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Guest Post: What Gold Supply Crunch?

Tyler Durden's picture




 

 

Submitted by Louis James of Casey Research

What Gold Supply Crunch?

We have reported on changes in global gold demand, from booming investment demand in Asia to European and US debt concerns that have re-solidified gold's long tenure as the ultimate safe-haven asset for turbulent times. In fact, with investment demand from private and institutional buyers continuing to grow and central banks increasing their gold reserves, total demand reached a record US$57.7 billion in the third quarter of 2011. Quite astounding.

But what's happening on the supply side of the equation?

The most important source of gold supply is mine production – which is responsible for about two-thirds of the total – followed by recycled gold. While recycled gold is the reason supply is inelastic, new production has more predictive power since it can reflect shifts in industry conditions and investor sentiment.

Starting with a bird's-eye view, take a look at global gold production since 1900.

(Click on image to enlarge)

The 1980 gold mania occurred when gold supply had the same structure as it does today: two-thirds from production and one-third from recycled product. As the chart shows, in the 1980s, production increased after the short-lived mania came to an end, while this time around, production has already gone up (more on that below). Also, as the 1980s wore on, production grew in spite of the price falling dramatically.

History doesn't repeat exactly, but it often does rhyme, so comparing the 1970-1980 decade to the present can give us a useful context for thinking about gold today. Reviewing the data available, here are some key comparisons:

  1. The previous major interim peak in mine production was recorded in 1970, followed by a 10-year decline and ultimately, the 1980 peak in gold's price. It's interesting to note that the mania occurred when gold supply was flat.

    This cycle, we have an interim peak in 2001, followed by a decline for seven years, and then a reversal of the trend in the last three years. On average, production decreased at 0.2% per year (2000-2010). But looking at the decade average ignores the trend reversal in the last three years: Gold production rose by 7.4% in 2009, 3.7% in 2010, and is up 5% in the three quarters of 2011 compared to the same period in 2010.

    This recent increase in production without a market mania beforehand could be seen as an argument against there being a mania this time around: There's no supply crunch. Supply could keep up with demand and prevent the crunch from happening. We don't see this being likely for several reasons, foremost among which is that we don't see the increases in production being sustainable. Mines are by definition depleting assets, and it gets harder every year to permit and place new mines into production.

  1. Global gold reserves in 1980 tallied 1.1 billion ounces (34,000 metric tonnes), and production at that time was sufficient to meet demand at the time for about 20 years. In 2010, reserves were 1.6 billion ounces (51,000 metric tonnes) and were also sufficient to meet demand for an identical 20 years, but production was twice as high. Much of this can be attributed to improvements in mining technology that, coupled with higher prices, allow larger, lower-grade deposits to be mined profitably. Again: no supply crunch.

    Not yet, anyway. In addition to the increasing regulatory burdens, the discovery process has grown more arduous. There are new technologies that have made some things much easier, but overall, most explorers have to go farther and search harder every year.

  1. Gold production has outpaced the increase in the population. In fact, gold production per capita now is even higher than in the 1970s. No crunch evident from this perspective either.

1970-1980 Gold Production
Per Capita

2000-2010 Gold Production
Per Capita

At interim peak (1970): 0.40 grams

At interim peak (2001): 0.42 grams

During mania phase (1980-1981):
0.28 grams

Current value (2010-2011): 0.37 grams

Source: USGS, World Bank

However, gold is not a consumer good – it's not something people need to eat a certain amount of every day, so the physical quantity of gold per person in the world means less than it would for other commodities. Gold, we have long argued, is a "fear barometer" in today's world. It's valued, which means it has demand in inverse proportion to people's confidence in other forms of money. So the fact that supply has kept up with population growth does not imply that supply has – or "should have" – kept up with demand… and we can see that it hasn't in the price of gold. A major part of that is the return of investment demand, almost to levels we saw in 1980, as you can see in the chart below.

(Click on image to enlarge)

  1. Today, as in 1980, mine production and scrap are the major components – almost the only components – of supply. The disappearance of net disinvestment from the supply side of things is one of the more bullish similarities we see between now and 30 years ago.

(Click on image to enlarge)

  1. One major difference between the gold market today and in decades past is the geography of mine production. South Africa accounted for two-thirds of global gold production in 1970 and 55% in 1980. In 2010, not one country was responsible for more than 14% of world mining supply (with the leader being China, at 13%).

    A similar shift has occurred with demand. In the 1980, it was mostly Western countries soaking up the gold trade, probably because that's where most of the wealth that wanted to avoid inflation was. By 2000, when gold was held in the same esteem as certain other four-letter words, North America and Europe had almost left the field. Today, it's become a truly global trade again, as you can see in the chart below.

(Click on image to enlarge)

Such decentralization has benefits: It creates flexibility and stability in the gold market. The market psychology is more diverse, making it more liquid and robust.

No Crunch Today – Crunch Tomorrow?

Your Casey Research metals team believes the supply of gold is going to tighten. Most companies have been forced to look in riskier jurisdictions and remote locations with poor infrastructure. Environmental and other regulations are multiplying and becoming more costly every year, and even in places where they are not, labor strikes and increases in taxes are taking their toll. Worldwide, mining becomes more complicated and expensive every year… and in some cases, not even worth trying. At the same time, big discoveries remain few and far between – and even when a discovery is made, it often takes up to ten years to reach production.

As they say, the low-hanging fruit has been picked: We do expect a supply crunch in the years ahead.

It's tempting to try to make an argument based on future constraints in gold supply and some of the interesting similarities between past and present conditions in that supply – they seem to point to a gold mania ahead. But it's the demand side that dominates the price of gold. Whether a shortage of gold supply from production occurs or not, demand for gold is more flexible than supply overall.

