THE GREAT GOLD SUPPLY DISCONNECT: Market Severely Undervalues Price

The market has no clue that it has severely undervalued the price of gold.  While Central bank intervention has worked hard at capping the gold price, the “Great Gold Supply Disconnect” will most certainly remedy that situation.  This gold supply disconnect took place after the gold price peaked in 2011.

That being said, the world is speeding recklessly towards an epic market catastrophe.  No, this isn’t hype… I wish it was.  But, unfortunately, the poor folks who continue to believe their STOCK, BOND & REAL ESTATE portfolios will provide them with a healthy retirement in the future, have no idea that their true values evaporated many years ago.  However, the market just hasn’t BAKED THEM INTO THE CAKE YET…. LOL.

Before we get to the Gold Supply Disconnect, let’s look at this wonderful chart that shows the carnage taking place in the commodity market.  This is “Commodity Index” divided by the S&P 500 Index:

This chart shows that the commodity index is at the lowest ratio to the S&P 500 since 1971.  Thus, the commodity prices have reached a 50 year low versus the S&P 500.  Moreover, the commodity index is lowest ratio (below 1.0) when we compare it to the average median which is 4.1, shown as the red dotted line on the chart.  Now, either commodity prices are too low, or the S&P 500 and its illegitimate older brother, the Dow Jones Index are severely over-inflated.

I would like to remind investors, without a properly functioning commodity supply market, companies wouldn’t be able to produce and manufacture their products.  Which means, energy and commodities are the foundation of our markets.

Of course, if an individual still had a semi-functioning brain-stem and wasn’t one of the millions of Americans now suffering from serious BRAIN DAMAGE, they would realize that the stock markets are in record bubble territory.

Now, another thing that it totally overlooked by most Americans and the Mainstream analyst community is how the falling oil price is gutting the U.S. and global oil industry.  Today, we received news of one of the largest U.S. gasoline and distillate inventory builds in the past five months.  However, if we look at the total U.S. Oil/Product SPR inventory, it rose the most since August 2015.

This had a wonderful impact on the price of U.S. crude oil…… which is now down $2.15 to $46.05 a barrel.  This low oil price continues to gut the U.S. oil industry even though the media suggests that the Shale Oil Industry is now profitable at $20-$40 a barrel.  I will be publishing an article shortly on the Permian Basin in Texas, which is now the Darling of Wall Street and the U.S. shale oil Industry.  Everyone is jumping into the Permian to make that big money… or so they believe.

Regardless…. collapse is on its way because the very energy we use to run everything is rapidly disintegrating.  And without energy, the global gold supply would most certainly evaporate into thin air.

THE GREAT GOLD DISCONNECT:  How The Market Has Severely Undervalued The Gold Price

The Fed and Central bank magicians have fooled the audience with a clever slight of hand that a newly printed $100 bill, which costs 13 cents each to produce, is worth $100 in gold, it isn’t.  However, the skyrocketing gold price hasn’t been BAKED INTO THE CAKE YET, but it will.

Before I show you the Gold Supply Disconnect, let’s look at this interesting chart which show the falling ore grades of five different gold producing countries:

At one time (1900), the average gold ore grade in the world was over 20 grams per ton…. 32 grams equals one troy ounce.  Today, the top gold miners are struggling to produce gold at a little more than 1.2 grams per ton.  Back when Nixon dropped the U.S. Dollar-Gold peg in 1971, the average gold ore grade from these five countries was approximately 8-10 grams per ton…. nearly EIGHT TIMES higher than today.

When means, the gold mining industry is now producing the most expensive gold dust in history…. and doing so for mere peanuts.

Furthermore, we also have the falling EROI – Energy Returned On Investment of oil that is used to extract and produce gold:

Thus, falling global gold ore grades and the declining EROI of oil means it costs a great deal more to produce gold today than it did in the 1900’s and especially in the past 15 years.   However, the profitability and the share prices of the top five gold miners have suffered greatly since the gold price peaked in 2011.

