I had recently seen a post relating to Steve St Angelo’s talks in the past about gold storing energy. He got me thinking about this a few years ago. Like, deep thinking stuff. I tried working it out in my head. It can’t work. I get where he was going, and I had a better analogy for him.
First – let’s talk about what energy is. Sciencenotes.org defines energy as…
“In science, energy is the ability to do work or heat objects.”
There are different TYPES of energy. Let’s just glance at the bottom.

I think where Steve is going with this is the mechanical energy needed to move dirt and rocks to then get the finished product of a refined gold bar. So, let’s take a look at that.

With this bar, I want you to imagine the energy used by dozers, rock trucks, generators in the form of fossil fuels. Over the years, gold has been harder to find, and with that, perhaps you are expending more fossil fuels to dig deeper. In Steve’s analysis, it is somehow storing this energy. In reality, the physical aspects of gold are not storing energy more than a bucket of water.
In reality, E = mc^2. So the energy in the brick of gold is equal to the mass of the gold times the speed of light, squared. This is how they made the nuclear bomb, with splitting atoms.
I think it’s more accurate to see what the gold represents, rather than try to think of it as energy. Why? Let’s assume you mined gold in 500 BC. You probably found a lot of it near surface. However, you potentially had slaves do the work manually. This is pretty cheap on the labor side, but you still needed to feed them calories. These people were primative bulldozers, if you will. They were not fueled by oil, but by calories in biofuels. Only in the last 180 years or so have we really been able to add oil or diesel to this kind of operation. What this did was take a lot of the manual labor out of it. In fact, you can say this process improvement was cheaper. Compared to human caloric intake to manually dig all of this, using machines made it more efficient and less energy was needed to mine it.
You can look at the backend of this, and consider the thousands of years of trees and coal used to melt the gold. This energy was heat energy. Today, perhaps they use nat gas to heat something, which perhaps is more energy dense. Whether you are boiling water with nat gas or coal, kilocalories are the unit of heat 1g of water 1 degree higher celsius. The same can be said for melting gold. But you need to cut all of those trees down, hall, and use a ton of them. The energy needed to get trees may be more – which is why we may use more dense energy heating sources today.
But I then ask you this. If gold stores energy, how much does it store? If a bar of gold from 500 BC used 1.1m joules of energy to make and today’s uses 300,000 joules of energy, which bar of gold is more valuable?
If you are saying that it stores energy, you need to be able to calculate that. You then need to go back in history to see if it did store energy. In fact, it does not, for the very reason I just talked about above.
Financial energy
I did a whole slide deck on this and 2 hours of videos on this about 20 months ago. I dug in deep on this. See, gold once upon a time never used oil to mine it. And, potentially years from now, it may not use oil to mine it again. I think Steve is right to approximate a barrel of oil to gold, but not for energy reasons.
In business, you have to use return on investment (ROI) on just about every business decision. If you want to franchise out your pizza shop, you need to then understand if you put in $100,000, what is the financial return on that investment. Is it 20% yearly? Don’t know. You then have to project out sales, expenses, etc. What starts to bake your noodle then is to imagine how inflation happens with the money supply. 10 years down the road sales might be $1m. However, the purchasing value of that dollar may not be anywhere near it is today. So the number on paper may look like really good ROI, but you need to account for the future value of money – all fun equations you learn when you take finance.
So I want to go back to extracting gold. In my slides, I used “jewels” to measure the FINANCIAL energy of gold. It is a play on the word “joules” used to measure mechanical energy.

