<optimum price what is it and why?>
I view the gold the same way I view other commodities like energy: is determined by supply and demand within my "maladjustment" overlay. There is a core demand for gold year after year, and then there are variations on that demand caused by what I would loosely call "heating" and "cooling". Then there is supply, and that in my mind is the price on an all in basis that producers need to replace mined and processed gold.
I spent a lot of time discussing and thinking about this (the mining business) on my gold thread throughout the whole 2000-2002 period (the ground floor for the Great Gold Bull market). In fact that process was formative to the views I generally believe today. The classic Hathaway piece of a few years ago expressed it best.
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Generally I felt that about $350 was the equilibrium (I don't use the term "optimum") price that gold producers needed to replace their reserves and stay in business. Below that would be a deficit, and the half decade or so of sub-350 prices and lack of investment into the sector is now the reason we have a maladjusted or heated market in this commodity. Simply put, there is no "overcapacity" in gold mining, at least not yet. I do think there may be be over-speculation, but that's different.
$415 would have been sufficient for producers to add production and reserves, but there will be a "considerable period" necessary (I hope everyone catches the sling at certain characters, by my use of that term?) for that new production to hit the market. However, the weakness of the USD is adding to the cost inputs of gold mining. Places like South Africa really can't mine and replace gold that profitably, even at US $415 gold. So it's necessary to continually adjust the replacement equilibrium price to account for dollar weakness. I think that's true of almost all key commodities and input costs. Therefore my conclusion is that the price of gold, like many other indicators (from natural gas prices to shipping rates to steel prices)suggests a maladjusted, bottlenecked, or "overheated" situation (caused by a half decade of sub-$350 price in the case of gold, and sub $25 in the case of black gold, which is a more important commodity to focus on in my opinion), and will probably stay that way for as long as the "considerable period" weak dollar dynamics in the world economy persists.
I think what I'm hinting at (if readers can follow my logic?) is that I don't see a deflation in the input sector as long as "considerable period" monetary conditions are present, or there is some exogenous bust. I do see overheated, maladjusted and inflationary conditions continuing to boil to a tempest however. |
