Oil is the lifeblood of the economy. Natural Gas and Coal run a close second in that regard. You cannot run a modern economy without energy. The same is true of farming. You have to eat in order to live.
Have you ever wondered why energy and farming are so heavily subsidized? Because no one in their right mind would start such a capital intensive business with pricing that looks like this without it. That is why!
This is a chart of Apple’s Gross Margins in the same period. 47.37% on the high end to 36.87% on the low end. This company dictates price, it is not a price “taker” like energy companies and farmers.
Compared to the previous charts, this is a sea of tranquility.
So what about miners? Precious metal miners have no such luxury of massive government support. They are on an island unto themselves. And those miners have to deal with price swings like this?
Much like farming and energy, mining is extremely capital intensive but they have no Farm Bill on their side. No, they are solely at the mercy of the SPECULATOR. The speculator cares not one bit that at $17.50 mining silver is a losing proposition. At $1200 gold only the best gold mines are profitable and there aren’t many of them. They care not that exploration projects will get shelved and production will decline dramatically.
But there is indeed more and that is ZIRP. There is little to no contango in these markets anymore, so the benefit of hedging future production is simply not there (June Gold futures for 2020 are currently $1376). Furthermore, bank financing for future endeavors is not there either for the same reason. A bank will want a significant amount of cushion in the future versus spot for the risk in providing start-up capital.
You now have complete justification for why OPEC exists. Speculators may try to drop the price of oil but for no extended period of time will oil ever stay below the cost of production unless OPEC wants less competition and I for one do not blame them at all. OPEC is only willing to take prices given by the market that suit them, push them too far and they push back.
The counter argument by “free marketers” is the market should decide the price. Why? Does the market decide the price of a new smartphone? How about my cable bill? Have you ever witnessed wild fluctuations in that price? Does the market decide the price of health care? Companies dictate the price based on their cost inputs and competition. They are not price takers.
Until miners “collectively” begin to set the floor on prices, the absurdity that is the precious metal markets will continue. I promise you this. If tomorrow ten of the world’s largest gold miners told the world supply is guaranteed at $1400 and not a penny below, we might put an end to what is nothing short of mindless speculation.