Gold Price Flirting With Cost Of Production Is Not Sustainable

In the latest Gold Report article, Jeff Clark, senior precious metals analyst at Casey Research, has been interviewed.

How are gold’s fundamentals different today than they were in 1984?

The fact that things are different today than in the 1980s is a really good point. The argument over methodology almost doesn’t matter. Even if it were true that the gold price of 2011 matched the inflation-adjusted gold price of 1980, that wouldn’t mean that gold has to go down the way it did in 1980. There wasn’t a near collapse in the banking sector back then. There wasn’t the Lehman Brothers upset. The government did not triple the money supply. We’re dealing not with apples and oranges, but apples and whales.

If history is not a map for the future, is John Williams correct that we are getting ready for hyperinflation?

History never repeats itself, but it does rhyme. I agree with John Williams. On a fundamental level, profligate governments around the world have been spending beyond their means, and eventually they have to pay the piper. The longer they put it off, the bigger the bill gets. Is it all going to unravel this year? I don’t know, but it’s impressive that someone as cautious as John Williams seems to think that it will. But whether it happens this year or next, it doesn’t really matter as long as you’re investing with a long-term view.

In hindsight, a lot of people have targeted last December as the bottom of the gold market. Do you look at those sorts of things in the rearview mirror?

On January 6, I published a statement to the effect that both Doug Casey and I thought our market would turn upward in 2014. On February 3, I said in print that the bottom was in December. I wasn’t willing to say that until the upturn was reasonably clear, but if we wait too long to take the plunge, it’s of no use; when it’s obvious to everyone, you lose much of the upside. Those of us who started buying in January and bought aggressively in February have benefited enormously. We were actually able to issue some profittaking calls in March before the market started correcting again.

What gold number are you using to evaluate whether a company can be profitable for the rest of 2014?

I have two numbers I keep in my head: spot and the three-year trailing average. It used to be cautious to use the three-year because gold prices were rising and the averages were lower than spot. Now the three-year is $200 above spot, so there are serious perception and credibility issues with using it in print. But I do still look at the three-year, because the low gold prices we have now will not last.

Right now, the price of gold is flirting with cost of production—it’s not sustainable. Some companies are using three price scenarios in their feasibility studies: a base case near spot, a scenario at significantly lower prices and another at significantly higher prices. Today, that more optimistic scenario is often the three-year trailing average. I like this approach; I want to see that they have a project that works right now. I want to see that if gold goes lower for a while, they’re not going to dry up and blow away in the wind. And I want to see if gold goes higher, how much higher my return will be.

What are your thoughts about silver compared to gold?

LJ: There are vibes about silver volatility being at near-decade lows and that always precedes a surge. I’m not sure the numbers actually bear that out, other than to say, generally speaking, that low prices precede high prices because markets are cyclical. If we’re at a cyclical low, it’s not rocket science to say it’s going to go up.

That having been said, there are so many new uses for silver out there, I see very strong demand, particularly in solar panel use, which is rising and rising.

My way of looking at it is that silver and gold always move together. Sometimes the ratio stretches. Sometimes it contracts. But they always move together. If you’re a gold bull, you have to be a silver bull.

On top of that, silver is an industrial metal, while gold is primarily a safe-haven metal. If the economy is successfully reflated by the governments of the world, then demand for silver rises. You have a safer bet on silver than gold in that respect. If, on the other hand, government efforts to save the collapse of the global economy are unsuccessful, then industrial demand may fall off, but the precious metal safe-haven demand will pick up. Where gold goes, silver goes also. It’s a win-win metal.

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