Gold and Silver Valuations. Why they can be confusing. Avoid overthinking and keep it simple.
February 26, 2022
Everyone is trying to get an advantage on what are the best investment plans of action. In a typical day there are hundreds of opinions on how to determine the future of an investment class. This publication focuses on Gold and Silver so we will stay in that lane. Let's dive into the variety of opinions surrounding precious metal valuations and see if we can discover methodologies that make sense.
Media sources like Seeking Alpha, KITCO, Stansberry Research, CNBC, Yahoo & Bloomberg are examples of Mainstream Media but they always have "conflicts" and play both sides of the narrative. They run stories like "Gold is going to $0.00" and hit pieces on precious metals sponsored by convicted felons (JP Morgan) and hedge funds. How could gold go to zero when companies like Newmont, Barrick have a $1,350 price per ounce cost of production and they return dividends to their share holders?
Superior sources for gold & silver news are personalities that have launched YouTube channels. There are dozens of them. Some popular ones include David Morgan's "The Morgan Report," Lynette Zang's "ITM Trading," Joseph Brown's "Heresy Financial," Jim Lewis and Ivan Bayoukhi's Wall Street Silver," Mario Innecco's "@maneco64," Palisades Gold Radio, Charlotte McLeod's "Investing News Network" Rafi Farber's "End Game Investor," "Finding Value Finance" and dozens of others.
What's Confusing about Gold and Silver Valuations?
George Shaw said it best, "If all economists were laid end to end, they would still not reach a conclusion."
Shaw's quote conveys the subjective nature of market forecasting. Most of us have not dedicated our lives to studying the market. Moreover, each of the following variables are "rabbit holes" in themselves. Who can really boast they know all there is to know about:
Price Charts
Support and Resistance
Trendlines
Investment Horizons
Simple Moving Averages
Long, Medium and Short term averages
Moving Average Crossover
Momentum
Reversal and Redistribution
Equity Analysis
The Elliott Wave Principle
Head and Shoulder Reversal Pattern
Double Top - Double Bottom chart patterns
Fibonacci Correlation This is Confusing. No one has time to dissect all of these sub-disciplines
Moreover, it's hard to figure out the role emotions have within investment strategies. The prime emotions are fear and greed. Behavioral actions linked to fear and greed also include caution, confidence, euphoria, complacency, pessimism and panic.
Later I will touch on manipulation and disclose best practices countering manipulation.
This article is taking a breather from all the "technical experts" by learning another viewpoint. Few analysts discuss Gold & Silver related to Energy. We will be looking at the work of an independent researcher and publisher named Steve St. Angelo
Technical analysts examine the price action of the financial markets instead of the fundamental factors that (seem to) effect market prices. So what is more comprehensive?
Steven St. Angelo offers proper historical context and teaches that Energy is the main driver of pricing.
St. Angelo offers some new historical theories when comparing the Bronze Age, Iron Age and Roman Empire. We paraphrased below, "During the peak of the Roman empire Romans cut down 100 million metric tons of wood to produce about 10,000 metric tons of silver. Lumber was the fuel for smelting silver. Throughout the Roman Empire if we include iron production, copper production, gold production, it required massive amount of trees to make charcoal to smelt these metals. It wasn't just wood needed to smelt metals. The ships they made for shipping people and materials and the military also used wood. Their construction materials were brick, stone, concrete, metals and wood. They used more than a billion trees. The reason Romans went to Germanic regions was because they had depleted their wood supply. They needed more fuel.
Same thing occurred during the Bronze Age. The collapse of the the Roman empire wasn't the debasement of their silver coins (money supply) or Denarius, that was the symptom. The height of their silver production corresponded with the peak in their wood fuel energy return on investment. They didn't run out of silver ore they ran out of wood."
A beautiful 3,500 year-old rock crystal vessel in the shape of a duck From Bronze Age. Discovered in Mycenae Greece. Emphasis - In all these eras, Bronze Age, Iron Age, Roman Empire, each needed wood. Wood needed to create charcoal. Charcoal needed to fuel. Smelters melt silver. Kilns required for glass, ceramics, pottery, tiles and clay fired masonry units (bricks)
Energy Return on Investment. Charles Hall one of the founders of EROI theories.
Stephen St. Angelo continues, "Oil exploration exploded in the 1920's and 1930s. This started in California, Oklahoma & Texas corresponding with automobile mass production. The geological pressure of these oil wells were very high because they had never been released. Back then the energy return on investment was the baseline, a 1:1 ratio. Over subsequent years when examining different regions and extraction methods the ratio gets worst and it becomes more costly." (e.g the ratio for oil sands is 5:1 for tar sands 4:1)
Charles Hall said our modern economy needs an Energy Return on Investment of oil
not to exceed 12:1.
