The Peak Gold Problem Is Very Real

via Adem Tumerkan at Palisade-Research.com

 

Another day passes – and gold stays flat. . .

It’s the most frustrating thing to watch as the price of gold drifts sideways – I grind my teeth often over it.

I know what’s causing it too – at least I think I do – and that’s the worst thing about it. The recent soaring dollar and the temporarily tightening central banks worldwide aren’t great for gold.

But – after a couple of minutes of cursing the world – my rational and logical side kicks in. And I soon realize that the lower gold prices allow me to average down and find undervalued stocks.

Most investors don’t realize a couple of things that are very important to them and their strategies. . .

First – just because the crowd isn’t investing in something today does not mean that they won’t rush in tomorrow.

Before every bull market, there was a bear market. For prices to climb higher, they must already be down.

Remember Bitcoin? Out of seemingly nowhere it became the biggest mania we’ve seen in years. And the important part is – no one can explain why it suddenly took off. It’s not like anything changed with the actual Bitcoin’s themselves – just people’s perceptions towards it.

Then once there are higher prices comes even higher prices. We call this ‘The Greater Fool Theory’ – when investors pay for something knowing someone else will pay more for it.

Soon, it becomes a vicious, self-reinforcing cycle spiraling upwards.

To summarize this all together – just because gold hasn’t rallied yet today doesn’t mean tomorrow it won’t. And when it does – it can go even higher than many think is possible.

 

Second – most investors, especially Wall Street, are short-sighted and only invest for the immediate future. Not the long-term.

Warren Buffet’s pointed out this situation and why it ultimately gives retail investors such a leg up. When everyone’s looking at the short run, the intelligent investors can cherry pick the long-term and find deep value.

I worked as an equity analyst before – and I’ll tell you from first hand experience that this is true.

For instance, when your job depends on you to make money – which is what Wall Street’s all about – you can’t tell investors to wait six months – or even a year. Because if you don’t make money right out of the gate – investors will pull their capital out and put it in a place where they are generating profits now.

This forces traders and analysts to focus on what’s going up today – even if the risks of losing money are much higher. . .

There were many times I saw positions that would return several fold my initial investment – but they needed time to mature. And I would be long gone – fired – before I could collect the huge harvest.

 

These two reasons are why I urge retail investors to take advantage of these situations – and look at them as opportunities. . .

So don’t worry about gold today – because the next year or two will prove exactly why all that teeth grinding was worth it.

There are a couple of reasons why gold looks so good going forward – regardless of the potential weak short-term. . .

I can sit here and tell you why the demand for gold will soar – but I’d rather focus on the supply side. Since this is how the best bull markets have formed historically.

Putting it simply: we’ve reached ‘peak gold’ – there just isn’t enough we can find anymore.

Goldcorp’s Chairman – Ian Telfer – has said the world has now reached this ‘peak gold’ era. This means that global mine production will keep declining because all major gold deposits have already been discovered.

“Gold produced from mines has gone up pretty steadily for 40 years,” Telfer tells the Financial Post. “Well, either this year it starts to go down, or next year it starts to go down, or it’s already going down… We’re right at peak gold here.”

Telfer says that at $1,300 gold or lower – it’s all been found. There are no more significant potential mines out there at these prices. And the exploration records show just that.

Many forget that mining companies are self-cannibalizing industries. Each ounce that’s pulled out of the ground today is one less ounce for tomorrow. Therefore, they must always be looking for new sources of gold. 

Telfer goes on to say how all the major mining companies – Barrick Gold, Newmont, Goldcorp – are all “shrinking fast”.

This is a very important signal that gold production worldwide is going to start declining.

Because when the peak’s reached – the only way to go is down. . .

We need to ask ourselves: is it just one gold mining chairman’s opinion, or is this ‘peak gold’ an industry worry?

 

Here are some other big names sounding the alarm. . .

Pierre Lassonde – the billionaire founder of Franco-Nevada Gold – also believes the same. That ‘peak gold’ is here and current mine supplies are at risk.

Rudy Fronk – the CEO and Chairman of Seabridge Gold – said that “peak gold is the new reality…”

Kevin Dushnisky – President of Barrick Gold – has said that “falling grades and production levels, [as well as] a lack on new discoveries” are what’s going to drive the next gold bull market.

 

As many know – I’m a firm believer of the Austrian economist – Joseph Schumpeter – ‘creative destruction’ theory. And that the last few years of sub-$1,300 gold has wrecked the sector.

Many of the old mining companies that couldn’t survive have bankrupted – they’re gone. . .

And all the remaining gold companies over-produced just to make up for the lost revenues caused from a falling gold price. I call this the ‘running on a hamster wheel’ problem – they depleted their finite resources, and burned through their cash, only to simply sustain without really going anywhere.

The thing is, analysts know this about the gold market. It’s not some hidden secret. They know prices will rise – eventually. But like I said in the beginning – they would rather start buying after prices have risen than before. Because their careers depend on it.

This gives us an advantage to find the best, high quality assets that will have their valuations soar once the price of gold climbs higher.

The investment thesis is really simple: as gold production and supplies continue declining – the gold price will do very well in the long-term.

