MAJOR FACTOR FOR OWNING GOLD: The Collapse Of Gold’s EROI

The world is heading towards an economic and financial collapse of epic proportions.  Individuals who are currently invested in this system fall into two categories.  We have the overwhelming majority invested in paper-digital assets and a fraction of the populace holding physical assets such as the precious metals.

Currently, the financial system favors those invested in PAPER & DIGITS, while it punishes the precious metal enthusiast.  Of course, this is only for a short time period, but it seems like an eternity since gold and silver hit their highs in 2011.

However, there is light at the end of the tunnel as cracks are beginning to appear in the very industry that is propping up the Highly Leveraged Fiat Monetary Debt Based Financial System.

I will repeat myself once again… ENERGY drives the markets, not FINANCE.  Finance is supposed to steer the economy in a straight line on the road, not full speed over the cliff.  Without a growing energy supply, there would be no U.S. Dollar Fiat Monetary System.

That being said, the global gold mining industry is now in serious trouble as the current low market price impedes exploration which would guarantee future production.  How bad is it?  Well, let’s look at the following chart:

Global Gold Value In The Ground Per Dollar of Exploration

In the 1960’s global gold exploration expenditures yielded a peak of $105 worth of gold in the ground for each $1 (Dollar) spent.  This continued to decline over the next four decades from $83 in the 1970’s, down to $57 in the 1980’s, $23 in the 1990’s and $11 in the 2000’s.

Basically, global gold value in the ground per dollar of exploration spent fell 90% since the 1960’s.  Thus, we had a collapse of the Gold EROI (Energy Returned On Invested) since the 1960’s.  The reason I call it the Collapse of the Gold EROI has to do with the fact that everything we do is based on energy.

Why the Falling Gold EROI Is Important

To grasp why the falling Gold EROI is important, we need to understand the basics of the EROI.  EROI stands for Energy Returned On Invested.  Some like to use EROEI, or Energy Returned On Energy Invested.  Either one works, even there are individuals who like to waste time on pointing out one is more correct to use than the other.

Charles Hall, one of the top minds studying this subject used the four letter EROI, in most of his scientific abstracts.  Regardless, the EROI ratio is the fundamental equation that allows LIFE or DEATH of a human, plant, animal or economic system.

It takes energy to produce energy.  Here are some EROI ratios:

1930 U.S. Oil & Gas Industry = 100/1

1970 U.S. Oil & Gas Industry = 30/1

2000 U.S. Oil & Gas Industry 11/1

Hunter Gatherer = 10/1

Human agriculture = 5/1

U.S. Shale Oil Industry = 5/1

Oil Shale Resources 1-2/1

Human, Horse & plow farming = 1-2/1

U.S. Modern Food Industry = 1/10

In the 1930’s the United States produced 100 barrels of oil for the market for each barrel of oil consumed in the process.  This fell to 30/1 in 1970, 11/1 in 2000 and shale oil production has an average EROI of 5/1.  Now, the supposed 1 trillion barrels of oil shale resources in the U.S. western states, has a lousy EROI of 1-2/1.

Why are these EROI ratios important?  Charles Hall believes the minimum EROI energy requirement to run a modern society such as ours needs to be at least 10/1 and more like 11-12/1.  Charles Hall in a Scientific American article “Will Fossil Fuels Be Able To Maintain Economic Growth?”, stated the following:

What happens when the EROI gets too low? What’s achievable at different EROIs?

If you’ve got an EROI of 1.1:1, you can pump the oil out of the ground and look at it. If you’ve got 1.2:1, you can refine it and look at it. At 1.3:1, you can move it to where you want it and look at it. We looked at the minimum EROI you need to drive a truck, and you need at least 3:1 at the wellhead. Now, if you want to put anything in the truck, like grain, you need to have an EROI of 5:1. And that includes the depreciation for the truck. But if you want to include the depreciation for the truck driver and the oil worker and the farmer, then you’ve got to support the families. And then you need an EROI of 7:1. And if you want education, you need 8:1 or 9:1. And if you want health care, you need 10:1 or 11:1.

In addition, Hall didn’t include entertainment, sports or etc.  If you look at the bottom of the EROI ratio list, you will see that our modern Food Production-Processing-Distribution system has a 1/10 EROI.  This means, for every 10 energy calories of energy consumed in this process, we put 1 calorie of food on the dinner table.

Basically, our modern system of getting food to the dinner table is a NET ENERGY LOSER by a factor of 10.

The only reason this(net energy losing) modern food system works has been due to the relatively high energy EROI in the past.  As we can see, advanced technology did not increase the EROI ratio of our food production system, it devoured it.  Simple hunter gatherer and human simple farming practices are much more efficient at producing food than our modern system food production-processing-distribution system.

So, how does this EROI factor into GOLD??  Gold used as a monetary metal or store of value, takes energy to produce a 1 ounce coin.  If we add up all the costs involved in the process to produce that 1 oz gold coin, the overwhelming majority of the cost is ENERGY. 

This is not just the diesel, natural gas or electricity used in the exploration, mining or smelting of gold.  This also includes all the materials, equipment and human labor which are nothing more than ENERGY DERIVATIVES.

