By SD Contributor SRSrocco:

A recent article by Paul Van Eeden claimed the fair price of gold to be \$800-\$900 an ounce.  If we look at the table I put together below, we can see that when we factor in ALL COSTS, in reality, the break-even price of mining gold is now above \$1,300:

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Here we can see that if we take the total net income of the top 5 gold miners Q3 2012, we get \$1.9 billion or 39% less than the same quarter in 2011.  If we take that net income and divide it by the total amount of gold produced by the group we get \$348.65 net income profit per ounce.

Before I get any hate mail… I realize this is a simple way to get that calculation.. but it is at least a much better metric than the industry’s CASH COSTS.  If we take the average price of gold currently, we can see that break-even is somewhere at \$1,350 when we add in everything.

So, for Paul Van Eeden to state that the fair price of gold is in excess of \$500 less than break-even, the top gold miners proves again that he is not only FOS, but did not go to the ROOT of the problem.  I highly doubt the market would ever value gold at \$800-\$900 an ounce knowing that break even is now \$1,350.

CONCLUSION

The biggest problem I see going forward is declining liquid energy supplies on the global market.  Hardly no one (especially in the mining industry) is looking at this at all.   That is why I believe most of them will get a rude awakening when they fail to realize their mining stock that has mines with 30 year mine lifespan may turn out to be a terrible investment in the future.

However, this makes owning physical metal even better….

1. AGXIIKsays:

I’m surprised the BE point is as low as \$1,300 an ounce given the SA mines shutting down production due to wage increased brough about after the strike. The Chinese are buying precious metal mines all throughout the region since they are not so concerned about the profit. They simply extract the metal and ship it home, profit be danged.

• MaryBsays:

China has an ulterior motive, to make their currency the new reserve currency and have it backed by gold. Meanwhile the idiots in charge of the USA are doing everything they can to crash the dollar and have countries refuse to use it anymore.

• Ed_Bsays:

Indeed so, AG.  We must all remember that the Chinese are not capitalists.  They are communists, so the ends always justify the means.  For them, this is NOT about wealth but about politics and what they can do to achieve power and standing in the world.  Capitalism is merely a handy tool for achieving their current power and influence schemes.  Once it has served its purpose, they can and will drop it like a bad habit.

• Sumkidsays:

The Chinese are sure buying a lot of gold and other commodities. They are buying gold because it is part of the Asian cultures. Meanwhile in the Western countries, people are selling their gold for fiat currencies and then keeping these fiat currencies as their savings.

2. Marchas45says:

The Profit is in the Holder. I decided to send my two daughters in California a couple of rolls each for Christmas. I can’t wait to hear their reactions when they receive them. “What the hell is this, I can’t buy anything with these” and I’ll say; Why would you want to sell them when there’s Profit and Wealth To Be Made Holding Them as it costs to much to mine it now. Lol Keep Stacking.

• Ed_Bsays:

Those who are not into PMs sometimes spend any silver coins they get AT FACE VALUE.  Hopefully, this will not happen in their case.

• Sumkidsays:

Well, if that’s the case, then be careful because they might sell the rolls for fiat currencies. With my experiences, explaining someone about the fundamentals of gold and silver isn’t that easy so I stopped convincing people at buying gold and silver except those who listen to me and are really close to me.

3. UglyDogsays:

If I was a miner I would be stockpiling my silver, not selling it at these suppressed prices.  Most silver is a byproduct of mining for other metals anyways.

• Ed_Bsays:

If I was a miner, I would be refusing to sell ANY metal to the crooks on the CrimeEx and would sell it all to the Chinese and Indians.  At least they know the value of PMs and appreciate them enough to pay whatever it takes to get them.  Is there a Silver Producers Association?  If not, there should be.

• Sumkidsays:

If I was a miner, I would pay my employees in gold and silver and then open a local grocery shop that accepts gold and silver as methods of payment. I would not be selling my mined precious metals for fiat currencies especially when the gold and silver’s prices are manipulated.

4. MaryBsays:

Keep buying while you can, I am seeing shortages from several big dealers and 2 or 3 months ago 90% on ebay became very hard to find under spot. Before then I was consistently getting 90% 20-40 cents under spot for dimes and quarters.

• Ed_Bsays:

Local dealers near me are VERY low in inventory and report almost no one coming in to sell them silver of any kind other than plate, which isn’t worth very much.  Only 1 time in the past 2 months did my local pawn shop have any silver coins at all.  He called me to let me know that some had come in but that he was selling them as a lot and not as individual coins.  I bought them all.  A couple of them are dogs that will go into my sell/trade box but most were decent looking.  I got 2 Morgans (1 BU and 1 AU), a VF Franklin half, a Stone Mountain 1925 half in Fine condition, 4 Washington quarters, and 13 dimes four of which were Winged Liberty coins and the rest were Roosies.  A decent haul and the first in a while.  Could be another while before any more show up, though.

• Sumkidsays:

It’s the same thing at my local coin shops, there aren’t a lot of gold and silver pieces for sale compare to before and one of my local coin shop has also ran out of silver bars for the first time. Although, at least my favorite coin shop is selling Canadian junk silver for lower than its melt value only for me! 🙂

5. Sumkidsays:

It cost about 1350\$ to mine an ounce of gold? But, I went to a conference and have asked an employee that works as a gold miner about how much does it cost to mine an ounce of gold and he said that it cost about 1000\$ per ounce on October 2012. I guess the cost of production is different for each mines.