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  • The Marginal Cost Of Gold/Silver Production (2012) [View instapost]
    Perhaps I didn't phrase that correctly.
    What i meant to say is mine supply adds a small amount each year to the total supply of gold. Most of the gold traded in the world is not the incremental new supply, it's the shifting among holders of the existing base supply.
    So annual gold production of roughly 2800 tonnes is of little significance to price because true supply consists of all the gold that has ever been produced (roughly 170,000 tonnes).
    Much like the increase in money supply dilutes purchasing power of existing money, an increase in the supply of gold shoud be understood as a dilution of the existing supply. So 2800 tonnes per year or a 1.6% increase in supply can be absorbed by the market via 1.6% price drop.
    If annual mine production were cut in half, this would translate in to an annual increase of ~.75% in the supply of gold. On the other hand, if a significant part of oil production were to be disrupted for an extended period of time, stocks would be exhausted after only a few weeks. This means it is much easier for gold to absorb any form of significant production expansions or shortages.
    Therefore, gold is precious because the annual production is so low relative to the total stock. This stability and safety is a crucial prerequisite for the creation of trust, and it is what clearly differentiates gold and silver as monetary metals rather than commodities.
    Jan 8 11:00 PM | Likes Like |Link to Comment
  • The Marginal Cost Of Gold/Silver Production (2012) [View instapost]
    I agree it is important to look at all-in costs when evaluating the individual merits of a company, but the marginal cost of production for the industry has no bearing on the direction of the gold price. Annual mine production only fulfills a fraction of annual gold demand. It's so small that global production could be doubled or cut in half and it wouldn't have a significant impact on price.
    This is one of the many reasons that currencies were once backed by gold - as it controls the rate at which governments could print money.
    You should view gold as more of a currency, and less as a commodity. This means looking at in terms of other currencies - not just the US dollar.
    Jan 6 02:49 PM | Likes Like |Link to Comment