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Sunday, October 11, 2009

Gold At $5000 per oz Do the Math, just do the Math

(So little gold at $1000/oz. for China, Germany, or Oil nations!)
Silver Stock Report
by Jason Hommel, October 9th, 2009
There is very little understanding of the relative size of the gold market, let alone the silver market.

In the gold market, the IMF has continued to "threaten" to sell 400 tonnes of gold, about once or twice a year, for the past ten years, to help "relieve the poverty" (yeah, right) of indebted nations who generally produce gold, and would actually be benefited by a higher gold price, not a lower gold price. This always results in a flurry of news stories, and usually panic among gold investors who are on leverage, who know next to nothing.

You never hear about how China actually was buying 500 tonnes over the last 8 years.

You never hear in the popular news how China wants to buy $80 billion more gold.

That would use only a tiny fraction of China's $2131 billion of foreign exchange reserves.

$80 billion in gold, at $1000/oz., is 80 million oz., which, divided by 32,151 oz/tonne, is 2488 tonnes, which is almost exactly the same amount as the annual production of all the world's gold mines.

You never hear that China has so many dollars that they want to buy all the world's annual gold mining production, as a small and tiny diversification, for years to come. But I just provided all the proof for that statement.

You never hear in the mainstream press how Germany swapped about 3000 tonnes of gold with the US, and wants their gold back, which again, is just over the entire world annual gold mining production.

You never hear that if the oil producing nations decided to sell oil for gold, what that would mean for the gold price.

Well, actually, we did hear something similar to that this week, a "vicious rumor" that led to the current $50 rally in the gold price.

Recent article:
The demise of the dollar
In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading
By Robert Fisk
Tuesday, 6 October 2009

But this might mean only that "gold should go up" is maybe all you'd hear. And actually, we quickly heard denials of the rumors that the Saudis would sell oil in something other than dollars.

But what are the implications? Anyone run the numbers? Why is it that in today's world, no journalist knows how to run the numbers to see the implications? Was everyone born after 1950 a failure in basic math classes? I mean, come on, this kind of analysis only requires the application of 7th grade math!

I ran the numbers eariler this year, in March.

At $40/barrel, the world spends $1.2 trillion, or $1,200 billion, on oil per year.

Oil is now $71/barrel. So $1.2 x 71/40 = $2.3 trillion spent on oil per year now.

Gold is now $1055/oz., which, at 80 million oz., is $85 billion on gold per year.

Thus, if all the world's new annual oil production was sold for all the world's new annual gold production, gold prices would have to rise by a factor of 2,300/85 which equals 27 times, or 27 x $1055 which implies a gold price of $28,500 per oz.

And that would, of course, allow no room for China to buy any of the 2500 tonnes of gold that they want, nor allow the US any room to buy back Germany's 3000 tonnes of gold that they sold to manipulate the market downward to fool the world into thinking that the dollar was somehow "strong".

I don't know why people don't get this. Math matters. To engineers, it's life and death when building a bridge. You'd think that the world's engineers and math teachers would be screaming at the top of their lungs to get people to buy gold, simply because of the implications of the math. Where are they? The thing I don't understand is why most people refuse to run the numbers. And why don't they understand the implications of the numbers that I present?

It's clear to me that gold is going higher than I can imagine or forecast, and that silver will do a lot better.

I strongly advise you to get real gold and silver, at anywhere near today's prices, while you still can.

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