Gold fund manager John Embry writes in Investors Digest of Canada, Gold Gleams as Influence of Central Bankers Wanes. Embry cites another analyst, Leonard Kaplan, who asks, why should gold cost $700 when an ounce can be mined for $350? Embry counters with
- In the case of gold, if paper money is being aggressively debased and investors choose to seek protection in the ultimate monetary safe haven, what does the cost of producing an ounce have to do with the price if demand overwhelms supply?
There is a relationship between supply and the cost of mining but it is the opposite of the one that Mr. Kaplan suggests. Whatever the price of gold, the cost of operating the marginal gold mine will rise until it is a bit less than the price of gold. This is because a deposit that is not economic to mine at one price will become economic to mine at a higher price. As long as “not much” gold (in relation to total supply) can be mined at the higher price, the price will be “not much” influenced by mine supply.