world burns, silver will be a recognized form of currency far easier to trade with than anything else short of 22 LR ammo.
I would rather dance with the silver devil than take on Wall Street, Goldman Sacks Biters, JP Morgan Chase, banks, politicians, the Fed, the CIA, NSA, DHS, IRS, and all of the other phony paper dream thieves on the loose out there.
with a username like that, who would mistake you for a gold lover?
When it comes to Gold i side with Harry Dent, the price will drop lower (much lower) before going higher. As he says, we have a major deflation about to happen and that equals much stronger US currency and that will drive commodities down not up.
It will be a VERY long time before the price of gold goes up again. It will take another generation of people who haven't lived thorugh this current spike in gold and commodities. Just like the last spike that was 35 years ago, it will be at least that long before the next spike.
And after that next spike in half a century, it will again drop down again, waiting for the next cycle.
As I recall, Hairy Dint had ads right on the Kitco gold charts page proclaiming why gold would fall to $750 in 2013, and again in 2014, and 2015. The man was very sure of himself and had all the charts and graphs to back it up.
A bit of a miss there, don't you think?
All good points. I like to stay diversified. Gold, Silver, Palladium, and lead.
One point you are very mistaken about is the cost of silver mining. Yes, the vast majority of silver is from copper, tin, lead and zinc mining. HOWEVER the cash costs of extracting it from those mines are only a couple dollars per oz, and NOT "30% above spot prices".
Your "incidental recovery" which you dismiss is still 80+% of annual silver production and is that which is recovered from copper, etc mining and is still profatable down to a couple dollars per oz.
Yes, let that sink in a bit. The fact that 80% of silver mining is profatable down to a couple dollars per oz.
The ONLY silver mining that is unprofitable is the "silver only" mining of low grade deposits. Which is only a couple percent of all mines in the world. Don't confuse the two types of extraction, which you are doing.
These facts put a huge dint in your assumptions of the "value" of silver due to mining costs.
That said, I still like silver better than gold because 50% of annual silver production is used industrially, but only 12% of gold is used industrially, But even that 50% industrial usage of silver, combined with the very low production costs, means that there is a still a LOT of downside possible with the silver price.
Sorry, but the tonnage of ore, and the energy required to process the ore, and extract silver content through the smelting and refining process still takes time, energy, and money far above that that of recovering the base metals the mine's primary purpose is built around.
So, your theory hangs together for the base metals not including all capital costs associated with the original property acquisition, mining claims, environmental studies, government pay offs, shareholder dividends, overburden stripping, and mine development.
Add all that together along with the cost of ore recovery, processing, smelting, and refining, and you have the true cost per ounce, however.
Then, cost plus for silver recovery at multiple tons of ore, more processing steps, more energy devoted to the silver smelting and refining process, and there you go again, right back up to around $20.00 per ounce of recovered silver, recovery cost subsidized by the base ore mining.
You CLEARLY don't understand mining and the separation and recovery of metals and recovery of silver.
Silver is removed from copper and base metals as a CONTAMINANT. It has to be done anyway. As a contaminant or byproduct, they don't have to do all the steps you mention. That's why the cash costs are only a couple dollars per oz as a couple extra small steps to separate silver from other removed contaminates.
Your assumptions are ONLY valid for a PRIMARY silver mine, and NOT for a copper, tin, lead or zinc mine. Silver is a BYPRODUCT of mining copper, etc. That's why the cash cost is only a couple dollars per oz.
So your assumption of $20/oz is ONLY for a primary silver mine. And primary silver mines are ONLY a SMALL PERCENTAGE of all silver mining in the world.
You are confusing PRIMARY silver miners with co-product base metal miners. Primary silver miners are a small percentage of all silver production. Learn your facts, it takes a LOT of time and research. You are making unsubstantiated ASSUMPTIONS.
I looked it up and Primary silver production is up 8% the past year to a total of 31% of all silver mining, with a cash cost DROPPING to about $7 to $8 per oz.
And that's why SECONDARY silver production costs are only a couple dollars per oz.
Yup, around 900 million ounces of silver are mined every year, and only half are "consumed"... meaning ~450 million ounces every year are hoarded.
There's a shitload of silver out there. Anyone who assumes we must be near a bottom is just making wild-ass guesses.
And with actual mining costs from a couple dollars an oz to $7 an oz, silver can fall to HALF it's current price without impacting supply at all.
Sigh. Rinse, lather, and repeat.
So, your theory hangs together for the base metals not including all capital costs associated with the original property acquisition, mining claims, environmental studies, government pay offs, shareholder dividends, overburden stripping, and mine development.