I took general physics 1 and 2 in college, AP physics in high school. I also took finance. All of this happened now nearly 30 years ago, so I won’t pretend I’m doing this stuff daily. I remember a lot of the big picture concepts, and this helps to understand a “jewel” as the finances needed to get gold out of the ground and into bar form – it uses a variety of energy to do so. However, remember the “future value” of money above? Something that costs you $500 to make in 1970 may cost you $5000 today. But using my analogy, both processes use the same amount of JEWELS.
Let’s take, for instance, in perhaps 1920 it costs $16 per oz to get gold out of the ground. You now have diesel trucks, people working at $1 per hour. Perhaps gold is sold for $20 per oz. The mine owner put in $16 and got $20 out. It’s a 25% profit. To me, this is the JEWEL. The combined process of the physical energy along with the ROI. This is the BUSINESS measurement of one oz of gold, to make this simple for people to understand.
If you fast forward to today, perhaps in USD it takes $1600 to take gold out of the ground. You have people making $50 per hour (rather than $100 per hour as the 100x multiple because now machines are a major source of cost of extraction) and perhaps the mine owner sold this gold for $2000. That’s 25% ROI.
Meaning – when you are doing the business process of ROI, you need to understand what the currency in today’s market will buy you with the return. This is the indicator whether or not the process is green lit. Some of these may be greenlit at 40% ROI and run more efficient. Some may be greenlit at 20%, but inflation sneaks up and they are actually making 10%. My contention is the ABSTRACT value of the jewel is perhaps a numerical ROI like 20% or 25% over the course of human history.
Now, what happens if the cost to extract that gold is $2200 and the value of gold is $1500? Gold is not mined. Supplies are not added to, but more and more people are added to the planet every day. When I was a kid in 4th grade almost 38 years ago, we hit 5 billion people. Today, we are close to 8 billion. More people added to the pot means more demand, big picture. As supplies of anything do not increase with the population, you will have severe demand price spikes. These higher prices then entice more supply back into the market. In the above example, price might go to $3,000 and at $2,200, projects are greenlit to mine. Once the gold is mined, it stores the JEWEL.
I say this, because this equivalent is used for everything. Consider drilling oil. You need to know that if you drill a barrel of oil out of the ground and the financial costs in today’s currency are $56, you will not drill when price is $40 and try to make it up on volume. If anything, you committed at $70 a barrel and hold some supply back hoping price comes back up. But when you greenlight these projects, you are looking at the currency cost to do so as well as the ROI on this process. Perhaps this is 20% or 25%.
One can then make the argument that if you were in 1960, the financial costs to extract a barrel of oil could be measured against the financial costs of extracting an ounce of gold. Or a pound of copper. Or a bale of cotton. Perhaps in 1960, the financial costs to extract a barrel of oil were approximately 1.2 g of gold. Both of these business processes, at that time, used currency for purchasing as well as figuring out ROIs, and the currency equivalents at that time, would have potential equated to 1.2g of gold per barrel of oil. Fast forward 63 years and the amount of cash that entered the system and sloshed around is stupendous, but the 1.2 g of gold per barrel of oil is still approximated today.
Now at that time, gold also had approximations with everything else. Perhaps a new discovery would find a lot more gold, and for a moment, the ROI on gold was 40% rather than 25%. This could flood the system with more gold (and drives the price of gold down in currency at that date/time), and with this, inflate the amount of gold in the system then making a barrel of oil perhaps requiring 1.5g of gold. Then, perhaps, a recession hit, and there was too much oil in the system, and suddenly an oversupply of oil hit the markets – and it cost .9g of gold to buy a barrel of oil.
What my suggestion is, is that gold stores financial energy in “jewels”. Assume the creation of a gram of gold was 1 jewel. 1.2 jewels then has the same spending power, approximately, as 1.2 jewels today. Whether you want to spend it on oil, cotton, copper, or a man’s fine suit.
Applying this to today – and what about silver?
When you look at historical ratios of perhaps silver to gold, for most of history this was somewhere like 16:1. At the time, this was the rarity of how it was found. However, gold was more prized by kingdoms as money, and wars were fought over it. The “easy” gold had been mined, come the 1960s, and the cost of the Vietnam war was increasing. DeGaul called bluff on the gold peg to the dollar, and in reality, it was becoming harder to mine at those prices. So they had to dig deeper to get gold, which cost more money (and yes, had to expend more energy which is paid for with money).
I could posit that the same is now rapidly taking place with silver. While the 16:1 found in earth’s crust was something that happened for many years, KN of First Majestic is seeing it at “8 or 9 to 1” now. However, supply is only one half of the supply/demand equations. For example, my 2 year old’s fingerpainting is one of a kind. It is so rare, you must pay me $1m. Yeah, right. In reality, there’s no demand for it. This is why supply AND demand need to be examined with price, and not just one or the other.
What has happened for years was an abundance of silver was mined, pretty cheaply. But….those days are over, and in my writings, I have shown that virtually every “silver primary” producer has been driven out of business. In order to survive, they must have a primary metal of gold or base metals.
And, as you can see, a 200m oz deficit last year is now cutting into available above ground stocks. You have the Jeffrey Christians out there talking about the 60b ozs above ground, but in reality, only about 5B of it is “available” today. Do you want to sell your silver at $21? No. Neither do I.
What you also must understand is that something is only worth, what someone is willing to pay for it. If I short a silver contract, and someone buys it, they agree on that price. No one forced me to sell this at $21. My contention is that these contracts being sold now are probably more exclusively the big base and gold miners forward selling silver at the best market price it can get. This is a price more or less below what a silver primary can do (with the ROI) to make money. So, they go out of business or flip to mining gold/base metals with a silver kicker.
This means that as the ore bodies degrade, less “silver projects” are being greenlit at $21 and less is coming to market. Base metals and gold producers aren’t “dialing up” silver production – they are merely selling a byproduct of the other metals.
The effect of this is gradual starvation of supplies to the market. Now, the question is, how long will this go on until there are not enough supplies at paper “market prices”? You can see the COMEX registered with 31m oz, and the eligible with a lot more. But get this math:
If yearly demand is now 1,000m oz (1B), you are looking at the COMEX as 3% of world yearly supply. Meaning, if there was an issue with finding silver on spot markets, this is perhaps 2 weeks of world demand? Not exactly a warm and fuzzy if I’m “naked shorting” a few hundred silver contracts.
I believe that this is Krakatoa incarnate.
I also believe you will start to see some “mean reversion” in history with “jewels of energy” that silver costs to produce and get closer in line to gold’s 16:1 GSR. The fact is that today, so much of the silver we are using is going to “green” stuff and is not easily recycled. It might take $100 silver prices to profitably recycle this down the road. So you might have 55b in silver above ground, but then consider the jewels of energy needed to turn band aids, toaster boards, and stretchy pants into a 1kg bar.
Steve talks about $20 as a “primary silver miner” price as a floor, but it’s not true like it is with gold because over 97% now of silver is mined by gold/base metals miners with silver as a byproduct. I can see the paper price going down even more – but what will happen, at some point, is the palladium beach ball effect.
When the beachball happens, no one knows. Could be today with first notice, could be years down the road. But this is happening, as the disappearance of primary miners of silver should be your canary in the coal mine.
Using my logic, above, no silver primaries now have the ROI to mine silver. Yet demand keeps exploding due to investment demand as well as green energy demand. Let that really sink in. What happened to gold, oil, or ANY OTHER commodity, in history, when primary extraction of it disappeared? “The solution to low prices, is low prices”.
Have fun!
Leave a Reply