Gold is a monetary metal. If confidence in paper money evaporates the way we think it will, the flight to the safe haven of gold could swamp any conceivable glut in supply. We've no crystal ball to tell us when it will start, but we definitely see a mania coming.

And another question arises: Now that gold demand and supply are dispersed across the globe, where will the mania start? US? Europe? How about China, India, or Malaysia? Things could really start cooking with no immediately evident cause in the West at all.

Regardless of when or where the mania starts, our advice is to make sure your personal gold reserves are in place.

 

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Fri, 12/16/2011 - 01:43 | 1986111 thegr8whorebabylon
thegr8whorebabylon's picture

I have some reservations about that.

Fri, 12/16/2011 - 02:36 | 1986166 Harlequin001
Harlequin001's picture

of course the one good thing about the quantum of gold in an economy is that it should neither increase nor decrease.

When production stops it will not matter...

The world will be better off when production stops altogether.

Fri, 12/16/2011 - 04:30 | 1986251 Heyoka Bianco
Heyoka Bianco's picture

You don't have the slightest grasp of economics, do you? Here's a clue: Asset inflation due to restricted supply creates price and demand deflation and therefore recession and/or depression.

 

Maybe you should trade some gold bars for a working brain.

Fri, 12/16/2011 - 05:17 | 1986266 Cugel
Cugel's picture

I find it's getting very hard to distinguish the ironic trolls from the true morons on this board, and it's not because the ironic trolls are getting more clever.

Which are you?

Fri, 12/16/2011 - 05:38 | 1986273 Michael
Michael's picture

I think there's going to be a margin call pretty soon.

A margin call of epic proportions.

I'm not just talking about mettles.

I'm talking across all asset classes.

No more margin.

Think re-hypothecation fallout.

Fri, 12/16/2011 - 05:55 | 1986278 Michael
Michael's picture

It amuses me how the NASDAQ Dot-Com bubble bust has been so thoroughly swept under the rug that hardly anyone mentions it anymore.

Fri, 12/16/2011 - 06:15 | 1986292 Michael
Michael's picture

I remember going home after work at the machine shop and turning on Bloomberg, and the new kid on the block CNBC, in the late 90's to follow the Dot-Com bubble and it's subsequent bust that I foresaw. I didn't own a computer till 2003 when the housing bubble started to get up a good head of steam. I said to myself at the time, I just got to be in on this epic housing bubble bust, in the blogosphere that is. To 2008 did not disappoint. Now I'm looking in on to the epic worldwide credit bubble bust. The mother of all busts.

I don't think there will be any more episodes after this one. 

 

Fri, 12/16/2011 - 07:55 | 1986352 Oh regional Indian
Oh regional Indian's picture

One thing everyone needs to understand and really understand well.

The three olympic pools is all the gold ever mined is a LIE. And if that is a major lynch-pin for pro-goldness then the whole thesis is just plain wrong. Stockpiles and stockpiles AND stockpiles exist. Old, ancient stockpiles. In temples and churches. I've seen some and know of many more.

It was not for nothing that the tale of our friend Midas has been told and re-told for millenia.

ori

/the-plan/

Fri, 12/16/2011 - 09:54 | 1986562 prodigious_idea
prodigious_idea's picture

You mention 3 Olympic pools of gold.  Not to be snarky, but any facts/sources to back up your claim about tonnage mined exceeding 3?

Fri, 12/16/2011 - 10:18 | 1986643 grey7beard
grey7beard's picture

>> The three olympic pools is all the gold ever mined is a LIE.

And only the oracle of ori knows the truth.  I'll have to say, this place has more than it's share of people who know stuff nobody else knows.

Fri, 12/16/2011 - 11:45 | 1986668 oldschool
oldschool's picture

You may be right about the 3 pools, and also the hidden hordes, to some extent.  Such things are very hard to get a fix on.  But as you note, they are ancient (ie, likely already in the equation) and often religiously segregated (ie, not likely to come to market).  So it seems to me one should ask how likely is it that that status will change?  And if it doesn't, how heavily should they weigh in the calculation of "supply"?  

Gold has historically been treasured for a reason, and I suspect the existence of those stashes is more a manifestation of that reason than an argument against it.

Fri, 12/16/2011 - 10:33 | 1986686 Dr. Gonzo
Dr. Gonzo's picture

Do you have any stats on how much paper has been mined for all the failed paper currency in the history of man? Or do you have any stats on how much money it costs to mine the cotton fibers to make a current valid $100 bill?  Are the Cotton mines being depleted to supply our M-2 money supply? Should people sell their gold to by stock in the cotton mining industry? Will the world be depleated of tree bark and cotton? Please elaborate.

Fri, 12/16/2011 - 08:58 | 1986422 midtowng
midtowng's picture

It's all symptoms of the end of a global fiat currency.

Fiat is never a long-term solution, and we're coming to the end. Credit quality is a joke because of sky-high debt that saturates every part of the global economy.

That doesn't preclude a rush to dollars. 2012 will probably witness an EPIC dollar spike, like nothing we've ever seen before. Probably larger than the 2008 spike several times over.

But when that spike ends, so will the global fiat currency regime.

Fri, 12/16/2011 - 07:55 | 1986351 Bicycle Repairman
Bicycle Repairman's picture

For the MSM it was largely swept under the rug immediately.  No one was interviewed about how their savings were decimated.  It never happened.

Fri, 12/16/2011 - 10:47 | 1986723 GoldBricker
GoldBricker's picture

Dot-Com? That got a new bubble to cushion the fall. Not likely next time 'round.

How often do you see discussions of Iceland's default, and how they're doing OK 2 or 3 years later?

