Who Really Controls The Gold Price? (The Answer Is Quite Surprising)

Tyler Durden's picture

Via SRSroccoReport.com,

There’s this notion put forth by the majority in the precious metals community that the Fed and Central Banks control the market price of gold.  I have even heard that some analysts believe the Fed could push the gold price any where they saw fit…. even to zero.  While I agree that the Central Banks do play a role in gold market intervention, they most certainly CANNOT push the price of gold anywhere they want.  This is an absolute falsity…. and I have the data to prove it.

To understand how the market determines the price of gold, we must first dismiss the economic principle of SUPPLY & DEMAND.  While supply and demand forces are factors in the short-term price movement of gold, they do not really factor all that much over the longer term.

Here is a chart showing the relationship of the gold and oil price since the 1940’s:

The gold price is in DARK ORANGE while the oil price is in BLACKWe can plainly see the price of gold and oil have moved in tandem, especially after Nixon dropped the Dollar-Gold peg in 1971.  While the oil-gold price movements are not exact, they parallel each other quite nicely.  Thus, when the oil price skyrocketed during the 1970’s, so did the gold price.  The same thing took place in the 2000’s.

Interestingly, the same thing took place with the silver price below:

In both of these charts, the volatility in the oil, gold and silver price increased significantly after 1971.  There was an underlying reason for this… and it just wasn’t the dropping of the U.S. Dollar convertibility into gold in 1971.  It was also due to the fact that the United States peaked in domestic cheap oil production in 1970.  This was actually the peak of the U.S. Empire, even though we have continued to dominate the world by exchanging PAPER (U.S. Treasuries) for physical OIL-GOODS.

So, if we look at these two charts above, we can plainly see the oil price was more the LEADING DRIVER in the gold and silver price than were supply and demand forces.  Again, supply and demand forces add volatility to the gold and silver price over the short-term, but the energy cost (mainly oil) has been the leading driver over the longer term.

Who Really Controls The Gold Price??

If the gold price has paralleled the oil price, then who really controls the gold market price??  While I agree that the Fed & Central Banks are intervening in the gold market, they can really only control the UPWARD movement in the price of gold.  Why?  Well, if we look at the chart below, we find our answer:

This chart shows the difference between the total production cost of the top two gold miners, Barrick and Newmont, versus the annual average gold market price.  The chart clearly shows that the production cost is always less than the gold market price.

In the early 2000’s, the top two gold miners production cost was closer to the market price.  However, after the U.S. Housing and Banking Market collapsed in 2008, the gold market price moved up considerably higher than the cost of production.  My analysis suggests that the gold price was starting to head towards its high-quality STORE OF VALUE properties, rather than its COMMODITY PRICING mechanism.

NOTE:  I determined Barrick & Newmont’s production cost by using my Net Income & Adjusted Income approach.  This is much different than going by either Cash Costs or All-In-Sustaining Costs.  My estimated total production cost includes more items such as taxes-interest expense and etc, that are not considered in cash costs or all-in-sustaining costs.

Also, cash costs are a totally bogus metric as they deduct the miners by-product revenue to arrive at a very low cash cost.  They list them as by-product credits —  other metals extracted and produced along with gold in the process.  However, they are not really credits.  These miners need these by-product metal sales to fortify their balance sheets.  Without them, many mining companies would be suffering losses, not profits.

 

Thus, a credit is something that one does not need… it’s a plus.  In reality, most of these mining companies need their by-product metal sales to remain profitable.

That being said, here are some examples of the Barrick and Newmont’s cost of production versus the gold market price:

2000 Production Cost = $276

2000 Market Gold Price = $279

2012 Production Cost = $1,272

2012 Market Gold Price = $1,669

2016 Production Cost = $1,113

2016 Market Gold Price = $1,251

Now, the reason the production cost at Barrick and Newmont has fallen from $1,272 in 2012 to $1,113 in 2016, is mainly due to the 50%+ decline in the price of oil.  It takes a lot of energy to produce an ounce of gold.  Oil was trading over $100 in 2012, but fell to $45 in 2016.  Even though the energy cost has fallen significantly, labor costs have not declined all that much in the gold industry.

