WHO REALLY CONTROLS THE GOLD PRICE?? The Answer is Quite Surprising

There’s this notion put forth by the majority in the precious metals community that the Fed and Central Banks control the market price of gold.  I have even heard that some analysts believe the Fed could push the gold price any where they saw fit…. even to zero.  While I agree that the Central Banks do play a role in gold market intervention, they most certainly CANNOT push the price of gold anywhere they want.  This is an absolute falsity…. and I have the data to prove it.

To understand how the market determines the price of gold, we must first dismiss the economic principle of SUPPLY & DEMAND.  While supply and demand forces are factors in the short-term price movement of gold, they do not really factor all that much over the longer term.

Here is a chart showing the relationship of the gold and oil price since the 1940’s:

The gold price is in DARK ORANGE while the oil price is in BLACKWe can plainly see the price of gold and oil have moved in tandem, especially after Nixon dropped the Dollar-Gold peg in 1971.  While the oil-gold price movements are not exact, they parallel each other quite nicely.  Thus, when the oil price skyrocketed during the 1970’s, so did the gold price.  The same thing took place in the 2000’s.

Interestingly, the same thing took place with the silver price below:

In both of these charts, the volatility in the oil, gold and silver price increased significantly after 1971.  There was an underlying reason for this… and it just wasn’t the dropping of the U.S. Dollar convertibility into gold in 1971.  It was also due to the fact that the United States peaked in domestic cheap oil production in 1970.  This was actually the peak of the U.S. Empire, even though we have continued to dominate the world by exchanging PAPER (U.S. Treasuries) for physical OIL-GOODS.

So, if we look at these two charts above, we can plainly see the oil price was more the LEADING DRIVER in the gold and silver price than were supply and demand forces.  Again, supply and demand forces add volatility to the gold and silver price over the short-term, but the energy cost (mainly oil) has been the leading driver over the longer term.

Who Really Controls The Gold Price??

If the gold price has paralleled the oil price, then who really controls the gold market price??  While I agree that the Fed & Central Banks are intervening in the gold market, they can really only control the UPWARD movement in the price of gold.  Why?  Well, if we look at the chart below, we find our answer:

This chart shows the difference between the total production cost of the top two gold miners, Barrick and Newmont, versus the annual average gold market price.  The chart clearly shows that the production cost is always less than the gold market price.

In the early 2000’s, the top two gold miners production cost was closer to the market price.  However, after the U.S. Housing and Banking Market collapsed in 2008, the gold market price moved up considerably higher than the cost of production.  My analysis suggests that the gold price was starting to head towards its high-quality STORE OF VALUE properties, rather than its COMMODITY PRICING mechanism.

NOTE:  I determined Barrick & Newmont’s production cost by using my Net Income & Adjusted Income approach.  This is much different than going by either Cash Costs or All-In-Sustaining Costs.  My estimated total production cost includes more items such as taxes-interest expense and etc, that are not considered in cash costs or all-in-sustaining costs.

Also, cash costs are a totally bogus metric as they deduct the miners by-product revenue to arrive at a very low cash cost.  They list them as by-product credits —  other metals extracted and produced along with gold in the process.  However, they are not really credits.  These miners need these by-product metal sales to fortify their balance sheets.  Without them, many mining companies would be suffering losses, not profits.

Thus, a credit is something that one does not need… it’s a plus.  In reality, most of these mining companies need their by-product metal sales to remain profitable.

That being said, here are some examples of the Barrick and Newmont’s cost of production versus the gold market price:

2000 Production Cost = $276

2000 Market Gold Price = $279

2012 Production Cost = $1,272

2012 Market Gold Price = $1,669

2016 Production Cost = $1,113

2016 Market Gold Price = $1,251

Now, the reason the production cost at Barrick and Newmont has fallen from $1,272 in 2012 to $1,113 in 2016, is mainly due to the 50%+ decline in the price of oil.  It takes a lot of energy to produce an ounce of gold.  Oil was trading over $100 in 2012, but fell to $45 in 2016.  Even though the energy cost has fallen significantly, labor costs have not declined all that much in the gold industry.

For instance, Barrick’s labor payroll per ounce of gold only declined from $328 in 2012 to $304 in 2015.  This is only a 7% decline in labor cost even though oil price dropped considerably in 2015:

On the other hand, the lower gold price has put more stress on Barrick’s financial bottom line as their payroll accounted for 26% of each gold ounce produced in 2015 compared to only 18% in 2009.  Investors need to realize it takes a massive amount of energy, labor, materials and capital to produce an ounce of gold.

If we look at the Barrick-Newmont Production Cost vs. Gold Price chart above, we see that the market price was never lower than the production cost.  Which means, the market or Central Banks did not push the gold price below the cost of production.  This is an important factor to understand when you listen to analysts suggesting that the Central Banks can rig the gold price down to whatever level they desire.

That is total BOLLOCKS…..

As, I have mentioned, the Fed and Central Banks can intervene in the market to control HOW HIGH the gold price will go.  That is the big difference.  So, those who continue to believe Harry Dent’s forecast that gold will go down to $700 an ounce, aren’t considering the COST OF PRODUCTION.  Harry Dent spends a lot of money advertising to get people to buy his books or newsletters.  Touting a $700 gold price gets people motivated in buying what he sells.

