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Subject:  Re: Precious metals Date:  5/12/2004  9:48 PM
Author:  PaulEngr Number:  30627 of 46938

Does anyone else think this might be something interesting to look at?

At one time I would have answered otherwise. However, I look at the precious metals market for job opportunities. These oscillations you mentioned last about 6 months to 2 years. They are irregular (isn't not a cyclical thing). So it's not stable enough to rely on for career options. One year everybody is living like kings and it's a job seekers market (like right now...see and look in the employment listings). Next year, they have massive layoffs and cut salaries.

That being said, the "precious metals market" is more than just gold, and that makes a huge difference. Certain metals (palladium and the other members of that group) have very useful chemical uses in catalysts. The primary market maker in that business is EC, who hedges in that business because they are also one of the largest catalyst manufacturers.

Other minerals (okay, precious metals) do not fit the gold model. Although it might be tempting to think of the silver and platinum markets as simply the "poor man's" and "rich man's" gold markets, the analogy doesn't work. Those metals have much more useful industrial functions compared to sitting in your safe at home.

The gold consumers (in the traditional sense) tend to use very, very little of what's out there. The major producers (mining companies) all have a break-even cost of around $250/oz. Also, most of the modern production techniques have almost no variable costs (almost everything is a fixed cost). This means that regardless of production rates, the cost to produce is about the same. So, if prices are >$250/oz., they make money. Otherwise, they lose their shirts. The fixed cost problem doesn't really apply to most other minerals because most of the time, the ore bodies are not so low grade.

The end result is that the only real driving force in the gold "market" is people (governments, private individuals, etc.) who are speculating in it. The actual underlying producers and consumers simply don't matter. The end result is that the entire gold market is essentially speculation at it's finest!

You are attempting to understand the mechanics of the market in the traditional sense. It simply doesn't fly. There is little to no real "market" to speak of. People can talk about this or that large bank buying up gold or flooding the market with gold, or whether economic downturns fuel increases in prices, but again it's nothing but a speculation market.

You can read up on all of the minerals that the USGS publishes data for annually here:

It isn't always exactly what you are looking for, but it's a good starting point. The yearbooks do an excellent job of describing the overall market (producers and consumers) on a mineral-by-mineral basis.

If you look at the gold minerals yearbook and compare it with virtually all of the other yearbooks, notice the difference in the structure. Most of them talk about changes in the customer base (the buyers), as well as the producers. With gold, there's just a couple paragraphs dismissing the customer base, and then the rest of the article discusses changes in the producers!

Also, since we're on the subject, beware of the non-metallic minerals. Certain ones such as mica and kaolins behave just like metals. However, there are a whole bunch of them which are distinctly different, especially sand, gravel, and aggregates. Once you start getting down below $50-$100/ton or you look at minerals that are extremely common (like sand and gravel), markets are driven by shipping costs more than they are by the intrinsic price of the mineral. This means that all markets become local in nature. For instance, let's say that a ton of aggregate is priced at $10/ton (depending on the specs, this is close to reality). It will cost roughly $10-$20/ton to ship it 50-100 miles, and about $8/ton to produce it. Since aggregates are available virtually everywhere except Florida, it doesn't take long before the price of the aggregate is immaterial. Only shipping costs matter. It also doesn't take long before somebody digs another hole about 50 miles away from the first one and starts selling the same aggregate from that hole. Thus as far as the aggregate market is concerned, all markets are local ones. The same is true for several other minerals. For instance, the "range" on lime and cement ($50/ton) is about 150 miles. The "range" on coal is several hundred miles.

Even though the price is right (about $50-150/ton), kaolin clays do not follow the same trend. Industrially useful clays are somewhat more rare, so some grades enjoy the advantage of national (actually, global) markets. The plastics filler grades have correspondingly local markets, while the high end glossing clays for paper have global markets.

Still other markets are somewhat determined by the few suppliers available. There is a solitary platinum operation in the U.S. (Stillwaters). That operation is not something you'd want to invest in (reminds me of Tyco), but the market is very unusual because of the limited number of suppliers vs. the larger number of buyers.

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