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The Lure of Gold John L. Dobra, Ph.D. West-Coast Annual Economics Teaching Conference COBA/UNR April 16, 2009 The Lure of Gold 7,000 years of seeking gold Gold Facts “Gold” is one of the oldest words in the English language. A cubic foot of gold weighs ~ ½ tonne

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the lure of gold

The Lure of Gold

John L. Dobra, Ph.D.

West-Coast Annual Economics Teaching Conference

COBA/UNR

April 16, 2009

the lure of gold2
The Lure of Gold
  • 7,000 years of seeking gold
gold facts
Gold Facts
  • “Gold” is one of the oldest words in the English language.
  • A cubic foot of gold weighs ~ ½ tonne
  • Gold mining is believed to have started in around 3900 b.c.e.
  • Gold is indestructible – all of it that has ever been mined is still here
  • All the gold that has ever been produced (~ 10 trillion ounces) would form a cube less than 60 feet on a side.
the lure of gold4
The Lure of Gold
  • 7,000 years of seeking gold
  • Original uses were ornamental
the lure of gold6
The Lure of Gold

Egyptians learned how

to make gold leaf around

1200 b.c.e.

the lure of gold7
The Lure of Gold

The Mask of

Agamemnon from

Greece, circa

1600 – 1500 b.c.e.

the lure of gold8
The Lure of Gold

Jason, of the Argonauts,

probably ripped of a placer

miner if there is any truth

to the story.

the lure of gold9
The Lure of Gold

It was not Alexander’s Armies that made him Great, it was Phillip of Macedon’s Gold

gold mining
Gold Mining

This is probably what

you think of when gold

mining is mentioned.

gold mining12
Gold Mining

This is probably what

you think of when gold

mining is mentioned.

Or this …

is it ore or is it a rock
Is it ore? Or is it a rock?
  • 2.5 lbs. of “ore”
  • 0.001134 Metric Tonnes
  • At 0.08 ozs./MT  9.07029E-05 ozs.
  • Value at $900/oz.  8.2¢
  • Recoverable Value  6.1¢
is it ore or is it a rock14
Is it ore? Or is it a rock?
  • 2.5 lbs. of “ore”
  • 0.001134 Metric Tonnes
  • At 0.08 ozs./MT  9.07029E-05 ozs.
  • Value at $900/oz.  8.2¢
  • Recoverable Value  6.1¢
  • It’s a rock.
  • If you had a few hundred million tons, it would be ore.
slide18

Battle Mountain

12 Miles

I 80

East Hill Zone

Red Rock Zone

UN section

Future Mackay Pit

slide28
Leach pad under construction. (Facing north – I80 is in background, Valmy power plant on upper left edge of picture)