Fri, 12/16/2011 - 07:15 | 1986328 Cugel
Cugel's picture

Michael, I'm thinking the same thing. The question is, if you want to make some coin, what is the last position people will defend?

I lost this week because I didn't think that people would sacrifice their position in gold to defend their worthless position in paper, but it seems they did just that. I'm holding pretty to the end game, but if I could puzzle out where the flock would run next...ahhhhh.

But the thought of buying treasurys makes me ill, so I think I'll miss out.

Fri, 12/16/2011 - 07:41 | 1986341 Freegolder
Freegolder's picture

Just get physical gold and hold it it tight. And maybe go read FOFOA.

Fri, 12/16/2011 - 08:22 | 1986378 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Cugel, while posters on this site make these arguments why gold is good in hyperinflationary environments (true), they fail to look at the short term. At the moment, gold is tied to fraudulent paper investing and speculators have driven it up as an asset class just like everything else. It is soon going to crash as an asset class like everything else in the short term. When the speculators lose out, then will be the time to buy physical.

Fri, 12/16/2011 - 08:51 | 1986415 Doubleguns
Doubleguns's picture

Cugal keep in the back of your mind that in the 70's folks had about 5% of their assets in gold. Today its less than 1% so there is a lot of upside still to come. If we went back to 5% would there be enough metal avail, nope so the price would have to surge substantially to equal 5% of assets or present assets would have to plunge precipitously compared to gold...unfortunately that is not out of the equation.

Fri, 12/16/2011 - 06:06 | 1986286 BigDuke6
BigDuke6's picture

'Which are you?'

Who cares, man.  He dont matter.

Start backing up the truck.

Fri, 12/16/2011 - 12:06 | 1986956 Random_Robert
Random_Robert's picture

Read, and TRY to comprehend,  all you mindless trolls and bitchez...

Money is nothing but a proxy for the stored value of future work. Therefore ALL forms of money are CREDIT.

ALL forms of credit only have asset value if you can find people willing to trade the work they did TODAY for the purchases they may plan to make TOMORROW (or the next day, or next year... whatever)

The only thing that distinguishes Gold credit from printed paper or electronic data credit is the fact that no one can conjure gold magically from nowhere. it is therefore REAL and maintains substance.

In other words, Gold is a form of money/credit that relies on NATURE as its Central Bank, and EARTH as it's Treasury.

If you truly understand this fact, then it means that you have transcended into the real world- a world that has no valid use for the entire political, elitist, fractional reserve leveraged derivative credit generating politburo and their stupid, worthless, pointless credit destroying schenanigans.  

If you would rather have a fat roll of Ben Franklins, and you have faith that they will always be more tradeable for edible iPads and toxic Monsanto corn, then hey- more power to you...

But I must point out that in so doing, you are placing your unbiased faith in man (fractional reserve bankers and idiot pseudo-economists like Roubini most notably) above Nature (or God, Earth, Gaia, whatever)...

Personally, that's not a trade I am willing to enter into.

The Nature of the Universe will NEVER be subverted by men- no matter how "powerful" these men may think they are, Nature will ALWAYS win.

 

Fri, 12/16/2011 - 16:02 | 1987939 OliverTwist
OliverTwist's picture

Could you elaborate on that a little bit more? I read it 4 times but I can't understand it.

Fri, 12/16/2011 - 03:11 | 1986190 vast-dom
vast-dom's picture

About as pertinant as a bedouin whore's opinion on gold trinkets and such. Ah but she never wanted money or gold, "background checks" notwithstanding. Here's some solid gold earrings for the kind beautiful gal and a whole lotta ersatz for the soulless gold digger hoe. 

Gold goes up. Silver goes up. And let's hope one day bond yields and interest rates go up too, finally (when Bernank et. al finally get off the planet).

Fri, 12/16/2011 - 03:59 | 1986232 Treason Season
Treason Season's picture

What is it with you and your obession with denigrating Bedouins? Maybe we can meet up in Dahab somewhere and go mano y mano you racist twat! Name the time!

Fri, 12/16/2011 - 07:52 | 1986349 jeff montanye
jeff montanye's picture

truly.

Fri, 12/16/2011 - 08:49 | 1986411 grey7beard
grey7beard's picture

If it makes you feel any better, when he mentioned Bedouin whore, I popped a wood.  Of coures, you are right to take offense as his intent wasn't good, but I'd not kick a Bedouin out of bed.  Me likes them all.

Fri, 12/16/2011 - 12:32 | 1987037 vast-dom
vast-dom's picture

Hey I like Bedouin Whores! Hell I like Jew whores, Russian whores, Chinese whores, Black whores, fuck me, whores of all kinds and types. It's just the gold digging EVIL ones that I don't like. And since i had an EVIL Bedouin Whore and happen like the sound of the words put together, I'm simply using it as a kind of shorthand. So please don't take offence as I meant it with laser-like specificity and had zero band intentions on the whole lot of Bedouins and whores in general, since I'm an equal oppurtunity gold collecting silver hoarding misanthrope anyhow. 

Fri, 12/16/2011 - 01:48 | 1986122 RockyRacoon
RockyRacoon's picture

Check out a simple change in the gold charts:

http://www.ritholtz.com/blog/wp-content/uploads/2011/12/G2.gif

Fri, 12/16/2011 - 03:59 | 1986233 DavidPierre
DavidPierre's picture

Gold and Silver markets were hit along with commodities in general.

There is A LOT going on behind the scenes and under the surface both politically and financially. Yes there is obviously a Dollar squeeze going on, otherwise the Fed would not have implemented the swap lines they did last week. Nothing has changed, except possibly gotten more severe, with the sovereign debt and banking problems, nothing.