A gold mining truck may look like a capital cost on the company’s balance sheet, but its value came from all the energy consumed in the materials, manufacturing, labor and shipping of that truck.  We must look at the economy as an ENERGY MATRIX.

Once we understand that all we are doing in this economy of ours, is trading ENERGY for ENERGY, then the value of Gold is just an extension of energy.  Some individuals argue that Gold is gold and energy is energy.  While that may be true at face value, how much gold are we going to get out of the ground without the use of ENERGY… in all forms and in all stages?

Gold is nothing more than STORED ENERGY VALUE embedded into a metal coin.  No, a gold coin does not contain energy, rather acts as a store of energy value which the precious metal community labels as a STORE OF WEALTH.

The falling Gold EROI spells real trouble for the gold mining industry going forward.  This means, at some point (soon) global gold production will peak and that will be the end of it.  This will be due to a peak and decline of global oil production on top of falling gold ore grades.

If you haven’t read my recent energy article below, I highly recommend it.  Click on image below to read article:

BIG BLOW FOR SHALE ENERGY IMAGE

The notion that Shale Oil & Gas will allow the world to continue business as usual for the next 2-3 decades losses a great deal of credibility as many major oil companies are pulling up stakes in Europe and abroad.  Not only is Chevron exiting all shale exploration in Europe, it’s spending more money on CAPEX than it makes from operations.  Again, the article explains this in more detail.

There is good chance, especially at the current low price of oil, that the world will peak in global oil production 2015/2016.  This will put severe stress on the Financial and Paper Asset system (Fiat Money, Stocks, Bonds & most Paper Assets) going forward.  Why?  All those so-called paper money-assets needs a growing energy supply to sustain itself.

Thus, a falling energy supply will cause a chain-reaction collapse of this highly leveraged debt based paper system.  The Falling EROI of gold is just another clue for an investor to realize GOLD’S VALUE IS GOING UP MUCH HIGHER in the future.

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34 Comments on "MAJOR FACTOR FOR OWNING GOLD: The Collapse Of Gold’s EROI"

  1. Steve,
    An interesting analysis/perspective, in line with your previous published works on EROI. It would appear with Peak Oil, that electricity production in the future will increasingly shift to nuclear and green sources (wind, solar, tidal, hydro, etc). That would allow society to prioritize oil for distribution, mining, transportation.

    The great thing about EROI ratios is that it removes the crashing price of crude out of the scenario planning. A reset will trigger a shift to food and sustenance. The point that Food Production-Processing-Distribution system has a 1/10 EROI is extremely concerning. Going back to small lots farming may remove distribution costs, but will lower overall yields, and is unlikely given the manifold increase in population (from simple hunter/gatherer/farmer days of old).

    • As for the hydro – there isn’t many more sites that fit left of the planet. As for the rest – besides nuclear – all the other sources actually mean de-industrialization. I remember one 10+ years old quote of some Nigerian businesman “You talk about greal role of solar – show me one steel procesing plant running on solar energy and I’ll believe you”.
      The plans to reduce use of oil already are on the table – for example – European transport development 2050 vision paper. Reading between the lines it is clear that the individual mobility involving any type of vehicle, besides bycicle and mass transportation, is planned to be discouraged by all the arsenal of tools at hand – brain washing, heavy taxation schemes etc. The same relates also to small commercial transportation (nothing has to be transported by truck more than 200 km away). Of course, it will free some oil for industry, but requires turnaround of the lifestype and (uh!, ah!) – de-urbanization, which is not at hand for establishment.

  2. Another easy to understand article as to why the Gold price Must rise.

  3. Well put. Thanks.
    Interested in similar discussion on silver– considering its critical roles, its far greater
    utility and current above ground availability maybe nearing 1:1 with gold…

  4. All the gold on earth falls into two categories. Gold above ground which was already mined and refined and the gold which is still in the ground and may be mined in the future. I believe that the already mined gold above ground is much larger in volume that the remaining gold in the ground. Whatever is left in the ground amounts to less than what already exists above ground. As a rough estimate, there are 170,000 tons of gold above ground and perhaps only 80,000 tons of gold left to be mined. That estimate depends of course on the prevailing price of gold. The higher the gold price the larger the mineable gold reserves.

    Assuming this analysis is correct, then it is clear that new mine supply will have a limited impact on the price of gold. The supply of gold to the market is all gold above ground: the already existing 170,000 tons of gold plus 2,700 tons of gold of freshly mined gold every year. Because of this huge ratio of stock versus flow of gold, it is clear that the price of gold can be maintained at artificially low levels even if new gold production falls all the way to zero. If necessary, military power can be used to bring to market all central bank gold reserves of this world in order to maintain the gold price at present levels. If these policies persist for another decade, eventually the appetite for gold will wear down and the demand for gold will weaken substantially. Perhaps this is what is going on in the gold market right now.

    A substantial rise in the price of gold would indicate an imminent collapse of all fiat currencies in the world and, as a consequence, chaos and misery for hundreds of millions of people allover the world.
    In order to avoid this misery, it is necessary to defend the Dollar and therefore, to keep the price of gold stable in order to direct the flow of savings away from the metals.

    Only the future will show whether this is all nonsense.