Add all that together along with the cost of ore recovery, processing, smelting, and refining, and you have the true cost per ounce, however.
Lies, damm lies, and statistics. Stop fucking around, and get real.
Include all hard costs to set up a copper mine, and then calculate the cost of silver recovery.
Peckerhead.
If they are mining COPPER and base metals, then it's not a silver mine.... DUHHHHHHhhhhh
So then they are only recovering a waste product, namely silver.
And I already told you that a PRIMARY silver mine today, mines for $7 to $8 an oz. Primary silver mine includes all the capex you mention. So $7 per oz is the REAL COST all INCLUSIVE.
Socrates — 'When the debate is lost, slander becomes the tool of the loser.'
You fail AGAIN. That makes you a three time looooser out of three posts.
My original post states quite clearly - most silver mining as a by product of copper mining, nickel mining, lead mining, et fucking cetera.
Dollar cost averaging for silver recovery for mining of silver from ALL sources is more statistically relevant than seizing upon cost recovery from copper mining only.
Read it again, tard - it is written in english for comprehension.
If it was a waste product, why recover it ?
Because it has value.
Also - what business provides product to market for exact lowest value extraction cost only ? Answer - the bankrupt ones. Product output to market - zero. Mining profit is part of the equation too, if you want to split hairs Occam's Razor style.
You started out around 3-4 dollars an ounce to get it out of the ground, now you are up to eight bucks an ounce. Nice Million Dollar Bonus quote from the past. Well, well, well, sliding scale of cost recovery, nothing else added.
Your opinion has no value for me.
When you seize upon small snippets of a post to legitimize your straw man argument, you diminish your intellectual capacity.
Socrates would bitch slap you into the middle of next week
You're on a 5 to zero losing streak, and it should be even more embarrassing to you that you've lost all credibility. It's very obious that your opinions no longer have relevence to everyone on ZH.
Keep going and you'll make it 6:0 and further dig that hole deeper.
My numbers come from my own mine engineering and planning experience with figures from the Silver Institute. I was a year out of date, from memory when I said only 20% of silver is from primary silver mines, as the figure now is 31%. but my figures are BACKED UP. Your's are out of your ass.
You are just chasing your tail and TRYING to backtrack, but you're still wrong.
How may decades of mine engineering and management do you have? ZERO?
You make a second point here as well. No starting from scratch, no minting required. Silver is already present in large quantities and ready to replace fiat. Aside from bullets, what other commodity/measurable units is there enough readily available to replace fiat?
Right now the Conspiracy, if you want to call them that, are having the Riyadh office dump oil.
Not as easy to dump gold on the market, so gold's price in terms of real goods (i.e. not bank-confetti) is way up.
The bad guys tend to change tactics depending on circumstance. The goldbugs are the least of their worries right now. Their priority is overthrowing Vladimir Putin before he puts the House of Saud out of business.
Patience. Both gold and oil will both soar once the Saudis stop dumping oil (or the Russians make them stop). At that point Uncle Sugar will no longer be able to count on cheap oil and cheap credit to keep the lights on, and will have to choose between defaulting on his debts or hyperinflating them away.
When oil "soars" as you say, that means the economy is HEALTHY, which means higher interest rates. Silver and gold will be DOWN.
Although greater prosperity from the third world will tend to prop up gold prices a bit. But that is entirly dependant on high levels of prosperity in India and China.
If that prosperity doesn't come for another 10 years, that means another 24,000 tonnes of new gold will have been mined. That's a LOT of additional supply, considering that gold is never "used up".
I hold a defined percentage of my wealth in gold/silver paper (today that's silver due to the gold/silver ratio). When the price drops, I buy, when the price rises I sell. The percentage remains fairly constant. I also hold a smaller percentage in physical gold and silver. That's there "just in case" and the price is irrelevant.
It's not difficult.
The difference is you are a "trader" and not simply holding (hording).
If gold is an alternative to fiat money, when the CBs create more money (debt) then gold should rise.. same with silver... as more dollars chasing fewer ounces..
Yet things have not worked that way for a while..
Which makes me wonder if all this creation of fiat currency, which drives down gold in dollar value, is really doing anything other than making bigger and bigger piles of debt that can not be repaid.. Which means that when the re-balancing occurs there will actually be so few unencumbered dollars in the system due to wiped out accounting balance sheets, that gold is worth what it is.. Meaning things are really a much bigger mess than we have any idea about.
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I guess you're not aware that unlike stock shorting, PM contracts can be naked shorted without [apparent] restrictions.
Since you're so smart, no one need tell you the ramifications for PM of that particular feature of the futures market.