In Costa Rica EVERYTHING is for sale and NO ONE is buying anything. Their economy has ground to a standstill and even their healthcare system has bankrupted leaving several million citizens with no healthcare. This also affects pension payments. THIS is exactly what will be happening all over the world in the coming year, overly optimistic "promises" of all sorts will be broken! Here in the U.S., tax witholding receipts has dropped significantly recently and is a good forecast that "official" recession is just around the corner.

Some say that commodities are being sold because they are "winners" and must be liquidated to support the "losers".  This has some merit. We also know that lease rates have been negative for several weeks where central banks were PAYING to lease out metal.

It makes zero sense for central banks to pay to lease out finite and real reserves, they do however know for a fact that this metal will be sold once it is leased out so record negative lease rates are definitely suspiscious. We also know that there are also many MF Global clients that are "stuck" in their long positions (and short). By and large, commercials are generally short and specs long, so while this sector of specs are locked up could this be a way for the commercials to force further liquidation on the specs? In other words, they "magically" find the money AFTER the specs have been margin called out of their positions?

Please keep in mind that Dennis Gartman has again called an end to the bull market in Gold. This type of pronouncement in the past has represented excellent levels to step up and buy.  This time will not only be no different but will end up being THE BIG ONE.

 Central banks actually now need Gold to be marked up by multiples to reliquify their balance sheets. Central banks when all is said and done have only two options left, only one of which will work. We all know that they can print as they have already and will need to at an ever higher pace, the other option is to make their Gold reserves valuable enough to close up the gaping balance sheet holes that have been created by over borrowing.

The global financial system is plain and simply insolvent on all levels.

 Go back to last Friday's closing sentiment, the entire world was BEGGING for more QE, (printing)...fast forward 3 more days and it sure looks like the table has been set to allow this doesn't it?

Commodities collapsing, the Dollar rising (deflation) and the inflation boogeyman not even being mentioned? Is there ANYONE out there that would argue with another round of QE being announced? If (when) it were announced, would commodities trade immediately to new highs? From these levels? No...but they will given a little time. 

The decks have been cleared and the opposition to further QE has been eliminated...so away we go.

It is ALSO true in the case of cleaning up "weak hands" in the Gold and Silver markets.

Expect action just like this before they really do mark up Gold.  Shake out as many peons as possible before the markup so there are less riders to "safety" when the system revalues. We no longer have free markets and really have not had since after the 1987 crash. Nothing happens by coincidence and nothing happens by "free market" anymore, everything and every market on the planet has the fingerprints of central planning on them. This has all become about the "end game" because even the bank accounts (sovereign treasuries) of TPTB are tapped out and broke. How convenient that more "QE" is considered just the tonic needed. Who'd a thunk it?

Please do not panic no matter how far Gold, Silver, and in particular the mining shares, are pushed down because mathematically "they" MUST print. We know that printing is Gold bullish on it's own. We also know because history has shown us that revaluing central bank Gold reserves is the final act of acknowledgement by fiat central banks.

NOTHING has changed fundamentally, demand still outstrips supply of precious metals. The system is still broke with no conventional fixes left to policymakers. Hang on to your precious metals holding as if your life depended on it...because it does!

And finally, from Jim Sinclair, who knows the precious metals markets as well as anyone in the world…

"The most important thing is volatility. One thing this shows you, and it increases continually, is this is the wildest chop we've ever been in, in the history of trading Gold, in terms of ups and downs. It means to me that Gold is going to rise to prices even higher than I expected...."

He is SO right on!

www.lemetropolecafe.com

Fri, 12/16/2011 - 16:42 | 1988083 OliverTwist
OliverTwist's picture

We also know that lease rates have been negative for several weeks where central banks were PAYING to lease out metal.

It makes zero sense for central banks to pay to lease out finite and real reserves, they do however know for a fact that this metal will be sold once it is leased out so record negative lease rates are definitely suspiscious.

A ridaje!!!

I will try it once again: lease rates = LIBOR - GOFO

LIBOR is the average interest rate that leading banks in London charge when lending to other banks. It is an acronym for London Interbank Offered Rate . (Wikipedia)

GOFO: GOFO stands for Gold Forward Offered Rate. These are rates at which contributors are prepared to lend gold on a swap against US dollars. Quotes are made for 1-, 2-, 3-, 6- and 12-month periods. (LBMA home page)

So negative lease rates exists always when LIBOR < GOFO.  (not very complicated aritmetics!)

In the last period GOFO were going up with LIBOR staying relative steady (low). (http://www.lbma.org.uk/pages/index.cfm?page_id=55&title=gold_forwards&show=2011)

This is the reason for negative lease rates!

Fri, 12/16/2011 - 01:53 | 1986123 Ecoman11
Ecoman11's picture

Fabrication capacity and hoarding is the problem. Not supply.

Sidenote: Check out this daily gold price chart with rate of change from 1979 to 1981. We haven't seen nothing yet.. http://www.freeimagehosting.net/f6645

Fri, 12/16/2011 - 01:51 | 1986125 Mike2756
Mike2756's picture

Buy now or be priced out forever!

Fri, 12/16/2011 - 01:52 | 1986126 Milton Waddams
Milton Waddams's picture

The recent volatility in gold has scared-off the blue hairs who were sold on the safe haven line.  

Fri, 12/16/2011 - 01:59 | 1986134 SilverRhino
SilverRhino's picture

If there were solutions to the debt driven economy, fiat printing, the welfare state, crony capitalism, endemic fraud, outright theft and other issues, I might be disinclined to preserve my wealth in gold/silver. Until all of those are solved one way or another, I will keep stacking.

It is the ultimate long term safe haven with ZERO counterparty risk.

