Under Water! The New Mining Crisis and a Precious Metals Price Floor

by Lear Capital EditorialJuly 10, 2013
mining precious metals

It’s a fact. Precious metals are becoming more and more difficult to find and increasingly more expensive to mine. After countless civilizations have turned to silver and gold as a store of value, it appears that mankind has picked all of the low hanging metals on the planet. The precious metals that remain are harder to reach, embedded more deeply in the earth, and only found in more remote and unstable parts of the world.

With silver and gold prices dropping, modern mining profits are getting squeezed by ever-rising costs and rapidly falling earnings. Production costs are now approaching, and in some cases exceeding, current spot pricing … clearly something has to give. With little room to cut a high-cost process, many mining companies are either reducing production or taking smaller mines off line. Others are simply shutting down. All of this translates to less gold and less silver. With demand remaining constant, we are ripe for a significant supply crisis … particularly if demand rises which it appears poised to do.

The arrival of a precious metals price floor presents itself rarely in history and in exceedingly few lifetimes. How did we get here? The mining industry has been rattled by rising labor rates, soaring power costs, new provisional taxes, increased royalties, and material and machinery costs that are rising at a rate of 15% per year. Meanwhile financing to fund new field surveys, exploration, and drilling has simply evaporated. Add new regulations, by-laws, green directives, and a multi-national bureaucracy, and the mining industry has been plunged under water.

Rarely do we think about the mining process or the cost of exploring, excavating, and extracting precious metals from rock, soil or caves deep inside the earth. Seldom do we think about the business of finding and refining metals … the men, the machines, and the terrain. It’s high time we did because there is a profit crisis occurring in the metals mining sector that will greatly impact supply, demand, and future production levels.

Once mines start to fold in rapid succession, supply will undoubtedly decrease. With physical and industrial demand for both gold and silver rising and supply falling, look for silver and gold to be driven higher. And this is just the supply side of the story.

Demand for physical bullion thus far this year has been unprecedented. It remains strong particularly in China and India where currency concerns abound. Bullion dealers in Shanghai, Mumbai and Dubai are all reporting record demand for gold coins. Retail investment in both silver and gold has also surged globally as demand for use in jewelry has risen. At home, sales of the silver American Eagle are on record-setting pace for the year while consumer demand for gold bars and coins has also increased. 

On the demand side of the equation, we can never forget that we live in uncertain times where paper is assigned more value and power than common sense tells us it is worth. This is compounded by the fiscal challenges of the Debt Crisis, rising Interest Rates, the wind down of Quantitative Easing, various global currency calamities, the rash of new, unstable governments, and a still unresolved Euro crisis.

So while investors have traditionally focused on the merits of gold and silver as tangible assets with enduring, intrinsic value … a new conversation is also emerging about the global mining crisis and critical supply. It is perhaps the most powerful market development to overtake precious metals in decades. While all of the common wisdom associated with basic supply and demand alone makes the case for owning physical silver and gold … the addition of any single, tinderbox crisis currently brewing around the globe could result in a momentous correction.

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