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Jeff Nielson is the writer/editor of Bullion Bulls Canada. He came to the precious metals sector as an investor in the middle of last decade, and quickly decided this was where he wanted to focus his career. Jeff's background includes four years of Economics at the University of British Columbia, before he went on to earn his law degree from that same institution.

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How The Bankers Drive Up Bullion Prices, Part II

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Originally posted at http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=23545:how-the-bankers-drive-up-bullion-prices-part-ii&catid=48:gold-commentary&Itemid=131

In Part I, I observed that if we really wanted to understand how the short-term manipulation/suppression of the gold and silver markets leads to even higher longer term prices we needed to focus on the relentless attacks by the bankers against the miners.

I explained why the bankers have such a pathological hatred toward the miners:

1) Higher valuations for the miners are seen as a bullish “buy” signal for the sector as a whole.

2) Gold and silver miners are certain to decouple (to the upside) from all other classes of equities.

However, by suppressing the share prices of the miners even more ruthlessly than they suppress the bullion market itself, the bankers are not only ensuring even higher long-term bullion prices but ultimately better/higher valuations for the miners as well.

The mechanics of this progression are yet another illustration of the “irresistible force” represented by the principals of supply and demand. I was tempted to include a chart of bullion prices versus miner share prices. Unfortunately, the only proxies available for miner share prices are one of the miner indices: either the HUI or XAU. However, those indices are dominated by the larger cap miners, and more importantly are comprised almost entirely of producers.

This distorts our picture of the gold and silver miners in several respects. First of all these companies at the top of the “food chain” represent only a tiny minority of the total number of gold (and silver) miners. Secondly they understate the level of suppression taking place, since whenever these troughs in the sector occur the junior miners are punished much more severely in markets than the larger-cap companies.

The global mining industry is not powered by multinational mining giants like BHP Billiton or Freeport McMorran. It may be dominated by these large-cap miners, but they in turn are utterly dependent upon the diligent (and efficient) exploration and development of the junior miners, who locate/develop almost all of the world’s new and important mineral deposits.

The gold and silver miners are no different. The average large-cap gold miner wouldn’t know a gold deposit if it tripped over one. Rather, these clumsy behemoths simply wait for the expertise of the juniors to identify large and lucrative deposits – and then they place a phone call to their bankers and set in motion a take-over.

The reality here, however, is that most of the value (for shareholders) is generated in the finding-and-development stage – and not through these buy-outs followed by mine construction and eventually production. The proof here is the long term performance of the juniors versus the seniors.

Even with the relentless suppression of the bankers, long term investors in this sector have been able to reap excellent returns from quality junior miners. Meanwhile, the performance of the seniors has been nothing less than abysmal. Not only have the large-caps failed to provide any leverage on the price of bullion (as they are supposed to), but as a class they have provided only a small fraction of the return of bullion itself.

Only part of this dismal under-performance can be attributed to lost $billions due to their ill-advised (banker-driven) hedging and other gold derivatives. Focusing on gold, the problem for the seniors is that they are too lazy to develop the smaller gold deposits, while the 5+ million ounce deposits which they covet are naturally yielding top-dollar when they are sold (living in an era of permanently rising gold prices).

Unfortunately for the senior producers, the serial currency-dilution of the bankers (otherwise known as “competitive devaluation”) means that prices are rising for everything. So after paying dearly to buy these gold deposits, the seniors are then faced with soaring construction costs. Exacerbating this problem, because of their focus on large deposits, and because of the additional permitting and development time required for these larger projects, it is the senior producers who suffer the maximum profit erosion due to these cost overruns.

Conversely, not only do the much more nimble juniors tend to develop their projects more quickly, but most of the mines being operated by the junior miners were developed organically. The obvious cost-efficiency of such vertical integration is a lesson that most of the senior producers need to re-learn.

Countering the inherent efficiency of the junior mining model is the relentless manipulation of the banksters. It is an unavoidable reality for most of these miners that they must obtain their financing for operations from the vampiric banks through equity-based financing rather than straight loans. The “cost” then to these miners of the relentless suppression of their share prices becomes obvious: every stage of development becomes more costly than it would otherwise be if these miners were able to obtain fair-market values for their shares, and thus better terms for financings.

The secondary consequence of this reality is less obvious but every bit as certain: developing these mining projects (and thus expanding supply) is severely retarded by this serial manipulation. Not only is it more difficult/time-consuming to obtain each financing, but with the cost of capital being artificially increased in this extreme manner it forces these companies to scale-back their level of development. A junior miner which would have been able to simultaneously develop two mines (under favorable conditions) is instead forced to develop these projects one at a time.

This explains why despite a full decade of soaring bullion prices we continue to see production increase by paltry single-digit levels, whilst demand continues to increase by robust, double-digit multiples of the increased mine production. The combination of the ever-increasing bullion supply gap and the serial currency dilution of the bankers means that in absolute terms gold and silver are more under-valued today than they were more than ten years ago – when this bull market began. Consequently, while investors in these mining companies are understandably outraged by the dynamics I have described, I’m sure their level of frustration would decrease if they merely focused on the big picture.

For reasons I have already outlined (and many others), there is no end in sight to rising prices for gold and silver. Indeed, the best years for this market are undoubtedly still ahead. This begs the question: what’s the rush for these miners to dig their gold and silver out of the ground and sell it onto the market as quickly as possible?

Selling gold for $1600/oz and silver for $30/oz may be yielding near-record profits for these miners, but selling their gold for $5000/oz and their silver for $200/oz will yield fatter profits still – and such prices are certainly on the way over the next few years. Ironically, the predatory actions of the bankers in the gold and silver market are entirely opposite to their predatory actions in the oil market.

