How significant are gold coin investments to gold demand?

September 16, 2011 – How significant are gold coin investments to gold demand? Bars and coins are second only to jewelry, consuming 2 ½ times as much of new supply as technology and 3 ½ times as much as ETFs. But new supply adds only 2 ½% to the total above-ground reserves each year.

Of the 165,000 tons of gold out there somewhere central banks and ETFs are sitting on less than 28,000 tons. That means that 137,000 tons, give or take, is just being held and gold coins and bars keep adding a little more every year. Looking at that another way, if the holdings were liquid they could replace mine production for half a century.

But of course held gold is not liquid supply. That’s why they call it held. To be sure gold moves about in the market, but less than 1% makes it into the supply stream by way of recycling. Clearly the movement of gold within the market sets the price, and that’s where conventional analysis models break down.

The gold price at any instant is simply what a buyer and seller agree it should be in an exchange. Buyers have a quantity of dollars that they are willing to exchange for some minimum quantity of gold (bid) and sellers have a quantity of gold that they are willing to exchange for a minimum amount of dollars (ask). Sales take place until bid and ask prices no longer meet and the market is cleared.

It might appear, then, that the gold price depends on the whims of the traders. To an extent that is true, but even on the heaviest trading days only a minute fraction of above-ground gold actually changes hands. Not that the gold isn’t for sale, it’s just that the most buyers are willing to pay is less than the minimum sellers will accept.

That’s the secret. The gold price is only what the majority of gold investors think the dollar is worth. Regardless of short-term surges in their opinion of that you can’t build a credible case that the greenback can somehow reverse it’s downward spiral, and so gold must continue to climb.

Even a frenzied run on gold coins would cause but a tiny ripple in that very large pond. Even total divestment of a big ETF wouldn’t have any permanent impact. Gold coins will remain a sound investment for as long as the dollar is in decline, and that promises to be a very long time.

Kevin Johnson

Senior Staff Writer –

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