Unfortunately, Dent, like most analysts, tend to leave out the energy in their forecasts.  This is truly hilarious as energy is the leading driver of our economies… not supply-demand or finance

The Production Cost Of Gold Is Higher When We Consider Capital Expenditures

My Net Income & Adjusted Income approach for determining the production cost of gold (and silver) provides a much more realistic metric than the industry’s “cash costs” or “all-in-sustaining costs.”  However, when a mining company releases its income statements, they do not include their capital expenditures (CAPEX).  Their net income (or adjusted income) does not include capital expenditures.  To find out what they paid in CAPEX, we must look at the Cash Flow Statements.

If we consider what Barrick and Newmont spent on CAPEX and then deducted it from their cash from operations we would arrive at their FREE CASH FLOW:

From 2000 to 2016, these top two gold miners free cash flow was a net $10 billion.  If we compare their free cash flow of $10 billion to the total $220 billion in revenues, it only accounted for 4.5% of their revenues.  Thus, Barrick and Newmont’s free cash flow shows that it cost more to produce gold than was shown in their Annual Income statements.  Which means, these gold miners still enjoyed positive free cash flow during this time.

NOTE:  In order to consider some unwise capital expenditures during the years when the gold price really surged, I subtracted from each company, their lowest negative free cash flow that year.  Actually, this was about $5 billion when we add them both up.  So, in all reality, the free cash flow of $5 billion (half of the $10 billion shown in the chart above) means that Barrick & Newmont only enjoyed a 2%+ free cash flow margin compared to their total revenues.

Regardless, the gold market price was still higher than Barrick and Newmont’s small free cash flow margin to total revenue.  Of course, if we include stock dilution as well as dividend payouts, these two gold miners would have an even higher production cost.  But, that would still not change the overall production cost all that much.

As I have stated in many interviews and articles, the Fed and Central Banks CANNOT push the gold price wherever they see fit.  The algorithms are electronically calculating the gold market price based on its cost of production.  The only way the Fed and Central Banks can control the gold price is on its way UP.  This is by using a massive amount of paper contracts to cap the gold price from moving up too high.

The majority of Fed and Central Bank intervention is controlling where investors put their money.  By funneling the massive amount of money printing into STOCKS, BONDS and REAL ESTATE, 99% of investors (in the market) remain happy, as well as the governments.  We must remember, local, state and the Federal Govt receive tax revenues are based on high stock, bond and real estate values.  Once their values implode, so do government tax revenues.  This would be a complete disaster.

Lastly, the present COMMODITY PRICING mechanism of gold will transition to its high quality STORE OF VALUE when the U.S. and Global Oil industry really starts to disintegrate.  This gold value transition will be the first in history.  Why?  Because gold was still valued the same after the Roman Empire collapsed… due to the fact that it was based on human and animal labor.

Unfortunately, today the gold price is being based on the energy in oil.  However, when the oil industry collapses, there is nothing to replace it.  Thus, the value of most paper assets will plummet.  Gold and silver will become stores of economic energy because the world was brainwashed into believing PAPER ASSETS will always retain their value…. not so.

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85 Comments on "WHO REALLY CONTROLS THE GOLD PRICE?? The Answer is Quite Surprising"

  1. A differing opinion by Chris Martenson :

    http://thecrux.com/buy-gold-while-you-still-can/

    • Silvrwllwn,

      Yes, Martenson puts forth some good analysis on the market rigging by Central Banks. Yes, I agree. However, if you read my article, you would have come across this statement:

      The Fed and Central Banks can intervene in the market to control HOW HIGH the gold price will go. There is a big difference there.

      The Gold Mining Industry Production Cost sets a FLOOR for the price while the Fed & Central Banks are there to CAP how HIGH the price will go.

      steve

  2. Indeed Steve, the fogs of fiat.

    I consider this your best article until now. It really says it all.

    Go viral baby, go viral….

    • houtskool,

      Thanks for the positive kudos. However, it looks like sentiment has really taken a toll on the precious metals community. Many are throwing in the towel. Traffic on precious metals sites has really taken a DIVE since Trump was elected in NOV 2016. While my traffic is down, it isn’t as bad (YET… LOL) as other precious metals sites because I also cover ENERGY.

      steve

      • There’s no precious metals community Steve. That too is perception.

        • Oh there is, there is. It has been shrinking in the west – at least many outspoken gold”bug” have turned really sour – but there are the hardcore stackers that remain steady and hold their grounds and continue to accumulate. Then there must be some giants too in the west that gobble up metal en masse but keep VERY quiet about it (see Steve’s silver import article some time back). And as we have seen in the past, mint sales can also be high when price is in the crapper and that did not translate into higher prices right away. US mint retail sales are too small a market to impact the global gold price anyway, IMVHO.

          AND finally, there are other well known giants that are accumulating too, especially along the silk road aka the yellow bRICs road; and that my friend is like 40% of the global populace. So the more (Western) weak hands that get shaken out the better. The lower they try and manipulate the price of gold the better. Both will actually just speed up the breakdown of their price stranglehold via the sales of completely naked future certificates. My worry is not the paper price of gold per se or that it will never rise (it will, and very drastically and dramatically so by gapping up up up and away). My worry is more what will happen once they do lose the golden war – and the will – and their paper ponzi blows sky high. Will we also see mushrooms in the sky (as a cover up) ???

          • “Then there must be some giants too in the west that gobble up metal en masse but keep VERY quiet about it”

            ? haven’t you seen those hundreds of billboards everywhere, “private collector wants to buy your gold! 1-800-something”?

            “Will we also see mushrooms in the sky”

            yes.

            “(as a cover up) ????

            no. as the icing on the cake.

          • True CHX13. Precious metals community is just not the proper discription. Maybe awareness community is a better way to discribe it.

