Determining the Price of Precious Metals
As with most markets, supply and demand most directly affect the price of precious metals. Supply and demand is reflected in the bid and offer prices of daily transactions, which occur in the billions and trade freely on and off exchanges.
The spot price of the precious metal is reflective of the value of the asset at the moment of the quote, and is also called the current ( or spot) price.
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Typically spot prices are consistent through all types of precious metals in the market at a given time, meaning that if the price of one goes up, so does the price of another.
In addition to paying the spot price for a precious metal, large banks typically charge a minimum purchase amount, such as 1000 ounces of a gold for example, and a premium, an amount paid in addition to the standard rate. Unfortunately, this can sometimes make the market impossible to participate in for investors with little capital, and is one of the major downsides of investing in precious metals. Luckily, futures contracts make gold accessible to each and every one of us, but that’s a different report for a different time.
Get Started in Investing
When investing in precious metals, you may chose between physically possessing the metal or owning the paper version of your precious metal that represents its value. The latter is far more common, though the former is generally a lot more desirable, particularly amongst gold bugs.
There are various options to choose from when deciding how to invest in precious metals. First, there are commodity ETFs (exchange traded funds), which tend to be very convenient, as they are a liquid method of buying and selling precious metals. They allow for ownership while blending the best aspects of growth potential and risk management. The downside (as with all ETFs) are the fees which can sometimes make the cost of ownership prohibitive.
Second, there are common stocks and mutual funds. In this case, shares of precious metals change based on price movements in the market of precious metals, and you can rely on the managers of the funds to monitor the value of the mining stocks.
Next, there are futures and options markets, which have the highest potential to profit or lose as you bet on the future price of products. Futures and options allow for great customization on the part of investors but also require more than just base knowledge. Options in particular can be very advanced weapons in the hands of a sophisticated investor. Likewise, a novice investor can easily vaporize their trading account with options, so make sure to know what you’re doing before proceeding.
Bullion is the form of precious metals that is purchased and delivered in the form of physical bars and coins. While they are a burden to keep hold of, many investors like having the option of holding their investment in the palm of their hand. Finally, there are certificates, which are representative of value, and are not as cumbersome as bullion.
The major exchange for purchasing precious metals is the New York Mercantile Exchange (NYMEX). It is the largest physical commodity futures exchange in the world, and is broken down into two trading divisions.
Energy, platinum, and palladium markets are traded in the NYMEX division, while metals such as gold, silver, and copper are traded in the COMEX—commodity exchange—division along with the FTSE 100 index options.
Pierre Lassonde Pt. 2: Gold Could Hit $20,000 An Ounce
Yesterday we had the first part of a recent interview by Kitco News with Pierre Lassonde, who retired as chairman of the board at Franco-Nevada earlier this year.
In today’s article, we highlight Lassonde’s comments on gold and why he thinks the Dow/gold ratio could hit 1:1 parity.
Lassonde says that retail interest in the gold market is evident by the record inflow into the GLD gold ETF this year, which has already set a record.
“If you look at gold itself, just look at the gold ETF. Look at GLD. GLD is up over 900 tons this year alone. They’ve had more inflow of money in the first 9 months of this year than any year in the past 16 years. It’s been public since 2004. It’s a record inflow of money into GLD and that’s also a precursor to what’s happening in the equity sector.”
He also says that gold prices will move higher should Democratic nominee Joe Biden win the November election. Lassonde says all the money that will be printed to finance all the new spending.
“If Biden gets in and they decide to do the kind of medicine we have in Canada, the costs are just going to blow out, they are going to have to print more money, all of that is going to fuel the gold price up.”
How high the price will rise is anyone’s guess, but Lassonde says he expects that at some time in the next 5-10 years, we will see the Dow/gold ratio to reach parity at 1:1.
When asked if that means gold will climb or the Dow will fall, Lassonde says he expects a combination of the two, but mostly a slight Dow correction with a massive increase in gold prices.
