Buying More Gold

The U.S. government is nearing its maximum borrowing capacity. If Congress can’t agree on a budget soon they won’t be able to raise the debt ceiling which could mean disaster for the economy. I don’t think anyone is expecting the US to default, but there will probably be a lot of uncertainty in the next week.

But one thing we can do in the meantime to protect ourselves against the risk of hitting the debt ceiling is to buy some insurance. So earlier today I went out and bought an ounce of gold for $1,400, and a 10 ounce bar of silver for $250. My purchase was from the VBCE in downtown Vancouver. They are a walk-in bullion and currency exchange business. They accept cash or debt card. You don’t need to show I.D. unless you’re buying a lot of gold/silver.

I chose to buy gold because in uncertain times, gold usually does well. It’s currently trading at around $1,300/oz USD. I don’t think there’s much room for it to drop from here. This is my reasoning. First, we know that gold has been a store of value for thousands of years and that’s probably not going to change in our lifetime. So if gold can never drop to $0 then what is the lowest it can go? To tackle this question, have a look at this excerpt from a Globe and Mail article published a couple of months ago.

“Many major gold miners have since started reporting what they call their ‘all-in’ cost of production.
Last quarter, Barrick’s amounted to $919 an ounce, while Kinross’s totalled $1,072 an ounce
and Goldcorp Inc.’s hit $1,279 an ounce. …Big names like Barrick and Australia’s Newcrest Mining Ltd.
have embarked on campaigns to either sell or scale back their highest cost development and exploration projects.”

So it appears the process of mining and getting 1 ounce of gold to market costs producers about $900 to almost $1,300. It wouldn’t make financial sense then for companies to spend more on production than what they’ll eventually get out of it. So if the price of gold falls below a certain point gold producers will start to mothball their mines and there will simply be less gold being produced.  But such a scenario would then put upward pressure on the price of gold since a reduction in the supply of newly mined gold in the market will certainly make gold more valuable. Earlier this year the price of gold dropped momentarily to ~$1200/oz but then bounced back up. I think the floor is around $1,100 to $1,200 per ounce, which is when gold companies will start to shut down their mines because it just won’t be profitable anymore to keep them running, and the supply vs demand will reach a price equilibrium that just can’t go any lower. So today’s gold price of $1,300 isn’t that much higher than where I think a sustainable floor is, but I personally believe there is much more room on the upside, especially if Ms. Yellen stays the dovish course with monetary policy 🙂

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Random Useless Fact: Camels have three eyelids to protect themselves from blowing sand.