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Commodity Pricing is Antiquated

 -- Published: Thursday, 23 October 2014 | Print  | Disqus 

By It's a Mystery

If you read or watch business news that does not have banks as advertisers you see a lot of news about a move away from the dollar. I have no doubt the number one reason for this is commodity pricing.


The number one law of economics is supply and demand. Nowhere on this chart is that reflected, NOWHERE. What you see is an almost doubling in price of silver as the dollar fell 10% against a basket of currencies. Since that time the price of silver and gold have done nothing but go down because the dollar has gone up.

This is the primary reason why mining of any kind is a difficult business. To elaborate, was it clear at the time in 2011 that Abe in Japan would embark on a monetary “experiment” unprecedented in size or that Draghi would wave a magic wand over European Sovereign debts? Are mining CEO’s expected to be clairvoyant?

In the gold chart above we see the price of gold in 2013 resembling that of a ski slope. The demand for gold in 2013 was more than double annual mine supply and all the smart hedge funds and Wall St. ignored that fact, as did traditional media outlets. Gold is a dollar trade they exclaimed. Why should anything in commodity land be a dollar trade?

We touched on this in a previous piece and now we are seeing the damage. The price of mining metals or drilling for oil or farming land has not gone down since the dollar bottomed in 2011. Companies and economies dependent on natural resources for income are in trouble through no fault of their own. I believe this pricing mechanism is about to blow sky high.

The manipulation of currencies, bonds and stocks globally is in unchartered territory and it simply will not end well. These things never do because some entity always pushes back and forces the entire faux pricing mechanism to collapse (London Gold Pool anyone?). Here is an example of one country that said enough. The Swiss Central Bank told the world there was a floor against the Euro and that was the end of that. So, please anyone out there that thinks these markets are freely traded please explain how the Swissie has not violated 1.20.

It looks clear that the dollar is headed higher but at what point does the “dollar trade” implode? At what point does an industry stand up and say you will not get what I produce at the price you are setting. That day is coming and when it does the algos that control markets in the Western economies will have no idea how to react. The only question remaining is whether gold is the first to react. There are signs of that in the demand numbers.

Consider that the most popular gold etf has roughly 750 tonnes left. In 2013 more than that left to fill the unprecedented demand globally. So now what? Mine supply is static, ETF flows have slowed and while Chinese demand is not as torrid this year it has recently exploded again, as has demand in India.

At some point, price must rise to reflect this demand picture. Much like the Swiss Central Bank, someone will step in and say no more. You will never see it reported in the mainstream media but that day is coming.

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 -- Published: Thursday, 23 October 2014 | E-Mail  | Print  | Source:

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