Barron:  “We are having a nice rally off the lows this morning in both gold and silver.  Silver is back above $20 and the gold price is nicely over $1,300.  As we are speaking gold is roughly $150 off its lows and I don’t think gold will see those lows again....

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“You have some analysts and banks claiming that gold is going to go back down, maybe even as low as $800.  I am of the strong opinion, and it’s because I’ve worked in the industry for over 30 years, if gold goes any lower than $1,100 to 1,200 that none of the mining companies will be making any money.

What we’ve seen recently is a lot of deferment of projects by the majors, and canceling of projects altogether.  As an example, yesterday Goldcorp took a nearly $2 billion hit because of an impairment charge from one of their projects.  What all of this is going to ultimately do is impact the amount of gold coming out of the ground and into the market. 

Right now companies are no longer mining their low grade gold.  Instead they are trying to access their higher grade material in an attempt to maintain their margins.  Unfortunately, not a lot of these companies have high grade material.  So the amount of ounces they are producing is coming down.  Of course if companies continue to scrap projects they have been working on for 5, 6 or 7 years, trying to get permits and building infrastructure, etc, this will have an even deeper impact on future supply.

I have been saying for years that the industry simply cannot replenish the ounces they produce.  The reality is that we have already seen ‘peak gold.’  Peak gold is the point when the amount of gold that is produced around the world has reached a peak, and we are never going to get to that point again. 

I think we have already passed the point of ‘peak gold’ because for some time now mining companies simply are not finding the large deposits anymore, and haven’t for a long, long time.  This has resulted in companies mining inferior projects with low grade material.

The problem with low grade projects is that if you have a shakeout in the gold price, such as the one we have seen recently, companies begin to lose money mining that material.  Costs are too high and companies end up in a position where they are paying money to supply the market with gold.

So we’ve already seen deferment of projects and canceling of projects, but what this is all feeding into, Eric, is very important when you contrast that to what’s happening with the declining inventories at the COMEX, and with gold lease rates (backwardation in the gold price).

The backwardation is exposing the fact that there is a real problem finding physical gold, and also that there is a fear in the industry that futures contracts which are forward-dated are simply not going to be honored in terms of the gold being delivered.  But add in the fact that there is a growing perception that we are going to see a huge contraction in gold production, it is exacerbating the worries that the gold is simply not going to be available for delivery in the marketplace.”

Barron also added:  “There have also been a lot of bullion banks which have been arbitraging gold, and really taking it from North America and sending it to places like China where they have been getting a $40 or $50 premium above the spot price in some cases.

In Vietnam right now you can get greater than $200 above the spot price.  So it makes a lot of sense for the bullion banks to buy gold here in North America, take delivery, and then send the gold over to Asia and capture the spread.  This is what is happening to a lot of the Western gold:  It’s going to Asia.  And the harsh reality is that it’s not coming back. 

Even though the Chinese have been getting a lot of negative press lately, they still keep taking the large surplus of US dollars and turning them into hard assets, and that includes an enormous amount of gold.  So all of this leads me to believe that gold will eclipse its all-time high this year or very early next year.”

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Eric King

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