Wednesday, December 16, 2009

Robert Blumen: Peak Gold?

Analysis of the economics of gold price formation by the financial media is nearly all wrong. The majority of articles and research reports obsess about mine supply, as if it mattered (which it doesn't see 1 and 2). There are additional pointless discussions about whether the gold industry is in a phony deficit or surplus (neither).

A variant of this fallacy is forecasting the gold gold price by looking at its cost of production. We know as Austrians that costs do not determine price. While it is true that a positive differential between the price of gold and the cost of operating current mines results in profits for gold miners, the market adjustment to eliminate this differential takes place mostly through a rising cost, rather than a falling price. The mining industry would surely respond to profit opportunities by producing lower-grade deposits with a higher cost per ounce, but this will not increase the total supply of gold by much because marginal costs rise so dramatically with increasing supply. Even if twice as much gold could be mined at a cost of $1000/ounce than at a cost of $500/ounce, this would only increase the growth rate of current supply from 1.5% annually to 3%.
Read the rest here...

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