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Suddenly, Not A Bad Environment For Gold Miners

A few years ago (when the world was very different) veteran mining analyst Jay Taylor told me something that seemed counterintuitive: Deflation can actually be a good thing for the gold and silver mining business — if the prices of mining inputs like oil fall faster than the price of precious metals.

In other words, it’s not inflation or deflation per se that matter, but the distribution of price trends. “With quantitative easing,” said Taylor, “the liquidity being pumped into the system has caused energy and labor costs to rise, which has more than offset higher precious metals prices. Historically, the miners have actually done better in a deflationary environment in which gold and silver are seen as monetary metals and the cost of getting them out of the ground declines due to lower energy and labor.”

So the relationship of gold to the rest of the commodities complex is a good indicator of the mining environment. Gold might be down, but if it’s relatively strong, the mining equation is favorable. How is it today? Improving:

Gold versus commodities

This implies that the cost of mining gold is falling while the price received for each ounce of gold is rising slightly. So margins, which have been squeezed to the point of evaporation for even high-quality miners, might be less horrendous than the markets now expect and (assuming current trends continue) earnings in the second quarter and beyond might exceed expectations. With mining stocks beaten down to historically-low levels, even stable earnings might be enough for a nice rally.

34 thoughts on "Suddenly, Not A Bad Environment For Gold Miners"

  1. Pingback: The Küle Library

    An array of reasonable historical metrics can be used to establish the proper price of gold, including:

    1) Its historical mean which would put gold right around $456 per ounce

    2) Its 16:1 historical ratio against silver which would put gold right around $268 per ounce based on silver being around $16.75 per ounce

    3) Its inflation adjusted price today from its last stable historical price of $35 per ounce in 1971 which would put gold right around $400 per ounce.

    4) Its current official US government price of $42.22 per ounce which is how the approximately 8133 metric tonnes of US government gold are valued:



    As it relates to cash costs, New Gold (NYSEMKT: NGD ) reigns supreme with a $316 total cash cost per ounce. New Gold, the smallest gold miner of the 10 by market value, relied on higher co-product production, such as silver and copper, to help offset gold mining costs, and also worked diligently on lower its operating expenses. Previous champ, Yamana Gold (NYSE: AUY ) , gets an honorable mention here as well for its $417 cash costs per ounce figure, which was also offset by the production of silver.


  4. I very seriously doubt that gold will ever fall below the current US government official price of $42.22 per ounce, and I believe that is a VERY SOLID FLOOR FOR GOLD.

    1. Any day now, socalbeachdude, any day now, and gold will revert to it’s mean of – what have you been screaming these past 3 or 4 years on different websites? – 456 dollars an ounce.

      While I am personally no gold bug, i.e. I have no special affection for the shiny metals, about 10 % of my worldly belongings are invested in physical PM’s. Why? Simply because it is solid insurance when all else fails. In that regard, I don’t even care at what price gold is selling. And this, my dear socalbeachdude aka Adam Price aka Chas Caldwell aka American Patriot, is the first time in my life I get the feeling that all else is at risk of actually failing. Big time. With our 40 year old credit system we finally seem to have pushed things too far and the system is now at risk of imploding through its own logic: if we raise the rates, the whole thing becomes impossible to service instantaneously. So we’re stuck and the only exit is a reset of sorts.

      But do feel free to keep screaming about that preposterous yellow relic post after annoying post. In fact, I don’t even might an avalanche of senseless replies from you on comments such as these any more. I’m used to them by now.

      1. No “all else” is going to fail at all, and the value of the US dollar willl continue to skyrocket as commodities continue to plummet including absurdly overpriced junk like gold. Expect to see the US dollar soar soon to over 120 on the DXY and skyrocket in purchasing power against most all if not all of the world’s 27 major commodities. Once gold gets well below its mean of $456 per ounce and at $300 per ounce or lower, then it won’t be such an immensely dangerous and hideously toxic commodity and if it reaches its current US government current official price of $42.22 per ounce, it will actually be a reasonably safe asset to buy

        1. True, the US dollar is now going off like a firecracker. And it will probably end the same way, too. Every supernova shines brightest just before implosion.

          I hope I’m wrong, though, even if I don’t pay my bills in dollars, because I’m not exactly looking forward to the turmoil it’ll cause when it happens.

          1. The US dollar is merely returning to proper equilibrium levels on the DXY and will likely achieve that at around 120 but could go even higher towards its 25 year high of around 164.

      2. I wouldn’t even put even 0.0000000000001% of my assets in any wildly volatile commodity. Anyone who does put more than 1% in such toxic junk is an utter imbecile.

