All Of The Gold Bulls Are Making The Same Case For A Price Floor

REUTERS/Thaier al-Sudani

An anti-Gaddafi fighter shows the media what they say was the golden pistol of Muammar Gaddafi, near Sirte October 20, 2011.

The plunge in the market price for gold has been absolutely stunning.  And analysts believe a number of factors ranging from momentum to low liquidity will send prices even lower.

However, the gold bulls are holding strong. 

Most bull cases these days hinge on one thing: the cost of mining gold.

Basically, they argue that gold mining costs are high.  And if prices fall below cost, then miners will stop mining it and supply will quickly evaporate.  The marginal buyers will then scramble for whatever's left, causing prices to surge.

Mining costs effectively put in a floor to the price of gold.

The problem is that gold mining costs aren't very uniform.  Barrick gold recently published some stats showing that it takes anywhere from 2 tons to 91 tons of rock to yield an ounce of gold.

Art Cashin discussed this issue this morning:

What's Mine Is Mine – On CNBC's Squawkbox this morning, Becky Quick was asking several guests about the mining cost for gold since bullion had plunged below $1200.  I thought the response might have been a touch confusing to viewers so I shot off the following email to my savvy and charming friend:

Gold mining costs are not uniform.  They vary from mine to mine and from level to level within each mine.  If the cost of my mine is $800, I will be happy to mine when the bullion price is above it.  As bullion moves even higher, I will dig out deeper and more difficult ore (adding to supply).  As price drops, I will concentrate on easier (cheaper) ore.  The cost of mining is an estimate of the average of all working mines and it tends to vary with bullion.

Peter Schiff spoke with Business Insider's Mamta Badkar about this yesterday:

Mining is very energy intensive and ten years ago, oil was $12 - $15 a barrel.  Now it's $95 a barrel. So that's just one of the costs. Labor costs have gone up because the cost of living has gone up in many of the countries where gold is mined. The price of gold isn't even high because it doesn't even reflect its production costs... 

It shows you how prices need to go higher. Most mines are going to be shut down and there will be no supply and that all by itself means the price of gold has to go up because there will be no supply.

Schiff expects mining companies won't invest in capital expenditures or exploration until gold hits $2,500 to $3,000 by his estimates.

Gold prices are straddling $1,200 per ounce today.

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