    • “A substantial rise in the price of gold would indicate an imminent collapse of all fiat currencies in the world and, as a consequence, chaos and misery for hundreds of millions of people allover the world. In order to avoid this misery, it is necessary to defend the Dollar and therefore, to keep the price of gold stable in order to direct the flow of savings away from the metals.”

      This is the very thing that is destroying our economy. Defending the dollar, suppressing the price of Gold, interfering in all markets, printing trillions of dollars and leveraging all assets to the hilt is what will bring down the global economy and plunge the globe into an unprecedented global depression. You can’t mess with economic mother nature and yet that is exactly what we are doing. There are no more free markets, there is only central planning and eventually we will pay for that.
      So, in order to avoid this misery, as you state it, we don’t need more interventions and defense of the dollar. That is what we’ve been doing and look where that has led us.
      What we need is a return to free market capitalism where entrepreneurs are encouraged and rewarded and corrupt financial institutions and governments are brought down.

    • “If these policies persist for another decade, eventually the appetite for gold will wear down and the demand for gold will weaken substantially”

      It will take a lot longer than a decade for the worlds appetite for gold to wear down.

      Gold has been known as a currency/symbol of wealth & prosperity for over 2,500 years. I don’t believe 10 years of artificial price suppression is going to make any difference what-so-ever.

      At the end of the day money is only what people believe in. If people loose faith or belief in Gold ,then yes of course it can diminish in price. Although I believe there is a much bigger chance of people loosing faith in the pieces of plastic they carry around in their wallet or the numbers they see on their computer screen…

  5. Articles such as this one clarify most certainly that gold and silver are very undervalued. However, the basis for this undervaluation is divorced from the physical market as central banks obviously and or with governements do not want to see money being syphoned off in that direction at the expense of more favored markets and as well the risk of creating a dollar alternative.

    And so market forces will prevail in the end and many understand these fundamentals. However, we do stand before the gates so to speak. Many are not secure in the idea that a miraculous reset is imminent. Governents can and will embark on programs no matter how insiduous to prevent significant monetary disruption, so one wonders about how powerful are these forces for reset and for that matter do they really matter?

  6. Derrick Michael Reid | February 26, 2015 at 8:39 pm | Reply

    Standing O

  7. Gold is a source of energy? Wonders never cease!

    • Jon,

      Actually, GOLD IS A STORE OF ENERGY VALUE. I thought I made that clear.

      steve

    • Jon,

      I absolutely agree with your sentiments. There is NO energy return on the energy invested in producing gold. Steve is confused here.

      What miners are faced with now is an insufficient financial return on investment. If gold was $20,000 an oz do you think that the poorer ore grades wouldn’t be mined? Of course not, because the additional amount of oil needed to recover gold from poor grades of ore would be easily financed at that gold price and today’s oil price to still make a financial profit for the miner. In other words energy invested does not restrict gold production, but the price of gold with respect to energy does.

      I mentioned Steve was confused. He says that:

      “Gold is nothing more than STORED ENERGY VALUE embedded into a metal coin. No, a gold coin does not contain energy, rather acts as a store of energy value which the precious metal community labels STORE OF WEALTH.”

      This is an important concept (see below) but not in how Steve uses it as stored energy value is true of any asset of global civilization. Steve explains quite correctly that nothing happens without energy. It follows then that civilization as we know it (cities, infrastructure, factories etc) all took energy to make and have this as a component in just the same was as does gold. Gold is not special in this respect. Neither is Silver nor any other component of civilization no matter how big or small.

      Energy however IS special as civilization is impossible without it and the standard of that civilization is dependent upon the amount of Energy Returned on the Energy that the civilization Invested to obtain that energy. When the energy returned falls below the 10:1 level, as it will soon (if it has not done already), then civilization will start to crumble.

      The stored energy value concept is important in other fields however. Prof Tim Garrett uses this concept to model the global economy as a heat engine and to explain why, rising carbon dioxide emissions – the major cause of global warming – cannot be stabilized unless the world’s economy collapses or society builds the equivalent of one new nuclear power plant each day!

      It really is a fascinating analysis but off topic here. Suffice to say in Garretts words:
      “If society consumed no energy, civilization would be worthless,” …. “It is only by consuming energy that civilization is able to maintain the activities that give it economic value. This means that if we ever start to run out of energy, then the value of civilization is going to fall and even collapse absent discovery of new energy sources.”…. “accumulated economic production over the course of history has been tied to the rate of energy consumption at a global level through a constant factor of 9.7 (plus or minus 0.3) milliwatts per inflation-adjusted 1990 dollar”

      If you’re interested in learning more here are some links:
      Published technical papers here: https://faculty.utah.edu/u0294462-TIM_GARRETT/bibliography/index.hml;jsessionid=FDF4E8D20A5BD1E6244F2E64BDB61496

      Summary articles here:
      http://www.sciencedaily.com/releases/2009/11/091123083704.htm
      http://robinwestenra.blogspot.com/2014/11/introducing-prof-timm-garrett.html

      • Brian,

        You made the same mistake as Jon. I never said there was a store of energy in a gold coin, I said there was a STORE OF ENERGY VALUE. Big difference.