Naked shorts are technically illegal and not as widespread as you imagine.
They can TEMPORARLY drive the market down a little, but they don't cause massive, long term fluctuations.
I guess you aren't aware that more than 50% of all physical transactions are OTC and COMEX (all of CME) only accounts for about 20% of the worldwide gold trade.
Derivaties are being manipulated lowed by large trading desks of banks and hedge funds to maintain a strong dollar while stocks are high.
It is the Great Dollar put. Bets made against oil and gold to keep the dollar propped, while corporations use Aurther Anderson account gimmicks.
It's a farce. Buy gold and silver while you wait for it to collapse.
The price of gold and oil "manipulated" by derivatives controls the strength of the dollar and the worldwide economy? Hahahahhahahaha
You forgot to mention how bitcoin fits into your conspiracy....
By taking dollars away from buying Gold. And going higher as the USD goes higher.
Those "dollars" you speak of "taking away" are a pittance.
Anal penis is looking for Coinhead, methinks.
Be great if you two got together, and left us alone for a while, dontchyaknow ?
I've already exposed your "theroy" that silver costs $20/oz to mine as BULLSHIT.
Keep talking yourself into a deeper hole.
Sure, and it has been going on since 1971. I suggest investing in real assets, innovation (that you own) and productive capacity. Could be a while yet. I will say only this with respect to the dollar; remember that the velocity of a dead currency is in fact ZERO. Watch the dollar velocity.
Real estate at these prices?
Sorry, I'll stick with silver.
"real assets", not, specifically, "real estate".
Even if all the gold is gone, they'll still be trading paper as there's always gold to mine.
This crap can't end as long as the banks run our countries and write policies.
I think they want to make it way worse. As long as the bankers are in control its not a market that trades "freely"
People want gold delivered. If ever there is a failure of delivery the shtf.
If your in paper gold expecting delivery you havent been paying attention?
Traders don't want gold delivered. If they have their gold delivered, that means they have to PAY for it. They don't have enough money to pay for all their contracts, they only have enough to cover their margins.
Say YOU are dabbling in futures and buy half a dozen contracts. Do YOU have the money to buy 6 contacts of physical? (600 oz)
I didn't notice today that oil is at 37 dollars... my god...
that doesn't scream that everything is fine...
Another joke of a day with Gold and Silver. So what's different Monday from Friday ???
So long oil, short gold? I can live with that. Even the Saudis can't dump oil forever.
Average of 16 to one says fair value for oil is USD67 a barrel---at least.
Once they curtailed "whatever that means" QE this was always going to happen.
This is the collection phase of the scheme.
First phase is enter the market.
Check........ FED is the only one allowed to issue dollars.
2nd phase is to get reserve currency status
Check....... Through blood sweat and tears of generations this was won so a private banking cartel could exert influence.
3rd phase is to increase market share
Check...... The FED got everyone and I mean everyone to buy their product which is debt.
4th Phase
Reap the harvest that is to say put the screws to your junkies.
Check....... And now the bill comes due.
In no way will they ever "turn the screws" on anyone, not in any direct way. The whole reason this scam continues to work is that it's hard to notice it when you're being skimmed, but easy to notice it when you're being mauled. It's all about the constant skim of inflation. They'll do what they can to kick the debt can down the road indefinitely, so that they can continue to skim what little wealth is actually generated by the real economy.
Deflation is now on it's way and they are going to tighten into the teeth of this?
Ridiculous and absurd complete farce by their own definitions I might add not mine.
Basically a world wide scramble for dollars is kicking off and the price of everything expressed in those dollars will go down more or less and credit will crunch like holy hell.
After that later possibly a while later given all the absurd detonations this will cause the when the helis come out then you might see some rampant inflation but not before that.
I'm not sure that I would endorse the idea of gold and oil trading inversely to each other. They're both commodities, and neither one can be printed.
Also, both commodities can be used to facilitate trade.
However, U.S. Dollars can be printed in infinite quantities as long as the debt ceiling is raised at regular intervals. And, I should note, U.S. Dollars are fiat and are thus backed by nothing other than the "full faith and credit of the United States Government."
So, the smashing of commodities via the futures markets is nothing more than a vain attempt to prolong the life of the U.S. Dollar.
Put yourself in the place of China and Russia.
You see a growing Cold War with the United States and highly unethical behavior on the US stock markets.
You see evidence of clear manipulation of prices for oil and the Rouble.
Does this look like an accident to you?
If you needed to invest in some other currency that was free from interference from the western stock market - what would YOU choose?
Case Closed.