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A Bumper Under That Silver Elevator – Keith Weiner

by Keith Weiner, Sprott Money:

If you can believe the screaming headline, one of the gurus behind one of the gold newsletters is going all-in to gold, buying a million dollars of mining shares. If (1) gold is set to explode to the upside, and (2) mining shares are geared to the gold price, then he stands to get seriously rich(er).

We are not mining experts, but we will address (2) by saying that mining shares only go up if the input costs don’t go up as much as the price of gold. And if the company keeps efficiency up, and costs down. And if local tax authorities don’t get greedy. And if mine labor unions don’t get violent, environmental regulators don’t make expensive demands, etc. And if the company finds new ore bodies at the same rate it depletes them.

Here is a graph showing the price of the VanEck Vectors Gold Miners ETF (GDX) against the price of gold. We have plotted both price as a percentage of the start price to put them both on the same scale.

GDX vs. Gold

You can see the problem. The price of gold from late May 2006 through present. In five years, the price of gold rose to 288% of its starting level. GDX was more than 100% behind, at only 170%. Note that the GDX is more than 40% down from its level in 2006. For comparison, the price of gold is just under double over the same period.

If this is gearing, then it looks like the gear box was bolted on backwards.

To bet big on gold mining shares now, your bet includes another conditional: (3) if the gearing has since been fixed…

Anyways, this is not really our wheelhouse. We focus our commentary on (1). Did something change in the market, that will drive the price much higher? Before that can happen, we would have to see something happen to put a bumper under that falling silver elevator.

Below is the only true look at the supply and demand fundamental of the metals, but first, the price and ratio charts.

The Prices of Gold and Silver

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It began the week moving up, but then reversed and ended lower.

Read More @ SprottMoney.com

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