          • Dave Kranzler explaining the flipping of gold and silver hedge funds.

            https://www.youtube.com/watch?v=XcGw3dalgiU

  3. But the investors switch from the other asset classes(bonds) to PM when inflation is high and interest rate is low.Ok there is a relationship betwween inflation and oil.
    Oil makes inflation, gold measure it.

    • silverfreaky,

      Yes, the oil price drives inflation, while the gold price measures it. However, there is a BIG FACTOR missing from your statement. And that is…. the value of most STOCKS, BONDS & REAL ESTATE, which comprise 99% of the market, are based on CHEAP & ABUNDANT OIL SUPPLIES. When this is no longer possible, then the value of STOCKS, BONDS & REAL ESTATE COLLAPSE.

      At this point, investors will move into STORED ECONOMIC ENERGY contained in physical GOLD & SILVER, while they flee ENERGY IOU’s of most STOCKS, BONDS & REAL ESTATE.

      Does that clear up the matter for you??

      steve

      • This could be many many years away as do not expect central banks stupid enough in order to not subsidize indirectly even rotten tar sands.
        New all time highs for amazon and google.1 trillion valuation is coming for each and quite soon I guess.

        • Correct rd. The exponential factor becomes more visible by the day though.

          • The pipe dream of a multipolar world by the BRICS is dismantled on a single day basis. Way too early (maybe decades away). GAFA market cap will soon exceed this of all chinese or indian markets.
            If I were some anglo american oligarchs I would not accept any kind of retreat : BRICS do not deserve any respect : they have nothing between legs.

      • Oil does not drive inflation. This is the opposite. Inflation is the fall in the value of fiat. The gold market is rigged. So how can it be a measure of oil?
        Oils demand depend is on consumption. This has nothing to do with gold in this fiat system. Demand is reliant on increases in credit. Its credit, that drives prices and where the credit is borrowed determines what prices rise. This credit is controlled by the banks and they determine the direction of nominal asset prices with the market being led by the media and P R also controlled by the same people.

  4. https://m.youtube.com/watch?v=VymhJCcNBBc

    Carbon based energy will be replaced by lattice enabled nuclear reactions. Watch the video and investigate for yourself.

    http://lenr-canr.org/acrobat/BarnhartBtechnology.pdf
    The US government says it is real. It will completely sink the nations selling oil.

    What would nearly free energy do to the price of gold and silver?

    • Bennet Cecil,

      With all due respect, I would kindly like to remind you that we still don’t have REPLICATORS as seen in the TV Show, STAR TREK. You know, a person just says whatever they want and the replicator produces it out of thin air. Today, we still have to do it the old fashion way…. and that is, takes OIL, COAL and NATURAL GAS to extract the minerals-metals, transport and manufacture Nuclear Reactors, whether they are regular or the newer Thorium based models.

      If I had a FRICKEN SILVER COIN for every person who has made a comment or sent me an email about some ENERGY SAVING TECHNOLOGY, I could retire.

      FER PETE SAKES FOLKS…. WAKE UP AND SMELL THE COFFEE. If we wanted to transition away from OIL-NATGAS-COAL, we should have done so 25-30 years ago. We have run out the clock.

      For some strange reason…. we live a TOOTH FAIRY WORLD where people believe the economy is run by ENERGY TOOTH FAIRIES.

      Gosh…. it gets really old and frustrating to see the same SHORT-SIGHTED rubbish over and over again.

      steve

  5. Yes, what was first the egg or the hen?The commodity market is cyclical.

    • silverfreaky,

      LOL.. you got me on a ROLL TODAY. For some reason your brain is still functioning in the ENERGY TOOTH FAIRY WORLD. Without cheap oil production, the COMMODITY CYCLE IS OVER. Please say that three times while tapping your feet together.

      I thought maybe you were reading my articles… but I gather from your shortsighted comments here… the BLIND continues to lead the BLIND.

      Go Harry Dent… LOL.

      steve

    • Well, silverfreaky, lets say the farmer took the eggs and replaced them by marbles.

    • Egg or hen – they CO-EVOLVED! And back when the “later-to-be-hen” was still a dinosaur, it already laid – guess what – eggs.

  6. But the cyle was broken because all the new printet money went to the financial system and the banks.So it’s important that trump bring the money to the real economy.

  7. The low interest rate phase means you can print money to the moon.
    That’s the trick.And all the debts where outsorced to the centralbanks.
    The problems appears when this new printed money creates bubbles.House market,stocks,..

    • silverfreaky,

      LOL… you say, “The low interest rate phase means you can print money to the moon.” HAHAHA… what a good laugh I got there. Thanks a million.

      Still no where in your comment do you mention OIL or ENERGY. Do me a favor, don’t use any energy at all for the next week and tell me how well things went for ya.

      Gosh… this gets really old reading the same STOOPID NONSENSE. While Central Banks can print money, they can’t PRINT BARRELS OF OIL.

      GOD HATH A SENSE OF HUMOR….

      steve

      • They can print oil yes, period. If trillions are flowing the energy markets, they will be able to produce astronomical quantity of energy provided the EROI is strictly above 1.

        • Oh, they WILL monetize, but it won’t work. At least not for long. They will blow up the currency and you’ll be eating sewer rats before you know it.

  8. I know that.But as you see we are in an worldwide recession.I told you once all investment strategies depend at when yo go in the investment and out.

    The timing is everything.At long term sight it’s clear that the oil price is increasing.
    But this is banal.

  9. I don’t follow Amazon but intuitively to me it seems their whole business model depends not only on trucks delivering goods to their warehouses (energy bill) but even more importantly delivery of each item of merchandise, individually , to each customer’s address instead of the customer driving to the store or warehouse and buying multiple items each trip. This has got to be extremely energy intensive. Seems like Amazon would be most vulnerable of all and then shackled to Amazon would Fed Ex and UPS.

    This analogous to the EROEI for the hunter gatherer vs the monocrop corporate farms.

    • Hubbs,

      SHAME ON YOU.. using logic in your comment. Don’t you realize our economy is run by ENERGY TOOTH FAIRIES…LOL?? When someone clicks on the PURCHASE button to buy another pair of shoes to add to their 5 dozen pairs already, it magically appears on the doorstep. No ENERGY REQUIRED.

      Thus, the amazing INTERNET SHOPPING MODEL is also based on the ENERGY TOOTH FAIRY.

      One day, Americans will realize the PARTY is over… and over for good.

      steve

  10. Steve ..what do you think of Uranium as a contrarian bet for long term … that also seems to follow oil price somehow … it seems if we do not have higher oil price all commodities will fall …

    • The only long term bet is live by the day, dude.

    • Joe,

      Uranium is a little bit different. However, you are correct. I see the value-price of most commodities-metals to continue to fall with the oil price and the disintegrating market economics. The exceptions are gold and silver.

      Uranium is the fuel for Nuclear Reactors. Unfortunately, Nuclear Reactors have always had a very low EROI – Energy Returned On Investment when we factor in their FULL CYCLE COSTS. In the 1950’s, it was stated that Nuclear energy would be TOO CHEAP TO METER. That turned to to be a BAD JOKE.

      We have never really decommissioned a fully functioning Commercial Nuclear power plant in the United States. All of the spent fuel rods are still being stored at many of these Nuclear Power plants. The TIME and COST to decommission just one of these NUKE PLANTS is off the charts. So, when we factor in ALL THEIR FULL CYCLE COSTS, we shouldn’t have built the first one.

      steve

  11. Robert Happed | April 27, 2017 at 6:50 pm | Reply

    Steve, in earlier articles, you explained why the price of oil is destined to decline significantly due to thermodynamical reasons. If the price of gold was moving in the past with the price of oil, doesn’t this mean that the gold price is destined to decline with the price of oil for the same thermodynamical reasons ?

    • Robert Happed,

      Yes, that would make logical sense. However, you are forgetting that 99% of the market is invested in ENERGY IOU’s such as most STOCKS, BONDS and REAL ESTATE. As the thermodynamic oil collapse really starts to hit, then the value of most STOCKS, BONDS & REAL ESTATE will plummet because the majority are based on debt. Physical gold is not based on debt, it is based on STORED ECONOMIC ENERGY.

      Thus, when the Market finally cracks, the gold price which has been based on its relationship to the oil price, will DECOUPLE and move towards a high-quality STORE OF VALUE. And by that, a very LIQUID STORE OF VALUE. Most STOCKS, BONDS & REAL ESTATE will not be LIQUID or able to be sold.. only at a fraction of their value.

      steve

    • An in addition to what Steve said, declining ore grades will push the cost of production for the miners continually higher, as most (if not all) the high grade sweet-spot ores have already been harvested. And as the oil price plunges, so will the availability of oil as the oil producers will go bust one after another… No cheap gold and silver will be ever produced again under the double whammy of declining ore grades and ever-sinking EROEI on oil/NG/coal.

  12. Ong Beng Hwee | April 27, 2017 at 7:41 pm | Reply

    Does this apply to silver price as well? If not how is silver price being determined?

    • Ong Beng Hwee,

      Yes, It applies to silver as well. I also included an OIL-SILVER price chart in the article above. The current estimated break-even for silver is about $15-$18, depending on the primary silver miner and for gold is $1,100-$1,500, depending on the primary gold miner. This is also where we get our 70/1 Gold-Silver ratio. The algorithms are basing the market price of gold and silver based on their cost of production.

      steve

  13. Nicely explained. To be fair though, the banksters can organise a spike down under favourable (to them) circumstances to fix gold price for a really big buyer — once, and then dismiss it as an anomaly. As the price for big transfers is based on London PM fix, a spike down could be worth a lot to bankers. If the time for such a transaction is carefully chosen, during some holiday or otherwise a quiet time, and they bomb the paper price right before the fixing time, it would fix the spike down, and then go right back up, but for the purpose of sale and purchase agreement the price will be fixed very low, and will remain so until the next fix. For such a valuable service, a big buyer can pay extra 1% or 2% of the transaction value to certain parties, which at $30M per ton (gold on sale, eh) and a 200 ton transfer would be worth $60~120M in that special commission. That is enough for a few healthy bonuses, and makes total sense to the buyer. If the situation is really unique and the banksters push the paper price to some nonsensical level, such as $700, the “special commission” could be 5% or 10% — that can be a billion dollar bonus. Who would say no to that even at the biggest banks? Also, prior knowledge of such an event can be worth even more, so a lot of people can retire after such an operation. In summary, as much as $700 is nonsensical, very likely it can be achieved within the current system. The only losing party in such a deal is the seller, and the seller may not be as well connected as the buyer.

    • Reader,

      Yes, you are correct. The Bankers can dump $3-5 billion worth of paper gold onto the market in an instant to depress the price. However, I stated that the FED & Central Banks CAN manipulate the price on the SHORT-TERM. And, this is only to CAP the price. That being said, the Central Banks cannot push the gold price below the cost of production over the LONG TERM.

      So, while GOLD PRICE SMASHES can take place on the short term, the Fed & Central Banks CANNOT rig the gold price below the COST OF PRODUCTION over the long term.

      steve

  14. Steve,

    I want to thank you for stimulating my interest and expanding my understanding about the interrelationship of fuels (energy stored and expended) to metals and financial instruments.

    My university education is Electrical Engineering, so physics was never directly connected to finance for me.

    I have been concerned for a long time about what I call “American Industrial Farming”. Way too much to state here about this unsustainable system! It’s all related.

    You’ve got my attention.

    Bob F.

    • Bob B,

      Glad you find some of the information on the site interesting. It does seem that I attract a lot of the ENGINEERING folks to this site, because I try to focus on the data and information.

      Yes, I am also extremely concerned about the MODERN HIGH-TECH INDUSTRIAL FARMING SYSTEM we have today. Basically, it’s a huge net energy loser of 1/10 EROI. Running this highly inefficient food production, processing and distribution system was okay when we had a higher OIL EROI above 15-20/1. However, the falling EROI of U.S. and Global Oil is putting a real KIBOSH on the entire system now.

      The gutting of the U.S. oil industry will continue over the next 5-10 years. I wouldn’t be surprised to see a disintegration of a large percentage of the U.S. oil industry within that time frame. If this occurs, then we are in REALLY SERIOUS trouble with no PLAN B.

      steve

  15. However, gold and silver prices plunged in 2011, long before the plunge of oil price in 2014. Why can’t we argue the other way round that it is PM prices that determine oil price? Statistics can only show relations among things, but they can never show which is the cause and which the result.

    • Milanolarry,

      Let me clarify a few things if you don’t mind.

      First… the gold and silver price did not plunge in 2011, they plunged in 2013. Actually, the annual gold price was higher in 2012 at $1669 than $1,572 in 2011.

      Second… the short-term price movements in oil, gold and silver correspond less than when we look at their longer term trend.

      Lastly… the oil price determines the cost of gold and silver production, not the other way around. So, no…. the silver or gold price would never determine the oil price. We must remember… we have to BURN ENERGY FIRST before we can mine gold or silver.

      steve

      • Interesting, Steve, though I still have the hypothesis that the dump in oil prices from >100 to <30 was, at least partly, part of a hidden bailout of the PM mining industry, so that they would not go completely bust when they smashed the PM prices at the end of 2012 below critical support at 1520 and 26. The other point is that the price of gold could / will be determined by the oil producers of the world. As the Saudis, Iran, Russia swap their earnings for fizzical PMs the paper markets will ultimately be overwhealmed by demand for the real goodies – and we already see this happening with the new fizzical exchanges in the east – gold in the neighbourhood of 2k mt go thru the SGE straight into China, never to return for a long time. This is not a sustainable situation.

        • CHX 13,

          Indeed a very interesting theory on why OPEC and other Asian Gold purchasers are also walking a tight rope in so far as they want to keep the PMs coming out of the ground at reasonable cost hence effecting a reduction in oil prices to go easy on the miners.

  16. Northwest Resident | April 27, 2017 at 11:33 pm | Reply

    I guess the term “black gold” is more meaningful than is immediately apparent.

    There is no doubt but that we are rushing head first into an oil/energy shortage crises. We’re already there actually and have been for quite a while, which explains in great part the massive debt being used to cover up the reality — complimented of course by equal amounts of massive propaganda to keep the public “mood” from blowing sky high. But a breaking point is rapidly approaching, I believe, where the illusion of “all is well” will disintegrate in short order.

    Gold and silver is a great place to put your money if you believe as I do that the world as we have known it is going to shatter, and not too far in the future. BUT, when that shattering occurs, the immediate currency of greatest value will most likely be food, bullets, tools and good old fashioned barter items. My belief is that gold and silver will have to wait for the dust to settle and for the post-collapse local economies to get going before they regain their historic status as currency of choice. If a gold and silver buyer can make it through the bottleneck and hold on long enough, then that person will certainly have a great store of value the can be put to good use at some point in the future.

  17. I’d argue that Kuroda controls the gold price via the Yen carry trade long stocks / short gold, it has been trading 1 x 1 since 2011

    • There are many paper assets that correlate with the paper price of gold one way or another, and many “market moving entities” have interest in low PM prices for many different reasons. But their actions are not sustainable and their house of cards is getting visibly more wobbly by the day.

  18. Steve,
    Another great report, thank you.
    Question: If the energy sector does indeed collapse (due to debt defaults etc.) then why would you not expect that the price of energy fuels would not increase dramatically? If many/most oil producers are going bankrupt then supply would diminish consequently, and prices rise accordingly, at least during the transition period while consolidated surviving producers (in better financial shape) are regrouping.Then the energy cycle would repeat again. . .

    • Mike,

      The reason the price of oil will continue to decline is due to the falling EROI and Thermodynamics. Unfortunately, we humans have been trained to think of SUPPLY & DEMAND forces. So, if supply goes down and demand picks up, then so will the price. However, this is pure nonsense. The overwhelming factor in the price of a metal, good or energy is its cost of production.

      That being said, you must understand this relationship…. ENERGY = MONEY. Thus the burning of energy provides us with economic activity that generates money. Also, we need surplus net energy from oil to have this extra money. As the EROI of oil has fallen along with the Thermodynamic oil decline, the remaining energy in that barrel of oil that makes it to the market provides LESS MONEY for the market to bid it up.

      We have to remember. BIDDING UP the price of something must come from the money supply. Our money supply has been seriously inflated, but the net energy in a barrel of oil is the money supply. So, if the net energy in a barrel of oil is falling, so is the money supply.

      Which means…. THE MARKET CAN’T BID UP THE PRICE IF THE NET ENERGY-MONEY ISN’T AVAILABLE.

      steve

      • Steve,

        Are you planning to write up a longer post about the thoughts and logic you have summarized here in your comment? A post that would clarify the relationship between energy and money. How oil provides liquidity and precious metals act as a debt-free storage facility?

        Also, it seems that a lot of folks have a hard time differentiating between money and currency. The price of oil could go ballistic when a currency hyperinflates. But the price of everything else would rise correspondingly. But that’s not what you’re talking about when you say that the price of oil will keep falling. In this thought process, money cannot be printed or digitally created, it needs to be created by capital investment and labor (lots of it). Whereas currency can be created willy-nilly by the government, central banks, and banks.

        This is also where the confusion comes from regarding gold. You know, you can’t eat gold. 🙂 And when there’s no high-level capitalist society, suddenly gold loses its value somehow. Historically — no, it definitely doesn’t. What loses value is funny-money because people distrust the governments and banks. Gold does what it always does — keeps your purchasing power. Or, in really dire times, it might even increase your purchasing power.

        Peter

        • Peter,

          Actually, that is a GREAT IDEA. Yes, I will write an article explaining in more detail the GOLD-REAL-MONEY concept versus hyperinflation and etc.

          steve

          • ‘but the net energy in a barrel of oil is the money supply. So, if the net energy in a barrel of oil is falling, so is the money supply.’

            This is a real world definition of deflation. Next is how interest rates are to relate to energy in a free mkt for i/r’s, not fed decreed.

          • Counterfiat,

            The reason interest rates are falling toward ZERO (or below), is due to the fact that the FALLING EROI is gutting the entire damn system. To offset the Falling EROI of Energy, the Central Banks and Market have issued a lot of debt. Because the world is now sitting on a huge PILE OF DEBT, it can’t service that debt at normal interest rates.

            Some believe the Fed and other Central Banks have lowered interest rates to stimulate the economy. While this is partly true, the overwhelming reason is that if the world had normal higher interest rates, WE COULDN’T SERVICE THE DAMN THING.

            Currently, the United States is paying $425 billion a year just to service its $20 trillion in debt. What if the interest rate was just 5%?? That would be $1 trillion just to service the fricken interest payment. Now, multiply that by all the other countries and Central Banks.

            What would happen if U.S. interest rates went to 10%… and that is not that high because we had 15-18% interest in the 1980’s. At a 10% interest rate, that means, the United States would have to pay $2 trillion a year just to service its interest.

            Interest Rates will never rise as it would TAKE DOWN THE ENTIRE SYSTEM.

            When the market finally crashes, real interest rates will be sky-high because very few people will have REAL CAPITAL (GOLD-SILVER) to provide for loans.

            steve

        • Steve,

          That comment sounds brilliant. Are you saying that the money supply might be falling (M2) not just because loans aren’t happening, but also because of the falling EROI could be causing it as well?

          • Eric,

            What I am talking about is the real MONEY SUPPLY, not M1, M2 or M3. It is more hidden throughout all the damn monetary inflation. Actually, we have no idea of what the REAL MONEY SUPPLY is because the Fed & Central Banks have mucked it all up with massive amounts of printing and credit expansion.

            That being said, the COLLAPSE will come quick because the REAL MONEY SUPPLY is shrinking quickly. At some point, the massive amount of debt will implode upon the world and with it… all the FAKE INFLATED MONEY SUPPLY.

            Then… we will see what the REAL MONEY SUPPLY will be.

            steve

  19. A lot of talk here about supply and demand, cause and effect, and price relations. In economic reality price is only a measure of supply (production) at a given or set demand. A change in supply causes or has effect on price.
    I do realize antidotal evidence can be found showing different prices at various levels of supply which do not agree with previous price-supply correlations; however many forget to factor in the demand side.
    There is this thing in economic theory that many times is not considered, it’s called a shift in the demand
    curve.
    Back in the day when the economy was booming, the price of energy was high because of high demand, however in a slower economy we can see a lower price of energy even in the presence of the same limited supply.
    One would think if we run out of oil, then it’s price would go sky high; but this cannot happen if there is no demand.
    Since PMs are a store of all the inputs needed to produce them, the high price one would expect in energy because of its depletion will transfer to and be reflected in the price of PMs.

    How does one price an unicorn when their supply is zero?

  20. Steve,

    While it is very correct that the central banks can control how high they will allow the goldprice. But looking at history especially since 1913 when the Fed opened his doors we see a different story.

    So we can see very clear that the central banks can not even cap the price of gold and clearly they could never as they are the originators of expanding unlimitted credit, debth. The only power they have is due massive propaganda is to do their outmost best to downplay the importance of gold and do their outmost best to keep gold out of the economic system. Themselves of course always hoarding gold. Sadly for the western banking cartel globally especially in the far east the cultures overthere are much stronger then the central banksters system.

    Going forward in the future it is very clear that the credit,debth expansion can never be stopped in this stage so goldprice but all commodities will rise in price as a reflection of the money creation. We will follow the ancient path which leads us to
    1.(hyper)inflation, 2. a reset all bank accounts on 0, 3.war or a combination of the mentioned solutions. We see all of them as we speak.

    • Pieter,

      I agree with you on MERIT, but disagree because you have not included ENERGY in your analysis-comment. We continue to study the markets by PURE FINANCIAL or MONETARY THINKING. However, we should be looking at the market based on ENERGY. Forget Money or Finance.

