Gold Moves Lower on Profit Taking and Oil

Commentary for Monday, Dec 15, 2014 (www.golddealer.com) – Gold closed down $14.80 at $1207.20 and then traded lower in the aftermarket by $10.00. This places gold below the important $1200.00 level – so last week’s suggestion that profit taking was in the cards seems to be playing out going into the holiday. And this move below $1200.00 has hurt the short-term technical picture so the bears are smiling.

Some will point to the dollar relative to gold’s move below $1200.00. It’s true that the dollar is very strong but if you look at the Dollar Index 5 day chart you will see it has been relatively flat trading between 88.00 and 88.55 – today’s number being 88.50. So we have seen some upward bias but not enough to set the rockets off.

You might want to blame crude oil – this is another “usual suspect” and this time around it carries weight. Last week’s high was $63.23 a barrel for crude and of this writing we are looking at $57.81. Including today that makes for 3 trading days crude oil has been under $60.00 and there is now some commentary that perhaps $55.00 is the real number.

Still I think most of the “cause” behind today’s weakness in the price of gold is simple profit taking. Remember that on Nov 28 gold was $1170.00 and by Dec 9 it had risen to $1230.00. The technical picture was improved considerably and the bulls were even claiming short-term technical control. Then gold faltered and that $60.00 profit began to look good to the long trade – especially going into the thin trading holiday season.

Silver closed down $50.00 at $16.52. We are back to the bargain basement numbers so expect sales will pick up even though the holidays are right around the corner.

Platinum closed down $19.00 at $1214.00 and palladium was also soft – down $14.00 at $802.00. Take note that there is only a $7.00 difference between platinum and gold.

Where is the love? Johnson Matthey sells Gold and Silver Refining business for £118 million – Johnson Matthey announces that it has agreed to divest its Gold and Silver Refining business to Asahi Holdings, Inc. (Asahi), a collector, refiner and recycler of precious and rare metals from waste materials, for £118 million (US $186 million) in cash, subject to typical post-closing adjustments. The transaction is expected to be completed by the end of March 2015.

Johnson Matthey’s Gold and Silver Refining business is a refiner of primary and secondary gold and silver materials. It serves customers globally from refineries in Salt Lake City, USA and Brampton, Canada. The business also provides investment casting services from its St Catharine’s facility in Canada. In total, the business employs approximately 340 people.

Question from a reader – Please explain the average cost of mining AG and AU before and after earth extraction for ultimate cost effectiveness. I’ve been told that an oz of AG is around 18.00 and the cost of AU is around 1000.00 and that these figures are before refinement. Thank You. Longtime customer with Jeff Neilsen and Ken Slater – Thank you for your expertise, C.D. Cyberspace

This is a great question but let’s narrow it down by first looking at silver – we will consider gold another time. The cost of silver production especially in a falling market is often looked at because the answer would logically infer a trigger relative to price. Theoretically if the cost of mining silver was substantially below the current spot market it would begin to support prices as none productive mines were closed.

But when you do a little digging you will find the answer to this production/cost question is not so simple after all. First of all let me begin by saying I’m in the physical business and there are others out there which are better qualified to answer this question. Like Peter Brant, the Silver Institute, Jeff Christian of the CPM Group, David Morgan, Keith Neumeyer, Ted Butler and a host of long time silver analysis who have claimed for years that “something ain’t right” when it comes to silver bullion pricing.

If you ask the informed about the cost of mining silver bullion per ounce the answers are amazingly different. They range from less than $10.00 an ounce to more than $20.00 an ounce.

The reason for this is not conspiracy – but has to do with how mines produce their product (silver bullion), write off capitalization, figure taxation and account for profit. Most of this is above my pay grade but the important thing to note is that the actual cost of mining silver out of the ground may have more to do with who is keeping the books than how that average cost will support the price of silver.

The important point relative to mining is that its cost will probably move higher in the future.

I would add that the cost of production is probably much less than $20.00 or there would be a great deal of silver mining operations going out of business or closing marginal operations.

Consider this from the Silver Institute (2013):  Silver mine production grew by 3.4 percent to reach 819 Moz. A large portion of the growth is attributable to the primary silver mining sector, which experienced strong growth from the start, along with the ramp-up of operations that entered production in recent years. Primary silver mine production grew 6 percent, and accounted for 29 percent of global silver mine supply. Mexico was the world’s leading silver producer, followed by Peru, China, Australia and Russia. Primary silver mine cash costs stood at US $9.27 an ounce, increasing 1 percent in dollar terms. The producer silver hedge book was aggressively reduced last year to stand at 15 Moz on a delta-adjusted basis.

But here the production answer begins to get foggy – only 25 percent of the silver that is mined in the world actually comes from silver ore. Silver is also a byproduct from the mining of gold, copper and other metals.

Adding to the investor confusion is the “silver deficit” story that has been around since I was in the business in the 1970’s. The theory here it that because silver is “used and not recovered” in a myriad of technical applications the cost per ounce must rise accordingly. Well if you do a little more digging you will find that sometimes there are deficits and sometimes there are surpluses. In other words it is disinformation probably by the silver trade that silver supplies are always moving lower.

The Silver Institute publishes figures on world silver supply and demand. They take into consideration things like mine production, government sales, scrap, jewelry demand, coins and bars, photography and other important factors in this changing price equation. Between 2004 and 2013 there were 6 deficit years and 4 surplus years.

As far as price volatility is concerned I’m surprised we have not seen more. The amount of silver theoretically traded on the COMEX each month is impossible – there is not that much silver in the world. This system works because very little is actually delivered – most traders move their commitments to future months. And so relating the futures market to the real silver bullion trade is problematical. In actuality the silver futures market is a rather large lottery given credibility because of government oversight. And traders are just odds-makers driven by imperfect usage data from all over the world.

So given the variables in the price of silver – even if you believe a high cost of production ($20.00) somehow helps today’s investor you might be on shaky ground. Producers might not shut down a non-profitable mine because the cost of starting it up again is prohibitive.

It is my contention that coin dealers have always believed there are rational reasons price shifts in silver are dramatic. The belief that large physical positions of silver bullion, silver coinage and silver scrap still exist is common among old timers.

I was around during the Hunt Brothers silver fiasco in the 1970’s. Believe me when silver reached all-time highs the lines to sell were around the block. I still think that if silver were to skyrocket in price the public would sell scrap like the dickens – so there might still be plenty hidden away in attics and basements.

I also believe there are large silver positions held in places like India and now China where paper money is not trusted – and these stockpiles work the way real money should work – they self-regulate relative to price and demand.

This position is not popular with big silver buffs because it does not support the “higher and higher” price theory which for some reason is always resurrected. And for my money is the worst argument to be used in favor of owning silver bullion.

So what should your strategy be now that silver is trading at a discount to old highs?

I’m certainly more excited about the price today than I was when it was $50.00 but discount the $100.00 silver stories which thankfully have disappeared of late.

Remember a few basics which are flawless and the reason I encourage silver bullion investment. Silver at these levels allows oceans of people to participate – everyone can afford silver regardless of their social standing or relative wealth.

The relatively new internet bullion dealer sells silver bullion cheap and many deliver free to all 50 states. This approach was unheard of years ago and today’s process also offers the investor a world-class selection. In the old days you had to be a sharpie to get great deals in silver bullion close to spot. Today they are available over your smart phone while you are at Starbucks.

And let’s remember that interest in silver bullion is only in its infancy. Many Americans have considered silver bullion investment but move on because they believe the process is complicated and the price too volatile. Actually neither case is true – so real silver bullion investment success may eventually hinge on informed marketing.

Is the “silver investment” crowd off balance? Sure – the price structure has been staggered to the point where even die hard players are scratching their heads.

Silver bullion investors are disappointed, but only temporarily – look at the record production numbers seen in US Silver Eagles. They continue to buy silver monster boxes and other related products because they see intrinsic value in a world which wants you to believe electronic money hidden in microchips is a better deal.

For now – especially because the price of silver is once again consolidating – look at silver bullion investment more from an “honest stackable product” viewpoint – private wealth in a world which lacks permanence. Look at silver bullion from a store of value standpoint rather than whether the transitory “cost of production” is an advantage.

The only thing silver bullion is lacking right now is hot money. Bring back investors looking to hedge against depreciating paper money and you won’t have to worry about how much silver comes from mine production or how much scrap is being recycled.

When will this happen? This is the big question – but today’s reader has four pluses in their favor: first, the production of fiat paper money is accelerating not decelerating. Second the price of silver is getting cheaper not moving higher. Third there are more active silver bullion investors today because of the internet than at any other time in my career. And fourth silver bullion is one of the few investments which can provide complete privacy. These four powerful factors will soon move real money enthusiasts to action.

According to CNBC – The Afghanistan war, the longest overseas conflict in American history, has cost taxpayers nearly $1 trillion and may cost several hundred billion more after it officially ends this month, according to FT calculations and independent researchers.

Who on earth still thinks this war is worth the price of blood and treasure?

The walk-in cash trade just average – typical small to mid-size buying and selling but nothing large in either direction. The phones were typically quiet for the holiday season.

The GoldDealer.com Unscientific Activity Scale is a “2” for Monday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Tuesday – 4) (last Wednesday – 3) (last Thursday – 3) (last Friday – 3). The scale (1 through 10) is a reliable way to understand our volume numbers. The Activity Scale is weighted and is not necessarily real time – meaning we could be busy and see a low number – or be slow and see a high number. This is true because of the way our computer runs what we call the “book”. Our “activity” is better understood from a wider point of view. If the numbers are generally increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.

You should now be getting email confirmations which include a PDF File when buying or selling so you can confirm your invoice or purchase order. This information also includes the various forms of payment and bank wire instructions. So when you buy or sell please check to see if we have your current email and that your computer will accept our email (no spam).

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Our four flat screens downstairs with live independent pricing (BullionDesk.com) are a big hit with the cash trade. Live pricing moves all the buy/sell product prices on a real time basis. Yes – you can visit the store with cash and walk away with your product. Or you can bring product to the store and walk away with cash. When buying from us remember if you exceed $10,000 in cash (the real green kind) a Federal Form is necessary.

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Our holiday schedule this year – Christmas (Closed Thursday the 25th and Friday the 26th) – New Year’s (Closed Jan 1st and 2nd).

A gentle reminder – each year during this holiday season the packages delivered to all 50 states slow down because Santa has control of the air traffic.

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