        Unfortunately, you cannot see the ENERGY MATRIX… most people can’t. All we do in the market is trade ENERGY for ENERGY. Copper, lead, zinc, silver, gold, clothes, food, manufactured goods and on and on are nothing but materials formed by ENERGY in all forms and in ALL STAGES.

        Someone may purchase gravel for their driveway. The value of that gravel is based on ALL THE ENERGY in all FORMS and in all STAGES along the way from processing at the quarry, loading in a truck, and transporting it to the site.

        We also must remember, the cost (VALUE) of the DUMP TRUCK comes from all the energy in all forms and in all stages in its manufacture or if used, in its remaining depreciated lifespan.

        Gold is nothing more than a means of storing ENERGY VALUE or as Mike Maloney states, ECONOMIC ENERGY in coin form. When a person trades a gold coin for some other GOOD or SERVICE (for the most part), it is traded for something of like energy value.

        steve

        • Hi Steve,

          I made no mistake. What you exactly said was, I quote “To grasp why the falling Gold EROI is important”

          EROI = Energy Return On Invested. There is no energy return. That was Jon’s point as well. Your article refers to many things to which EROI does apply and then relates it to gold to which it does not.

          If there is an Energy Return which you say there is in the quote above, where is it and what energy units do you measure it in?

          All you have is an energy value captured in the product (gold) and, BTW, Mike Maloney makes no claim to an EROI which you clearly do. A store of economic value – yes, of course. Gold maybe the best, but then again so may be drinking water. It depends.

          I am fully aware of the Energy Matrix as you refer to it and have been for well over 10 years. If you read all that I wrote you will see that I did not dispute there is an energy value to gold or to any other asset such as those you list; in fact I gave some links to where energy value has been used to explain the global economy based on the principles of a heat engine.

          Steve, you are just using the wrong term, that of EROI, to describe the energy value contained in a product. You should be talking in terms of Energy Value returned on Energy Invested which is quite different and you should give the units it is measured in otherwise it is meaningless in absolute or comparative terms.

          • Brian,

            Again, you fail to see that gold is nothing more than a product of energy. While I understand what you are trying to say, as several others have tried to convey my supposed wrong doing here, it still doesn’t change the fact that you don’t see the ENERGY MATRIX…. even though you claim to.

            We must remember, the world was on a gold standard when the U.S. had an energy EROI of 100/1. If the world was still on a gold standard today, we would still have an energy EROI of 10/1 or less. If gold is money, than gold is also energy value. Which is why we can also have a falling GOLD EROI.

            Lastly, you say that Mike Maloney doesn’t use the EROI.. of course he doesn’t. Most precious metal analysts have no clue about ENERGY or the EROI. Some still believe if we back the worlds fiat currency to gold, then we would have the biggest economic expansion in history. This is PURE BUNK.

            The problem with the world, is they don’t see things in a more COMPLETE and CONNECTED WAY.

            steve

          • Robert Happek | February 27, 2015 at 9:19 pm |

            Since gold does not return any energy, the concept of EROEI does not really apply to gold. Nevertheless, Steve is correct in the following sense: We value gold not so much for the amount of energy invested to mine and refine gold. That amount of energy is trivial. We value gold because of the astronomical amounts of energy needed to create gold out of hydrogen. In fact, the amount of energy is so large that it requires a supernova to create gold. The energy levels of our sun are not sufficient to create gold. I repeat again: Gold is valuable because it is impossible to create gold here on earth or in our solar system. Gold has its origin in objects which are much larger than our sun.

  8. I find that all these forecasts on the price of gold are unuseful
    We must understand that reasoning in terms of old economical theories
    is wrong
    Keynes is dead, and his soul too, if he ever had one
    Demand and supply coming from the market, as far as gold is concerned, play a role like ZERO’s in math
    Since bankers and goverments have such huge power, gold price is in their hands and we all can do ZERO
    Gold price will go up only when they decide
    They will decide only when the crisis is over, and that may eventually happen in the next decade. Next decade, guys

    • “Since bankers and goverments have such huge power, gold price is in their hands and we all can do ZERO
      Gold price will go up only when they decide
      They will decide only when the crisis is over, and that may eventually happen in the next decade. Next decade, guys”

      They have the power until physical shortage of mined, refined, coined, or bar gold and silver are so depleted they can’t manipulate the prices on the COMEX and longer. My estimate, but more important the estimate of those far more knowledgeable about PM’s than you or me, is before 2020. I’d bet three years or less.

  9. @ Jon:

    All money (Gold is money, any currency is debt – JPM similar) is a form of energy in stock !

    Truth is all that simple – so the trapped in orchestrated complexity can heardly find.

    Great article – 10 pts !

  10. Maybe I’m not able to follow the big picture, but this is a rather extreme way to view things. I’m not saying it is incorrect, just different.

    If I understood correctly, using Hall’s oil example, if I go and cut my neighbors grass for $20, then I exerted some amount of my own energy, say 3:1, for $20 worth of fiat energy.

    I mean, with the current system, you cannot deny the fact that $20 is also a form of stored energy, because I can take that $20 and use it to acquire a gold coin that someone else exerted energy to mine, melt, etc.