For instance, Barrick’s labor payroll per ounce of gold only declined from $328 in 2012 to $304 in 2015.  This is only a 7% decline in labor cost even though oil price dropped considerably in 2015:

On the other hand, the lower gold price has put more stress on Barrick’s financial bottom line as their payroll accounted for 26% of each gold ounce produced in 2015 compared to only 18% in 2009.  Investors need to realize it takes a massive amount of energy, labor, materials and capital to produce an ounce of gold.

If we look at the Barrick-Newmont Production Cost vs. Gold Price chart above, we see that the market price was never lower than the production cost.  Which means, the market or Central Banks did not push the gold price below the cost of production.  This is an important factor to understand when you listen to analysts suggesting that the Central Banks can rig the gold price down to whatever level they desire.

That is total BOLLOCKS…..

As, I have mentioned, the Fed and Central Banks can intervene in the market to control HOW HIGH the gold price will go.  That is the big difference.  So, those who continue to believe Harry Dent’s forecast that gold will go down to $700 an ounce, aren’t considering the COST OF PRODUCTION.  Harry Dent spends a lot of money advertising to get people to buy his books or newsletters.  Touting a $700 gold price gets people motivated in buying what he sells.

Unfortunately, Dent, like most analysts, tend to leave out the energy in their forecasts.  This is truly hilarious as energy is the leading driver of our economies… not supply-demand or finance

The Production Cost Of Gold Is Higher When We Consider Capital Expenditures

My Net Income & Adjusted Income approach for determining the production cost of gold (and silver) provides a much more realistic metric than the industry’s “cash costs” or “all-in-sustaining costs.”  However, when a mining company releases its income statements, they do not include their capital expenditures (CAPEX).  Their net income (or adjusted income) does not include capital expenditures.  To find out what they paid in CAPEX, we must look at the Cash Flow Statements.

If we consider what Barrick and Newmont spent on CAPEX and then deducted it from their cash from operations we would arrive at their FREE CASH FLOW:

From 2000 to 2016, these top two gold miners free cash flow was a net $10 billion.  If we compare their free cash flow of $10 billion to the total $220 billion in revenues, it only accounted for 4.5% of their revenues.  Thus, Barrick and Newmont’s free cash flow shows that it cost more to produce gold than was shown in their Annual Income statements.  Which means, these gold miners still enjoyed positive free cash flow during this time.

NOTE:  In order to consider some unwise capital expenditures during the years when the gold price really surged, I subtracted from each company, their lowest negative free cash flow that year.  Actually, this was about $5 billion when we add them both up.  So, in all reality, the free cash flow of $5 billion (half of the $10 billion shown in the chart above) means that Barrick & Newmont only enjoyed a 2%+ free cash flow margin compared to their total revenues.

Regardless, the gold market price was still higher than Barrick and Newmont’s small free cash flow margin to total revenue.  Of course, if we include stock dilution as well as dividend payouts, these two gold miners would have an even higher production cost.  But, that would still not change the overall production cost all that much.

As I have stated in many interviews and articles, the Fed and Central Banks CANNOT push the gold price wherever they see fit.  The algorithms are electronically calculating the gold market price based on its cost of production.  The only way the Fed and Central Banks can control the gold price is on its way UP.  This is by using a massive amount of paper contracts to cap the gold price from moving up too high.

The majority of Fed and Central Bank intervention is controlling where investors put their money.  By funneling the massive amount of money printing into STOCKS, BONDS and REAL ESTATE, 99% of investors (in the market) remain happy, as well as the governments.  We must remember, local, state and the Federal Govt receive tax revenues are based on high stock, bond and real estate values.  Once their values implode, so do government tax revenues.  This would be a complete disaster.

