Supply/Demand dynamics

[escobar]

I wanted to start a thread about the supply / demand dynamics as they relate to Gold and Silver prices going fwd. I am trying to link my understanding of more abstract ways to look at prices (money supply, debts, fx reserves etc) with real world supply demand dynamics.

How will rising prices effect current demand equations as they relate to industrial usage, scrap and mining supply etc. also as prices rise dollar amt need to be invested rise to buy the same amount of oz's.

I never seem to read much discussion about this when listening or reading to the big picture people targets for gold and silver as they relate to: national debts, money supply, fx reserves etc.

For example Rickards mentions a target of like $6k for gold which is probably one of the lower end projections for the reasonable big picture thinkers out there. Turk quotes 11k, heard some head scratching 55k numbers from the freegold thinkers. But what will be the non investment demand at these levels? also the dollar amounts to buy the same ozs as today will be huge so it will take ever larger dollar amount to take away the same amt of supply.

Looking for an open discussion on how you guys think about this. Thanks

[PMBug]

In order for prices to reach those levels without having severe inflation - such that it's not the metals appreciating, but the dollar depreciating in terms of real goods/commodities in general, investment demand will have to far outstrip industrial demand.

So, IMO, either the price is achieved by severe inflation, in which case there isn't any real impact on industrial demand (costs passed on to consumers), or it's a moot point because the metals are essentially/defacto re-monetized and no one is worrying about industrial products in the face of collapsing currencies (economies in the toilets).

[DCFusor]

Right. Investment demand has to be the main and least predictable driver particularly as prices get really high - it's well known that investors, seeing something going up, will buy at almost any price due to fear of missing out. At that point prices interestingly swamp things like cost of mining as a driver. All that stuff, and a lot of industrial use, is just in the noise at that point.

Remember, we don't make much silver based film anymore. That was a major way of making it go poof down the drain in development (and even then, big houses found ways to recover it at much lower relative-effective prices than it has now).

The stuff I (and some other tech outfits) use precious metals for only needs micro-grams at a time, and the cost of that at almost any price per ounce is still going to be less than the other costs of fabrication or deposition or materials prep.

In my case, if anything, I already have a lifetime supply for that sort of work, for most things (could use some more sheet Pt around the place if anyone wants to barter or sell me some). So I and many others wouldn't place a ceiling price on demand anyway. The integrated circuit business and PCB business uses a fair amount of gold from one standpoint - but it's avoided where possible and they've become real good at using it in mono-molecular layers over something cheaper -so while an IC fab might use an amount of gold one of us couldn't afford to buy in a month, in the grand scheme it's still diddly. A $200 CPU might have a hundred uG of gold in it...that's not a lot in the scheme of things, and of course, as we get smarter, we use less - engineers are like that.

You'd have to guess that a super high price would dampen demand for new gold jewelry at some point - or trigger a reversion to plating or low gold alloys.

But that's a monkey-psychology thing - if it ramped at the right rate, it might make new gold jewelery more in demand as a way to get two birds with one stone so to speak. She gets happy, and you both get a store of value that appears to be increasing.

Solar panels use some silver in the internal interconnects, because of the conductivity, but more for the ductility - it doesn't work-harden and break as quickly as the electrically equal amount of copper would. I have no idea what those numbers are, but they sure do make a lotta panels, and the ones I own seem to have some grams each in them. That's quite a lot, actually.

On the production side, if I can go by the Rare Metals Handbook (somewhat out of date I suspect) quite a lot of all the PM's aren't mined and refined as the principal output of a particular mine - they are byproducts of things like copper, lead, zinc, nickel, and so on that fall off as anode slimes or flue dust from some other process.

Thus, at least one major component of the supply would be driven by other metal production. It would then seem that if the world economy stalls, so no one is producing those other metals full speed ahead, that the PM byproducts supply would drop, and perhaps that would be without a loss in demand - might be something to research further.