We now know because of this ‘peak gold’ situation that the $1,300/oz price level is the floor. And that overtime the price of gold will trend higher. 

As I wrote earlier – we’re in the early stages of a supply driven bull market. And these are the kinds of bull markets that get me most excited.

Comments

anarchitect Dame Ednas Possum Sat, 07/14/2018 - 08:18 Permalink

Yes.  But until the reset arrives, peak gold won't be a big deal.  The supply is the stock, namely almost all the gold ever mined, about 180K tonnes.  If yearly output drops from 3K tonnes to 2K tonnes, it will barely affect the price, especially given that so many buyers are satisfied with paper claims.  The paper leverage is so great that, even if annual production doubled, there would still be a big problem when the reset arrived.

In reply to by Dame Ednas Possum

Wild tree Fri, 07/13/2018 - 20:55 Permalink

I subscribe to the theory that the wheels are coming off this train, unlike any other time in history, everything is interconnected. Now we have exported the "Debt is necessary for growth" mantra to the whole world. When the world-wide bubble pops, all currencies will be toast. How will you revalue your gold, in what currency?

I expect that this next transition will be so FUBAR, that not even gold will save our butts.

I hope I am wrong.

Winning!!!!!!!!!!!!!

Kafir Goyim divingengineer Sun, 07/15/2018 - 00:14 Permalink

Who has gold and silver?  Nobody has it, so how would you know if those few people who actually do have it are able to transact?  I suspect a farmer will take silver for his eggs.

When your currency is as shitty as Venezuela, any other currency is just as good as gold.  Hell, a Mexican peso would seem like hard money to these people.  So it makes sense that they transact with any other currency besides bolivars.

it's only when other currencies are not available, or they are falling just as fast as yours, that you would need gold and silver.  Examples of this are Iranian Rials and Turkish Lira.  For those people, euros and dollars are frowned upon, so gold looks pretty good.

In reply to by divingengineer

mosfet divingengineer Sun, 07/15/2018 - 03:25 Permalink

Liquidity or lack of.  PMs have become unobtainum In Venezuela so there's little use for it as a medium of exchange.  So barter has become the primary economy, since items like plantains offer a better ratio of liquidity vs scarcity than PMs or cash can.

I encourage anyone to dig below the surface and take an unbiased look at Venezuela's markets and economy.  You might find out stuff like their stock market in Bolivars has out performed Gold in Bolivars by 10X since 2010.

In reply to by divingengineer

Montana Cowboy Fri, 07/13/2018 - 22:26 Permalink

I have been listening to these high priests at the Church of Gold and Silver for decades now. All they keep doing every year is adding 1 to the year when the wheels fall off and gold goes to the moon. The reason they get away with it is because believers don't impose a time limit on these gurus. They preach without any drop dead date. What a luxury. The information needed to conclude this is going to happen is substantially the same information needed to know when its going to happen. Instead, because they can't produce evidence, they say catchy things like "it can't go on forever." Where is the evidence that it can't go on forever? I have never seen it.

Go read up on the Infinite Monkey Theory. It says that a monkey sitting at a keyboard, if given an infinite amount of time, will eventually type out War and Peace and all the works of Shakespeare. Given infinite time, everything with a probability greater than 0 becomes a certainty. Don't give anyone an infinite amount of time for their prediction to come true. The buzzer went off a long time ago on metal gurus. Even if they turn out to be right, it won't be because they were smart. They were just statistically overdue.

Scipio Africanuz Montana Cowboy Fri, 07/13/2018 - 23:49 Permalink

Gold is not an investment, it's money, and insurance against going broke and how so? When an economy is healthy you buy productive assets with gold, and when an economy becomes schlerotic, you buy gold by selling shaky assets, so as to protect your networth.

Speculative gold investments are for the brave! Gold and silver are universally accepted money. Their prices at any point, depends on the economy you're engaged in, if it's strong, the metals decrease in price, not value, and if it's weak, they increase in price. They're like economic barometers to tell you the true pulse of the underlying economy, no more, no less, gold is not an investment, it's protection against value defenestration!

What's happening now, is that some folks are playing financial shenanigans, to prevent folks from discovering the true health of the economy and why? Because the economy is sick! If folks discover that, they will surely demand it be healed, or protect themselves by buying insurance ( precious metals ), against its demise, therefore, folks must never be allowed to find out hence, the abracadabra shenanigans! Will it work?

The long answer, is nope! The short answer, is even longer, and it's that "hell no, it won't!"

Now, nature is in battle with magic, who wins? Buy your popcorn, soda, and front row movie seats, we're about to watch the movie titled "Thou shall not.."

Enjoy!...

Edited.

In reply to by Montana Cowboy

Fester Scipio Africanuz Sat, 07/14/2018 - 08:28 Permalink

If one understands that the real health of our economy,  jobs, money, basically everything is manipulated and this includes PM’s, then you can speculate that that basic economic principles will prevail. PM’s will revalue relative to other hard assets that are not (as)manipulated. 

 

If one ounce of gold “should” purchase 1 acre of land in your area but currently requires 7 ounces then you can speculate that this imbalance will correct. It may not totally correct at once or even in our lifetime but you can speculate with gold. 

