Mar012014

Line in the Sand

Mr. Burns, 3/1/2014

It’s twelve hundred bucks, give or take a hundred.  That is how much it presently takes to produce one ounce of gold; of course that is just an average or a mean or a median or whatever.  It is not exact and it varies from mine to mine, but on the whole it costs about $1200 to dig and refine 1 oz. of gold.  That is also the floor for the price of gold in US dollars.  During the last couple of gold cycles, the price could and did go lower than the cost of production, but it is different this time.  Yeah, it is different this time.  Normally I laugh at anybody saying that because they are in denial and deluded by their preconceptions, and yet I am saying it.  It is different this time.

Why?  What’s different?

To answer that we need to know what is normal.  During the more recent decension phases of a commodity, in this case the gold, cycle, the price will for a time decrease to less than the cost of production in order to consume the glut or overproduction resultant from the the boom phase of the cycle.  During the last gold boom, as the pog increased gold mining companies increased production.  The price was much greater than the cost of production and it became profitable to increase shifts, buy equipment, and mine less productive mines.  Then, the peak price was reached when the largest number of speculators had already bought and the price started to decline.  Less mines were profitable, there was excess mining equipment, and too many miners to support a decreased price.  I don’t know much about most commodities, and I only know a little more about gold than I do about other commodities, but I know the above described has been the last couple of gold cycles, abbreviated and simplified.  And I know that gold is not a commodity.

What?  What did he say?  Gold is not a commodity?  It is included in the commodities divisions of futures exchanges, is it not?  It is.  But, it has only been considered a commodity by a minority of the interested parties for only a small portion of the time that the interested parties have been interested.  Gold has been money for five thousand years, is still money, and only the ignorant and deceptive deny it’s true function as money.  Admittedly, it is not a highly used currency presently, but the difference between money and currency is profound, especially a fiat currency manipulated by a central bank and created out of thin air by a fractional reserve banking system.

A 2,700 year old Greek gold coin.

How much gold can a central bank or a government create?  Not much.  Ok, none.  They could, like anyone, mine and produce gold, but that takes labor and capital.  How much labor and capital does it take for the federal reserve to create dollars to buy treasuries or buy mortgage securites?  Again, none.  Gold is rare.  Dollars are not.  Gold is money.  Dollars are also, but not for too much longer.

By the way, I am writing this while listening to “Say a Prayer” by Duran Duran.  Why is that some music upsets one’s thought processes and other music enhances it?  I don’t know.  Thought I would ask just in case one of you knows or has an idea.

It costs about $1200 per oz. to produce gold.  Why so much?  After all, twelve hundred smackers is a lot for just one ounce of anything, and this for a metal that has few if any uses other than as money or adornment.  And it  would not have use as adornment if it was not valued as money.  The main expenses of a gold mining operation are the land, the equipment, and mostly energy, energy mostly in the form of diesel fuel.  It takes a whole lot of diesel fuel to get at the gold, more diesel fuel to transport it to the initial refinery, more energy to refine it, more diesel to transport it to the final refiner, and then, … you get the idea, right?  And as the price of oil increases, so goes the costs of gold production.  Is the price of oil decreasing?  In the US it has recently, but in the rest of the world, not so much, and not so much of the world’s gold production takes place in the US.  Gold is mined in areas where there are no diesel fuel truck stops, and guess what it takes to get the diesel fuel to where the gold is being mined?  Yup, you got it.  You guys are smart.

In 2012 the total gold mined in the US was 230 tonnes, my guess is that it was about the same for 2013.  Total world gold production was 2920 tonnes in 2013, and of that total, China mined 437 of them.  China does not let the rest of us know how much it cost for China to mine those 437 tonnes, but it is probably a fairly safe guess that it cost China at least $1,200 per ounce to produce 437 tonnes and it probably cost China more because China has to import almost all it’s energy/diesel fuel.

The last time the pog got down to $1,200 per ounce, there was a buying frenzy in China; not just by the People’s Bank of China, but by regular folk, Wong 6-pack.  Actually, it was mostly zhen xian pan 6-pack because it appears that Chinese housewives buy small amounts of gold as savings.  That last word is important here;  SAVINGS.  Zhen xian pan 6-pack is not buying gold to speculate on the price, but is buying as savings.  She does not buy futures on the futures market.  She does not buy shares of an ETF.  She buys physical gold that she can hold in her hands and she does hold on to it.  She has no plans on selling it if the price rises.  It seems the Chinese have a much, much longer history with fiat currencies than Americans and they have a lot less trust in their paper yuan than their American counterparts have in dollars.  This may seem a bit odd to us Americans, but the Chinese government and People’s Bank of China, and Chinese banks in general encourage the Chinese citizenry to buy gold as savings, not only in words and speeches, but by making small gold purchases available at Chinese banks.  Just curious, what would you think if your local branch of Bank of America started offering 1/10 ounce American Eagles for sale?

