07 January 2014

The secret gold demand indicator

In yesterday's post I had a footnote on reports that Perth Mint sales were up 41%. That figure got a lot of coverage and was taken as a general positive statement on gold demand. However the figure is only part of the story and highlights a deficiency in understanding demand in the gold market.

To restate, the figures reported were just in respect of our minted coins and minted bar sales. These represent at best 10% of the volume of gold we sell each year. As such, the 750koz we sold of minted products can only be taken as an indicator of positive retail demand.

The follow up question that Kid Dynamite asked me was how much of a percentage increase did we have on the remaining 90%, the majority of which is sold in tonne lots as kilobars into the Asian markets.

Now I bet most people would expect me to report some similar large percentage increase, given all the coverage of how much gold is imported into China and traded on the SGE. Unfortunately we don't reveal those hard figures but I can tell you that circa it was not up or down by much. Why?

The reason is that the Perth Mint sells pretty much the same amount of gold each year, because the mines that refine with us mine it at a pretty consistent rate. Now we also refine scrap, which changes a lot in response to price, so our total throughput (and the resulting "sales" of the refined gold) does change.

But, can we really consider sales of gold from scrap sources as "demand", when there was obviously a seller dishoarding it at the other end. That is surely a wash, is it not? But also, doesn't that logic apply to the sales of gold from newly mined sources, as there is a miner selling (supplying) on the other side of the demand?

For example, would it make sense to say that demand was up for Apple stock today because more shares (volume) were traded today compared to yesterday? Of course not, as the total number of Apple shares is the same and all that has happened is that ownership of those shares has changed hands. Volume is certainly a useful metric, but it doesn't tell you about demand.

Since all the gold that has been mined still exists, gold is like a company stock - it is just the ownership that is changing. Some may argue that newly mined gold adds to this stock, so this is the demand. But the problem with that is that mine production is relatively consistent. Saying that newly mined gold = demand would just have you reporting demand of 1-2% every year. That is not useful.

My point is that for every buyer (demand), there is a seller (supply), so just reporting a volume sold figure doesn't actually tell us if demand is "up". Selective reporting of one segment of the gold market that "sales in ounces of X are up" is just PR spin, or narrative building. It is not actually telling you if demand is up or down at all.

So how can we determine the state of gold demand? The only real way is to look at the intraday order book listing the volume for all bids and offers in the market and observing whether there were more bids (buyers) or offers (sellers). But I've rarely seen journalists or bloggers refer to this when they say demand is up or down. Reason is it is hard to get and analyse such data.

Plus you have the problem with the gold market that most of the trading is not done on exchanges, so you don't know the depth of the bids or offers on gold around the world. So how can we work out if demand for gold is up or down?

Well there is another shortcut measure to get around this problem and tell us what is going on with gold demand. I will now reveal this secret indicator. It is secret because right now I don't see many goldbugs using it at all.

This is how it works. If you have more people bidding to buy than there are people offering to sell, then the gold price will go up. This indicates more demand (buying power). And if there are more sellers than buyers bidding, the price will go down and indicate less demand.

Excuse the sarcasm, but price tells you about demand vs supply. Of course the permabull goldbugs cannot accept this because the gold price has been falling and that is a negative. They can only deal in positives (as you aren't going to sell a newsletter or coins with negatives) so they ignore price (except when it is going up) and construct a narrative on the basis of selective information.

The gold price is down because demand is down. Get over it. I own gold but do you see me crying about it? If you are so insecure about your gold investment and the reasons why you bought it that you can't accept the negative price action and look for reassuring bedtime stories about how demand for gold is great even though the price is going down then you shouldn't be in gold in the first place.

Gold is a tough, opaque and volatile market. Whether you are holding gold as insurance or a trade, it therefore requires an mind open to all the data and varying interpretations and some adult maturity, otherwise those just looking for positive data and cognitive bias will get screwed. Time to man up, or woman up, and stop acting like a baby.