"We need profitable barrels of oil to run all the different systems in the world. If you don't have those profitable barrels then you start getting into trouble. You start producing lower quality oil. The only way you can maintain the minimal quality needed is by adding more debt and that's why we're seeing massive amount of debt needed to sustain oil exploration."
We are consuming much more oil that we are producing. Four barrels of oil are consumed for every one barrel of oil produced.
Gold Valuation tied to price of oil
Steve St. Angelo continues, "In 1970 the price of oil was $1.80 per barrel and this climbed to $36.00 per barrel in 1980. An increase of 17X." St. Angelo, "The Gold price corresponds with the Oil Price due to oil being the main driver of the cost of production for the Gold Mining industry.
*Today the cost of production for gold is $1,350.00 per ounce. The price of gold is $1,885.00 per ounce. Today the cost of production for silver is $18.00 per ounce. The price of silver is $23.93 per ounce. Thus the profit margin for gold is 28% and the profit margin for silver is 25%.
When ore quality declines then it takes more energy to yield an ounce of gold or silver.
Ore grade decline increases energy consumption. Today the yield is 1.5 grams per ton (open pit setting) This means 19 tons of overall mining effort yields only one ounce of Gold. Gold ore today is more like "gold dust" compared to the high quality veins of the past. Now it takes huge open pit mines which is very energy intensive. Mining companies have to work approximately 7 times more to recover the same amount of Gold. In terms of dollars they also must spend 7 times more energy.
This is all happening at the same time today when oil is much more expensive. So it's triple bad news. Oil is pricier. Oil is of lower quality. And ore grade is of lower quality. Now the end product is still the same quality, the gold or iron is still .999 pure gold or silver it just exponentially more expensive to mine, refine and mint.
4 more charts from Steve St. Angelo
U.S. Gold Mining from 1929-1934.
South Dakota's Homestake Gold Mine yielded an average ore grade of 0.319 ounces/ton (oz/t). This converts to 10 grams/ton (g/t). This chart show the country's overall gold ore grade for each year that averages 0.17 oz/t. This converts to 5.3 g/t.
The top four gold miners' Total Processed Ore. Gold Production and average yield which comes in at only 0.92 g/t.
LESS THAN ONE GRAM PER TON
A long-term chart showing the decline in Gold Ore Grades in 5 top gold mining countries.
In the 1930s silver miners with a PickAxe and wheelbarrow could yield 43 ounces per ton which is now down to 4 ounces per ton. It takes 10 times more mining effort today than in the 1930s.
Editors Note regarding the decline in ore quality.
The Pickaxe paints a metaphor on the subject of decreasing ore grades
Pretend you are a child that has access to a toy warehouse. The toy warehouse has a floor that is like a sandy beach. Above the sand sits the child's highly desired toys. Then in 10 foot increments below the floor there are deepening layers of stratification that descend minus 200 feet. Any little kid would want to get to the toy warehouse as quick as possible during a time when the toys are easy to obtain. As each day progresses the good toys are harder to find because they are buried deeper. Kids that show up later in time have to keep digging deeper to find toys compared to to the kids who arrived earlier. Also, early toy warehouse explorers expend less energy when the toys are easily to obtain on the surface. In summary, the first hours the toys are easy to find and readily available. Each day thereafter the toys become harder to find. Those late to the party spend significantly more energy because the toys are also intermittently scattered and harder to extract from the depths. Have you ever been too late to an estate sale? The bounty has already been picked through.
The prices of all goods and services are tied to price of oil. This is true in retail, manufacturing, plastics, education, electronics, construction, agricultural, healthcare, entertainment, technology and most intensely military.
Military and Energy
Military equipment manufacturing, military branches, military bases, military departments across the globe use more energy than any one sector. The problem with this use of energy is there is no productive return back to society. Fighter jets, tanks, warships and the millions of weapons, ammo, buildings, barracks, backpacks etc have no utility for society at large. In Alamagordo New Mexico there are dozens of hangars where stealth airplanes are "mothballed." The U.S. Air Force's next-generation B-21 stealth bomber program will likely cost taxpayers at least $203 billion. In the US nearly half of our efforts, energy and money go to building a so called "strong military." The USA spends more on defense than the next 11 countries combined. Equally taxing, think of all the energy used for military in adding $761 Billion to $781 Billion.