Of course if the price rises high enough (and it's not merely fiat inflation), then it might pay large producers to go ahead and keep producing base metals and stockpile them if they could make enough out of the PM byproducts, but in many cases if I understand correctly, it would take pretty high prices to make that reasonable to do at all - tiny fractions of the PMs in a whole lot of Cu for example. Since your main business might be the copper - and you have this interesting concentrate from making that, no reason not to go ahead and smelt and refine that too. But if the PM was the only thing coming out of that, the costs of getting a tiny fraction of a percent of it out of the ore alone would be prohibitive.

That would lead to a really interesting pair type trade - as the base metal demand and production go down, if the demand for PM's doesn't also go down to match, you could short base metals and go long PM's for example, and do real well.

I really agree with PMBug's apparent premises here though. If PM's skyrocket due to inflation - then you really don't make money (value) off them as they just buy the same amount of other stuff later. If they go up due to investment/jewelry/industrial types of demands, then you have true relative appreciation. It's obvious most hardcore bugs are talking their book because they "get this" idea - I think that's where some of the nuttier price projections are coming from, because the more they can increase demand, well just like fiat, the first holders of it are the winners.

This is something even honest scientists fall prey to - you have a premise you're pretty sure of (or have a vested interest in) and then look for ways to justify it - there's a heck of a risk of confirmation bias there. I see all sorts of silly reasons gold should be 50k an ounce - but if you examine the logic closely, it falls apart and doesn't take into account what else would have to be true for that to be true at such extreme levels. Plays well to the choir but maybe needs more critical examination.


I would look to energy prices generally as a main cause of fiat-devaluing myself, it's really going to be the driver if things keep on their present course - and it's a tough course to change - I promise that science will NOT come up with a cheap box you can clip to the antenna on your toyota (or tractor trailer) that will let it run on freely available hydrogen in our lifetimes - multiple problems there with all the sub-premises.

Current energy production causes very strange mis-allocation of resources (where have I heard that one and what it results in?) because some guys just get it outa the ground (eg they don't create lasting value, just supply a wasting asset and make big holes), producing little else but a mess, and get a lot of money in exchange to mis-allocate for it - think of the middle east buying off their populations to keep in power, for one. Or big oil buying off our government for another larger one. Does that create lasting value?

Then the consumers don't use it efficiently to create new value much - it's mostly used for things that make us feel good for a little while (air conditioning, joyriding, TV), but produce no lasting value if the supply is cut off, which it will be at any given price of it.

Unlike gold, you burn oil or coal and it's truly gone after that. Even uranium has that one going for it - there's a finite amount; though if we didn't have our head up our nether regions we'd get a lot more use out of it than we do (about 100:1 is possible) - we call fuel spent when only a little bit is burned off because of the buildup of other nasty junk, and our current refusal to reprocess it to get the unused fuel back. They cite proliferation as the reason, but it's a truly nasty job to do it without killing people in the process as well.

So, I'm trying to build at least a mental model of how these major themes tie together, and certainly don't think of myself as an expert in any of the subfields. I'm here to learn like anybody, but willing to share what I think I know as well - knowing I'm about as fallible as the next guy - often better informed than most, because I love learning, but that doesn't mean I know it all, either.

[dereksatkinson]

well.. 1600 was thought to be unheard of a few years ago. We are just going to have to see when the public gets involved. That's when we'll know it's over.

[DoChenRollingBearing]

Good thread!

It all depends on how it all shakes out...

My guess, no better than anyone else's, is that FOFOA will be shown right:

Gold: "$55,000" / oz
Silver: $5.00 - $200 / oz

Silver in his view will not ride along the big reset. Once you have bought your gold "You have already been paid." <--- I don't think that is really so for silver.

The central banks have already chosen their store of wealth. There are 100 x the amount of paper claims on gold as there are physical oz (at least in the USA).