      As I have stated many times, the U.S. and World’s funds have been funneled into STOCKS, BONDS and REAL ESTATE, and not into gold or silver, especially after 1971. The value of most STOCKS, BONDS & REAL ESTATE are based upon the economic principle of NET PRESENT VALUE. Net Present Value takes future earnings and provides a price for the Stock, Bond or Real Estate today.

      That is the BIG DIFFERENCE not included in your comment. Because 99% of the world’s wealth is invested in STOCKS, BONDS and REAL ESTATE, the value of gold and silver have been artificially forced lower, regardless of hyperinflation or etc.

      steve

  21. Thanks for the info but really there is nothing surprising. If central banks whacked gold too much, miners would cut production drastically and central banks would live their worse nightmare.

    The usa net non-monetary gold exports since 1995 is a negative 5000 tons. ABX and NEM produce 95% of gold in usa. Their production since 1995 has approximated domestic consumption. So where did the 5000 tons come from.?? The us treasury reports their gold at 8 tons. The Fed report earmarked gold at 6 tons. So it’s very likely the 5000 tons was leased by bullion banks via evergreen contracts and sold off into the market. That gold can never be replaced at current market price. If the bullion banks had to replace the 5000 tons it would bk them. They only have 800 billion of equity. 5000 tons at $2500 per oz is $400 billion.

    Think this is the primary reason why the bullion banks, fed, ppt,, boy and bis try to contain gold even if they lose money on their transactions. Got to kill investor sentiment because if gold takes off it brings down the financial system.

  22. Steve , I have only intended these bits of information to add to an open forum as you have in the past encouraged. Mike Maloney explaining physical silver’s position: at 6:00 https://www.youtube.com/watch?v=U93LHdeQXAs&t=369s

  23. Hi Steve, what you are teaching is fascinating. Are their any other analyst in the precious metal community that agree with you? How could his have been overlooked for so long? Thanks for your service.

  24. Steve
    Great article. I agree that the oil market and the dollar will collapse. maybe tomorrow , maybe 10 years. The key point you made was the rising cost of production. wether the cost of oil or declining ore quality, this has been a constant for about 15 years now. So for me, if I had $1000 in Jan 2002, should I invest in stocks, bonds, real estate or gold. Gold wins hands down with CAGR of 10.2%. So the key question is, why did gold start to take off then, after 20 years of no growth, and will this approx 10% CAGR continue.all figures below Jan 2002 – Jan 2016
    source INDEXMUNDI
    Gold 2002 281.51 2016 1100 CAGR 10.22

    Silver 2002 4.5 2016 14.1 CAGR 9.6

    Copper 2002 0.62 2016 1.95 CAGR 8.55

    all metals, same time, CAGR 4.65
    (so when you take out gold, silver+copper, metals have been about same as general commodities)
    all commodities CAGR 3.70
    all energy CAGR 3.47
    oil CAGR 3.24
    food CAGR 4.22
    … so 2016 Jan was the wash out bottom. Over the past 2 years, prices have rebounded to Jan 15 levels. Two year round trip. All above prices are to jan 16 extreme low, so inflation is running around 3.7%+ broadly across all commodities. Gold around 10.2%

  25. The dollar to gold ratio is $7313 so the gold price is a complete manipulation.

  26. Martenson

  27. Steve unfortunately I see one problem ,
    USA has got most powerful army , their corporations run almost whole World including all western countries and their government puppets.In few years if they beat China and Russia , they will run whole World by force. I don’t see any problem for them to have any problem with oil supply and gold will be pushed right to the bottom. Who is then going to stop whole manipulations???

    • Mark,
      No question the US military is the lynchpin for US economic fiat based reserve currency status hegemony…for now. But it costs a hell of a lot ( money, energy, human capital) to keep the military deployed so surely, like all other empires, the US will get drained and start to wither. It must have a value added production based economy to support a military As Steve has stated in his unique analysis, the energy paradox will quietly become an undermine our economy, so our military dominance can not be sustained indefinitely.

      The question I have is whether the elites have come to grips with this inevitability and think they have to strike hard and fast, while they still can?

      Up to now the US has used its military and financial hegemony to pick on countries that can’t fight back. But China, Russia, or collectively a large group of nations who finally get fed up with the US and UK’s BS, well they may be a whole lot more trouble

      Scary thought.

    • Mark,

      You bring up an excellent topic…. THE U.S. MILITARY. However, I disagree with you that the U.S. has the most powerful army in the world. That was true maybe a decade or two ago.

      The U.S. Military is just like the Battleship of World War 2, it’s obsolete. However, Americans don’t know that as they have been brainwashed to believe we have the best military in the world. The one thing that the U.S. military can brag they are NUMBER 1 in the world, is that they spend a great deal more money than anyone else.

      The Russians now have military technology that can totally shut off and jam a U.S. Ship, Plane, Tank or Vehicle guidance and arming systems. Actually, they have done this already… but it didn’t make it to the MainStream Press.

      Furthermore, our Aircraft carriers are also obsolete. The Russians and Chinese have missiles now that can totally sink any U.S. Aircraft Carrier. So, they are nothing more than sitting ducks now… just used for show for Americans and other gullible people throughout the world.

      Lastly, the U.S. Military is burning about half of the ENERGY today than it was in 1975. This is not because our technology is more efficient, it’s just that our military is much smaller because it’s too expensive to run like we did during the 1950-1970’s.