*The U.S. and Allies won WW2 against the Axis powers (Germany, Italy & Japan) because the United States was producing 70% of the world's oil supply.
* Source Steve St. Angelo. We end the section that covered Steve St. Angelo's insightful analysis on Gold / Silver and that you can not consider valuations in an Energy Vacuum.
The remainder of the article continues on further gold & silver valuation themes. We dive into the heated controversies including price manipulation and consumer groups fighting manipulation.
Back to price. Today's price to produce gold is $1,350.00 per ounce and gold's current price is $1,890.00 per ounce. Today's price to produce silver is $18.00 per ounce and silver's current price is $24.20 per ounce. The average profit margin being 26.5%.
Bullion dealers such as APMEX, SD Bullion, JM Bullion, SilverGoldBull, BullionMax, Monument Metals, Money Metals, Franklin-Miles average 17% profit margin ( quite a bit more for some American Eagles )
We'd all love to buy gold direct at $1,350.00 an ounce or Silver at $18.00 an ounce. Similarly we'd all love to buy Levi's from Levi's directly but we can not bypass JC Penney, Nordstrom Rack or Kohl's.
The reason silver and gold are stores of value is because you are buying the metal at a price frozen in time. When you buy physical gold today here is what is happening. You are buying at today's production cost of $1,350. Then you are taking delivery of the metal and you locked in that transaction. Your cost for that unit is tied to that moment in history when its price captured the price of energy at that moment in time. (a precious metal unit based on its' corresponding cost of production in that given month and year) Then later energy prices rise and so does price of gold.
It is the same principal as this common statement, "My parents purchased their home for $85,000 in the 1990s." Today that same house is worth 10 times more.
The best way to maximize your gold and silver purchases is to buy as much as you can afford at the current cost of production and then figure out ways to not let the future price of energy eat into your other ways of life. Based on everything you've read above you can see how energy conservation within your own sphere of influence is a solid anchor belief.
Buying gold and silver is also related to a mindset that you stack all you can because someone is going to want it some day.
Buying gold and silver is like stopping or pausing the game clock. As the rest of the world is rushing around chasing their tales you are collecting these valuable pieces of assets. It's like a fast moving game of hockey. While the pro players are skating at rapid speeds what if you had secret powers that slowed them all down giving you a moment to intercept their passes and skate towards the goal. They couldn't defend your advances and shots on the goalie.
For over 5,000 years, civilizations throughout Africa, Mediterranean, China, Europe, Asia, India, South America, North America, Australia have been obsessed with Gold and Silver.
Manipulation, COMEX, LBMA, Bankers
Before we unpack all the theories of manipulation in the silver market it is our thesis that all markets are managed or manipulated. Elon and Kimbal Musk are under investigation for insider trading. On Saturday, November 6 — the day after Kimbal Musk sold his shares — Elon Musk posted a poll on Twitter asking whether he should sell 10% of his shares. Musk claimed in the tweet that the sale would answer criticism that he paid little or no federal income tax, despite being the richest person on the planet. Similarly Apple insiders know when the new iPhone will be released. The stock sometimes is walked back over a period of time and insiders can make money shorting the stock on its way down, then boom, Apple can launch iPhone version 13 and "magically" the stock surges.
Manipulation isn't just by Corporate insiders and regulators. Legislators trade equities based on insider information. After "classified" intelligence briefings it is permitted for members of House and Senate to buy and sell stocks.
RE silver manipulation, some people think they can't do something about a situation if it is "out of their control"
But there is a way to take control. EB Tucker on Kitco Feb 27 talks about gold, Tucker says, "Look at gold, gold had a $100 dollar move in the last day. If you look at the futures market 100 percent of the year's supply of gold changed hands in one week and it was only a 4 day week. So the gold price is under assault, the volume is very very high. I feel very good because nobody cares about gold and when nobody cares that means nobody's watching and when nobody's watching that's when things are about to get crazy good. You can buy an ounce of gold in the futures market for $60/ounce but can't take delivery. An entire year's worth of supply turned over in the futures market which is highly unusual. None of that is real gold, it's all paper and so when you see that then it's getting ready for a move. There's no reason why gold can't walk back over $2,000 and make a new high in the coming months.