Fri, 12/16/2011 - 01:54 | 1986129 user2011
user2011's picture

I just watched a Taiwan TV news clip. Taiwan stock market has been tanking for the past week or two. It has lost 24$ YTD. Now Taiwanese investors are getting out of stock market and buying gold. Someone had bought 100 million USD worth of gold in one single day. May be someone really get the insider info in Asia.

Fri, 12/16/2011 - 01:56 | 1986131 philipat
philipat's picture

Mixed message? IMHO Gold has declined because CB's don't want the surplus countries to buy Gold instead of Dollars (China in particular) and because of the "Strength" of the US Dollar. If you believe the Dollar is strong because the US economy is in great shape, then sell Gold. If, however, you believe that this is temporary, soon the SHTF and all fiat currency will be worth only the paper it is printed on, then don't. I'm in the latter camp and continue to accumulate physical at these now more attractive prices.

Fri, 12/16/2011 - 04:06 | 1986236 wandstrasse
wandstrasse's picture

I am in a third camp: I believe a command economy is ahead. The value and even the usability of PMs will be commanded by the hidden or obvious world government. This can be good or bad for (us) stackers.

Fri, 12/16/2011 - 02:02 | 1986132 Pullmyfinger
Pullmyfinger's picture

None of this takes into account the supply and demand dynamics that have resulted since 1980 from the fractional reserve leveraging by the etf's.

In short, actual physical demand is much, much higher than statistics regarding physical possession indicate.

Mon, 12/19/2011 - 04:20 | 1993462 Hanuman Capital
Hanuman Capital's picture

I have to agree. Aside from high physical demand, the cash rich majors need to increase their gold supply to keep up with demand.

I'm convinced that M&A activity will increase 2012 so the new year will present a good buying opportunity for gold stocks too.

This WSJ article suggests demand will drive M&A. 

 

Fri, 12/16/2011 - 02:05 | 1986140 Shineola
Shineola's picture

Can't mine and refine as quickly as Bennie Shalom can print.

Fri, 12/16/2011 - 02:11 | 1986149 delacroix
delacroix's picture

what happens, when a dollar costs more to print, than it's worth?

Fri, 12/16/2011 - 02:20 | 1986159 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

confetti.  it's a tradition

Fri, 12/16/2011 - 02:48 | 1986183 akak
akak's picture

but only transitory

Fri, 12/16/2011 - 02:52 | 1986186 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

transitory like the weather.  from a bill to confetti, and then receycled back into a bill!

it's magic

Fri, 12/16/2011 - 03:09 | 1986203 hidingfromhelis
hidingfromhelis's picture

sounds kind of barbaric

Fri, 12/16/2011 - 09:29 | 1986489 Doubleguns
Doubleguns's picture

ahhh but they add a few zeros during the recycling process. That removes the barbaric effect.

Fri, 12/16/2011 - 02:30 | 1986165 knukles
knukles's picture

Negatvie Seniorage

Now that's negative carry!

Fri, 12/16/2011 - 02:43 | 1986175 qussl3
qussl3's picture

Kinda hard to beat 0.00000000000000000000001kwh for 1trillion million quadrillion umpteenium digital bucks tho.

Fri, 12/16/2011 - 04:35 | 1986255 omniversling
omniversling's picture

1 Squidillion BenBux

Fri, 12/16/2011 - 04:44 | 1986260 Dr. Engali
Dr. Engali's picture

Doesn't cost anything to push a button and add a digit in an all digital world. That's when we go paperless.

Fri, 12/16/2011 - 09:07 | 1986451 GoldBricker
GoldBricker's picture

One way would be to stop printing 1's and print only 5's and higher. In the early 1980s it became too expensive to make copper pennies, as the copper was worth more than a penny. That one they could debase.

I live in the eurozone, where our equivalent of a penny is a "euro cent" (yes I know, committee-designed names ain't catchy), but they have almost disappeared from circulation, as has the 2-cent coin. I expect the 5 to go soon.

Back to your question: The quick-and-simple answer is to print no more 1's and maybe add a larger bill, say $200, to the lineup. Repeat the process as inflation rachets up. They weren't making 1-mark notes or coins in Weimar Germany.

But the quick answer might not be the one that's chosen. It seems that the US wants to push everyone into electronic transactions (the better to track you with, my dear), and I would expect any strategy to conform to that goal (so, no 500-dollar bills anytime soon to match our 500-euro note).

Mon, 12/19/2011 - 05:05 | 1993494 Hanuman Capital
Hanuman Capital's picture

That's one of the reasons why change is being lifted from the market. A penny is worth more than a penny in terms of commodity value, which is worth more than the printed paper that buys more than the penny of greater worth. Talk about backwards. 

Fri, 12/16/2011 - 02:15 | 1986143 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The graph:  global gold production since 1900

Please note, only half of the world's gold production has come since 1900.  That means when you stare stary eyed at a sovereign, you are looking at half of something that is centuries old.

[I]mprovements in mining technology....

This will quiken the peak of production, as it will quiken the resource depletion.

[G]old is not a consumer good – it's not something people need to eat a certain amount of every day, so the physical quantity of gold per person in the world means less than it would for other commodities.

This just isn't true.  When Zimbabwe faced hyperinflation, the only way to get food was with gold. 

As for the "developed" countries, oil trades for the dollar.  The dollar is backed with the holdings of the Federal Reserve.  The Fed has liabilities, and assets.  It's chief asset is 14k tonnes of gold.  The dollar is backed by gold; and what does the dollar trade for?  Oil.  And what generates food production?  Oil.  Gold is oil, thus why the Fed, and all Central Banks, hold gold on reserve and as their chief asset.