      So, don’t count on the U.S. Military to save the day when the MARKETS CRASH. Rather, the U.S. Military will likely disintegrate to a much smaller size within the next 10 years.

      steve

    • Mark,

      I find it hilarious how you still believe in the might of the US military… It’s in the same state of disrepair as is the US infrastructure, US government, US financial system, etc.

      A short video to sum it all up:

  28. Steve, slightly off topic but something I’ve often wondered is why the miners do little or nothing about the manipulations. Surely they must realise what’s going on? Could it simply be that they’re either paid to do/say nothing or that board members are part of our friendly bankster community?

    • Sterly,

      There is really not much the Miners can do about the situation. They are outgunned. Let me briefly explain.

      First…. The Banks control the flow of money-capital-lending to the Gold & Silver Mining Industry. So, the Banks have the miners over a barrel because they hold their debt or their future financing.

      Second… The Gold & Silver Mining Industry can’t hold onto their metal to force higher prices because, they are quite similar to the typical Family in the United States. And that is, 2 weeks away from Bankruptcy. I am stretching a little there. Yes, some Miners have some saved capital and could continue business for a while if they did not sell their metal. However, the mining industry must continue to sell their metal to pay their bills. Which means, they have very little leverage compared to a bank that can receive or print money out of thin air.

      Lastly…. Many of the Mining CEO’s are there to make a BUCK. They really don’t care all that much about the Fiat Monetary System. Rather, they are there just to manage profits as best they can. The better they manage profits, the better their Reward. It’s that simple.

      steve

  29. NUTS. This article assumes that the price of gold is exclusively the consequence of the (mining) offer, and does not depend (much) on the demand. While instead the price is formed by the equilibrium between offer and demand.
    What is ignored here, is that the production costs of the miners actually depend also on cost of gold itself. Similarly to oil extraction, different mines have different extraction costs and operate only if the value of gold is high enough. In other words, since year 2000, the AVERAGE cost of extraction has not increased from $280 to $1100 only because of the increase of energy, wages, etc. It has increased also simply because of the opportunity, because it has become profitable to run mines having higher costs.

    Knowing that the annual compound production of all the miners is only a tiny percentage of the stocks around the world, it is easy to understand that if the stock owners start to sell, the price can go far below the current extraction costs and most miners, and in such a case most miners will need to stop their business for several years. However, even by doing so, the few most profitable miners will survive and guess what: your charts will show that the production costs are below the cost of gold again. Of course: nobody runs a business where the product has less value than the production costs!

    • tom,

      Thanks for stopping by and providing your comment.

      That being said, you did a wonderful explaining why my analysis was incorrect about the Gold Price & Supply-Demand in your three long paragraphs. However, you shot yourself in the foot when you ended it with your last sentence:

      Of course: nobody runs a business where the product has less value than the production costs!

      Basically, what you stated in your last sentence confirms my analysis that the COST OF PRODUCTION is the leading factor in determining price.

      While it is true that the world has quite a lot of gold held in vaults, a Gold Coin during the Roman Empire would buy someone a very high quality TOGA and pair of leather SANDALS as it would also purchase a high quality SUIT and dress SHOES today. Now, I am not talking about a cheaply made $300 suit and Chinese made shoes… no, I am talking about HIGH QUALITY.

      Regardless, the Austrian School of Economics has unfortunately brainwashed people about SUPPLY-DEMAND, whereas the real value of a good has always been based on Thermodynamics-Energy.

      So… I will not change your thinking on this because you have been programmed to think a certain way… your software can’t compute the Thermodynamics because your coding has been corrupted by the short-sighted Austrian School of Economics.

      steve

  30. Since the ’70s Greenspan has bemoaned the fact that the Bank behemoths have controlled the price of oil, silver, and gold via paper derivatives. Presently JP Morgan has a 950 million ounce naked short on silver. To suggest that either gold or silver is controlled by oil supply demand is to suggest oil nullifies naked shorting under the CFTC Comex systems.

    • Volubrjtor,

      I see you have been busy replying here and on twitter. Well done.

      However, I will reply as well. PLEASE READ CAREFULLY BELOW…..

      IMPORTANT CLARIFICATION: GOLD-SILVER Production cost determines PRICE FLOOR, while CRIMEX manipulation controls PRICE CEILING..

      GOT IT???

      steve

  31. Sounds like a lot of people actually get pissed off at someone who buys 5-10% of their investable dollars in gold and silver. They think it’s a waste of dollars. I suppose if someone did an accounting of how much money they wasted on things they bought over the years, I wonder what the percent would be. Gold and silver are assets among literally dozens of assets one could amass. Don’t put all your eggs in one basket and the price of gold and silver won’t matter unless it’s your retirement fund. I have faith in humanity. If history is an indicator, a sh*t storm is coming a lot sooner than later and your normalcy bias is going to get its back broken. I’d rather have more choices than fewer choices of exchange in that environment.

  32. I found this discourse very interesting, to say the least. Its actually too deep for me to follow without research and I don’t have the time for that at this time. For instance, what is PM? I just signed up for the future articles so hope I can pick up from them.

    • DisappearingCulture | April 30, 2017 at 2:51 pm | Reply

      It isn’t too deep for you to follow; just learn at your own pace. PM usually refers to precious metals. Gold and silve have historically been used for thousands of years as money. Papaer money not redeemable for something of substance like gold or silver is called fiat [by government decree] money [actually currency rather than money].

  33. With gold and silver averaging 18%-20% respectively for the last 10 years or so, it seems like a solid investment to me regardless of all the politics surrounding it. Just buy some….you won’t be sorry.

  34. Your article came to mind yesterday, when both oil and gold value in fiat dropped simultaneously. Interesting yes.

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