If gold "only" goes to $3000, hey, I am pretty big winner! Gold goes to $55,000, we should go to Vegas, and the first round of drinks is on me!

[DCFusor]

I'll hold you to that one DoChen, that is, if drinks aren't an eagle each by then. If they are, drinks on me, here - but they might be corn-based. Because you'd want to be out of a city if gold goes to 50k, I'm pretty sure. Most of the arguments for that I've seen assume that total gold ownership will stay the same as the paper game collapses - eg the demand for physical in ounces will match the current paper holdings no matter what the price then goes to when it's discovered that the paper is multiply re-hypothecated. I don't think that's a good assumption - some people will just take their whipping when paper goes down and that's that - there isn't that money to re-buy the real thing if they've lost it in the paper game. Hence no ability to drive the price up that high unless it's just inflation.

Derriks right too - this last big correction was preceded immediately by a ton of bugs boasting on how gold had blown off almost all other investments for the previous year ('11). Always a bad sign when that happens.

[dereksatkinson]

If gold "only" goes to $3000, hey, I am pretty big winner! Gold goes to $55,000, we should go to Vegas, and the first round of drinks is on me!

If gold goes to $55,000 Vegas probably wont be a place you'd want to visit. The US would probably look substantially different.

[ancona]

At 55,000 an ounce, who the hell would be able to "make change" for something purchased with gold? I agree with the general concensus here, that gold at 55,000 means the end of the republic as we know it, and the start of a new dark ages.

[escobar]

I have read a few of the FOFOA recent post. I enjoy his writing. The thing I find odd though is he seems to gloat that he is not a gold bug and doesn't believe the gold standard will come back etc. But then seems to lay out this grand unified theory of freegold which will eventually help bring global trade balances in order and as a result bring sanity to the global financial mkts.

Perhaps he touches on this in older posts which I have not read but I dont see how that is possible without some very formulized gold standard. He talk about creditor nations transferring debt back gold right to debtor nations and then the tend will reverse when the debtor nations decide that want to spend the gold they have accumulated. Curious how this would work without very strict gold standard in place.

Also again he does not address the supply issue as I see it. If gold were 55k lets say and all other commodities were much lower or did not appreciate as much, we would see every miner in the world switch to 100% gold mining. So just like Fiat fx gold supply would grow rapidly.

curious your thoughts here.

[DCFusor]

escobar - as you say, "the cure for high prices, is high prices". The real question is "high compared to what" here, I think.

No way gold goes to 50k without some major societal disruption in which all bets are off. If it does, and it's "only" fiat hyperinflation, that's one thing. If it goes up that much compared to say, loaves of bread or oil - that's something else entirely, and I think, a heck of a lot less likely.

[DoChenRollingBearing]

I started reading FOFOA in late 2009. I was immediately captivated by his predictions (I have always had a soft place in my heart for certain kinds of radicals, and that's what I had him pegged as at first). I then read his pieces from then on.

I can see it happen: $55,000. As all the paper gets destroyed, as the gold derivatives become seen as a chimera. If the COMEX is very low on physical (see Jim Willie thread elsewhere today here at pmbug), then what happens when people want their gold? Not cash, but gold? And who gets those ALLOCATED bars (you "own" that serial numbered bar) once HSBC hypothecates it away a la MF Global? And what happens when gold leasing becomes broken, who owns the gold? (Answer: whoever HAS it).

FOFOA makes a long and complicated case (for me anyway), but I think he is right. In the end, gold will rule supreme. FOFOA also predicts hyperinflation, which is why he predicted $55,000 in NON-HYPERINFLATED 2009 dollars. But, he does not predict the destruction of the USA...

It is hard to summarize FOFOA in one (even very long) post, and I do not buy all of his ideas (the euro being so much better than the dollar). So, if anyone wants to study the case FOFOA makes, you have to put your time and mental energy into reading... And reading...

But, yeah, if Vegas is still Vegas AND we hit 55K, the drinks are still on me!


