Life with John

A couple of recent items provide some insights on what’s driving gold prices these days:

“What is the Cost of Mining Gold? ” A great info graphic from Virtual Capitalist analyzing the top 50 mining companies in the world. (Then again, just about all of their info graphics are great!)

The info graphic shows, using Barrick Mining (ABX) as an example, the ”all-in sustaining cost” that mining companies have begun reporting. It is revealing that cash costs, what has historically been published as the mining cost per ounce, are only 61% of the “all-in sustaining cost.” Certainly an eye opener from an investment standpoint!

Also noted is that ”South Africa mines are the most expensive, primarily due to the fact that their underground mines are deep in the earth.” True, but SA costs are also driven up by never-ending power supply problems, labor demands, and shady political shenanigans, so it would be interesting to see how those costs fit into the overall cost breakdown. In the latter two instances, you have to wonder how often less-profitable, lower-grade operations are continued as a concession, even if they amount to jobs moving earth around with little to show for the effort.

“Robin Hood in reverse – gold being taken down to make the rich richer” — Lawrence Williams discusses falling gold prices due to sales of bullion-backed ETF shares:

While some accuse the U.S. Fed of complicity in such sales, it could just as well be due to some serious financial shenanigans in the markets with the massive sale orders of paper bullion seen surely as attempts to drive prices lower by banks and funds perhaps holding massive short positions, and having access to almost unlimited capital.

How deep are the pockets of those driving the prices down?  With the U.S. Fed, the Japanese central bank, the ECB, the Bank of England and others all pumping money into their respective economies, at least some of which is finding its way into the markets at unprecedented levels, this liquidity is potentially enormous.  A batch is going into the stock markets, which are on a sustained upwards trend, which suits the central bankers as a rising stock market helps hide the true state of the economy and promotes a feeling of financial well being.

But some is undoubtedly also finding its way into those hands which are knocking precious metals prices over and over – again a process which suits the central banks.

I’m not sure it’s worth looking around for an invisible “Robin Hood” when those with the deepest pockets imaginable (their own printing presses) also have the strongest possible motive — pumping the stock market and the apparent economy higher and higher. What we seem to have these days is a “Hans & Franz” economy that looks pumped up, but is just a girlie man in a sweat suit with wads of cash stuffed in for the appearance of fitness:

“You got so much flab on your butt you can pull it over your head and make umbrella! Look at those buttocks! Like marshmallow! You guys are lucky we don’t have a campfire here in the background!”

Hear me now and believe me later, sooner or later a “flab-alanche” will arrive!  

On the positive side, both of these items are good news for investors in physical gold — the prices are quite low compared to the cost of its production. As for bullion-backed ETFs, you may as well just hold your favorite currency, at least until the “flab-alanche” arrives!