In the oil market, the bankster cabal has always sought to maximize production, since as a matter of elementary economics, the best way to suppress price over the long-term is through maximizing supply. Indeed, in the earlier decades of bankster manipulation in the gold and silver markets, they were reasonably effective in maximizing supply (despite low prices) through duping/coercing the miners into hedging vast amounts of production at absurdly low prices.

This massive forward-selling of bullion had the effect of adding more “supply” to the market, but it did so through ultimately borrowing that extra supply from future production. Those days are gone, and in fact de-hedging has aggravated the supply deficit in recent years, as it ultimately subtracted supply from the market.

Conversely, over the past decade the psychopathic assault by the bankers in the gold and silver sectors has been entirely counter-productive. On the one hand, delaying the price of bullion from reaching its fair market value only serves to continue to stoke investor demand, as rational investors are supposed to seek out and purchase the most undervalued assets.

On the other hand, the serial assaults on the miners (and the junior miners in particular) mean that millions of ounces of gold and silver that would/should already be on the market (in the absence of manipulation) continue to sit in the ground. The result is a supply crisis.

Understand that mineral production is not like oil production, where once a supply source has been accessed supply can be increased almost as easily as turning on a tap. Having large amounts of bullion being located but remaining in the ground due to the continued suppression of the sector does not mean that there will be a sudden “flood” of new supply once the price of gold and silver again breaks free from the shackles of manipulation.

Incremental increases in production for these miners are multi-year undertakings, even once a deposit has been defined and brought into production. Thus over any shorter term horizon, the best-case scenario from a supply standpoint is that production could rise sufficiently to eliminate the supply-deficit. Note that this in no way implies over-supply of bullion to the market, but rather only that the supply crisis would not continue to worsen.

Mainstream propagandists continue to peddle the myth that there is no supply-deficit; that “scrap sales” are sufficient to meet the supply deficits of gold and silver. Empirical evidence totally refutes such claims. The pattern is very clear: each time there is a spike in the price of bullion there is a corresponding brief spike in scrap sales as well.

However, these scrap sales immediately taper off the moment that the price-spike ends. Indeed, scrap sales quickly fall back to lower levels even if prices continue to advance slowly. It’s only the spikes that produce these brief flurries of selling. The message is clear: there is no price level at which scrap sales can/will ever “balance the market” on their own. Instead, these relatively modest surges in supply merely blunt the demand from investors for a short period of time – during periods of peak demand.

The dynamics here are as certain as the arithmetic which underpins them. Continually attacking the miners only serves to keep millions more ounces of gold and silver in the ground each year, rather than on the market. While suppressing the share price of the miners is a successful short-term tactic in restraining bullion prices, it results in still higher levels of demand – and thus an even worse supply-deficit.

It is this supply-deficit which is 100% responsible for rising prices. As the market becomes ever more unstable due to bullion being ever more under-priced, this relentlessly ratchets-up the upward pressure on prices. Consequently, the same manipulation tactics which successfully froze bullion prices below the cost of production for two decades (when the supply imbalance was not as large) have failed miserably over the last decade – and are certain to be less effective still over the next decade.

Greed (and evil) are entirely short-sighted states of mind, since as a matter of basic human behavior all such malice seeks short-term gratification. Consequently these financial marauders are nearly totally oblivious to the long-term consequences of their actions. Again we have empirical proof of this principle.

Had the banksters chosen to engage in their long-term price-fixing of the gold market at the $600/ounce level, and their price-fixing of the silver market at the $10/level (instead of at roughly half those prices); they could have successfully retained their choke-holds over these markets for decades longer – if not indefinitely.

At such prices, hundreds of gold and silver mines would not have been pushed into bankruptcy, and instead they would have been cranking-out thousands of tons of gold, and tens of thousands of tons of silver over those decades – rather than all of that metal remaining in the ground. At the same time, it would have required only a tiny fraction of the bullion-dumping which was actually done to have frozen prices at those higher price levels. Thus instead of Western central banks having exhausted every ounce of gold which they are willing to dump onto the market they would have kept thousands of tons more in their own vaults.

The irresistible forces of supply and demand and the self-defeating nature of bankster manipulation lead to an obvious conclusion. Years down the road when the dust finally settles and gold and silver reach their peak, it will be the serial suppression by the bankers which will be the single most important factor in maximizing prices.

There Are 2 Responses So Far. »

  1. Only the elimination of the central banksters will allow equilibrium and stabilty to return to the system.

    The greed they have is for power and control. Greed in and of itself is not necessarily evil. It might be called greed to wish to aquire property and wealth through honest means or hard work. This is not evil greed except when looked at through the eyes of collectivists who demand sacrifice. Sacrifice demanded of people and for the enrichment of the controllers.

    But the Banksters are greedy in an evil way. They aquire not through honest trade but rather by the manipulation, fraud, and outright criminal theft.

    The proper function of banks is to facilitate free and honest trade.

    These criminals must be eliminated.

  2. Robert, I often remind people to “be careful what they wish for”.

    As outraged as we are by the suppression of this sector, ironically there is a flip-side to this scenario. With limited supply, heavy demand, and MANY reasons for a “mania” to ensue in this sector it is the actions of the banksters which make it IMPOSSIBLE for gold or silver to reach the status of asset-bubbles.

    And while we might think (wistfully) that we would LIKE to see these markets soar to such heights, think about what it implies: the price of gold and/or silver being so high that they were GENUINELY “overvalued”. How comfortable would you be in a scenario in which the fundamentals suggested we should be swapping our BULLION for PAPER…?

    I would also suggest that the Big Buyers (i.e. the NATIONS accumulating gold reserves) think much the same way that I do. They can live WITH the manipulation, and a world where the price of bullion advances (relatively) slowly – because in a sick sort of way this makes the sector more “stable” (lol!).

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