Is gold about to "run out"? The correct answer to that question
is the likelihood of that happening is precisely 0%.
However, that is not the conclusion one would come to from the Zerohedge
headline Peak Gold? Goldman Calculates There Is Only 20 Years Of Gold
Supply Left.
Zerohedge supplied a couple of charts.
Peak Gold
Diamonds Aren't Forever
Gold About to Run Out?
Zerohedge comments ...
If the "known reserves" of gold plunge in the
coming decade, no matter how many gold futures and GLD short sales are
conducted by the BIS, the price will have to go up, and it will go up high
enough to where a new surge of gold miners will come online and find
thousands of new tons of gold reserves around the globe.
Unless they don't, and Goldman is correct that "peak gold" may have
arrived. This will be even more true if over the coming years the long
overdue fiat economic panic finally washes over the globe, and a revulsion
toward central bank policies forces a scramble into gold whose value (if not
price since fiat currencies will be redundant) soars.
The answer is unclear, but what is certain is that like the price of oil over
the past decade and until last fall when price discovery finally became
somewhat credible, what happens in the physical realm has absolutely zero
marginal impact on the price of commodity which has about 100 ounces in
deliverable paper contracts for every ounce in underlying. It will be only
after the gold price distortions via the derivative market are eliminated
that such trivial price-formation forces as supply and demand are once again
relevant.
Gold Not About to Run Out
Gold is not about to run out for the simple reason that nearly every ounce
ever mined is still in existence. In that regard, mining supply, central bank
buying, jewelry demand etc. are essentially meaningless.
Misconceptions About Gold
I discussed jewelry demand and other topics in 2007, in Misconceptions about Gold. The article says written by
Trotsky, edited by Mish. "Trotsky" was a spoof name at the time for
who is now better known as Pater Tenebrarum at the Acting Man blog.
Gold Supply and Demand
If gold's price were determined by fabrication demand alone (jewelry and
industrial uses), it could not possibly trade at a price of $650 oz.
Many gold analysts, from the mainstream to fringe groups such as the Gold Anti-Trust Action Committee
(GATA) claim that they can predict what the gold price will do by adding
up annual fabrication and investment demand (as well as dehedging demand by
miners) and contrasting the resulting total with annual supply (mine supply,
central bank selling, disinvestment and scrap). In short, they analyze the
gold market in the same manner as they would analyze the copper market.
It should be immediately obvious that this can't be correct. After all,
nearly the entire gold ever mined (approximately 150,000-160,000 tons) is
still here. In short, the total potential supply of gold is some 97-98%
greater than the gold produced every year (approximately 2,600 tons).
On that basis it makes no sense to apply traditional commodity supply/demand
analysis based on annualized trends in the gold market.
Simply put, there is a big difference between commodities that are
effectively used up (aside from scrap residual returning to the market every
year) and a commodity the indestructibility and durability of which inter
alia made gold the 'money commodity' in the first place.
Jewelry Demand vs. Monetary Demand
One can further illustrate gold's unique nature as money with a study of gold
prices vs. jewelry demand. If record fabrication demand for gold (jewelry)
must be good for the price of gold, then a historic high in jewelry demand
should in theory coincide with a high gold price.
However, record high jewelry demand in 1999 - 2000 in actual fact coincided
with a 20 year bear market low in the gold price - the exact opposite of what
traditional commodity supply/demand analysis would suggest.
We can therefore conclude that there must be a source of gold demand that is
of far greater importance than the jewelry and industrial demand components,
and that demand constitutes the true driver of the price of gold in terms of
fiat money.
Indeed, there is. This demand component is called 'monetary demand'. Monetary
demand and the supply of gold is actually best described as the 'degree of
reluctance of the current owners of gold to part with their gold at current
prices' since, as mentioned above, some 160,000 tons are owned by somebody
already.
De facto gold acts in the markets as if it were another currency rather than
a commodity. It often keys off other currency cross rates, such as
dollar/euro , and has a strong tendency to ignore all the typical
supply/demand analysis thrown at it by the mainstream (including the World Gold Council which
should know better).