 

A 1/10 troy ounce American Eagle.

 

It is not a trick question.  I don’t know.  I want to know what you think.

Anywhooz, the regular Chinese citizen likes to buy gold for savings and the People’s Bank of China also buys gold.  How much are zhen xian pan 6-pack and the PCB buying?  No one knows for sure.  Well, actually no Westerner knows for sure.  There might be, and probably are, some People’s Bank of China bankers who know, and they aren’t telling.  But, the amount of gold that the People’s Bank of China and the Chinese citizenry are buying is more than China is producing.  And that means China is importing gold.  And that means we can know how much the Chinese are buying by how much they are importing.  Some idea, because the gold imported and bought by the PBoC is not reported in a timely fashion, nor is it reported in an accurate fashion.  The Shanghai and Hong Kong Gold Exchanges imported 2,668 net tonnes into China in 2013.  NET tonnes because the two Chinese gold exchanges do export very small amounts that have been imported; those small amounts having been fashioned into jewelry.   None of the gold produced in China is exported, nor is it bought by consumers, ie. zhen xian pan 6-pack.  The PBoC does sell gold to Chinese bank clientele, but it is neither produced in China, nor accounted for in the import statistics.

The PBoC reports holdings of 1054.1 tonnes of gold.  Yeah, I know, I don’t believe it either.  The PBoC takes possession of all the gold produced in China and last year that was 437 tonnes.  Even if the PBoC  didn’t buy one ounce of imported gold, the PBoC would have a lot more than 1,054 tonnes after three or so years.  So, China imported 2,668 tonnes of gold last year and the total world mine output was 2,920 tonnes.  Let that sink in for a minute.  China imported 91% of the total world gold production last year, which includes scrap gold, (Cash for your Gold).  And that percentage has been increasing every year for the past few years.

Where did all the gold come from that China is importing?  It certainly did not come from mine output unless you think that the world’s gold consumption has decreased by 91% over the last few years.  The world gold consumption by the most conservative estimates rose by 21% last year to 3,684 tonnes, or 126% of the total gold production.  Again, where did the gold consumed over the gold produced come from?  Well, I will tell you.

It came from the various gold exchanges and the exchange traded fund, GLD.  That’s where it came from.  Aww-w-w-w,  Ohh-h-h-h-h-h!  That is what all those other posts were about.  Now, we are getting somewhere.  The gold exchanges have been selling PHYSICAL gold and China, (and India, and a few other Asian countries), have been buying PHYSICAL gold.  And any time the pog gets close to the cost of production in China, what do you think the Chinese do?  They buy.  CUZ IT’S  THEN CHEAPER TO BUY IT THAN IT IS TO PRODUCE IT!!!

 

This a 1/20 troy ounce Panda minted by the PBoC for sale to taitai 6-pack. The gold content is currently worth about $66 according to Kitco spot.

 

What this all means is that there is no glut or overproduction.  Gold is not a commodity.  Never has been.  Gold is money.  And it is starting to behave like it again.  More accurately, more people are behaving as if gold is money.  And more will continue to do so.  These people are not Americans.  Americans are clueless about money.  They think money is something you borrow and spend and is something they are entitiled to because they are Americans.  It isn’t really different this time.  It is actually the same as all the other times in history when a fiat currency has replaced gold as money.

The PBoC has over $3 trillion is foreign reserves, of which $1.3 trillion is in the form of USA treasuries, and the Federal Reserve is turning their treasuries into toilet paper.  The Chinese have a history with fiat currency.  Heck, they invented it.  And they have a lot more experience and history than the US when it comes to inflating away a currency’s value.  What do you think the PBoC is gonna do with all that US paper?  Let it sit there and become Uncle Sam’s chicken feed?

It won’t be different this time, except to those who are not acquainted with the history of money farther out than the last one hundred years, and think that the history of money starts and ends with the United States of America.

A Chinese citizen at a gold shop in Tiayuan, Shanxi Province buying gold jewelry by weight, in this case 880 grams.