    So, theoretically, as long as the “system” (I’m purposely not using the word government) supports the fact that $20 is always $20, then there isn’t a problem.

    The way I see it, and I may be completely wrong, and/or lost, it is when this $20 is exchanged on markets, where its theoretical store of energy or store of value can become more, or less. QE reduced the store of value/energy of $20, but fear in the world strengthens the $20. I feel that this is one problem.

    Another problem would be debt in any system, because if I worked up $100,000 of stored energy, and whomever I lend it to does not repay me, then I am pissed off because I just lost stored energy that I worked hard with my own energy to earn. Therefore, one option is that I never lend my $100,000 of energy, but theoretically, someone may need that $100,000 of energy to make more energy, say a fighter jet. This introduces interest the debtor owes me, because I gave him some of my hard earned energy, and interest….I guess is also energy.

    So, really, currency and other markets, and the idea of lending energy in the form of debt, actually ruins the “system”.

    One could argue that, and again I may be completely lost on this concept, that gold is just a rare object that people are willing to spend their hard earned energy on because they like it, and it is rare. Some people value it at different energy values than others (therefore creating another market), hence it does store energy/wealth in a sense, but what if one day nobody gave a shit about what society has deemed “precious”. Gold and silver, in a traditional sense, have only achieved this status because of its rarity, and the fact that since the beginning of time, when people started documenting things, it has always been something someone would trade their energy-related goods for. Prior to this, they would just theoretically barter, which is trading energy for energy, but people may need shoes, but not want sheep in exchange, so they take the shiny yellow gold because civilization has always considered it “precious” (and it is rare).

    So, theoretically, a fiat “system” could work if the system ALWAYS enforced the value of fiat paper, and it could not be manipulated in any way or form, and there were rules that were always justly enforced in terms of lending, or lending is just not allowed. It appears that financial markets is what really screws with this possible “system” which is really just a means to replace bartering, in a sense. So, a fiat system could work if PERFECTLY implemented and nobody could MANIPULATE, theoretically, but I guess the world would all have to use it. But as long as the rules were always followed…

    I don’t know, I guess I am just wondering if it has to be gold and silver. Regardless, I do see the whole you can’t have anything if you don’t exert energy, but what if, since cavemen existed, they always valued pearls? It just shows that gold has always been a way to commensurate a transaction due to its universal acceptance, and therefore it makes sense it is a store of wealth/energy…..

    But I think in a PERFECT WORLD, a fiat regime could exist if the aforementioned were always enforced and universally accepted like gold. Then gold would just be a rock. BUT AGAIN, PERFECT WORLD.

    Don’t get me wrong, I love gold and silver, and I do believe the fiat ponzi scheme will eventually fail. I’m a stacker (with the little I have)….I just find tying gold to energy a very abstract and interesting idea.

    I mean, c’mon, what the hell did they use on the Star Ship Enterprise to buy drinks with in the bar when Whoopi was working……? 🙂

    • P.s. Comments and corrections to anything I am missing would be great. Like I said, I am a gold and silver bug. I’m just trying to wrap my pea-brain around this energy thing. 🙂

    • Ramer,

      I believe you get the basic concept. Please check out my newest interview with Will at Perpetual Assets. The reason gold and silver are much HIGHER QUALITY ENERGY VALUE ASSETS is that the energy has been already consumed in the process of making the coin. It sits there as a STORE OF ENERGY VALUE.

      The $100 Trillion in Conventional Global Paper Assets under management, do not contain this STORED ENERGY VALUE. Energy in the future must be burned to create the economic growth that allows these paper assets to have value or to be paid back. The peak of global oil production will destroy the value of most paper assets.

      This is the reason I highly favor gold and silver over most other physical and paper assets.

      steve

  11. Perhaps some can better understand that gold and silver [historical money in more places and times than paper, shells, beads, or feathers] throughout history, will better preserve purchasing power of necessities in the future than most other assets.

    It takes a lot of educated intelligent thought, applied education and experience, people possessing those qualities, food for those people, purchase of land, costs of compliance with government regulations, equipment, electricity, diesel, gasoline, and on and on to produce gold, and to lesser degrees silver, copper, iron, zinc, and other non-renewable resources.

    So tangible non-renewable elements are a “store” of a lot that went into producing them. They undergo very little degradation from temperature and time.

    Now gold has few industrial uses that can’t be fulfilled by less expensive elements.

    Maybe some can understand how $1,000 worth of pure copper bought today may be worth more than $1,000 will buy in the future. Copper ore grades are declining, and most people see copper wires so they get copper. Silver has FAR more industrial uses than copper. So silver being more rare and compact may be much better. Gold is just gold. People have always wanted it.

  12. As an FYI – some of the largest silver miners are actually copper miners. Silver is a byproduct of the mining process. So, weak copper demand has an indirect impact on silver supply.

  13. This piece can be summed up as the invisible hand of inflation. The general rising costs of extracting natural resources.

  14. I like your EROI concept and find it very useful.

    Gold prices are a function of the financialization of all markets:

    1) Currencies are subject to a “dirty” float: central banks are manipulating their currencies (to keep their currencies weak against the $US) such that effectively there can be no price discovery in almost any market, especially for a hard asset like gold; this has been going on for decades;

    2) Low/no interest credit finances humongous malinvestment. Fundamental analysis essentially has been rendered useless;

    3) The petrodollar is a fundamental lever in geopolitics as is the concept of EROI in all fields.

