Gold at $1,000/oz ? (CDG)

Hears an article from gold-eagle.com:

Renewed Faith Gold Going to $1,000/oz

I am not going to argue whether there is price suppression or manipulation or any other factors. I am just going to argue basic business sense.

Currently, let's say gold is going for $300 an ounce and silver is $5.00/oz. In any business there is a cost of raw materials - and it is not too hard to find that price. From what I can tell, there are mines that can dig up gold for as low as $250 an ounce, but it seems most would need $350 to breakeven. For silver, the cheapest I can see it being dug up is $10 an oz. At these prices if you are a miner, it is very hard to make money on gold and silver. But there is yet another factor to be considered. The gold and silver coins you hold in your hand are finished products.

Finished products on average cost 4 times the value of its raw material. That means if a loaf of bread sells for a dollar, the raw material and fabrication costs are the following: a pound of flour and one egg cost about 25 cents; 55 cents goes to paying the cook; and 15 cents goes to taxes. The rest is your profit (about 5 cents). This is basis stuff you learn in any Business School or on your own if you run a business. Some efficient businesses can survive with a three times mark-up from raw materials, but you don't want to go below that because if business slows, you risk bankruptcy. Your costs are so low, you don't have the cash flow to cover hard times.

Since I said the least you can mine gold for is $250/oz if you were following basic business principles in selling a one ounce gold coin, right there would give you a price of $1,000 an ounce.

There are lots of people who do technical analysis here. I am not one of them. My sense of whether gold or silver is under or over-valued comes from my sense of being a bargain hunter. After years of haggling over anything, you get a sense of the price of everything. I am sure you probably have the same sense as well. For instance, I know nothing about real estate. But I am enough of a bargain hunter to know if I come across a house priced at $25,000, that house is far under-priced. I don't have to know anything else about housing or it market, location, (very important in real estate); whether the house is termite ridden and thus a pile of junk; what the tax level is; whether the neighborhood is good or bad; or the many other things you think about when buying a piece of real estate. All I need to know is I've found a house selling for $25,000 -- and no matter what happens, I am not going to lose too much money. True, its value could decline to $20,000, but the odds of that happening are relatively small vis-à-vis the more certain likelihood the house appreciates to $50,000…producing a 100% profit.

The same is true of gold and silver. The sales price of precious metals are either close to or below the cost of production. So the odds are good I could at least double my money.

You ask: But what if it stays at the same price level? How long will it stay there? Let me ask you this? How many bargains have you found, I mean something you can brag for years to your friends how good of a shopper you are? You don't come across true bargains every day. I bet if you're like me, you're still bragging about that "steal" you brought five to ten years ago. The longer something stays a bargain, the more likely it will be discovered by other bargain hunters. It seems the Japanese and other Asians have discovered gold. And they love bargains. What is more, due to their crumbling economy and near bankrupt banking systems, they would be buying gold even if it wasn't a bargain.

A bargain is great for buyers, but since we are talking business, how long can you continue selling below your costs? If you go to a store, you may find a few items on sale. They are known as 'loss leaders.' They try to get you into the store. Once inside, you notice things you need. But the staples are up quite a bit. I mentioned bread selling for a dollar. Maybe a couple of years ago but most places sell bread in my area for $1.50….milk is up, meat is even higher. And if you're 'Joe Sixpack,' you will spent a fortune on beer and cigarettes.

As a store you may have 'loss leader' sale items, but you do two things to protect your business. First, you only have the items on sale for a very short period -- and second, you don't sell everything in your inventory at a loss. The gold and silver companies and coin shops only have gold and silver to sell. And they have been selling below the cost of mining the metal. Now the coin dealer I buy from has been telling me business has been good for the past few years, and he is making a profit. If gold and silver have been selling below cost, and yet the person I've buying from isn't suffering a loss, then the money has to be coming out of somebody's hide. When you take money out of somebody's hide, sooner or later it gets to be financially onerous. The seller not only wants to make up for the loss he is taking, but make up for the loss he sustained over all the years. The last occurrence that was similar in nature was the oil situation.

I was a child during the 70's and didn't drive, but I remember gas being about a quarter per gallon. I remember because a motorist ran out of gas, gave me a dollar and a gas can to go to the nearest station to buy gas. I got a gallon but the exciting part was I got to keep the 75 cents change. Then Boom! The gasoline price exploded. I remember because I was getting to be a teenager, and like every other teenager wanted to drive. I couldn't afford it. I couldn't afford the gas. (Now I don't have a car because while I can afford a car I can't afford parking fees, insurance and gas)

The gasoline was under-priced at a quarter, but the money was coming out of the hide of the oil-producing countries. Eventually they realized what a financial beating they were taking. CONSEQUNTLY, they formed OPEC - and started taking back their foregone profits out of the hide of the American consumer.

Right now I see the same situation with gold and silver as I did with oil and gasoline. Precious metals are cheap today, but will be dear going forward. Do I understand or care why gold and silver is cheap now? No! If I am willing to do some digging I can find out why. But that's not important!

Am I enough of a bargain hunter to buy all I can, and if I don't need it now can I figure out a way to sell it at a profit later? Yes! And that is all you need to know to have faith gold will go to $1,000.



"golden-trumpet"

March 15, 2002