Fri, 12/16/2011 - 02:15 | 1986151 dark pools of soros
dark pools of soros's picture

on the surface oil trades for dollars but there are 'agreements' that also go with it for various things year to year

Fri, 12/16/2011 - 02:18 | 1986156 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

yeah like gold loans from the Fed to other Central Banks in turn for purchases of USTs

Fri, 12/16/2011 - 13:54 | 1987432 dark pools of soros
dark pools of soros's picture

yes, the 'prices' for things on those levels are totally different than what the serfs see

Fri, 12/16/2011 - 02:46 | 1986181 Harlequin001
Harlequin001's picture

'The dollar is backed with the holdings of the Federal Reserve.  The Fed has liabilities, and assets. ' - The dollar is not backed by anything but the full faith and credit of the United States.

and that 'faith' is soon to be sadly lacking...

Fri, 12/16/2011 - 02:58 | 1986184 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Sell the rumor, buy the news.

It is true, the dollar is backed by faith and credit, but the Fed, the Fed is backed by gold reserves, from the Tresurie.  Trust me, when the shit hits the fan, that gold on loan will be used as collateral.

To add, the gold is already used as collateral; it is used as a swap for bids on USTs, par gold loans to other CBs.

Fri, 12/16/2011 - 03:46 | 1986227 lemonobrien
lemonobrien's picture

the military

Fri, 12/16/2011 - 08:16 | 1986374 mikhail kalashnikov
mikhail kalashnikov's picture

there is no faith in the federal reserve.  the dollar is only backed by the full faith and credit of the United States War Machine.  YOU WILL ACCEPT DOLLARS, OR WE WILL FREE THE SHIT OUT OF YOU.

Fri, 12/16/2011 - 02:16 | 1986154 dr.charlemagne
dr.charlemagne's picture

I wish Tyler would put a widget on the site for the GOFO and daily gold lease rates. Supposedly, the fit hits the shan when short term gold rents for more than short term bennie bucks

Fri, 12/16/2011 - 02:33 | 1986167 jimmyjames
jimmyjames's picture

I doubt mining supply has much to do with prices or even future prices-

The above ground stock of gold is estimated to be 160,000 tons and very little is ever lost to industry-

The LMBA trades 700 tons every day-so 2600 tons/year would have little impact--

I don't see that it's bullish or bearish if mines produce 2,600 tons per year or whether jewelers do or don't buy 2,800 or 3,000 tons-

When the price is high-miners go after the lower grades so naturally the supply has been shrinking-

Gold is divisible so basically any amount of gold supply is enough-the catch is how many paper notes are printed against the existing supply

1 oz. could be priced at 100 or 100,000

Fri, 12/16/2011 - 02:53 | 1986187 akak
akak's picture

I doubt mining supply has much to do with prices or even future prices-

Not according to Jon Nadler, the official spokesman of PM dealer Kitco, who loves to (disingenuously) harp on "drastically increasing mine supply" and all those mountains of scrap gold just littering the landscape as some of the many, supposedly bearish reasons to run away from gold. 

Yes, RUN AWAY from gold --- and into the dollar and US Treasury debt!  This, from the spokesman of a(n ostensible) precious metals dealer.  What is wrong with this picture?

Fri, 12/16/2011 - 02:57 | 1986188 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Well the only way to trust an arguement is if it outlines both sides.

Fri, 12/16/2011 - 03:08 | 1986202 jimmyjames
jimmyjames's picture

Yes Nadler-who you would think would be too ashamed after 10 or so years of gold kicking him in the balls after every interview to even sign his name let alone get his ugly mug on camera at every chance-

Someone obviously has a picture of him with a sheep-

Fri, 12/16/2011 - 03:17 | 1986210 akak
akak's picture

- and the sheep's on top, too.

Fri, 12/16/2011 - 04:08 | 1986237 slavador
slavador's picture

jj:

Curious as to why you fucked off from posting at MISHland. What do you see coming in 2012 for gold?

 

Fri, 12/16/2011 - 10:51 | 1986736 jimmyjames
jimmyjames's picture

Hi  slav-

I didn't like the tone of or the threat from board moderator FW about what he called trolling when i posted a comment about gold during a topic about a flight to safety out of europe-

He took me on about it and i kicked his ass-so he threatened to delete my posts-so adios-

I still read mish and a few like you over there-

Merry x-mas to you and family slav-

Fri, 12/16/2011 - 14:45 | 1987641 slavador
slavador's picture

Merry x-mas from BC - my eldest 2 kids are coming home in a couple of days from their prairie homes of ice and snow and money.    

Fri, 12/16/2011 - 04:34 | 1986252 Major Miner
Major Miner's picture

Kitco also buys gold, and makes a pretty penny on it too. Nadler scares people into selling their gold for a fraction of spot prices, Kitco uses the gold to make coins, then sells it at spot+. it's an ingenious business model.

Fri, 12/16/2011 - 09:14 | 1986463 chubbar
chubbar's picture

Yeah, perhaps, but KITCO also has major unallocated gold & silver bullion accounts. Don't be surprised to wake up one day to find these assholes have hypothecated those accounts and they are gone. They are probably using them as collateral in order to play the market in some manner with PM futures positions offsetting their risk. We all know how that is going to end eventually. There is a reason Nadler talks down gold and I doubt he'd still be around collecting a paycheck unless there is a serious reason why.

Fri, 12/16/2011 - 14:07 | 1987494 akak
akak's picture

Excellent analysis, chubbar --- I think you have gotten to the nub of the issue with Kitco and their dishonest, disingenuous, execrable snake of a spokesman Jon Nadler.

Fri, 12/16/2011 - 02:35 | 1986169 navy62802
navy62802's picture

Not to discount this post, but supply and demand no longer govern the PM markets.