    There is a currency war going on in the world that will likely result in some form of a gold-backed currency. This is why the Chinese and the Russians have been vacuuming up physical gold and maybe even helping manipulate the paper price of gold down to enable them to buy more physical (Swiss refineries are running 24/7 melting gold to Asian specs).

    If you adhere to the substance of the above thesis, an investment in gold is a speculation that a “clean” float among currencies–in effect a revolution– will result in a gold price that reflects true supply/demand/global trade/energy dynamics. Should such a revolution occur, the gold price will reflect the unraveling of the financial machinations that control the gold (and silver) price today That future price is unknown, but could conceivably be an order of magnitude (10x) what the paper price is today. Furthermore, it would result in the destruction of the purchasing power of the $US.

    For elucidation of the “dirty” float see: “Dirty Float” at http://fofoa.blogspot.com/2014/08/dirty-float.html

  15. Hi!, Patrons Of The SRRocco Report Et. Al.:

    This has been posted before but when will anyone with true blue authority listen up to the real message developing that will converge sooner or later with reality regardless of how long facing up to those realities is put off into the energy dependent depletion cycle we all face together is beyond common sense from my perspective anyway? Do you dear reader KNOW how many Beneficial Insectaries dot the landscape of these United States who have decades ago found ways to control pests without the use of pesticides as an oil based derivative. Perhaps this type of news learned composes only a fraction of the entire oil story but this story is developing on many levels even outside of the oil derivatives considerations along the innate level dwelling within each of us called health, soil and other kinds of environmental protections. Does it do the human race any good is my question to preach environmental concerns but at the same time disregarding them to make a profit? How long ago was it that someone in Western Civilization meaningfully learned what He taught US; when He said: “What shall it profit a man if he gain the whole world but loose his soul?” “Woe to you scribes, Pharisees and hypocrites!” What does the word He used here woe mean; have you ever really and truly thought about it or just read it somewhere along your timeline of life but NEVER really “realized” exactly what He was helping US to understand if “we have ears to listen up?” If we have difficulty learning the true meaning of His intention using this word, perhaps Daniel Webster can throw some purposeful light on the subject; when he wrote in his dictionary that woe means “consequences grievous to be born”. In other words He was counseling US that we can bring about conditions for which we shall grieve but He was attempting to help us avoid those conditions if possible but like moths flying into a flame getting burned but to only return again to the flame we continue to repeat those grievous conditions repeatedly. The hypocritical aspect is that we all have an inherent souls’ sincere desire for OUR health don’t we but why then do we sabotage that desire for any kind of monetary gains that bring into existence conditions grievous to be born such as cancer etc.? When a moth flies into a flame and gets burned it can’t figure it out but we are men/women not moths having a greater capability to reason things out than moths ever can if we choose to learn to use those capabilities instead of ignoring them for mere monetary gains which are short term at best as todays’ fiat monetary system is very relevant in teaching US if we pay earnest attention. This report today is a great and honest endeavor to substantiate where we are in terms of OUR worlds’ energy position that has far reaching implications throughout OUR entire society relevant to OUR economic and agricultural health needs that reach far further into OUR future than mere short term profits is it not? No amount of profits will ever supplement therefore for our best interests within OUR souls’ sincere desire for OUR health and there is nowhere to run and hide from this fact is there? Please dear reader take some time out when you can and please visit some of the websites for the following Beneficial Insectaries that now dot the landscape of OUR Nation and within other Nations as well:

    (1): Rincon Vitova Insectary in Calif.
    (2): ARBICO ORGANICS in Arizona
    (3): Kunafin Insectary in Texas
    (4): Biofac Crop Care in Texas
    (5): M & R Durango in Colorado
    (6): Beneficial Insectary in Calif.

    The list is far too long for me to list them all but these are a few that have solicited my services over more than 40 years of my participation in this evolving industry which needs to be seen in the light of their strong desires to serve the publics’ health and welfare needs not only across the US but throughout OUR entire world. There is far too much for you dear reader to learn than can be posted here; if you will please take the time to reach out to this information through your participation in visiting their websites and learning how they have developed many kinds of alternatives to oil based pesticides for pest and varmint controls etc. A good example is fly control in feedlots for cattle and where chickens etc. are raised. The parasite they ask users to use attacks the developing fly pupae before they become flies and they have a range of about a mile. Once these pest flies are eliminated at feed lots, the cattle no longer expend great amounts of energies swishing away flies which becomes demonstrated in much greater and faster weight gains towards slaughter for human consumption without anything toxic being used. One of the basic themes for the use of beneficial organisms (not just beneficial insects) is that they are self renewing through their capabilities to reproduce themselves while controlling various pests even at a micro-biological level only seen through a microscope. Each of the Beneficial Insectaries has counselors available to help customers properly organize their approaches to various pest control concerns at no cost and they have their FREE catalogues for you to review their offers, if you merely ask them to send one to you through the mail; while some offers can be viewed also online but it’s your overall choices that count. These companies are organized in such a way that they can help anyone concerned with pest controls in their environments help themselves get started, counseled along the way through the control process until whatever it is they are protecting is ready for their harvests. In my humble opinion; especially if you are a grower of any kind, is that you owe it to yourself to inform yourself about these viable alternatives to oil based pesticides which will help to conserve OUR depleting oil supplies reserves over the long haul including being thoughtful of the next generations that will need oil based energy supplies also in their turn. These alternatives are also useful around OUR homes, community areas including OUR schools plus they are proactively protective of OUR many valued pets etc.

