A Mining Boom has caused Gold to fall while Gasoline continues to Rise

Posted by PITHOCRATES - June 2nd, 2013

Week in Review

Gold and oil share something in common.  We price both of these commodities in U.S. dollars.  Which makes it difficult to hide inflation in these commodities.  Food companies can shrink package sizing to keep from having to raise their prices to factor in inflation.  But you can’t do that when you sell oil by a fixed quantity.  A barrel.  Or gold.  Which we sell by the ounce.  Which means if you depreciate the dollar (with quantitative easing where we print money to buy bonds to increase the money supply so as to lower interest rates to encourage people to borrow money and buy things) you have to increase the price of these commodities.  Because if you make the money worth less it will take more of it to buy what it once bought.

But gold and oil also have a major difference.  While an increase in the price of gold encourages gold mines to bring more gold to market environmental concerns have prevented people from bringing more oil to market.   It is because of this that the price of gold has fallen while gasoline prices are rising again (see The Gold Standard by SARAH MAX posted 6/1/2013 on Barron’s).

Gold prices rise in times of economic malaise—hence its 23% rise in 2009 and 27% rise in 2010. When prices are rising, mining stocks have historically outperformed the physical asset. Yet gold-mining stocks have lagged over the past few years, even before the price of gold plummeted from its August 2011 high of roughly $1,900 a troy ounce to less than $1,400 today. “The main reason is cost inflation,” says Foster, explaining that a global mining boom has driven up the costs of labor and materials, while forcing miners to look farther afield for new gold deposits.

As the government inflates the money supply it reduces our purchasing power.  This erodes the value of our savings.  Making the money we worked hard for and put in the bank to pay for our retirement unable to buy as much as we hoped it would.  This is why people buy gold.  Because gold will hold its value.  If they increase the money supply by 20% the price of gold should rise, too.  Close to that 20%.  So when the Federal Reserve finally abandons their inflationary policies people can sell their gold and put their retirement savings back into the bank.  Adjusted, of course, for inflation.

The price of gold has fallen despite the Fed’s quantitative easing still going strong.  So if the dollar is worth less how come it now takes fewer of them, instead of more of them, to buy a given amount of gold?  Supply and demand.  With the high gold price people mined more gold and brought it to market.  Increasing the supply.  And lowering the price.  But because the Fed is still depreciating the dollar costs continue to rise.  Making it more costly for these mining companies to mine and bring gold to market.  Reducing their profits.  And the cost of their stock.

If only the oil business was free to operate like this.  For with the Fed depreciating the dollar they’re raising the price of a barrel of oil.  Making it attractive to bring more oil to market.  But wherever it can the federal government has shut down oil exploration and production.  To appease the environmentalists in their political base.  So, instead, gasoline prices continue to rise.  While gold prices fall.  And the dollar continues to depreciate.  Which will one day ignite a vicious inflation.  Much like it did in the Seventies.  And then it will take a nasty recession to get rid of that vicious inflation.  Like we had in the Eighties.  But at least in the Eighties we had one of the strongest and longest economic expansion follow that nasty recession.  Thanks to a strong dollar.  Low taxes.  And a reduction of regulatory costs.  Something the current administration clearly opposes. So we’ll probably have the inflation.  And the recession.  But not the economic expansion.  For that we may have to wait for the next Republican administration.

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