If we take a look at the next five charts, we can see that the gold miners share prices have under-performed the gold price since the beginning of 2012:

BARRICK GOLD

NEWMONT

ANGLO-GOLD

GOLDCORP

KINROSS GOLD

You will notice in all five charts, the price of gold (Gold color) was underneath all the gold mining companies stock price trend up until 2011.  Then after 2012, the Great Gold Disconnect took place as the gold price is now higher than these companies share prices.  Some of these gold miners share prices are much lower than the gold price trend, such as Kinross Gold, AngloGold and Barrick.

What is quite amazing is that Kinross (ranked 5th largest gold miner) produced 2.7 million oz of gold in 2016, and its share price is currently trading at less than $5.  Think about that.  Kinross produced $3.8 billion worth of gold in 2016, and its share price is trading at less than $5 a share.  Now, compare that to the first chart in article (above) which shows the commodity index trading at a 50 year low versus the S&P 500 Index.

What we have today is a totally insane and hyper-inflated STOCK, BOND and REAL ESTATE market, and a severely under-valued gold market price and gold mining shares.

The investors of the world believe the hyper-inflated values of STOCK, BONDS and REAL ESTATE will continue indefinitely.  Unfortunately, the gold supply disconnect that took place in 2011 is a big RED WARNING LIGHT that the something is seriously wrong.

When the broader stock, bond and real estate markets start to crack and drop like a rock, watch for the gold price and the mining shares to head in the opposite direction.

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28 Comments on "THE GREAT GOLD SUPPLY DISCONNECT: Market Severely Undervalues Price"

  1. Hey Steve, ZH had this article that might be a game changer for the diminishing EROI equation, what’s your assessment?
    http://www.zerohedge.com/news/2017-06-07/saudi-america-%E2%80%93-how-new-tech-creating-another-oil-boom

    • carl,

      Ken Barrows is reply hits the nail on the head. I get a laugh out when I see a new energy article like this one claiming a NEW OIL BOOM just at the same time the U.S. Oil Industry is gagged on enough debt to drown itself.

      Energy expert Art Berman wrote an excellent article on the HYPE that technology has made drilling oil cheaper: http://www.artberman.com/shale-cost-reductions-are-10-technology-and-90-industry-bust/

      If you read the article, he provides data showing that the real decline in oil production cost came from the GUTTING OF THE OIL SERVICES INDUSTRY and not TECHNOLOGY.

      Furthermore, all this new shale oil drilling technology did nothing to produce real profits for the U.S. oil industry when the oil price was above $100 from 2011-mid 2014. Matter-a-fact, a lot of new debt was added after 2012…. LOL.

      Unfortunately, a lot of people will fall for this OIL BOOM INSANITY when they should be preparing for a collapse much like what happened in Egypt.

      steve

  2. Carl, that’s a corporate press release, which I guess is close enough to “news.” Besides stating the cost to extract is $10/barrel, it doesn’t tell the reader anything about EROI or the process generally.

  3. Kinross (KGC) is under 5$ because it is a dog. It has a negative P.E. ration and a book value of only $3.45…And it has 1.25B shares outstanding…Duhhhhhhh…..duhhhhhh….I can’t figure out why it is not higher….

    • steve,

      Yes… I know all about the lousy performance of Kinross and many other gold mining shares. You are preaching to the choir. However, when the gold price is being capped while STOCKS, BONDS & REAL ESTATE are being propped up by $8 trillion of Central Bank purchases since 2008, and that is what was made public, it’s no surprise many of the gold miners are DOGS.

      Lastly….. just the U.S. government deficits from 2011 to 2015, which were $4.6 trillion, would have been able to buy all GLOBAL GOLD & SILVER PRODUCTION for the past 30+ years.

      steve

  4. Not to worry about supply, I have created a new pm, it’s called bitsilam.
    I will issue just the right amount depending on demand and need soon as 1,000 folks line up at my front door.
    Only accepted method of pay is physical silver.

  5. Steve, What is your thought on Platinum? Should a person derivatives between Gold, Silver and platinum?
    Thank You!!!

    • Alan,

      The way I see things unfolding, Platinum, while a precious metal, will not really function well as a store of value when the markets crash. Of the 6 million oz (Moz) of global platinum production in 2016, 3.3 Moz were used in autocatalysts market. Yes, I lot of platinum (2.2 Moz) was used in Jewelry last year, but the public understands GOLD & SILVER as stores of value more than platinum or palladium.