    RUSS SMITH, CA. (One Of Our Broke, Fiat Money Corrupt States)
    resmith1942@gmail.com

  16. SRSrocco, Perfect article on EROEI applied to Au/Ag.

    For the Brian’s and Jon’s, well, ‘You can lead a man to knowledge, but you can’t make him think.’

    Our entire modern system is based on an EROI that was much higher. And it is grinding to a halt because of it.

    If someone doesn’t understand (what janis said) “You talk about greal role of solar – show me one steel procesing plant running on solar energy and I’ll believe you”.

    Well, ‘I can Explain it to you, but I can’t understand it for you’

    • Hi Samsara,

      As I am obviously a simpleton that is having some difficulty understanding this issue, perhaps you would be kind enough to help me some more.

      I’m an ecologist by training and am fully aware that absolutely nothing happens on this world without the use or application of energy whether it be the reproduction of a bacterium or the functioning of civilization. This is what SR refers to as the Energy Matrix and I have no problem with that as a concept which, of course, applies to anything that we humans make: gasoline, gold, steel, concrete, all of which have used energy in their production and so have an energy cost or value.

      I have been basing my understanding of EROI on a definition by a person who I consider to be the father of EROI, Charles A. S. Hall. His definition (ref p310 of his book Energy and the Wealth of Nations) says:

      “What Is EROI?

      Energy return on investment (EROI or sometimes EROEI, with the second E used to refer to the use
      of energy in the denominator) is the ratio of energy returned from an energy-gathering activity compared to the energy invested in that process. EROI is calculated from the following simple equation, although the devil is in the details.

      EROI = Energy returned to society/Energy required to get that energy

      The numerator and denominator are necessarily assessed in the same units so that the ratio so
      derived is dimensionless, for example, 30:1, which can be expressed as “30 to 1”. This means
      that a particular process yields 30 Joules on an investment of 1 J (or kcal per kcal or barrels per
      barrel).”

      Please notice that Mr Hall refers to energy returned, not energy value or energy cost, but pure simple energy like you can get from gasoline.

      Now if you could please explain to me how energy is returned from, let’s say a gold coin, what energy units are used and how this energy can be used in the future, I am sure I will, at last, understand how this EROI of gold works.

      • No reply from Samsara, doesn’t surprise me, so let me help him/her out a bit.

        Using Charles Hall’s EROI equation i.e. EROI = Energy returned to society/Energy required to get that energy

        First let’s take what Steve has said about energy in gold: “I never said there was a store of energy in a gold coin, I said there was a STORE OF ENERGY VALUE. Big difference.”

        I agree, a big difference. So let’s say that it is a 1kg bar instead of a coin – makes no difference – and put that value into the equation together with the cost in energy to produce that 1kg of gold using identical units for numerator and denominator so we can get a dimensionless ratio for EROI as Charles Hall intends. It looks like this:

        EROI of gold = 0 MJ per kg / 1000 MJ per kg,

        EROI of gold = 0 (zero) Yes, that’s correct, EROI of gold is BY DEFINITION zero. Therefore it cannot rise or fall because it does not exist.

        Whatever it is that Steve is trying to convey, EROI is NOT the correct term to convey it.

        As it happens I agree with just about everything Steve writes about as he displays both common sense and a deep knowledge and understanding of the issues he discusses. However, on this he is just plain wrong, and while he is, of course, free to abuse concepts such as EROI to his heart’s content, it does nobody a favor, it just confuses difficult issues for those that want to look further into these things.

        I have said in earlier posts regarding this topic that the concept of embedded energy value is a very valuable concept and can be used along with diminishing energy returns due to peak oil to analyse the onset of economic and/or civilization’s collapse as well as other things; but embedded energy value is NOT the same as EROI.

        It’s like saying that Hurricanes and Tornadoes are the same thing because they are both weather systems that have a rotating air mass and high winds with a quiet bit in the middle! I’d quite rightly be taken to task if I referred to Tornado Katrina or that the mid-west was getting wrecked by Hurricanes as these weather phenomena have quite different mechanisms underpinning their existence.

        It is no different for EROI and Embedded Energy Value and the correct terminology should be used.

        Ref for energy cost for gold: http://www-materials.eng.cam.ac.uk/mpsite/interactive_charts/energy-cost/IEChart.html).

  17. It’s not a new concept that precious metals represent stored labor and energy. This has been known for 1000s of years. Unfortunately, many in the Western world are presently dupes or marks in this matter.

