17 December 2013

No high premiums for suggested gold miner cartel

Yesterday The Gold Report published an interview titled Miners Should Launch a Gold Cartel or Risk Losing Everything, Advises Stephan Bogner.

In it Stephan suggests that "mining companies should collectively refrain from selling into the market at spot prices but should instead find buyers themselves, as there are definitely investors worldwide—especially from Asia, as well as the Middle and Far East—that would pay high premiums on the spot price to get their hands on physical bullion."

I think this suggestion is simplistic in a number of ways. Firstly, while premiums can develop in certain geographical markets from time to time due to various factors (see this interview with Al Korelin where I explain the impact of restricted Chinese import licenses and quotas) in no market is anyone paying $1900 an ounce - "high premiums" at best means tens of dollars, not hundreds of dollars (see this William Kaye interview). The fact is that Chinese demand exploded in April because the price dropped, and a lower price is the miner's problem.

Secondly, the gross premiums being quoted are not necessarily what the bullion banks are getting. In that William Kaye interview, he says that "senior members in China’s government, probably in the State Council, basically decided that they were sick and tired of the premiums that the Chinese people were having to pay over the London price for gold", which accords to what we heard, but William gets it wrong when he says that "they (Chinese officials) recognize that the bullion banks, at the expense of the population and the jewelers, have been making arbitrage profits". The real story is that it is the limited number of licensed Chinese importers who have the upper hand over the bullion banks, who compete to supply (and extend credit) to the importers, so a good part of the premiums were going to the importers, not the bullion banks. So miners would not get all of the reported high premiums.

Thirdly, the actual gross premiums paid by importers are just that - gross. From that you have to take off the costs of selling, which would include management time spent by each mining company finding and negotiating with each buyer, shipment costs to refiners, fabrication costs, shipment costs from refiner to buyer, and in most cases of the main distributor/importers, the cost of interest in funding the sale as these business often want 180 day payment terms or consignment stocks. The end result is that the reported gross premiums end up as a much smaller profit.

The idea of miners finding buyers themselves is like saying farmers should deal directly with individual supermarkets. There is a reason industries like milk (and gold) have processors who aggregate volumes, and distributors who manage sale to many retail outlets. It is just more efficient than producers trying to deal directly with every buyer. Gold distributor/importers for example, prefer to deal in tonnes at a time as that keeps shipment costs between countries down.

The only way it could work is if a group of miners got together and pooled their output and negotiated with a refinery for fabrication and distributors for sales at a scale that made sense. But then that organisation is just doing what bullion banks do. In addition it would need to raise capital from investors to fund the gold tied up until they eventually got paid, and miners are having problems raising money. There is also credit risk associated with who you are selling to, if they don't pay. These are not skill sets many mine managers have.

I'm not trying to dissuade miners from forming such groups - it doesn't make a difference to the Perth Mint, for example, whether we deal with a bullion bank or a miner group. Just pointing out that there is no easy money in these "high premiums" that are seen from time to time. Gold distribution is a competitive business and the marginal profit earned is not going to solve miners' current financial problems, which require prices hundreds of dollars higher, not tens of dollars.

The only way gold miners can really impact price at the margin is to withhold supply. Stephan suggests this, saying that miners "should use gold and silver as the functional currency for the industry ... look for ways to bank their gold as cash assets or take out gold loans, not dollar loans. They should buy physical gold and silver and store it outside the banking system. When they require cash, they can sell part of their holdings." David Baker, of Baker Steel Capital Managers, has been talking about miners holding gold on their balance sheet and gold dividends as well. Perth Mint fully supports such initiatives (see this Korab Resources announcement for example).

However, the problem with the idea of holding gold is that at this time the most miners are strapped for cash and don't have the ability to not sell and simply hold gold in the quantities necessary to impact the price.

I don't know what the solution is to gold miner's current problem, but suggesting that there is some pot of easy high premium gold waiting for producers just creates a false hope.


  1. There's another knock against a cartel arrangement, barring a truly effective enforcement mechanism: The incentive to cheat around your quotas.

  2. Again Bron, you've failed to apply Ockham's Razor. The reason why gold miners are having problems is because most of them aren't gold miners at all. They don't mine any gold, just talk about it while paying themselves generous salaries out of investor funds. And only a fraction of the miners that do produce are not indebted to their eyeballs, which means the banks get their cut, shareholders get nothing.

    They are more accurately called share miners or frauds, Ponzi schemes that are presently being called bullshit on & deservedly so. That may change of course since the ASX is also a Ponzi scheme, but at present few are falling for their swinging baloney.