A rising gold price usually begets falling jewelry demand, which is exactly
what the theory of price
elasticity would suggest. But at the same time, rising prices actually
tend to stoke investment demand, just as a developing uptrend in the stock
market tends to invite more demand rather than less.
What's the Real Long-Term Driver for Gold?
Most analysts are totally clueless about gold and gold markets. They cite
jewelry, mining production, central bank sales, and all sorts of other
irrelevant factors in their analysis.
In an interview on Gold Switzerland Robert Blumen discusses “What’s really key for the price formation of gold?”
Gold is an asset. People buy it in order to hold it. The
price of gold is set as people balance, at the margin, the amount of
additional units of gold they want to hold against additional units of other
assets or cash they want to hold, or consumption.
If you think of the possible gold buyer as the guy who is saying, “Do I want
to hold one more ounce of gold or this $1,800 that I have?” The answer to his
question is going to be different for each person and for each additional
ounce. You might say “yes, I want one more ounce of gold instead of $1,800”.
Now, you have an ounce of gold and if I ask you the question again you might
say, “No, now that I have bought that additional ounce, I’ve got enough
gold”.
On the supply side, are the people who own gold. From their point of view
they have to answer the question, “Do I want to keep holding this ounce of
gold or do I want to sell it on the market and have $1,800?” That $1,800
might stay in cash or maybe they have another use in mind for it. The supply
side is everyone who has any gold and the buy-side of the market is anyone
who has any money that they might want to put into gold.
The people who already own gold, they could be active on either side of the
market as a buyer or a seller. I want to emphasize that everyone who owns any
gold at all is part of the supply-side of the market, not all at the current
price, but at some price.
Many of the people who have bought gold in the last few years are not
remotely interested in selling at the current price or even double the
current price, but there is always a price or some combination of price and
circumstances where somebody would put some of their gold on sale — maybe not
all of it but some of it. And people on the money side of the market are
asking the same question in relation to gold. The market balances all of
those choices out and you have a price that brings out the quantities on both
sides of the market into balance.
Maybe that’s not totally true, maybe some gold is held by people who wouldn’t
sell it for any reason. But I think that the concept of the gold bug who
plans to take it all to the grave is over-stated. I asked a person the gold
business whether gold retail trade is all selling and no buying. He told me,
“No of course not, there are always buyers and sellers”. After all, what is
the point of having a store of value if you never use the value?
And it is important to understand the cost of owning gold is not necessarily
the amount of money you could get by selling it. Prices are only a way of
quantifying true costs. The cost of owning an ounce of gold is whatever other
sort of economic opportunity that you are sacrificing by owning the gold
instead. People who own gold are every day looking at “what other economic
opportunities am I giving up by holding this ounce of gold?” and then “Do I
want to shift the next ounce of gold somewhere else that will give me a
better return or a better consumption experience?”. If you could swap an
ounce of gold for one unit of the American Dow Stock Average that was at the
time yielding 12% then the cost of owning an ounce of gold is not owning a
unit of the DJIA. The cost of owning gold is the opportunity cost, of which
holding cash instead is only one possible choice.
How Much Gold Is There?
Here are a few charts courtesy of Sharelynx Gold from my November 2014
article Swiss Gold Referendum in Perspective in which I presented
the case the referendum was meaningless except perhaps from a psychology
standpoint.
Annual Gold Production
Cumulative Gold Production Since 1835
Central Bank Holdings vs Cumulative Production
Of the 2013 total (a bit higher now), central banks hold about 31,877 tons.
SNB Purchases Irrelevant
One must exclude central bank holdings from the amount of gold available for
central banks to buy. And as stated earlier, one can subtract various other
items like rare coins, but the overall numbers show that it's safe to
conclude "buying 1,800 tonnes of gold over 5 years" is
essentially irrelevant from a "gold available" for purchase
standpoint.
Irrelevance
Discounting short-term psychology factors, mining is irrelevant, central bank
purchases and sales are irrelevant, jewelry demand is irrelevant, and coin
sales are irrelevant as factors in the price of gold.
Finally (and much unlike oil) because nearly every ounce of gold ever mined
is still in existence, the entire concept of "peak gold"
cannot happen until mining grinds to a total halt.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