  18. I believe that gold will go up in price. I don’t know when, or why, or how long it will stay up. But I don’t believe it will go up because it is a store of energy value. There are many thing out there that cost more to produce than they sell for. The market solution is that these things generally stop being made (unless subsidized), or unless the price per unit will drop dramatically with increased volume of production and sales. I am certain we can find some rock in the ground that would cost more to mine — and consume more energy to mine — than the thing is worth to anyone. The market responds by not mining the stuff; the price does not go up to meet the cost unless there is a sudden increase in demand. (I say “sudden” because if the demand were there all along, the price would have met and exceeded the production cost.) Gold works as a medium of exchange and a store of value — it certainly has not been a store of value for the past four years! — because it is available to serve as such. At the stratospheric price points imagined by some it cannot serve as a medium of exchange because it is not available to be exchanged. Obviously, if you believe in a total dollar collapse, a scenario wherein the dollar has no value whatsoever or a Zimbabwean value, gold, like every other hard asset (land, cars, food, jewelry, art, etc.) will serve as an instrument of barter, and then will again have a currency value when a new currency emerges. But few people among those predicting doom foresee the dollar dropping to zero. At worst, they see a drop of 20-30%, which in itself would be catastrophic for many. But if gold’s price is to be expressed in dollars, a dollar decline of 25% could raise the price of gold by perhaps 33%, all other things being equal. But certainly, huge increases that would double, triple, quadruple the price of gold would not occur based on such a 25% decline in the dollar’s value. And since people would be buying gold, such as they buy hamburgers or furniture, with dollars, the price might not even rise by that much (especially if other world currencies are also heading downhill). During the financial crisis of 2007-2009 home prices took a beating, even though they were not financial instruments, and even though the great majority of mortgages were sound and secure. They went down because no one had the money to buy them. If no one has money, they’re not buying gold either. It is entirely likely that the price of gold has been artificially held down by rampant governmental/central bank manipulation, and that when manipulation ends the price will soar to its realistic market value. But why would world governments ever end this manipulation as it is always going to be necessary to maintain their currencies’ “value” by keeping gold down? Private and corporate manipulators always had an interest in ending their manipulations after reaching their goals or reversing the direction of their manipulation. But the government has no such interests. Their interest at all times is to keep gold suppressed. They will allow it to trade within a range, but they have no interest in seeing gold break out and decrease the perceived value of their currencies. Nor need they, as opposed to private and corporate manipulators, have any worry whatever about losing money. That does not matter in a world where you can print endless money and keep on selling derivative shorts. These shorts may be overcome by frenzied buying, but only for a while until the frenzy wears down. Then, the steady shorting of gold futures will assure the decline from the frenzied heights. Certainly, in a world-wide crisis, the central bankers can agree to support gold at a new value, in which case they will move their manipulation markers, and much money can be made by those who are long, but the price cannot rise above what is agreed by the Federal Reserve and their counterparts. The bankers could probably just kill gold, no matter how many thousands of years of value it has had, if they wanted to, by just shorting it until the bottom falls out. But they own too much gold to allow this to happen. As I said, they keep it in a comfortable trading range. Right now, this is a range at which America sells its gold and China, Russian and India acquire it. The Central Bankers are all content with the current pricing right now. When their needs or viewpoints change, accommodations will be made, and a different trading range will be established. Many have prognosticated that the value of gold will not rise until the physical supply is “divorced” from “paper gold” derivatives This may (or may not) be true, but why would the government allow this to happen, when they are so successful with their manipulation under the current scheme? I believe my thoughts are leading me, more-and-more, to a greater appreciation of silver’s ability to move upward significantly greater than gold. It would not reflect poorly on a given President’s management or mismanagement of the economy for silver to jump in price. Certainly, silver prices are invariably tied to gold prices, but the range (which can be expressed in terms of the gold/silver ratio) presently provides plenty of room for upward growth. But in the end, and to get back on topic, gold and silver are going to be worth whatever a buyer is willing to pay in terms of dollars at a given time. This really has no correlation to the cost of the energy it took to produce the gold or silver coins. That cost equation only serves to motivate (or demotivate) a producer from making the product. If they do not mine, refine, and fabricate (or mint) gold coins, that does not raise the price one dime unless there is increased demand. And if there were sufficient demand, then the cost of manufacturing (and the cost of the energy involved in the process) would not demotivate increased production. Let’s face it, gold and silver prices have been falling since 2011 because willing buyers will pay less-and-less to willing sellers, not because the costs of the energy involve in the production process has increased. Someday, for some reason, willing buyers will increase their bids, but not because of an increase in the cost of the energy to produce the goods.

  19. Creator of us dollars in labor creates 1200$ at what expense ? Creator of gold creates 1 oz gold. At what expense ? I think its easier to run the printing press or add digits on a screen Then to work the mine. Its all corrupted . With paper gold . Paper gold is a joke. An OXYMORON .

  20. Dave the Stacker | March 11, 2015 at 9:03 pm | Reply

    Steve, Did somebody leave the keys in the asylum gate? Some of the folks posting here surely need some professional help. So what if I am an obsessive/compulsive purchaser of silver which harms not a single person. I feel sorry for some of the passive/aggressive personalities that insist on attacking you and your beliefs. As for me, I just took delivery on my 500th Silver Eagle, as the market price volatility makes it possible to get more silver for my fiat buck!

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