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News came out yesterday (which we sort of already knew) that the world’s mints are now running 24/7 to meet the demand.   Zerohedge commented on this and quoted an investment strategist from Seattle who said, “There is no doubt that physical demand has improved, but it will not be enough to support prices.”  While they did heckle the quote, I as usual would like to break it down to its core logic or certainly lack of.

“Physical demand has improved”…yes it has but improved from what?  Was physical demand “weak” in 2011 when we made the highs of $1,900 and $50 for gold and silver?  Has mine supply increased since then?  No and no.  Physical demand was firm and growing in 2011 and has grown further from there.  China’s appetite for physical metal seems to have grown with each new “import bite.”  The only thing that is in abundant supply is the paper contracts offer “gold” for sale.

So breaking this down to the simple economics of Mother Nature 101, we have only so many refineries and mints in operation for a reason.  2 years ago the mints and refineries were seeing an uptick in their businesses and the amounts that were being demanded by the markets.  So they reacted by increasing their outputs to meet the higher demand.  But…you can only operate a refinery or mint at peak capacity for 24 hours each day because there are no more hours in the day.  Do you see where I’m going?  Capitalism left alone will create only as many bakers (not bankers), dentists, and mechanics etc. etc. …and mints/refineries as are necessary to meet demand.  If a market for any skill or product is glutted then capitalism will “cull the herd” and put the weaker competitors out of business until the “excess” capacity comes back into line with the demand.

For instance, let’s say that “brain surgeons” are the highest paid profession and everyone (if they could stand the blood and guts) wanted to be one.  Assuming that everyone had the ability and actually did become a brain surgeon, how many of these would be “unemployed brain surgeons” in short order?  (As a side note, it would probably take a little while for the unemployment to set in since the necessity for economist/banker lobotomies would keep them busy for a year or more).  My point is this, there were only so many mints and refineries with only so much capacity in the past because it was enough to meet the “current demand.”  There was no sense in building any more capacity because it would have been idle capacity and the investment would not have made any sense… and thus then liquidated by Mother Nature.

But here we are now and the capacity is becoming strained.  No problem…”we’ll just build more capacity” you say?  OK, here is the logic part…if the minting and refining capacity was ample a couple of years ago why would we need more now?  Why, if the global mine supply has not grown at all would we need any more capacity?  Think about it, just because there is more demand for the finished product doesn’t mean that refineries and mints can produce more… more production requires more “input” of raw material right?  If the production of coins and bars was in balance with demand (that already exceeded total mine supply) AND the amount of raw material (metal actually mined globally), why the big change?  And…most importantly where is the extra “raw product” to refine and mint coming from?  It has to come from somewhere right?

Do you see the problem here?  What was in “balance” is no longer in balance.  Forget that demand has exploded and we can now absolutely define a minimum twice as much demand as supply, we now have another indicator (chokepoint) where “capacity” which had been built over many years is no longer enough.  “Capacity” that was MORE than ample to handle total global production that has not increased (and surely will not increase) for many years.  THIS is proof to anyone “thinking” person that “supply” is being fed into the market to keep a lid on it.  But “where” is the additional supply coming from?

You see, if “they” want to continue to “meet the demand” they will need more minting and refining capacity.  Never mind that total mine supply was more than ample to supply the capacity (and workers actually got some days off), now the manufacturing capacity is not enough no matter how high the machines are turned up or how hard the workers are whipped.

I hope that you see how I have come at the “supply and demand” question from a different angle here.  The processes of refining and minting had to have been built over a number of many years and assuredly the level of capacity was ample otherwise capitalism would have “built more” if there was a buck to be made.  There wasn’t, not so much because of the demand side but because of the levels of “supply” from the world’s mines and scrap supply.  This is so because a refinery or mint can only create product with actual supply of raw material…which has to come from somewhere.  Please ask yourself “where” this might be from?  While asking you this question, please also contemplate the question, “If ‘something,’ anything is withdrawn from a hoard…does not that hoard shrink?”

Briefly, the bottom line is what it has been all along…how much metal do the central banks really have left?  Not “what do think they have left? but how much vaulted gold (by the NY Fed) is ACTUALLY left” because this is the ONLY place that the excess supply could have come from?  How do I know this?  Simply because of the sheer size and amounts that the mints and refineries are processing…there are no other “hoards” in the world large enough to supply what is now being processed.