> Manufacturers of widgets will slow the assembly line if the market is flooded with product and the price commanded for a widget drops.
Actually, one does not look at the absolute price, but the relative profit margin. When I was in the telecom industry the price of our product dropped from $300 to $150 per channel in about three years, but our manufacturing cost dropped from $250 to $75, increasing gross margin from $50 to $75 per channel. While no longer dropping, gold has been stuck around $275-300, but cash costs per ounce and total cost have continued to drop over the last year. On average, gold miners can making more money today at $275 gold than a year ago at $275 gold. It's the relative margin, not the absolute price.
> It is so fundamental, they teach this principal in introductory economic classes. It is amazing that the producers and their fan clubs cannot master this principal
Yes, but once you get past the thereoretical macroeconomic supply/demand stuff, you have to get into the real world of microeconomics of running a business - margins, IRR, capital allocation, financing, etc.. Once you made a decision in 1994 when gold heading to $400 ($500 according to the goldbugs) to spend $US500M on a project that went into production just as gold peaked in early 1996, you just do not slow it down or shut it down. You might have $US40M in annual interest payments to make, and another $50M in depreciation (non-cash expense), not to mention skilled employees that you just don't dump, liabilities to local, federal, and state government, etc.. You just don't walk away from tough situations, you deal with it.
> It is amazing that the producers and their fan clubs cannot master this principal
Guilty as charged, but I still got my MBA in Finance despite my ignorance. |