“It’s hard to see the Dow going down to 10,000 or 12,000. Could it happen? Yes, but I find it very difficult. Could it go down to 20,000? Very possibly. 17,000? Yes, 15,000? Could the gold price go up to $15,000? Absolutely. That’s what I’m talking about, but I don’t think it’s tomorrow morning. I think it’s sometime in the next 5 to possibly as long as 10 years.”
Lassonde says there have been two instances of the Dow/gold ratio reaching 1:1, and both times it occurred for different reasons. This time, he thinks we get to 1:1 due to all the money printing by the Federal Reserve.
“It’s instructive to look at the past. Because twice when it’s happened, it’s happened for very different reasons. Back in 1933, the Dow lost 90% of its value between 1929 and 1933. It went from 360 to 37. The gold price went from $20 to $36. So the gold price almost doubled but the Dow itself went down 90%. In 1980, the Dow had gone down from essentially 1000 to 600 from 1966 to 1980, it came back up to 800, but the gold price as we all know, went from $35 to $800, which is 24x from the beginning. So very, very different responses to different times.”
“The ratio has been 1:1 twice in the past. It takes a 40-50 year period if you look at 1930, 1980, well we are now at 2020, so 40 years, so sometime in the next 5, 10 years I think we are going to see 1:1. But I didn’t know how we were going to get there. With COVID, I think we’ve seen the answer in a sense that if you look at our neighbor to the south, the Federal Reserve, they are printing $3 trillion, they are talking about another package in the $1 trillion to $2 trillion.”
Lassonde does caution that if we see 1:1 parity, we shouldn’t expect $15,000 or $20,000 an ounce gold to stick around for very long. He said based on history it might only be a day or two, or a few weeks at most.
“The key question here is how long is it going to be there? Don’t forget in 1980 the gold price was $800 for less than a day. If you look at the entire quarter the gold price was $675 and if you average out for the year it was less than $600. So yes, it did go to $800, but it was there literally for a day. In 1933 though it went on a little longer than that but it was certainly less than a year, I think it was probably closer to three months or something like that. So the key question is how long will that ratio be 1:1. How long are we going to see the gold price at these crazy numbers. And then what will be the inflation? What’s the dollar going to be worth? I don’t know.”
Moore: Biden Wants to ‘Decapitate’ The American Energy Industry
In a recent op-ed for Fox Business, Stephen Moore, a senior fellow at the Heritage Foundation and an economic consultant with FreedomWorks, said Joe Biden wants to “decapitate” the American energy industry, while also claiming that won’t.
Moore said Biden can’t help but contradict himself, as “he’s older; he loses his train of thought; he can’t be expected to remember his latest official position on fracking every week.”
Moore also mentioned during a recent stop in Pennsylvania, Biden has said we wouldn’t ban fracking.
“I am not banning fracking. Let me say that again. I am not banning fracking. No matter how many times Donald Trump lies about me,” said Biden.
Yet during the Democratic primary debate, Senator Bernie Sanders said “I’m talking about stopping fracking as soon as we possibly can. I’m talking about telling the fossil fuel industry that they are going to stop destroying this planet — no ifs, buts and maybes about it.”
“So am I.”
Moore said this forced the Biden campaign to issue a retraction. Biden didn’t mean to say that. However, his “Made in America” plan clearly doesn’t leave room for fracking as a source of energy.
“But what is unambiguous and in big, bold writing in the Biden ‘buy America’ plan is his signature pledge to the climate change crusaders to end fossil fuel use in America by 2035. This, of course, is a de facto ban on fracking, because if we aren’t going to use the energy, why would anyone drill for it?”
Biden’s zero-carbon emissions target by 2035, only 15 years away, requires no fossil fuel production. It also requires no fossil fuel consumption 15 years from now.
Currently, we get about 80% of our energy from fossil fuels according to Daniel Yergin, a world expert on energy.
Fossil Fuels and Blue-Collar Jobs
Moore says cutting out this major source of energy would be a “gut-wrenching experience for blue-collar workers.”