@ ancona

You would use your gold, after the reset, only to buy capital goods like farmland, apartment buildings, the gas station(s) in town, the toll bridge. Or perhaps in my case, most of our competition down there in Peru. You would certainly want to look at buying monopolies...


EDIT:

At my blog I wrote up a "Thought Experiment" on the value of gold. One of FOFOA's readers asked the question (to people he knew, but who had not bought gold) "Do you think the Chinese would take their $2 trillion in Treasuries and trade that for our $419 billion worth of gold? Most people responded yes or probably." That kind of implies a gold price of $7600 right there (2 tn / 419 bn). The other question would be: would the US Government pay off the $2 tn debt with our gold worth only $419 bn? NO WAY!

To pay off our 15 tn + national debt with our gold, we would have to have gold priced at $78,000 / oz:

$15,000,000,000,000 / 192,000,000 oz = $78,000 / oz

(8000 tons) * (2000 lbs/ton) * (12 toz / lb) = 192,000,000 oz

The above arithmetic, of course, proves nothing. But, it may help clarify thinking as to how much gold is really worth...

[escobar]

Thx for the responses. I find this discussion helpful. I do enjoy reading the FOFOA posts, mentally stimulating. But to your pt its always hard to give an easy explanation of his thought process. In my experience great ideas are usually fairly easily conveyed. They dont take pages to understand and help the other person understand.

I used to work in the financial industry and met a guy that was one of Carl Icahn analysts. He said Carl wouldn't look at an idea if you could not convey the thesis in one page.

Yeah I hear you on the US gold reserves relative to debt, money supply etc. But the problem is if one unit of measure, say gold becomes so divorced from other units(silver, other pm, commodities etc) then the logic starts breaking down.

The us govt could just turn around and buy whatever commodity is relativley much cheaper and offer that in sufficient quantities to the other party. I find it odd that he think that the gold standard wont come back etc but then his whole theory relies on complete and absolute observance of the gold gods. somewhat contradictory to me.

I mean if gold becomes so overvalued relative to what I can buy with it and someone offers to pay in my choice. I will take what I perceive as more valuable. His views seemed to be divorced of any human mktplace dynamics which seems to make him the biggest gold bug of them all, which he claims he isnt.

In terms of the derivatives. If there is ever some great scandel like that they will just settle in cash and say tough luck. Its written into the comex contracts, force mejeure.

[KMS]

I hate to think that Tptb might do something like that, but I agree with you that we cannot 100% be sure they will play by any rules we have heard of before. Considering how things are going with Greek debt and MF Global/JPM, etc...

[DoChenRollingBearing]

@ escobar

You have a good point re good ideas usually being easy to understand.

So, for the record, I feel like FOFOA is right, I think so, but it may be faulty logic. Or whatever.

That's my story, and I'm sticking to it!

***

Question for the board:

If it does NOT go to $55,000, is it safer to take my gold out on boating trips?

[PMBug]

...
In terms of the derivatives. If there is ever some great scandel like that they will just settle in cash and say tough luck. Its written into the comex contracts, force mejeure.

If it becomes widely known (ie. proven/documented and reported) that the derivative markets are broken, it would, I think, cause a surge of demand in the physical market. If the physical market is really as tight as some folks say it is, a supply shock would become evident and prices would jump dramatically without having a sea change of interest from the public (ie. folks [institutions] who are already investing via the derivative markets investing directly in the physical market could drive a huge spike without a large influx of new investors).

...
If it does NOT go to $55,000, is it safer to take my gold out on boating trips?

All goldbugs are sailors are heart. It's a primal imprint in the ethos! No point in owning gold if you can't take it out on the lake to enjoy.

[bushi]

...that gold at 55,000 means the end of the republic as we know it, and the start of a new dark ages.

