Unicorn futures

It’s almost that time again — 2016 $50 1-ounce US Gold Buffalo coins go on sale on January 20, 2016. Or at least, that’s when most precious metals dealers will start shipping them. The spot price of gold as I write is around $1072 per ounce, so uncirculated business strike buffaloes, 99.99% pure, will be cheaper than they were in 2008.

2016BuffaloWhat’s been happening in the world of gold lately? Just how hard is it to process an ounce of gold, and how much does it cost?

In a 2013 article from Business Insider, Barrick Gold’s richest mine, Turquoise Ridge, was noted as producing just 0.45 ounces of gold per ton of rock processed. And that was the richest mine cited.1

At that time, it cost Barrick an average of $919 to mine an ounce of gold, and the market price was somewhere around $1400-1600 per ounce, leaving around $500-700 profit. Other companies had higher average production costs, due to higher labor costs, poorer quality ore, deeper shafts, etc., meaning their profit margin was much less.2

That was 2013 — today, the market price is only $1072 per ounce, so Barrick’s profit margin has necessarily been reduced. Barrick has probably been forced to close its poorer mines, such as those that yield only a tenth of an ounce per ton or less. The cost of energy may now be cheaper, due to lower oil and gas prices, but I can’t imagine other overhead costs like labor have gone down much in 2 years’ time.

Is $1072 a good price for an ounce of gold? Who knows? I certainly don’t know the whole story, but even if I did, you can bet everyone plays with the numbers to fit their side of the story.

I saw an analytical article from Bloomberg the other day with this forecast: “The outlook for more interest rate increases in 2016 means bullion could drop to $950 by the end of next year. … The bank [Societe Generale SA in London] sees prices at $955 in next year’s fourth quarter. It’s a completely different era. Maybe it’s not the era of gold anymore. The last decade was a decade of gold. This decade, you’re going to look to something else.”3

All I can say about that is that it’s a good thing for the analyst that the interview ended before he was asked just what that “something else” might be. If market prices drop below current production costs, miners will simply close less productive mines in order to stay in production. I don’t believe any of this “peak gold” nonsense, since we haven’t even begun to mine the seabed, but that’s really beside the point: as of November 2015, there are already 293 ounces of paper gold (ETF shares) being traded on the market for every ounce of real, physical gold in existence:

ComexCoverRatioThe market is already, hundreds of times over, trading in shares that represent ounces of gold that are still in the ground someplace. In short, we’re trading in make believe.4

Trading in gold ETF shares seems akin to playing musical chairs, except that instead of being only one chair short for every 293 players, there’s 292 chairs short. I guess ETF traders are just hoping the music will never stop, or at least not while they’re playing the game. No thanks — it seems safer to dollar-cost average things and buy an ounce of real gold every year. The price of gold might fall some more, but the expectation that it will return to the $250-500/ounce range it traded at between 1983 and 2005, before some $7.66 trillion of US government stimulus spending between 2008 and 2012, is a little unrealistic.5

Physical gold has been a means of storing wealth since the days of the pharaohs. If we’re entering an era of “something else,” it must be an era of unicorn futures or something.

Notes

  1. Sam Ro, “Here’s How Many Tons Of Rock You Have To Mine Just For An Ounce Of Gold,” Business Insider, 24 April 2013. http://www.businessinsider.com/tons-of-rock-for-an-ounce-of-gold-2013-4
  2. Jeff Desjardins, “What is the Cost of Mining Gold?” Visual Capitalist, 21 May 2013. http://www.visualcapitalist.com/what-is-the-cost-of-mining-gold/
  3. Luzi Ann Javier, “Gold is on a wild ride,” Bloomberg, 21 December 2015. Via Mineweb.com at http://www.mineweb.com/news-fast-news/gold-is-on-a-wild-ride/
  4. Comex gold cover ratio histogram is from Tyler Durden, “There Are Now 293 Ounces Of Paper Gold For Every Ounce Of Physical As Comex Registered Gold Hits New Low,” Zero Hedge, 4 November 2015. http://www.zerohedge.com/news/2015-11-04/there-are-now-293-ounces-paper-gold-every-ounce-physical-comex-registered-gold-hits-
  5. Sam Ro, “$7.66 Trillion Of Stimulus In America From 2008 To 2012, Itemized,” Business Insider, 21 January 2013. http://www.businessinsider.com/766t-of-fiscal-and-monetary-stimulus-2013-1
  6. Image of a 2016 1 ounce gold buffalo coin is from American Precious Metals Exchange (APMEX) at http://www.apmex.com/product/93752/2016-1-oz-gold-buffalo-bu

Incidentally, Virginia passed a law this April that exempts bullion purchases over $1000 from sales tax:

§ 58.1-609.1. Governmental and commodities exemptions. …

19. On or after July 1, 2015, but before January 1, 2019, gold, silver, or platinum bullion whose sales price exceeds $1,000. Each piece of gold, silver, or platinum need not exceed $1,000, provided that the sales price of one entire transaction of such pieces exceeds $1,000. “Gold, silver, or platinum bullion” means gold, silver, or platinum, and any combination thereof, that has gone through a refining process and is in a state or condition such that its value depends on its mass and purity and not on its form, numismatic value, or other value. Gold, silver, or platinum bullion may contain other metals or substances, provided that the other substances by themselves have minimal value compared with the value of the gold, silver, or platinum. “Gold, silver, or platinum bullion” does not include jewelry or works of art.

http://law.lis.virginia.gov/vacode/58.1-609.1/

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4 Responses to Unicorn futures

  1. Jim Bovard says:

    Excellent post. One silver lining of current gold prices is that there is less temptation for politicians to do a FDR-style confiscation of all privately-owned gold. Unless of course it is absolutely necessary to revive the economy, reduce inequality, or curb global warming.

    • John M says:

      Thanks Jim. There is FDR’s precedent for confiscation, of course, but Nixon’s de facto abolition of the Breton Woods system in 1971 makes that very unlikely. I think that’s how he really earned his “Tricky Dick” sobriquet — every politician in Washington smacked their forehead in admiration and thought, “Wow, you mean the dollar is worth whatever we say it is? Why didn’t we think of that before?”

      As for those other laudable goals, well, “”Doing right ain’t got no end.”

  2. cindy knoke says:

    Excellent information. Thank you & Happy New Year!

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