  5. Here in California (the Golden State) we learned long ago to KEEP OUR GOLD IN THE GROUND WHERE IT BELONGS and have spent the last 100 years shutting down nearly all of our former more than 13,000 gold mines and now have about 16 gold mines still operating and we’re working hard on getting those shut down ASAP.

  6. Massive plunges in the price of gold are dead ahead as it starts correlating with the aggregate commodities indices which have been plummeting. The Bloomberg Commodities Index is now at a 12 year low and back to 2002 levels. If gold correlated with that index – as it inevitably will – that would put the price of gold right around $300 per ounce.

  7. In this time of massive suspected, if not circumstantially evident and blatantly official manipulations of markets (e.g., the US stock markets, gold and silver prices, and interest rates, respectively) I don’t trust the stock market in general, and PM mining stocks in particular. I don’t care how “rational” it may be for PM mining stocks to do well in this crazy environment of currency wars and officially stated efforts to devalue the major currencies of the world, as long as the guardians of the current centrally controlled fiat monetary system have any say they will not allow such an obvious symbol of defeat such as the rise in the gold price or that of equities in the gold mining companies to reflect their sorry-ass state.

    The capital level of the PM miners is relatively puny and so the ability to whipsaw that sector is much easier than most. Only if one is willing to hold shares in the mining companies for the long term would I invest in them, and even then by the time they finally break out for good – if they ever do – the currencies in which they are denominated could be so whipped that you might have done just as well in a savings account at a bank. I say “a bank” because the chance of you ever realizing any actual physical “profit” – physical cash – from brokerage firms if the SHTF seems remote. Between taxes and currency exchange rates and capital controls and liquidity restrictions and bail-ins, etc. I seriously doubt I would ever really benefit.

    You have to be willing to take a really sanguine view of things to conclude that – historically – some how, some way this has all passed before and “markets always recover” and the “market rewards those with patience”, etc. Supposedly, the human race is supposed to be advancing so the old paradigms will no longer apply. I don’t know if now is the time for that, but with so much technology and issues of artificial intelligence arising I suspect this time will be different, that this time either a new modality will be initiated or there will be a massive regression, “reincarnationaly” speaking.

    So, I’m out. But I like to watch.

    1. Most all of the gold miners are very marginal and crude operations, particularly the so-called “junior miners” and about 90% of them will hopefully soon be entirely out of business and their assets sold off for about 10 cents on the dollar.

      1. Way past time for a beach umbrella. Any more sunstroke and you’ll start confessing God runs Wall Street, the New Jerusalem.

  8. I wonder how many readers foresee this bull market playing out much like that in the sense that during the 1970s valuation run up, physical bullion outperformed mining shares overall, where as conversely after the peak or price plateau is reached, mining shares will outperform bullion a la the early 1980s.

    I know at this moment I’m taking Mark Twain’s consultation on mining hole liars and the return OF my money not ON my money.

    As most of you know, mining equities are not very private, and they are not money. They are liabilities laden with multifaceted counter-party risks; they are not safe haven investments you can hold outside the financial system.

    Mining shares have bankrupt-able downside risks and weighing their upside potential versus physical bullion, I still think bullion is the smarter move given where the financial world is today.


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      1. Homestake will likely soon be entirely out of business and its stock totally worthless. Hellllllooooooooooooooooooooooooo?

        By the way, are you aware that is a chart from 1997 which is now 15 years old, dude or dudette?

        1. You need to end your post with /SAC.
          As funny as your posts are some people might take you seriously.

          I am old and I have seen a lot of history and read a lot of history. Our time as an empire is up, and they usually don’t die quietly.
          History pretty much repeats itself and this time will be no different.
          Sit back get some popcorn and watch Rome go up in flames.

          1. Agreed, the US will have to accept the reality of a multipolar world. I hope there’s still enough wisdom left in the American leadership to acknowledge and fully appreciate that new reality, because I can’t stop thinking – with quite some apprehension – of that formidable military apparatus you still have at your disposal.
            Where did you/we go wrong? Many will say the beginning of the end was the creation of your Federal Reserve in 1913, but that’s just an institution, to be used or usurped at will like any other institution. Personally, I think our troubles really started when we witnessed the swift downfall of the communist block. It made the West cocky and arrogant. Far too arrogant, it would now appear.

          2. Huh, dude? What does history in general have to do at all with my comment directly above?

        2. You’re so desperate it’s laughable. You type in such a flurry you didn’t even look at the chart.

          TROLL!!!!!! Let me guess we should all buy government bonds?

        3. Reeeetttttaaarrrrd… I was using Homeestake to prove that you are wrong. Because gold miners went UP DURING THE GREAT DEPRESSSSSION.

          Since 1920 the Barron’s Gold Mining Stock Average has Outperformed the DJIA.

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