Fri, 12/16/2011 - 02:39 | 1986171 Reptil
Reptil's picture

Places where one can sell their "useless" scrap gold, are popping up like mushrooms in an autumn forest here.
NONE offer spot prices when buying scrap. Best I've seen is 80% for 24karats. What a sham this is. LOL

Check out this interview of Folker Hellmeyer: https://www.youtube.com/watch?v=jaeC8CEi1DU

Gold is money, but after the implosion, IMHO the 10x 20x bagger is going to be silver. Do the math yourself, demand is inflexible, unless we all go back to medieval times.

Fri, 12/16/2011 - 02:41 | 1986173 Handyman
Handyman's picture

I hope it's all that and more for silver.

Fri, 12/16/2011 - 02:44 | 1986177 gbresnahan
gbresnahan's picture

Seems to me this trade is getting a bit crowded.. Not that I'd dare short gold, just pointing out my observation.

Fri, 12/16/2011 - 04:20 | 1986238 Dr. Engali
Dr. Engali's picture

I don't get that argument when gold doesn't even represent 1% of your typical portfolio managers positions. Not to mention that your average Joe is still selling to every pawn shop they can. Gold is going to outperform stocks again this year. Sooner or later people are going to start asking the question "why isn't gold part of your portfolio when it goes up every year "? That's what is going to drive the price upwards.

Fri, 12/16/2011 - 02:46 | 1986179 akak
akak's picture

Better watch out, Tyler --- Bron Sucheki may come into this thread and tell you that "you don't know what you're talking about when it comes to gold", as he did in another one earlier today.  Sounds to me like the gauntlet has been thrown down.

Fri, 12/16/2011 - 09:42 | 1986528 web bot
web bot's picture

Hey Mr. A... Leo K = BATZ. Anytime you see BATZ, know it's our little friend Leo.

Check out my exchange with him on the ZH post on Ontario govt debt.

Have fun...

Fri, 12/16/2011 - 14:14 | 1987533 akak
akak's picture

Hey web bot,

I read your post and Batz' response, and I must admit that it did not sound exactly like our dear little leo.  However, this Batz is obviously Canadian, so allowances must be made for the unique brand of statist brainwashing that comes from having a foreign figurehead monarch bitch on one's money, and saluting a flag with foliage on it (and primarily composed of the socialist color red).

Mon, 12/19/2011 - 15:21 | 1995014 web bot
web bot's picture

LOL.

Fri, 12/16/2011 - 03:08 | 1986201 Do You Speak Greek
Do You Speak Greek's picture

Seems like a lot of heresay in the piece.  The whole last section of the piece is speculation from known gold permabulls.  Kinda hard to take them seriously, even being a long-term gold bull myself. 

The key though is how disastrous the ETFs have been for the physical market demand.  They are 100% correct about that.  Those sneaky banker bastards... gotta hand it to em!

Fri, 12/16/2011 - 03:12 | 1986204 bankonthebust
bankonthebust's picture

BTFD.

Fri, 12/16/2011 - 03:19 | 1986212 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

bitchez

Fri, 12/16/2011 - 03:33 | 1986221 New American Re...
New American Revolution's picture

East or West, what does it matter, it will be both, for both are falling apart quicker than many realize.   In fact, the entire world is enflamed and embraced by revolution.   They don't see it in Washington DC yet, but they see it in Moscow.   And while rightly so, they can see no further for the beam in their own eye.

Fri, 12/16/2011 - 07:17 | 1986329 Quinvarius
Quinvarius's picture

They see it here.  I worked at a large bank for a while.  One day I looked out the window and guys in haz mat suits were walking around the mail room entrance and the police had everything taped off.  I knew it had happened a couple times before.  But this time, The pricks didn't even bother to evacuate the building or tell anyone.  To me that says it was happening a lot more than anyone cares to bring up. 

I am sure that congress is not trying to take away people's rights out of the blue.  They are reacting to something we are not hearing about.  They are wrong and cowards.  I think they are scared.

Fri, 12/16/2011 - 05:47 | 1986276 The Swedish Chef
The Swedish Chef's picture

To me it´s quite simple: when media and so called financial experts (ie paper pushers) badmouth gold as an investment and companies buying scrap are advetizing all over said media it sends a clear message. 

 

Bought a Krugerrand the other day. Wish I had cash enough at home to buy another. Or maybe I should wait until the correction bottoms out at around $1450-1500 and but two or three.

Fri, 12/16/2011 - 06:34 | 1986301 IamMarla
IamMarla's picture

production of ore versus market manipulation of paper traded metal. I like this view.

Fri, 12/16/2011 - 06:48 | 1986310 Quinvarius
Quinvarius's picture

In 1913 we had 3 billion in national debt.  Every 49$ of it was backed by an ounce of gold.  Today we have 15 trillion in national debt.  Every $57,366 dollars of is backed by one ounce of gold.  So as you can see, the issue has nothing to do with gold supply.  It has everything to do with money supply.  Gold is a currency trade.

Fri, 12/16/2011 - 07:27 | 1986335 Reptil
Reptil's picture

I told that to my (helpful) bank guy. Correlation M2 > = spot >.
it was funny to see things go click-click-click in his head and his face change expression.