“The oil, gas and coal industry accounts for somewhere between 5 and 10 million jobs, depending on how you count them. These are almost all high-paying blue-collar jobs — the kind that Biden laughingly says he wants to bring back home to America — and hundreds of thousands of them are in battleground states such as Ohio, Pennsylvania and Colorado.”
We’ve become world leaders in energy production because of the hard-working fracking industry.
“Oil and gas IS made in America now, thanks, in no small part, to President Donald Trump’s all-in strategy of making the USA energy dominant,” said Moore, adding that Joe Biden’s plan would make us reliant on China, Russia and Saudi Arabia for our energy needs.
“So, Biden is telling us we are going to bring jobs back home by decapitating our energy industry. Wind and solar account for about 5% of our energy consumption today, so even if we double their output, we still need to have access to other energy. Under the Biden plan, it sure looks like we will have to get it from Russia, Saudi Arabia and even China, which is planning to build hundreds of coal plants over the next decade.”
China Doesn’t Care
Moore says China doesn’t care about climate change, only overthrowing America as a global leader.
“The leaders of Beijing could care less about climate change. What they do care about is global economic domination by knocking America off our pedestal.”
Joe Biden’s “Made In America” energy plan will help them do just that.
Former Gold Company Chairman: Gold Miners ‘Never Had It So Good’
Pierre Lassonde, who retired as chairman of the board at Franco-Nevada earlier this year, said that gold miners have “never had it so good” during a recent interview. He also said that he expects the Dow Jones Industrial Average/gold ratio to approach parity in the next 10 years.
When discussing gold companies seeing an increase in margins with prices moving higher, Lassonde said this situation is different from when gold prices ran higher in the early 2000s.
“This is very comparable to the kind of margin expansion that we saw in the early 2000’s. Don’t forget, gold bottomed in 2001 at $250 to rise to $1900 by 2011. So the rise in gold price, everybody thought would lead to enormous margin expansion. (But) they never got the kind of multiple you were expecting because there wasn’t any margin expansion.”
Lassonde said back then, companies weren’t able to increase their margins due to higher energy costs.
“There are two reasons for that. One, is the oil price kept going up, and energy as we know is 25% more or less of the cost of operating gold mines. So as the energy price went from $25 a barrel to $140 a barrel, the margins were not expanding as fast. And then because during the late ‘90’s the gold price kept going down, mining companies essentially stopped exploration and when the gold price started to come around what they did because they didn’t have any reserves, they dropped their cutoff grade. And so they were producing the same amount of gold but were moving twice as much dirt and that too costs a lot of money and you had no margin expansion.”
Gold, Gold Miners, and Oil
Today, gold companies are benefiting from stable oil prices and that means a huge increase in margins when costs aren’t increasing but profits are.
“The difference today is very, very different. Number one because oil prices are flatlining. When you look at oil prices today, $37 (a barrel), but when you look at the oil price for the next year, you can look at the contango, it’s almost nothing. So that’s a 25% component of the miners of their costs. The gold miners today have never had it so good. The margins that they are producing are the fattest, the best, the absolute unbelievable margin they’ve ever had. Ever.”
Not a Cause for Concern?
Investors shouldn’t worry that they’ve missed the move in gold prices as there is plenty more upside left, said Lassonde. He said the proof is by looking at who just took a major stake in a gold company.
“The answer to that was provided a couple of weeks ago when Warren Buffett bought half a billion dollars worth of Barrick Gold at today’s price. And what is Warren Buffett seeing? This is not an individual that bets on the gold price. He doesn’t bet on commodities. What he’s seeing is he can buy Barrick at a fraction of the kind of multiple that he believes is the right multiple. So no, you haven’t missed the boat at all, even though the gold stocks are up double from the bottom.”
He says this is just the latest secular bull market in gold, the seventh one he has been a part of , and they all progress the same way.
“You’ve got to think, at the bottom, six months, a year ago, the stocks were so cheap but nobody was interested. Nobody was interested. It’s the same old story in our space. At the bottom of the market, there’s never enough money and at the top there’s way too much. And we’re barely off the bottom at this point in time and there’s a lot to go before we reach the top.”
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