  3. Hi Bron,
    the premium/spread on gold is something I simply dont really understand in the first place. Here's why:

    If I look at any commodity (e.g. copper, tin, rohdium...) and look at the lowest retail product I possibly can get in the industry (large quantity, simple stuff like rods, bars, wires, powder...), that price is much higher.

    Not with gold!? Why that? I mean looking at a really beautifull Kanguroo/Nuggets (requires quite some technology to mint those so nicely) just has a retail premium of 2,68% above spot, while spread between buy 911€ to sell 924€ (right now).
    (Here's a site of premium compared of all major german retailers listed: http://www.gold.de/aufgeld,gold.html )

    Do you have any take on this very uniqueness of gold compared to any other commodity?
    Greets, AD

    Keep up the great unbiased work, really appreciated.

  4. Hi Bron - Nice article.

    Good case in pt is barrick gold. I think they operate 24 mines with 2013 production at around 7 million oz. 6 mines account for roughly 60% of their production at an all in sustaining cost of around $700 per oz. I think they would be better to continue to operate their 6 "low cost" mines and moth ball the balance. Yes, they would lose 2.5 million ozs of gold but the incremental profit is relatively small. Their 6 star mines could easily support their debt load.

    To date mine closures have not been significant. Global gold production is roughly 70 million ozs. ex china/russia. Cut supply by about 1/4 and gold would undoubtedly rally sharply and the industry I believe would be generating much higher profits.

    It's expensive to close mines and I think the miners are hoping that etf liquidations and direct gold leases have been played out. It's more expensive though to operate high cost mines which generate a small return. The additional revenues depress the price of gold. The industry needs to bite the bullet even if gold rallies back to the highs.

    Also, think the miners should take issue with the world gold council/gfms published data. Randall Oliphant is chairman of the wgc and is the ceo of ngd. He should know that fabricated gold products, roughly 2700 million tons annually, generate about 15% scrap. We're had this discussion before. The 15% scrap is counted as old scrap gold which is incorrect. Also, direct lease sales need to be quantified. I think a good chunk of the direct lease sales are done simultaneously with swaps so the gold never leaves the central bank vaults. But some of the lease gold ends up in switzerland.

  5. What function does gold serve today that society needs more pulled out of the ground? If all mining stopped what function will it serve tomorrow that existing stocks can't satisfy through price movements alone?

  6. Norm, is Barrick having problems? What is their share price compared to any dividend?

    You say their six best mines, out of 24, could support their debt load. That doesn't sound problematic, though I guess it still doesn't mean shareholder get any.


  7. Below is abx recent presentation:


  8. Justin,

    I was going to say LOL, but unfortunately what you say is far too often true.


    I think the gold market is highly competitive and far more retail-ly, hence premiums for smaller fabricated forms are lower than other commodities.

    If there was a market for it, I suppose we could mint copper coins really cheap as well, actually a lot cheaper than gold coins as weight control not as much of an issue.

  9. Bron, any comments on this article?

  10. "the gold market is highly competitive and far more retail-ly"

    no doubt that the gold market is retail-ly in some parts, specially the "evergreens" of tourist attractions (no personal offense) ;)
    but I think that makes the explanation too easy.
    In fact, "evergreen tourist stuff" tends to be more pricy, since in many cases a high margain rip-off is easier to accomplish (think of the Chris Duane storry ROTFLMFAO :D)

    In terms of "competitive" I have some serious doubts if that is the (only?) explanation. Come to big industry and met some purchasing department managers and you'll find out how customers negotiate prices "competitively" ;)

    Is gold money? Who knows.... but put those premiums and margains in prospective with paper cash. If you think of fees at ATM machines in some countries or exchange rates of foreign paper cash in banks, physical gold bullion appears to be even more "competitive". And at such point it becomes strange, since gold bullion are "for real" not just "printed made up stuff".

    I can not really manifest my thoughts on that, but my gut feeling tells me, that liquidity in the broder sense might add to this as well.
    Greets, AD

  11. Lots of good fact based work but then he mentions PBOC buying 500t with a link to an article of speculations, not necessary.

    I assume when he uses "suppress" he means "hide". I doubt there will be any more public reports after his work shows how to interpret them

  12. AD, I think you also need to consider the fact that gold is really expensive, so the fabrication cost appears much lower when expressed as a percentage of the gold price. Convert silver coin premiums into percentages and you will see it is a lot higher.

  13. Bron,
    is it really that easy?
    1000€ gold is just as expensive as 1000€ silver ;)
    Okay, okay, silver is much heavier/bulky in that case, so talking about transportation costs...
    but let's look at paladium and platinum, both more rare in terms of being mined and similair price/weight as gold, spread&premium are much bigger than on gold (at least here in Germany).
    I wish spread/premium would be just as good as gold, and I would be buying much more of those.
    Greets, AD