The Russians have tons of gold. The Chinese have a tons of gold and the US is the one that keeps the gold price under control. This is a very good setup for gold. You can't find any headlines about gold. You can find pages on crypto (bloomberg, Yahoo finance, Twitter feeds, Stansberry, Kitco) but nothing about gold. This is the time when you want to make your move. You have to pay a premium to get it. That tells you something. There's not a lot of physical gold out there circulating around so the price is ripe for large move to the upside." Steven St. Angelo points out that only one half of one percent are PM investors and states that once people take notice that traditional investment and savings instruments are not safe then there will be more silver and gold buyers. He continues "The real factor that destroys the massive debt, leverage, and derivatives in the system (all that is propping up the value of most Assets) is The Energy Cliff. This is by far the most important reason to own the precious metals."
Silver and gold are the highest quality store of energy value and we are marching towards the Energy Cliff. Scroll up towards the beginning of the article. Think of being able to buy the Roman Denarius when the silver coin contained 90% silver compared to late in Roman empire when the Deanrius was diluted to 5% silver content. The Wall Street Silver playbook: 1. Use popular media forces (social and broadcast) to mobilize a "like minded" mob. Today Wall Street Silver has over 182,000 members.
2. Empower the members with "calls to action." Provide mission statements so the membership moves like a united front. Currently the movement is on the fringe but as the numbers grow so does their collective power. The groups objective is to chip away at the status quo while it becomes more mainstream. In the early days the labor unions were harassed and ridiculed but soon the presence of unions were disruptive and posed great threat to the ruling class.
3. Organize the movement into a silver buying syndicate to buy as much silver collectively. This is two pronged in substance. It helps members because they are saving in real money vs debased paper money. Simultaneously it drains silver inventories. There is not that much silver left in circulation relative to demand.
4. Educate members to keep stacking, never sell & recruit others to do likewise.
5. Silver goes up in value faster if they can crack the dam built by bankers. Rafi Farber on February 25, 2022 reports,
JP Morgan 920 Million fine for spoofing. Convicted of felonies.
Bank of America , 800 Million Ounce Short position, video by Joe Brown
Ted Butler research on Bank of America's short position.
A common sense way to set gold price if the Fundamental Value of Gold
There is a finite amount of gold on our planet. We can account for 98% of all the gold that has ever been mined. This is the total amount of gold held by everyone above ground. There is very little gold below the ground and of that tiny amount remaining it is of extremely poor quality and too expensive to mine. Reported earlier. Ore declined from 10g/t to .9 g/t , a mind boggling 1000% rate of deterioration. Physical Gold & Physical Silver, exponentially better bang for buck over Mining Stocks!
Total Debt is $85,923 Trillion divided by 205,238 Tons = Gold price of $11,869.00 per ounce. Based on historical GSR (15-1) sets silver price at $791.00 per ounce
source Lynette Zang, ITM Trading, https://youtu.be/8SYoboXvRrA
7 other reasons Gold and Silver Will Spike in Price
Quantitative Easing. More than 35 percent of all U.S. dollars in circulation have been newly created in the last 30 months.
Debt & Deficits. Over $150 Trillion, combining balance sheet and unfunded liabilities, against only $3 Trillion in revenue per year.
Negative yield. T-bonds pay 2%, subtract inflation yields a guaranteed loss of 6% or more.
Current investment in Precious Metals is one half of one percent and the historic mean is 2%. Returning to historic mean would be the quadrupling of buying pressure.
Institutional investors that have to fund sovereign governments, retirement funds, life insurance policies and universities can not follow a strategy that offers guaranteed losses.
Inflation is raging throughout USA and the World. Currently it's estimated to be between 15% and 20%. Gold and Silver perform well during inflationary periods.
During war Gold and Silver increase in value. War also increases inflation.
The Quantity Theory of Money was developed in the 16th century. It was a response to the influx of precious metals from the New World. The equation goes, MV = PY
M - is the Money Supply multiplied by V-the velocity of money (the average number of transactions that a unit of money performs within a specified interval of time) = P- Price Level, (which is the inflation rate) multiplied by Y (which is real economic activity.)
In doing the math the number throughout history is almost a perfect match with the GDP deflator.
We recommend Steve St. Angelo's premium service priced at only $250 per year
The SRSrocco return on investment can be recovered in one or two transactions (physical silver, gold or mining stocks)
Biography
Independent researcher Steve St. Angelo (SRSrocco) started to invest in precious metals in 2002. Later on in 2008, he began researching areas of the gold and silver market that, curiously, the majority of the precious metal analyst community have left unexplored. These areas include how energy and the falling EROI – Energy Returned On Invested – stand to impact the mining industry, precious metals, paper assets, and the overall economy.
Editors Disclaimer - The PickAxe business model is to report on silver and gold in the context of business, finance, economics, politics, history, sociology, aesthetics, psychology and never runs paid promotions. Editorial is separated from advertising. There is no advertorial.
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