 

Same me can be said with silver.  Hard asset to hard asset. 

In reply to by Scipio Africanuz

Montana Cowboy Scipio Africanuz Sat, 07/14/2018 - 15:10 Permalink

Your post is full of fallacies and sophistry. There are good reasons to stack, but you haven't surfaced any of them. You have only regurgitated what you heard at the Church of Gold and Silver (coin dealers and miners).

"Gold is not an investment, it's money"

No, its not money. In fact, there is no good evidence that gold was ever money unless it was combined with a government-issued coin/claim check. When the metal was removed from the money, the money continued to function as money and the gold and silver did not.

A few years ago, I tried to use gold and silver as money just to test the theory. I couldn't buy anything. Here in Montana we have many Hutterite communities running very big ranching and farming operations. I tried to buy whole hogs with metal. They held a meeting on this matter up near the Canadian border with the elders in their organization. They declined. I tried many other experiments as well. I quit when I realized nobody could buy food in Venezuela with gold and silver. I actually spoke with people that tried it. One said "the only thing you can get in Venezuela with gold and silver in your pocket is your brains beat in." So, if metals can't perform as money in that scenario where money died, the theory is dead.

"When an economy is healthy you buy productive assets with gold"

You're kidding, right? Show me any productive assets you can buy with gold and silver. They don't exist. You can't buy real estate because almost all of it is financed and the bank with the lien won't accept metal for a loan payoff. I know the typical response. Just sell the metal and pay off the loan. But if gold is money, you shouldn't need to convert it. That only serves as evidence that the metal isn't money. It is, at most, an asset that can be traded. But so is everything else. If gold is money, then everything tangible is money too.

"Gold and silver are universally accepted money. "

Gold and silver are universally refused as money - anywhere and everywhere.

"Their [metals] prices at any point, depends on the economy you're engaged in, if it's strong, the metals decrease in price, not value, and if it's weak, they increase in price."

What? If metals are money, they don't have a price. Everything would be priced in metals. Its evident in your writing that your brain doesn't even believe what your hand is writing.

In reply to by Scipio Africanuz

Silver Savior Scipio Africanuz Sun, 07/15/2018 - 18:16 Permalink

Gold is an investment and there is not one thing I want to trade right now. The gold and silver IS the productive asset and I will short everything else. 

How could someone trade this beautiful metal for a shitty peice of farmland and you have to smell horse crap all day and pray you can keep the farm together? 

Sounds like a liability if you asked me.

In reply to by Scipio Africanuz

lunaticfringe Montana Cowboy Sat, 07/14/2018 - 12:10 Permalink

True. The sky is falling gold meme has gone on since '08 and the POG has been steadily falling since 2011. The biggest problem that I can see is that people can actually live without gold and silver. There is simply no catalyst to change that at present. Peak gold stories may strive to achieve that but really only appeal to a small group of us. Beyond that- I am headed to the folk festival in my hometown- perhaps I shall see you there.

In reply to by Montana Cowboy

bilbert Fri, 07/13/2018 - 23:23 Permalink

O.K. - I'll be the outlier here and say this is a good article, firstly, because the entire market minus the PM miners could easily drop 50% in short order, and likely will at some point.

Secondly, the PM mining sector is SO unloved, there are bargains galore, if you are not in a hurry for quick returns.

Thirdly, PM prices have been hovering around the cost of production for a number of YEARS, so Gold is NOT going to $750 an ounce, nor Silver to $11, EVER.

Lastly, there is no need to rush into PM's or PM mining stocks RIGHT NOW, as all the markets are being actively "managed", and fundamentals haven't mattered for a number of years now.

My recommendation?  If you are in the "General Market", sell everything and go to cash.  When you see PM prices, and PM miners share prices rise 20% from current levels, buy PM's and PM miner stocks with both hands, as there will be TREMENDOUS upside.

If you are currently PM or PM miner "heavy" - do nothing.  The downside is negligible, and the upside will be shockingly good.

JM2CW

 

MrPalladium salv0 Sat, 07/14/2018 - 17:26 Permalink

" could skyrocket "

The critical fact is that the mining industry cannot seem to find new mine deposits to exploit.

This means that new production is falling and will continue to fall. Miners are "forced sellers" and when new finds fall short of depleting mines, supply must come from non-miner holders who are definitely not "forced sellers".

In reply to by salv0

Roacheforque Sat, 07/14/2018 - 08:56 Permalink

As many do, you grind your teeth for the wrong reasons. Gold today gets "it's price" from incorrect reasoning. Once gold is understood as the "systemic reserve asset" (which everyone accepts as monetary debt fails) it will get it's value from the correct understanding of it's priceless utility.

At the unforgivable risk of repetition ... this idea that gold is some "safe haven asset for the next downturn" is likely the most crowded wrong position on Earth. Such a position is slow to turn, even though inevitable. Do not bet against the CBs. They hold the gold that they are directed to hold. And the reason is not "tradition".

These thoughts below are a start ...

https://roacheforque.blogspot.com/search?q=tradition