Gold — as good as cash

MINING EXPLAINED

–The following is an excerpt from Mining Explained, published by The Northern Miner.

The price of gold is influenced by monetary, economic and political factors. For many years, until the early 1930s, its price was controlled by governments and pegged at US$20.67 per troy oz. All gold produced in Canada was sold to the Royal Canadian Mint.

In 1934, U.S. President Franklin Roosevelt officially raised the price of gold to US$35 per troy ounce and, in effect, re-established the gold standard which had been displaced by floating exchange rates following the First World War.

In 1947, the Bretton Woods agreement ushered in an era of fixed exchange rates whereby various world currencies were exchangeable into the U.S. dollar, which, in turn, was readily exchangeable into gold.

This system worked well into the late 1960s, when speculative pressure against the American dollar caused a run on gold. This brought in the “two-tier” gold system, where there was an official market for central banks and a “free” market for others.

Speculative pressures and a faltering U.S. economy forced the government to raise the official price to US$38 per troy ounce in 1972 and again to US$42.22 the following year, in effect, devaluing the U.S. dollar.

Since 1972, gold has been freely traded on terminal markets. Both Zurich and London bullion markets vied for dominant influence. The Winnipeg Commodity Exchange started the trade in gold futures in 1972. Comex and other U.S. markets followed suit to create a lively spot and futures market. Gold prices today fluctuate, based on terminal market buying and selling.

Because it is an investment of last resort, gold also functions as a currency and tends to increase in value as other currencies fall. Its price in a given currency will go up during times the currency is weak, and fall when the currency is strong.

Prices quoted on spot and futures markets are for “0.9999 fine” gold, that is, gold with a minimum 99.99% purity.

Other Precious Metals

The price pattern for silver is exceedingly complex. Fear of inflation, armed conflict and the changing patterns of industrial usage all affect the price of silver. The metal is quoted in U.S. dollars per troy ounce. The dominant market for silver is the London bullion dealers’ market, and there is an important futures market at the Comex in New York City. Prices quoted on spot and futures markets are for 0.999 silver.

The prices of platinum and palladium are fixed daily by a group of dealers in London, and futures are traded on the New York Mercantile Exchange. Prices are quoted in U.S. dollars per troy ounce.

Other precious metals of the platinum group do not trade on terminal markets, and the most useful quotations are the producer prices set by individual refiners in response to the market for each metal. The precious-metal dealers in London belong to the London Bullion Market Association, which maintains its own website (www. lbma.org.uk) with recent market statistics, including the daily prices. Montreal-based precious metal dealer Kitco also has a useful market snapshot on its website, www. kitco.com, with prices for gold, silver, platinum, palladium and rhodium.

Other Metals

Prices of metals that are not traded on terminal markets like the LME or the bullion dealers’ market generally find their price levels by supply and demand. Many are traded on long-term contracts between consumers and producers — for example, a steel producer might have contracts for the supply of iron ore, chromium, and nickel with several producers.

In the absence of daily spot prices and futures prices, the important price is the producer price. Most often, producer prices will be set for several different grades or forms of the metal. For example, there are separate prices for refined cobalt, cobalt powder and cobalt oxide.

Similarly, iron ores are graded for sale, based on the amount of contained phosphorus, silica and other impurities. Iron ore pellets are the preferred form of iron among steelmakers. Prices are quoted per tonne for international trade.

Metals used in steelmaking, such as manganese, chromium and vanadium, may be sold as refined metal, ore concentrate or alloyed — at a specified concentration — with iron.

Two other important alloy metals without terminal markets are tungsten and molybdenum. Tungsten is sold as ore concentrate or ferrotungsten, while molybdenum is generally quoted at a price per lb. of molybdenum contained in a molybdenite concentrate.

The price of uranium is affected by political factors related to its military use. While a market does exist for sales of small lots on a spot basis at a price called the “exchange value,” most uranium is sold to public utilities under long-term contract.

No matter how the metal occurs in the mine, uranium is sold in U.S. dollars per lb. of U3O8 (a uranium oxide). Mine output is priced accordingly.