  1. Quote "the gold price has went down" - & all credibility is instantly lost due to shocking grammar?

  2. That is what happens when you rush a post and don't proof. Thanks, will have to wait till tomorrow to fix.

  3. Thanks you for your insight and understanding, I am one of those who were grateful "for reassuring bedtime stories" when gold went down, and to overcome that I needed to read what you wrote.

  4. "And if there are more sellers than buyers bidding, the price will go down and indicate less demand"

    Indeed, & what's more, it doesn't necessarily mean that supply has increased, only that demand has decreased.

    Starting from the fact that money has constant marginal utility, that is, demand approaching the infinite, thus supply becomes meaningless, I'm tending towards the idea that the 'law of supply & demand' is actually just the 'law of demand'. Price doesn't depend on supply, only demand.

  5. Bron-

    I usually find your posts well thought out. Disagree totally with your lastest post. 2013 liquidation from gold etfs and lbma is around 2000 tons, about equal to miner production ex china/russia. Swiss refiners are running 3 shifts and are having trouble sourcing gold. I assume you read Koos Jansen post on 2013 China demand. You also know that Turkey gold imports were up 150% to 302 tons in 13. Sge spot demand is robust. I do agree with your comment about facing facts.

  6. Bron, is Perth Mint also running at full capacity like the swiss refiners regarding 1kg bars etc.?

  7. Ok, the demand is down. In that case. why is GOFO negative?

    One may also wonder why 96% of December Comex deliveries went to JPM house account. Is JPM the only player in Comex wanting physical gold? I doubt that.

  8. Your indicator is deficient. Price increase does not significantly increase the supply of gold through mining. Also there is a massive supply overhang of aboveground gold which does not flow in response to price. Price rises, price falls, but gold is hoarded. Why? Maybe price is not currently sufficient to make gold flow? And when gold does flow at the right price, who needs mines? Can not trade the aboveground gold back and forth?

    Gold is not like commodities which are used. Gold is not used, it is accumulated.

  9. Norm, I think you've missed the point of my post, which is really about looking at the gold market from a non bullish bias.

    Your statment about the Swiss refineres can also be restated "swiss refiners are running 3 shifts to reprocess all the massive physical gold that was sold". Turkey & China gold imports again, that is just one side, that gold has to come (supply, be sold) from someone else. It is just ownership changes.

    Who the old and new owners are is useful info, but the figures themselves do not represent "demand" being up.

    Anon, "which does not flow" - how do you know this for a fact? If China SGE deliveries are = to mine production then where does all the gold come from to meet all the rest of the world's gold "demand" for jewellery, industry and coin/bar? It obviously comes from the hoarded stock, indicating that the stock does flow. What we don't know is how much is flowing.

    I think a follow up post is required.

  10. Date: Sun Dec 07 1997 18:45

    Looking back , one will ask, "how could I have thought that no one wanted gold, when more of it was being bought than existed"? Indeed, more gold than exists or will be produced in the next ten years!

    Source: http://www.usagold.com/goldtrail/archives/another2.html

    Looking at the price of gold to judge whether demand is up or down is erroneous.

  11. I am strongly convinced that this supply and demand is just some weak human excuse for simply saying "nobody aint knows nothing anyway", but instead "supply vs demand" sounds more brighter.

    Just to give you some examples: Have you ever went to a store where they have been sold out of something you wanted to buy? How can that be possible according to this SvD stuff?
    Or think of the latest apple gadget. What is the supply (infinite) vs. demand (limited to braindead jerks)?
    Or when you drive up to your filling station, can you describe the SvD on that purchase?

    I'd say, there is much much more than just "supply and demand" to the human price discovery and exchange of goods.
    Greets, AD

  12. I find it a very interesting post and wish to add my view.
    I still consider mint or other private sales figures important, because I assume that increased buying power from gold and silver will derive from increased public intrest in the metal. To my interpretation people selling jewelry for cash would be people suffering from financial stress.
    Iwould also be selling jewelry if my family where in financial trouble.

  13. Interesting post but wish to add my view. People who are hardstrapped for cash will sell their jewelry. I don't consider them as investors in precious metals selling out. I consider higher demand for coins positive as it means people are showing more intrest from investor perspective or as protection. I consider these people smarter then those relying on tree made money.