I-80

what about profits
What about Profits?
  • Here is where I get in trouble with Mining Industry executives:
what about profits41
What about Profits?
  • Here is where I get in trouble with Mining Industry executives:
  • “The gold mining industry will never make above normal profits in the long run.”
what about profits42
What about Profits?
  • Here is where I get in trouble with Mining Industry executives:
  • “The gold mining industry will never make above normal profits in the long run.”
  • Why?
what about profits43
What about Profits?
  • Why?
  • Industry Structure and Conduct:
what about profits44
What about Profits?
  • Why?
  • Industry Structure and Conduct:
    • Many buyers
    • Many sellers
    • No significant entry barriers
    • Homogenous product
  • It is about as close as you can come to a perfectly competitive industry.
profits
Profits?
  • Myth – Gold Mining is a highly profitable business.
profits46
Profits?
  • Myth – Gold Mining is a highly profitable business.
  • If this were true, we would all be gold miners!
profits47
Profits?
  • Myth – Gold Mining is a highly profitable business.
  • If this were true, we would all be gold miners!
  • It is true that there are some highly profitable operations.
profits48
Profits?
  • Myth – Gold Mining is a highly profitable business.
  • If this were true, we would all be gold miners!
  • It is true that there are some highly profitable operations.
  • But is it true industry wide and over time?
profits49
Profits?
  • To answer the question I put together two historical data series:
    • Gold Prices
    • Precious metals industry Return on Equity (ROE) from several sources
profits51
Profits?
  • To answer the question I put together two historical data series:
    • Gold Prices
    • Precious metals industry Return on Equity (ROE)
  • The correlation coefficient between Gold prices and ROE is 0.05 – in other words they are uncorrelated.
profits52
Profits?
  • The correlation coefficient between Gold prices and ROE is 0.05 – in other words they are uncorrelated.
  • Why?
profits53
Profits?
  • The correlation coefficient between Gold prices and ROE is 0.05 – in other words they are uncorrelated.
  • Why?
  • In large part because of the factors we’ve been talking about.
profits54
Profits?
  • In a low price environment operators drive down costs by:
    • Raising cut off grades
    • Cutting back on exploration
    • Cutting back on development
    • Deferring equipment purchases
profits55
Profits?
  • In a high price environment operators drive up costs by:
    • Lowering cut off grades
    • Increasing exploration
    • Increasing development
    • Purchasing equipment
profits56
Profits?
  • In a high price environment operators drive up costs by:
    • Lowering cut off grades
    • Increasing exploration
    • Increasing development
    • Purchasing equipment
  • In the current price cycle external factors such as world wide growth in demand and energy costs have also been factors.
profit maximization
Profit Maximization?
  • Profit Maximization is a central assumption in economic analysis.
profit maximization59
Profit Maximization?
  • Profit Maximization is a central assumption in economic analysis.
  • In the case of this industry our assumption is wrong.
profit maximization60
Profit Maximization?
  • Profit Maximization is a central assumption in economic analysis.
  • In the case of this industry our assumption is wrong.
  • What this industry seems to maximize is… and this will come as a shock to some…
profit maximization61
Profit Maximization?
  • Profit Maximization is a central assumption in economic analysis.
  • In the case of this industry our assumption is wrong.
  • What this industry seems to maximize is… and this will come as a shock to some…
  • Sustainability
sustainable development
Sustainable Development
  • Efficiently utilize capital
sustainable development63
Sustainable Development
  • Efficiently utilize capital
  • Efficiently utilize the natural resource
sustainable development64
Sustainable Development
  • Efficiently utilize capital
  • Efficiently utilize the natural resource
  • Sustain local communities through good times and bad
sustainable development65
Sustainable Development
  • Efficiently utilize capital
  • Efficiently utilize the natural resource
  • Sustain local communities through good times and bad
  • Environmentalists think that they invented “sustainable development” but natural resource industries have always been practicing it.
so why do they do it
So why do they do it?
  • Because they can?
so why do they do it67
So why do they do it?
  • Because they can?
  • That’s not as dumb an answer as it may sound.
so why do they do it68
So why do they do it?
  • Because they can?
  • That’s not as dumb an answer as it may sound.
  • Every mine is actually two mines:
    • The hole in the ground
so why do they do it69
So why do they do it?
  • Because they can?
  • That’s not as dumb an answer as it may sound.
  • Every mine is actually two mines:
    • The hole in the ground
    • Massive stock and derivatives markets
so why do they do it71
So why do they do it?
  • Since NYMEX opened futures and options markets for gold in 1972, using these markets for hedging has been a huge part of the business
so why do they do it72
So why do they do it?
  • Since NYMEX opened futures and options markets for gold in 1972, using these markets for hedging has been a huge part of the business.
  • Most transactions, however, occur OTC and Off-Shore.
so why do they do it73
So why do they do it?
  • Since NYMEX opened futures and options markets for gold in 1972, using these markets for hedging has been a huge part of the business.
  • Most transactions, however, occur OTC and Off-Shore.
  • In periods of falling and low prices these companies typically can make more money trading than mining.
so why do they do it74
So why do they do it?
  • Since NYMEX opened futures and options markets for gold in 1972, using these markets for hedging has been a huge part of the business
  • In periods of falling and low prices these companies typically can make more money trading than mining.
  • But that’s a subject for another day…