How to Spot Good & Bad Analysis

As most of you know, there isn't a shortage of precious metal analysis on the internet.  Everyone has their opinion.  Yes, even I.  However, there is a way to understand which analysis is better than the other.

To be able to find out which analysis offers the most accuracy, it must get to the root of the problem.  Unfortunately, most analysts do not try to get to the root of the problem, instead they use data taken from other sources and make their predictions and forecasts based on this spoon fed data.

For example, all the nitwit politicians and their economists keep regurgitating about how to CREATE JOBS.  This is by far the most insane analysis I know of.  The U.S. has peaked in creating net new jobs and its all downhill from here.  Now, there is a way of creating millions of new jobs overnight.... get rid of the computer.  If we did that... then by gosh we will create more jobs than there are U.S. citizens.  However, I assure you, this is not something the government will do.

ORE GRADE DECLINES....WHAT'S THAT?

Several years ago, I sent a chart to several well known precious metal analysts on the decline of gold ore grades in 4 countries over the past one hundred years.  I only received a few responses, but two of them asked me where I got that chart and was it true.   This was circa 2008.

At that time, I saw no gold or silver analyst write or talk about falling ore grades.  However, today, a week doesn't go by without someone in this field bringing up this subject.  Hell, even if you go on King World News, you will hear it from some of the top folks.

This is the very reason why I have taken the time to look at how the ore grades and yields are declining in the top gold and silver producers.  I know of only a few individuals who have provided actual data on the decline in gold ore grades and yields, but no one has done this in silver.  That is why I researched and produced the chart below (from my previous guest post):

I am not mentioning this again to toot my own horn (my wife does that for me), but to show that of all the precious metal analysts I have come across, no one has yet presented any information on actual data of declining silver ore grades.  So... how in the living hell can any precious metal analyst really make a correct forecast if they don't have the ROOT FUNDAMENTAL DATA???

I focus more of my attention on the analysts who are cheerleading the miners without knowing the energy situation in the future.  Again, how can they get on King World News or where ever for that matter, and state that the miners are a good place to park ones money when they don't have a grasp on the aspects of energy and declining ore grades?

Of course these miners can still produce metal for the foreseeable future, but what happens in say 5-10 years when the energy situation grows increasingly worse?  What happens to all those so-called ASSETS (plant, equipment, trucks and etc) when energy shortages appear?  I mean, how does an accountant figure what these assets are worth, if there isn't enough energy to run them?  This is HUGE PROBLEM no one is looking at.  The same king of thing that no one was looking at 4 years ago in declining ore grades.

MY PROBLEM WITH BIX WEIR

I saw the interview with David Morgan and Bix a few days ago.  Bix is a pretty intelligent chap who does understand the manipulation of the precious metals.  However, his theory that the collapse of U.S. Debt will be the savior for the country because he believes we will tap into all these HIDDEN RESOURCES, makes his good analysis turn quite bad.

Even if a person doesn't believe in PEAK OIL, the falling EROI- energy returned on invested has been proven by actual data.   I would like to remind the reader that our modern society needs at least an EROI of 8/1 to survive.  Tar sands at 2-4/1 and shale oil at 4-5/1 will not help us in the end... even though it is bringing on more supply.

Bix, doesn't go to the ROOT OF THE PROBLEM.  That is why his theory is full of holes.

BREAK-EVEN GOLD NOW AT $1,300+

I also saw that article by Paul Van Eeden about the fair price of gold to be $800-$900 an ounce.  As I stated in a previous post... the man is completely FOS. (full of sh*t).  If we look at the table I put together below, we can see that when we factor in ALL COSTS, the break-even price of gold is now above $1,300:

Here we can see that if we take the total net income of the top 5 gold miners Q3 2012, we get $1.9 billion or 39% less than the same quarter in 2011.  If we take that net income and divide it by the total amount of gold produced by the group we get $348.65 net income profit per ounce.

Before I get any hate mail... I realize this is a simple way to get that calculation.. but it is at least a much better metric than the stupid industry's CASH COSTS.  If we take the average price of gold currently, we can see that break-even is somewhere at $1,350 when we add in everything.

So, for Paul Van Eeden to state that the fair price of gold is in excess of $500 less than break-even, the top gold miners proves again that he is not only FOS, but did not go to the ROOT of the problem.  I highly doubt the market would ever value gold at $800-$900 an ounce knowing that break even is now $1,350.

CONCLUSION

The biggest problem I see going forward is declining liquid energy supplies on the global market.  Hardly no one (especially in the mining industry) is looking at this at all.   That is why I believe most of them will get a rude awakening when they fail to realize their mining stock that has mines with 30 year mine lifespan may turn out to be a terrible investment in the future.

However, this makes owning physical metal even better....