....or the opposite - creation of a (hypothetical) sound monetary system, backed with gold, at whatever ratio of fiat to gold would be required, to provide adequate supply of money to the global economy, and saving us all from the down-spiraling economic turmoil?

in any way, industrial and not investment demand for especially gold, is really small, I believe. It doesn't have too many practical applications. Gold's main purpose is and always been a money. Gold IS money.

Genghis Khan, as pragmatic a man as it gets, was laughing at gold and silver offered to him by the powers of his times, that he and his "tribesmen" rode to death, as a things with no value/meaning. Iron, horses, wood, slaves - that was of value to him. Being in power to kill a man, and see his wifes crying, was his greatest pleasure. And he needed no gold nor silver for that.

My point is, that gold and silver derive their value nearly ONLY from the fact, that they are widely accepted AS money ITSELF (or near as good as, in today's biased markets), and not because they are so "precious" for any other practical reason (AFAIK, silver has much more industrial applications than Gold, both by numbers and by volume). Almost ANYTHING could be used as money, if agreed upon, and secured from counterfeiting - and it would immediately gain in the perceived value immensely. Just like fiat paper money - one tiny sheet of it with couple of printed numbers, can buy you roles of otherwise very similar paper .

I suggest watch "The secret of OZ" by Bill Still on Youtube, well worth it, to understand that small important thing (although he is against the gold money, for the reasons he explains in the documentary - but it is valuable doc, and I am agnostic )

Actually, the fact that gold is NOT really usable for anything significantly different apart storing the wealth, is precisely WHY it has been used as a money. It is one of the necessary qualities of the money - that it has no other practical use, other than serving a purpose of widely accepted medium of exchange. So you can only "spend it" by exchanging it for other, (in)tangible goods, but not "spend it" by, let's say, eating it away, or building it into the walls of the new houses (so, bricks wouldn't work well as money, even if agreed upon, nor would candy do. "My dog ate my homework, sir" would turn into "my kids ate my rents by mistake, sir")


Remember, such a devaluation fiat to gold does not necessarily mean "inflation". If the gold's price is settled at such high levels because that is a price that market commanded - it cannot cause inflation, because it doesn't change the supply of money. Remember, that gold has to be purchased first, for ever-increasing price (so someone somewhere is getting it's today's paper/electronic fiat equivalent). Probably, with the defaults happening along the way, and rightly so (eg. "we will settle X of our debt with you, by paying Y in Gold" - where Y is WAY lower than today's valuation of X in ounces). I think that would work for many. I bet that China would happily accepted settlement with USA, if you agreed to pay 20% of their US treasuries holdings in gold, and cancel the rest. Only nobody wants to part with their gold, somehow, somewhat, for whatever reason

[ancona]

Very well articulated Bushi, and your scenario is just as plausible as any other out there. Your position is also presented well. ;-)

[DCFusor]

Bushi - your last paragraph. Gold doesn't (can't) cause inflation, it measures it.
A whole lot of other things about markets make far more sense when plotted against gold instead of dollars. It ought to be a default choice in all market plotting software.

I bet the big traders have this and are just snickering at how we get fooled by what we see. - They can just play the temporary dislocations while we play catchup.

[rblong2us]

All goldbugs are sailors are heart. It's a primal imprint in the ethos! No point in owning gold if you can't take it out on the lake to enjoy.

Would you sell any of your gold if it reached $55k an oz ?

2 questions -

What would $55k actually buy on that day and would it cost double by the end of the week ? ( i might buy a diving barge though, regardless of price )

Just who would be buying your gold ?


I see gold 'going into hiding' at this time and bic lighters becoming the new currency.

Golds true role can only begin once fiats are truly burnt, so any $number is irrelevant once we get to the crazy numbers being discussed.

Until the feds really loose control of things, gold will generally do no more than 'keep up' with markets because thats all the feds will allow.

Always happy to be wrong though

[ancona]

Rblong,
Bic lightersw would be worth their weight in gols......so to speak. As would .22 cartridges, canned food, tobacco, medicines, and clothing.