Fri, 12/16/2011 - 10:03 | 1986596 SamuelMaverick
SamuelMaverick's picture

It is also funny to hear and read that the ECB and the Fed are not ' printing money ' and that they have no plans to --- then I go to the St Louis Fed research website and check out the M1 and M2 charts- they are completely vertical for the last three years. The bottom line is that actions speak louder than words, and the Fed is creating money like a wild banchee. You are a fool if you think the women will just lift their skirts and drop their panties when you walk into a bar. It usually requires a little effort , a little conversation, and a little money in order to get those panties off.  Central Banks are buying gold, the general public is selling, the general investment community is being pushed to sell with these periodic coordinated smashdowns. The PM and monetarist communities are screaming as loud as they can warning everyone that will listen to BTFD.  This scenario has happened before, in the 1930's the US and all the European countries devalued their currencies almost 50% , without any warning to the general public.  Like magic, the banks were recapitalized thru their gold reserves doubling in nominal value.  The average Joe / 99%er saver got half of their wealth stolen .  It seems to me that this is the exact same scenario is in play again. Good luck, yours,  Maverick

Fri, 12/16/2011 - 09:26 | 1986482 chubbar
chubbar's picture

That's an interesting stat. Can you elaborate on what you are using for gold supply numbers. I ask primarily because the U.S. garnered quite a bit of it's present gold stock (assuming we believe they haven't sold it or otherwise encumbered) during WW2 so there'd be a change in the denominator between those dates as well. I'd like to use this stat but was wondering about it's accuracy. Thanks!

Fri, 12/16/2011 - 06:51 | 1986312 Wakanda
Wakanda's picture

If hungry and angry sheeple begin trashing infrastructure, it will become more difficult to mine, transport, store, trade everything. 

Git while the gitting is good.

Fri, 12/16/2011 - 07:55 | 1986333 nathan1234
nathan1234's picture

The world has never ever faced the finanancial crisis it is facing now. With Countries and Banks insolvent.

One cannot trust any currency.

Comparing gold and charts with history does not mean much when this kind of crisis stares us in the face.

Do i prefer piece of paper  put out by a dishonest and corrupt government to gold and silver

Heck no!

Fri, 12/16/2011 - 07:27 | 1986336 vegas
vegas's picture

All the gold ever mined still represents less than 1% of financial assets worldwide. Mine all you want, the world will soak it up.

 

http://vegasxau.blogspot.com

Fri, 12/16/2011 - 07:31 | 1986337 onebir
onebir's picture

Does anyone know what proportion of gold miners costs goes on energy? It seems like they only get a few oz per tonne*. That'll probably push up costs & choke supply as energy prices increase.

*here 1.3 oz/tonne or .005% in their best test drilling:

http://www.marketwire.com/press-release/roscan-drilling-confirms-13-ounces-gold-per-ton-over-20-feet-at-golden-mile-tsx-venture-ros-1550976.htm

Fri, 12/16/2011 - 08:00 | 1986358 persu
persu's picture

Gold is heading down? How is that you all gold believers? How do you think gold will perform in deflationary depression? I agree about the miserable state of the economy and fiat currency system, but gold is no solution.

Had to say this just to get on your nerves....besides I am getting tired of ZH. The same story over and over, added with some paranoid conspiracy rubish.

Fri, 12/16/2011 - 09:59 | 1986586 tmosley
tmosley's picture

Feel free to read cnbc.com, then.

Fri, 12/16/2011 - 10:40 | 1986703 GoldBricker
GoldBricker's picture

The same story over and over, added with some paranoid conspiracy rubish.

Then why read it? Are you bed-ridden or something? Not enough trash on the internet, you've looked at all of it already?

BTW, it's "rubbish", not "rubish".

Fri, 12/16/2011 - 14:24 | 1987574 akak
akak's picture

BTW, it's "rubbish", not "rubish".

He must have been unconsciously thinking of himself (rube-ish).

Fri, 12/16/2011 - 08:20 | 1986376 IslandMan
IslandMan's picture

Looking at the graph, it seems production still hasn't hit a new high, even after the gold price has climbed by a factor of 6 over the past 10 years.  Looks like Peak Gold is not far away...

Fri, 12/16/2011 - 09:03 | 1986441 walcott
walcott's picture

Long term fill a couple rooms full of copper bars. Cheaper and it's used in every god damn thing.

by the way for the nickel hoarders. Nickels are 75% copper. The price of copper drives the 

valuation of a nickels. If you want true nickel coins get canadian nickels. But just the

same it's all about copper when you're talking about nickels. And oh yeah world war too.

Fri, 12/16/2011 - 09:34 | 1986492 Treason Season
Treason Season's picture

FWIW  Gary Savage has this to say;

"As a matter of fact I’m pretty confident that if the dollar turns down it is going to trigger the beginning of the third and final, bubble phase, in the gold bull market.

The public is already starting to become aware of the gold bull. All we need at this point to start the flood is for gold to recover quickly from this selloff. If gold quickly shoots back up and tags, or penetrates that big psychol"ogical $2000 number I expect it will be the siren call that draws the public into the bull market. And it is the public coming into a market that triggers the bubble phase.

During this phase of the bull I expect we will see the normal ABCD wave pattern break down as gold starts to accelerate into what will almost certainly be the most incredible parabolic advance, maybe in history. By the fall of 2014 I expect we will see gold somewhere between $7,000 and $20,000 an ounce."

http://smartmoneytracker.blogspot.com/

Fri, 12/16/2011 - 10:35 | 1986690 SubjectivObject
SubjectivObject's picture

The summary is appreciated.

Can we get the same analysis features for silver?

Thanks.

Fri, 12/16/2011 - 10:43 | 1986711 GoldBricker
GoldBricker's picture

Hey everybody,

You can't eat gold, but in extremis it can help you to eat. For a good story, read this:

http://dailyreckoning.com/gold-and-money-in-extremis-one-mans-story/

Sat, 12/17/2011 - 01:13 | 1989468 Bansters-in-my-...
Bansters-in-my- feces's picture

"Gold"....
Not just a Breakfast drink.
Try some today.

Do NOT follow this link or you will be banned from the site!