      Also, only a fraction of platinum or palladium are acquired as investments compared to GOLD & SILVER.

      steve

    • DisappearingCulture | June 8, 2017 at 7:20 am | Reply

      Alan,
      Platinum is a bettr investment than rhodium or palladium!

  6. Thanks Steve.

  7. OMG. what a great work!

  8. For long-term wealth preservation; owning physical gold, silver, platinum, palladium, copper, or any physical metal at a low price is better than owning fiat anything, including fiat bitcoin, fiat stocks, etc. which are high now; but gold/silver is low now and many are avoiding metals for fiat cryptos and fiat stocks in their bubble.

  9. Another awesome, awesome article!!! Love, love reading your stuff.. what a brain!

  10. Just for your information…
    At one time (1900), the average gold ore grade in the world was over 20 grams per ton…. 32 grams equals one troy ounce.

    One troy ounce (abbreviated “oz” or “ozt”) equals 31.1034768 grams exactly

  11. New gold mined, is deflationary. All newly mined gold costs both in energy terms and monetery terms, according to your information, more to mine that existing gold, so the more gold thats mined the more this raises the price of existing gold, relative to other goods. So expanding the golden monetery base, will make all gold buy more per ounce with one proviso: Once the manipulation ends and we get real market values.

  12. Robert Forshee | June 8, 2017 at 3:57 am | Reply

    Hi Steve,
    Just sent a donation to you to show my appreciation for the quality and value to me of your work. What is your next report?
    Thanks,
    Bob F.

    • Robert Forshee,

      Thank you for your kind donation. It really helps fund the SRSrocco Report site. Now, when you say REPORT, are you referring to my public articles, in which some label as REPORTS, or are you talking about a new PAID REPORT?

      steve

  13. Thanks a lot Steve for your work.
    Is the internet traffic on your page still growing as you indicated few months ago?

    • Andy,

      Actually, yes. According to Alexa.com, the SRSrocco Report site is currently ranked 72,000 in the United States. The lower the number, the higher the ranking. The SRSrocco Report site is also ranked 220,000 globally.

      steve

  14. Hi Steve
    I work for an Australian gold mine company and have for the last 10 years. Our grade is 13g per ton average and produce 250 – 270k oz per year.Maybe you should research some of the smaller Australian gold companies as well.
    Regards
    Rob

  15. 3.5 GRAMS OF GOLD in a 1915 Austrian rare coin.Auction price at this moment is at $210 Canadian… Anyone here care to give me guidance on how high one should consider going for such an item? I would appreciate it …Thanks

  16. Steve,
    Until end 2015, I was invested in both PM’s and mining (gold and silver) stocks, purchase regularly from 2012 onwards.
    At that time I was worried about the prospects of PM miners that had already been crushed (leverage effect, non ideal management, declining ores, high oil cost, etc.).
    Btw, it was a good laugh to read that ZH article on new oil technolgy…
    Also because of taxation and tracking issues here in the EU, I decided to bite the bullet and materialise a loss on my PM shares: I switched all of my investments in gold and siver bullion.
    I realise with your graphs that as of today the mining shares have not performed that well compared to bullion, even though the price of crude has substantially declined, and are much more volatile than PM’s.
    My opinion is that, when the markets melt down, bullion will be a much safer place to be than PM stocks.
    I think that you already gave the advice to be careful about mining shares in the past.
    Could you please elaborate on the respective balance bullion/stocks in the next future?
    Thanks again for your good work and sharing.
    Serge

  17. Today ‘they’ dumped 4 billion in paper claims on 1,2 grams per ton.

    I think we all have to agree by now its totally FUBAR.

  18. Will owning FIAT Bitcoins or PHYSICAL Gold Coins PROTECT YOU from the financial collapse ahead?
    https://www.youtube.com/watch?v=xCneIJYH8yw

  19. I would stay far away from mining shares. Because in the end you are just holding paper.

  20. These information should be in all the headlines of all the newspaper. Thanks Steve for keeping us in the light

  21. Maurice Miner | June 9, 2017 at 9:14 pm | Reply

    Steve, can you possibly elucidate your thoughts as to what is BEHIND the “Great Gold Disconnect” of 2011. Why did this happen, and what market forces have been playing for the last six years?

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