Shortage Of Gold?

The plain answer is NO, so you don't have to continue reading, if you don't want to.

There can be no shortage of anything, unless there is a governmental price control on the item. Is there a shortage of water in the desert? Not unless its price is controlled. Is there a shortage of antique furniture? No, unless its prices are controlled. Is there a shortage of blacktop. sugar, housing, lumber, tools, land, or anything else? Not unless their prices are controlled by government. Take any example. I use the Model A Ford in my book (which you can receive free by e-mail if you request it). Is there a shortage of Model A Fords? No, unless their prices are controlled. Suppose the government said, in all its wisdom of course, that "Hey, those Model A's only cost $275 when they were new, and that $10,000 price tag is unreasonable. From now on, the maximum price that can be charged for a Model A is $275. We have now placed a law on the re-sale price of Model A Fords, and anyone violating it will go to jail." There would then be a shortage of Model A Fords. No one would sell theirs.

Is there a shortage of housing? Only if the prices are controlled, and there is ample proof of that. New York City, among a few other cities, has rent controls, and there is a dire shortage of housing in these lucky locations. It is legislatively controlled, so that the landlords cannot raise their rents, if you can believe that. Therefore, costs, taxes, repairs, and maintenance go up, but rents remain the same. Thousands of buildings have been abandoned, and thousands are derelict. There is a shortage of housing everywhere there is rent control, or price control by government.

Is there a shortage of gold or silver? The prices of gold and silver are on the open market and not controlled, other than by manipulation. There can be no question about gold and silver's prices being manipulated, and I won't go into that here. The manipulation results in lower prices than there should be, but it is not actual control. The manipulators will fail eventually, and have already, to a degree, or gold wouldn't be over $300. When an item comes in short supply, the price always goes up, till there is no more short supply. When Bunker Hunt tried to corner the world's silver supply in 1979-80, the price of silver shot up to $54, and gold followed. The more futures and physical he bought or controlled, the higher the price went, till the Comex betrayed him, and the game was over. Gold went up, and Hunt tried to corner the world's supply of silver, simply because of a President named Jimmy Carter. Try to remember what was going on then. We were paying to have the Panama Canal taken from us by one Senator, Dennis DiConcini, and may he rot in hell, along with the other 50 that voted "yes." The hostages were in Iran, interest rates were astronomical, and if you wanted to buy a house, you would pay 21% interest. Everything looked pretty bad…to put it mildly! Everyone, including Bunker Hunt fled to safety, and that was gold and silver.

When Ronnie Reagan got elected, Carter was banished to Plains Georgia, and building houses for the homeless. Under Reagan's Presidency, the situation improved greatly, other than the national debt being quadrupled. To illustrate how a supply shortage is self equalized, let me tell you what was happening to silver back then. People were selling their silver flatware, candlesticks, and jewelry for spot price, because it was so high. I bought several really fine pieces of silver for scrap prices. Silver was coming out of the woodwork, mines were re-opening, and there never was a "shortage." Everyone who was selling theirs, was equaled by those who were buying. When people decided prices were high enough, they stopped buying, and prices went down. Prices are what balances supplies, in every single field. Prices for what was junk furniture a hundred years ago, are now high, simply because most of it was long ago burned, or tossed. Dressers that sold for $12, now command $800, if they are in good condition. Supply and demand.

Most of the Duesenberg autos are accounted for, and still in existence. They can command over $2 million. The reason for this is that few were built, and are still few in numbers. But Duesies are not scarce. The price equals the supply. Water in the hot desert is expensive, because unlike Seattle, the supply is limited. It is not scarce. Water can be had in the hottest places in the desert…for a price.

Getting back to gold. Gold can be mined for its current price of about $317…in some places. Why doesn't it sell for what it costs to mine? Because the mines want to make a profit, and it costs a lot to mill, smelt, refine, stamp, and ship, and this accounts for the difference between spot and ask price of coins. Why are Krugerrands so much cheaper than Gold Eagles? Maybe it has to do with the union employees of the US mint. That's why one ounce Silver Eagles are $1.45 over spot, and privately minted one ounce rounds are 50 cents over spot. Krugerrands, made by poorly paid workers in South Africa, make "Krugs" cost but $2.50 over spot, vs. union made Gold Eagles at $12 over spot. (The US Gold Eagle is probably the most beautiful coin in the world.)

When gold goes up far higher than the total cost to produce, you may wonder why. The answer is that demand fixes prices as well as supply. When the price goes up, more mines can re-open, as the price has reached their point of profitability, thereby increasing the supply. As the confidence in the one time "almighty" dollar decreases, and people with brains flee to safety with precious metals rather than worthless promises on paper, the demand will increase. This causes the price to go up. The reaction will continue, until one of two things happen, and I do not know which. (1) Paper currencies are finally recognized for what they are, and that is zilch, meaning there can be no limit on price in currencies, or (2) the price goes so high in currencies, that it would be sensible to re-convert metals into currencies. Either could happen, but whichever happens; it makes sense to get out of dollar denominated instruments.

One should understand that the amount of gold and silver available, will always be limited, as they cannot be produced by cutting trees, as can paper money, bonds, stocks, and other un-securities. Also, remember that gold and silver have been recognized as true money, safety, and storage of surplus assets for thousands of years, and that isn't going to change. If everyone in the world wanted a single, tenth ounce gold eagle, that price would be in the tens of thousands of dollars each, not the current $35, there is so little gold around. But there wouldn't be a shortage. As currencies and financial institutions fall like a chain of dominoes, more and more will flee to safety, and more and more will realize that gold and silver are true safety. Therefore, there is no limit on their respective prices.

The railroad between Durango and Silverton Colorado, is one of the most beautiful train rides in the world. At age 18, in 1952, I rode it for $3 round trip. Today, it is $60. Same track, same engines, same cars, but 20 times the price. The railroad is balancing its capacity (supply) with its price. Rather than build more cars, and restore more engines, it would rather screw the riding public and raise the price so high that its cars are filled, and no new ones have to be built. The railroad is balancing its fares with its capacity. If I owned the railroad, I would cut the fares in half, and build, build, build. Volume would continue to increase, and less wealthy people would not be cut out because of price. If gold goes to the sky, everyone will buy less or none, because of its price, and this will balance out the supply, just as the railroad's fares balance out its supply of seats. Economics is simple, but not understood by the masses. Those economics professors try to make everything so complex, and it really is simple. Remember the two word definition of economics: "PEOPLE ACT." It's just that simple.

As far as silver is concerned, I know of no place where it can be mined at the current $5 per ounce. Where the silver is coming from, no one knows. Fortunately, it is coming, and not "scarce." When wherever it is coming from, is exhausted, the price will immediately HAVE to go to a price level where it is profitable to mine it, and that happens to be well over $15 per ounce, or thrice its current level. This makes silver, to me, a better buy than gold, but whatever goes first, I am sure the other will follow.

If you have waded through the above, it's simple: Gold and silver won't ever be scarce, unless their prices are controlled by government, which is 99.9% impossible. If government ever attempted to do that, we would go underground like the drug dealers. Protect yourself!

Don Stott

July 10, 2002

Don Stott has been a precious metals broker since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com