Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

Are the Production or Consumption Drivers of the Gold Price?

Commodities / Gold and Silver 2015 Jul 20, 2015 - 12:06 PM GMT

By: Arkadiusz_Sieron

Commodities There are many opinions about what factors drive the price of gold. Among the candidates you will find: inflation rates, U.S. dollar exchange rate, real interest rate, geopolitics, oil prices, market volatility and crises, mine production, jewelry demand, speculation, technological demand, central banks’ actions, manipulation, and investment demand. We will deal with them in this and the following editions of the gold Market Overview. We will begin by rejecting production and consumption. It does mean that they do not affect the gold price; however we are interested in factors which drive the gold price.


Let’s look at the mine production. Nearly all gold in the world that has ever been produced is still held in some form. This is why mine production is not a key factor driving the gold price. The mining adds only about 1 percent to the total supply each year (and in a rather stable and predictable manner). And an amount equal to the annual mine supply changes hands in less than a week in the London market alone. Therefore the impact of mining production on the gold price is practically negligible.

In other words, gold is hoarded as a monetary asset, and not consumed like other commodities. Because the stock to annual production ratio is around 60, the gold market, unlike other commodity markets, cannot be in a supply deficit, despite the erroneous opinions of many analysts, who treat gold as they do other metals.

They forget that other commodities derive their economic value from being consumed or used as an input in production, whilst people buy gold in order to hold it (even in the case of jewelry, gold is still held and could be melted and come back to the market). Because typical commodities have to be destroyed to use them (coal has to be burned, wheat has to be eaten and so on) or, in case of base metals (like copper used to build pipes), transformed in an irreversible manner, their stockpiles are not large and amount to, in the best case, a few months of production.

Therefore, ignoring inventories, which are not large in the case of typical commodities, supply is mine production and demand means consumption. This is why commodity analysts look at the annual mine supply and industrial off-take. Thus, in the commodity markets the price regulates the flow of production into consumption, or rations the annual production.

However, the gold price rations rather all metal held in the world; therefore in the gold market production does not constrain its price. The gold market is so liquid that even the complete halt of mine production will not affect it significantly (the existing gold owners possess most of gold); hence, mining production does not drive gold prices. All of these analyses on mining industry, peak gold, cash costs, strikes in mines, declining new gold discoveries, an alleged structural deficit and so on are not that important. The gold price significantly influences the gold mining industry, but not the other round way. Look at chart 1. As you can see, mining production has been constantly rising since 2008, but it did not prevent the gold price from rising until 2012.

Chart 3: Mining production (in tons; blue line, right scale) and average annual gold prices (yellow line, left scale) from 1997 to 2014

From the above analysis, it should be clear now that the technology demand is not an important gold price driver either. Unlike other commodities (including even silver), gold is practically consumed not at all. The technology and industrial sectors account for less than 10 percent of the total demand–a lot less than for other commodities. This is precisely one of the reasons why gold was chosen as money.

            What is also important is that this category of demand (similarly to mining production) is relatively persistent and steady. The electronic companies contract gold delivery in a stable pattern throughout the year. This predictability ensures that technology demand has little impact on the daily price of gold. Moreover, only a part of gold used by industry is lost and never returned to the market, since more and more gold is being recycled over the long run.

            If, as we stated before, technology barely affects the price of gold, it can only support the yellow metal in the long-term (see chart 2, where the industrial demand was falling between 2007 and 2009, and also between 2010 and 2012, during a period when the average annual gold price was rising).

Chart 2: Technology demand (in tons; blue line, right scale) and gold price (yellow line, left scale) from 2002 to 2014

            The yellow metal is only a minor input in electronic equipment, and industry firms are not interested in gold speculation and trading since they are price-takers, not price-setters. Again, it is the gold price that affects the technology demand (not immediately, however), not the other round way.

            The key take-home message here is that gold cannot be analyzed as a commodity, because it is a monetary asset. The yellow metal has an extremely high stock-to-flows ratio, hence we once again observe that it is practically not consumed, nearly all gold ever mined in history still existing in some form.

Therefore, investors should ignore commodity-type approaches when analyzing the gold market since they often lead to the erroneous investment assumptions and conclusions. Specifically, neither mining production nor industrial demand drives the gold prices.

If you’re interested in reading our thoughts on other gold-related topics, we invite you to our website. We focus on the global macroeconomics and fundamental side in our monthly gold Market Overview reports and we provide also Gold Trading Alerts for traders interested more in the short-term prospects. Sign up for our gold newsletter and stay up-to-date. It's free and you can unsubscribe anytime.

Thank you.

Arkadiusz Sieron

Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules