The Silver Bot

In an interview with Tim Treadgold, legendary Australian prospector Mark Creasy makes a point about watching the stockpiles, not flow, of gold:

… scrap gold, and even mine-supply, aren’t really the big players in the (gold) market. There’s about 160,000 tonnes of gold in existence, and the world produces about 2000 tonnes of freshly-mined gold a year, and about 1000 tonnes is generated as scrap. The total amount of mined gold and scrap is less than 1% of the overall gold market. The mine supply isn’t all that important in the gold price. It’s all about sentiment. The people who will influence the value of that 160,000 tonnes are the biggest shareholders, and they are the central banks, which own about 30,000 tonnes.

Gold is a bit like a company which has a dominant shareholder. If everyone believes the dominant shareholder is selling the price drops like you wouldn’t believe. A major influence is how people see the biggest shareholders handling their gold.

The best way is look at gold is not on the peripheral, say the scrap market or even mine supply; it’s to ask what are the big shareholders doing. In the past we’ve seen big holders such as the Bank of England and the Swiss National Bank selling, and people think we’re out of this. When they see a big new buyer, people want in.

Now Mark’s point that the flows are peripheral is not to say that they do not have an influence on the price. In the long run, if we have passed a “peak gold” moment then flows reduce and the stockpile levels out which, in the face of increasing demand, is bullish for price. Significant changes in flows can also tip the balance of the buying and selling volumes of the holders of the 160,000t stock.

The biggest influence classical “flow” supply/demand analysis by the World Gold Council has on price is via perception of its effect on price rather than any actual effect due to the physical volume of the metal. Why “flow” supply/demand is so dominant is due to the fact that it is (relatively) nice and easy to measure.

In contrast, the stockpile of gold in vaults is not easy to measure - how do you determine the position of gold “shareholders”? How much volume of gold will be bid and offered to the market at each price level? Even if you can poll all the holders, the so constructed supply/demand curves of the stockpile will change over time in response to events. This is Mark’s “sentiment”. Because this sentiment is difficult to pin down, there is a bias towards the numbers, the measurable 3000t flow and away from (or complete disregard for) the unmeasurable 160,000t stockpile.