Lastly, the present COMMODITY PRICING mechanism of gold will transition to its high quality STORE OF VALUE when the U.S. and Global Oil industry really starts to disintegrate.  This gold value transition will be the first in history.  Why?  Because gold was still valued the same after the Roman Empire collapsed… due to the fact that it was based on human and animal labor.

Unfortunately, today the gold price is being based on the energy in oil.  However, when the oil industry collapses, there is nothing to replace it.  Thus, the value of most paper assets will plummet.  Gold and silver will become stores of economic energy because the world was brainwashed into believing PAPER ASSETS will always retain their value…. not so.

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Enceladus's picture

Oil is harder to stack.

Dame Ednas Possum's picture

#fake news

More gold 'market' misinformation to downplay reality. 

Correlation is not causation.  Anyone could chart 100 other things that have moved similar to each other but it does not mean one causes the other. 

Spoiler alert: fundamentals affect the gold price (of course) but it is such a heavily manipulated market that today the fundamentals are masked and PMs are controlled (control of upwards movements in the author's lingo) by fraudulent ETF's being dumped en-masse.  Look at the April smashes for example and you will see causation.  This is nowt to do with oil. 

It's simple really. The Learned Elders at the Fed and the other members of the tribe's cabal are shafting the price of gold as a life-support to extend the dying days of the USD and their free-shit procession of epic wealth transfer to them. 

When this shit-show eventually collapses... panic and human fear will control the price of gold. 

Just keep staking. 

 

Troy Ounce's picture

 

I wonder what the gold price would be if every owner/holder of gold just refuses to sell. Plain and simple.

Because of a nuclear war f.i. because Mericans have been told they are great again.

 

Oil price, spoiled price.

Doña K's picture

Oil is dirty and ugly. Lining up shiny coins is various geometrical arrangements is such a pleasure. 

jeff montanye's picture

nearly 5% of registered COMEX silver inventory was withdrawn april 25.

there are the largest commercial short positions in the recent history of the silver market.

really wouldn't take much money at all to light a rocket under the silver price.  

china could blame it on n.k. and so could the too big to jail.

DownWithYogaPants's picture

And elevator farts get you high - or correlation is not causation!

Pairadimes's picture

This article is more about the recent behavior of the 'value' of fiat FRNs as compared to large volume commodities than it is about gold per se. The market in rehypothecated paper 'gold' has allowed buyers and sellers to trade vast volumes of 'gold' without actually ever touching it, which has suppressed the value of physical gold to the point that it now tracks the production price closely. When enough holders of the actual metal realize they are being played by this dynamic, they will choose not to part with the metal at a fraction of its true value, and this farce will be forced to end.

Fizzy Head's picture

Fake news? I for one don't discount srs Roccos logic here, guy spends a ton of time researching very relevant issues surrounding these PM markets. He's been doing this for a long time and his arguments are logical.

The future of precious metals is uncertain and can change overnight but for now, the trends vs EROI are relevant.

Harlequin001's picture

I read his stuff quite often and usually there is some good stuff in there, but these oil price charts don't explain the dumping of 15% of total global gold mining supply through derivatives markets in less than two hours to take out the bid stack.

Neither does it explain how ETF's dilute demand for physical gold either.

This article is trying to make excuses for the link to the oil price. It is wrong.

SuperVinci's picture

And SRSNumbnut never considers XAU which is multitudes bigger than any other market  in the world. That is what drives the "gold" price...paper/electronic XAU credits aka the BIS's gold market.

virgule's picture

And the article fails to discuss time frames. Gold going down to 700 for e.g. a few years would be a sign of world chaos at best. Gold going down to 700 for a week, in reaction to a giant market crash and massive forced liquiditation, is quite possible in my opinion.

anarchitect's picture

The article fails to account for the stock of gold, 170K tonnes, that dwarfs yearly mining output.  It is primarily this stock that determines supply.  Furthermore, uranium is being supplied for less than the cost of production, a situation that can persist for many years in the mining sector.  Gold and silver are no different.

OceanX's picture

Yes, energy is the base line ...the amount of gas in your car won't effect how fast you can go but, it does determine whether you can go.

Implied Violins's picture

"Just keep staking"

I'm sure you meant 'Stacking', which I agree with...but that Freudian slip is also on-point, as "STAKING" is the ONLY way we can EVER kill the VAMPIRE SQUID!!

Dame Ednas Possum's picture

Oops... I meant 'just keep STALKING' 

Look out your window... the guy with the stick-on beard, that's me blowing you kisses. 

Dame Ednas Possum's picture

Hi Jann,  good to see you're back at your keyboard. Best health. Big fan of your work on BullionStar. Take care. 

Teja's picture

Correlation is not causation.  Anyone could chart 100 other things that have moved similar to each other but it does not mean one causes the other.

Although obviously correct, it is always good to discover a correlation. Together with a theory supporting this correlation, it will give you a better grip on reality than to assume divine / Fed interference. It is a bit like the scientists who stopped believing that planet motion was caused by God, looking for a better theory correlating with the measurements. The first theory they picked up, epicycles, was wrong, too, but at least had better predictive ability than just believing in God's whim. And it got them started on better theories later.

The theory that a lower limit of the gold price is given by the costs of production is absolutely reasonable, and the facts seem to support it quite well. Long term, I expect one factor in the costs going up enormously which was not mentioned here, the factor that new gold mines tend to be deeper and lower grade than existing ones, making exploitation more expensive. There is no FOFOA or paper gold explosion magic needed to push gold prices up in the next decade.

 

Steroid's picture

Let's believe that oil leads gold!

However, I see a growing delay with the price of gold.

I see a big one coming!

I guess this is always tru with these charts, you can see in them whatever you hope for.

garypaul's picture

"after the Roman Empire collapsed… ... human and animal labor."

Sad to say, but I think we'll see 'human and animal labor' before we see Elon Musk driving around on his Mars colony (autonomously of course)

jmack's picture

I couldnt plow thru the wall of text, who controls the price of gold?

Jimmy Jimmereeno's picture

SRS doesn't have a clue about the price of gold, the price of silver or the price of crude oil.  Witness his asinine posts that the fools at goldseek and silverseek continue to proffer to their reading audience.

Jus7tme's picture

The oil price, it seems?

HedgeJunkie's picture

The argument is made that it's the Saudi's and OPEC countries.

But, ultimately, it's the FED controlling the oil to dollar relationship and interest rates.

Jungle Jim's picture

Same here. I'd like a summary.

BobEore's picture

Okey dok.

China controls the POG. Working through agents JPM et al, they make the moves everyday in the derivatives market & OTC trade to both sequester supply of phizz - using fiat profits... and make sure prices move in whatever direction best suited to their longer term plans.

The same parties also control the shills like SGT ROXX here - who get paid to produce puff pieces appropriate to the task of keeping us all in the dark about the real ... dirty lowdown of "price manipulation" and cartel control of markets.

That should do it.

Jimmy Jimmereeno's picture

First, let's confuse correlation and causation as in oil and silver prices.

Second, let's introduce a non-sequitur and assassinate Harry Dent's character.

Third, in his own words, "That is total bollocks"

 

Tylers, bring out the hook for this SRS joker.

LN's picture

Those that cannot be named would be my guess.

Voltaire seemed to know some things.

LN

Stuck on Zero's picture

No mention of gold as a byproduct of copper production.

sinbad2's picture

I haven't heard of that, silver, yeah big time, but not gold.

Teja's picture

Gold is a by-product of alcohol production. There is a Polish vodka "Goldwasser" with flakes of gold in it. Proves it.

Also, if you drink enough alcohol, your physical gold doubles.

45North1's picture

Seems like giving the miners just enough oxygen to stay alive would help keep supply supplied.

If they went bankrupt, the costs could run away on the Central Banks.

A lot of damage has been done to the industry by high grading and the collapse of the junior explorers, if or when the PM market turns, true price discovery could be revealing.

GRDguy's picture

All canaries (in the markets) have been stuffed.

They will now always indicate everything's fine, no need to worry.

Until it's too late.

The central planners's picture

You hit the nail. Im guessing what the silver production cost? 16 bucks?

 

sinbad2's picture

The gold mines around here know their costs pretty well, and just shutdown if the gold price goes low.

They start up again as soon as the price rises.

The oil companies do the same, there are a lot of capped off shore wells, that would come back into production if the oil price went up.

The whole article is just BS.

Bud Melvin's picture

This passage has always troubled me

 

James 5:1-6English Standard Version (ESV) Warning to the Rich

Come now,  you rich, weep and howl for the  miseries that are coming upon you. Your riches have rotted and your garments are moth-eaten.Your gold and silver have corroded, and their corrosion will be evidence against you and will eat your flesh like fire. You have laid up treasure in the last days. Behold, the wages of the laborers who mowed your fields, which you kept back by fraud, are crying out against you, and the cries of the harvesters have reached the ears of the Lord of hosts. You have lived on the earth in luxury and in self-indulgence. You have fattened your hearts in a day of slaughter. You have condemned and murdered the righteous person. He does not resist you.


PlayMoney's picture

The Cartel had best be careful indeed slamming miners too low. Run them out of biz and they could create a huge run to the upside when things get dicey.

Montana Cowboy's picture

Or maybe the cartel (probably bullion banks) knows about an extreme glut. Maybe that's why shorts pound it. They know the longs are just plain wrong. The only thing that can stop shorts from taking money from longs is delivery defaults - which may be a hilarious notion to those in the know. It is the coin industry that has told us for decades that the vaults are almost empty. But they go unopposed because there is nobody with a financial interest in taking the other side of the argument. Instead of coins and bars, maybe they should just form the metal into tulips.

poland spring's picture

Interesting article.  

Jimmy Jimmereeno's picture

Maybe if you're from some planet other that earth.

Dame Ednas Possum's picture

Interesting, yes... but not in the way the author intended.   

nc551's picture

Maybe miners don't spend more than they dig up, no matter the manipulated price of gold.  Is gold tracking oil or is oil tracking gold, or are they both tracking malfeasance?

Montana Cowboy's picture

Good point. I remember that someone proved a correlation between gold and opium.

fwaynemartin's picture

Gold $5000 any day now!

tailgunner's picture

This article is a smoke screen.  For years and years now we have watched the central banks smash gold and silver in exact same amounts and the charts were parallel.  In the last two weeks alone we have seen gold attempt to rise and in  $3 billion dollar amounts have 4 times dropped the price when there was no market benefit to the shorts.  Over $12 billion dollars used to dampen the price away from the breakout price.  

 

COMEX is a crime scene each day, and so it London market where they have one once of physical  gold for for every 100+ onces of gold pledged.  Then when caught they give out cash.  No law man here, just more banker crooks.

The basis units of energy (oil) and value (gold) are different, but have been tied together in a large false facade of investment lies.  Turn gold loose and see where it goes and oil will not follow.  Oiil is a consumable, gold is not.  I hope that helps you understand the difference.  But when bankers move the prices to resemble thelr lies, then who knows what the true value of each is.  A true price discovery would be amazing, and we will see it in the unknown future and gold will be a hell of a lot higher.

 

 

 

 

Teja's picture

Lower limit of Gold price controlled by oil and other costs factors. Lower limit, not upper limit.

man from glad's picture

If the USA hits North Korea and that whole scene goes tits up, we'll see how well the central banks can hold down the price of gold.

Peter41's picture

Good exposition.