Why gold production does not affect the price
Most observers believe the gold market changes in the volume of its production by one of the most important factors affecting its price. Gold bulls inability to use the miners to increase production as an argument in their predictions about the growth of prices, and bears argue that the growth of the yellow metal in the end break the back of a bull market in gold. I submit that the annual production of gold is so small compared to the existing stocks of metal, which he has almost no effect on its price.
The size of the existing stocks of gold ( and why it makes sense to consider gold as a currency).
Gold, which pulled out of the ground every year, is not consumed , but is added to the reserves. This means that all the existing stock of gold is a potential source of gold supply . Therefore, gold – it is rather a currency than a commodity .
We understand that not all the gold ever mined is ready for immediate sale , but much of it is available for market transactions . According to statistics, in the entire history of humanity is sick of land 150 tonnes of gold, of which two-thirds were produced after 1945. Of the 150 tons of around 108 tonnes stored in the monetary and investment purposes. Monetary and investment ( MI ) gold includes reserves of central banks and the IMF , ingots and coins in private hands, in the possession of gold ETF and investment funds, as well as investment jewelry with high gold (24 ct.) Thus , 108 tonnes represent the minimum number of salable gold and is clearly not comparable to the amount of gold mined in the world last year – 2,400 tons .
Consider the gold market as if it has only recently mined gold metal dominated the proposal is as wrong as the U.S. market is considered as if it had meaning only dollars , printed last year. Indeed, the new dollar that is created today will become indistinguishable part of the total supply of existing dollars , and it is the total amount of dollars in conjunction with the demand for the entire sentence determines the price of the dollar. Moreover, it can be argued that the size of annual gold production has significantly less impact on the price of gold than the number of newly created dollars on the price of the dollar , as the proportion to the newly created dollars make a far greater proportion of the total number than mined gold from existing stockpiles. If the increase in the gold reserves of 2% per year, the amount of dollars growing at a rate of 5% or more.
The situation in comparison
Thus , the total reserves for Sale – 108 thousand tons ( MI gold) , the annual volume of production – 2400 tons. That is, changes in investment demand for gold MI in more than forty times more important for the formation of the gold price than the changes in the volume of production. In other words, the change in the amount of investment demand 0.25% significantly more than 10% change in volume production .
Information London Bullion Market Association (LBMA) also support the assertion that a change in the volume of production – it’s a tiny amount compared to the volume of the market. According to the LBMA, the average daily trading volume in London is about 20 million ounces (650 tonnes). That is, during the four days the entire annual gold production refers only to one of the world’s playgrounds.
If the volume of production is not essential , it is important that ?
Gold prices for the period up to two years determined by a combination of relations against the main elements of its index , credit spreads , nominal interest rates and the yield curve.
In the long term, the price of gold is determined by the change in confidence in the monetary system and the economy , as illustrated by the long-term trend of a broad stock market (in fact, there is no reason why the stock market would serve as an indicator of monetary confidence, but since the 1930s , governments have consistently pursued policy of currency devaluation and creating instability when the economy is in trouble .)
For example, the bearish stock market years 1966-1982 coincided with a bull market in gold and tools associated with it ( gold mining shares ) . In 1982-2000 the situation changed – a bull and a bear in the shares of gold . Since 2000, the same situation as 1966-1982 years. Correlation does not imply causation , but in general it can be said that there is an inverse relationship between the value of the keeper of the most famous and more speculative instruments.
All of the above means that the bull market in gold will continue until such time as the bear market is over shares when the average value of stock returns will not fall below 10 , and the dividend yield does not exceed 5 %.
But most other commodities experienced a rally in 1970 , fell from 1980 to 2001 and has grown since the beginning of the current decade. What is gold different from any other material ? The answer to this question can be found in the chart ratio of gold and CRB ( broad commodity index ) below.
In order to avoid distortions we cleared the index of all paper currencies and analyzed the changes in the purchasing power of gold relative to other commodities. The graph shows that gold has shown better results than other commodities during the bear market shares and the worst results in the stock bull.
It should also be mentioned that in 1930 most of the commodities and related stocks showed very poor results , and gold and gold stocks were at their best .
Other factors affecting the price of gold
For completeness, we will focus on two other factors that are generally perceived as affecting the price of gold, namely the sales of gold by central banks , and changes in the demand for jewelry. Below we explain why the first factor has very little effect , and the second has nothing at all.
Sales of central banks , including the U.S. Treasury and the IMF :
– Central banks hold 30 % of MI gold and therefore have the opportunity to influence the short-and medium-term trend in prices. Actual sales for the last 20 years have been too small to cause long-term impact on prices. According to the World Gold Council (World Gold Council), they sold their gold at a rate of 250 tons per year in 1990 and 400 tons per year in the 2000s . This means that reducing their stock at a faster rate during the current bullish market than 1990s central banks , however , failed to significantly affect the price of gold.
– News on sales of securities are only short-term impact on the price.
– Sales of securities – a reduction in demand for some holders of gold, but at the same time can lead to an increase in demand for gold MI . After all, the credibility of the paper currency falls as gold, “ensure” that currency is sold, and falls particularly hard at a time when the currency weakened for other reasons. Something similar happened in the second half of the 1970s , when the sales of gold U.S. Treasury followed by an increase in prices.
– Central Bank monetary manipulation ( the manipulation of interest rates, money supply , etc. ) have a much greater impact on the long-term price of gold than periodic purchase / sale.
Changes in demand for jewelry
– Analysts often attach great importance to changes in demand for jewelry. Periodically, we find the claim that jewelery demand was 60 % of total demand for gold. In fact, they are referring to the new 60% gold (such as fresh extraction and scrap) . Thus, they ignore the huge existing stocks of gold.
– In fact, the changes in the annual volume of demand for jewelry is even less significant than the changes in the volume of production.
Anticipating some of the objections
Objection: At some point, the market can not be sellers of existing stocks , which leads to the domination of the market gold mining companies.
Answer: Statistics LBMA demonstrates that the sale of gold miners are very small compared to the volume of trading in London alone . But even if all the owners of gold will decide to hold it in anticipation of higher prices , the sale of gold miners still will not have a significant influence on the price. Consider the example of Bill and Fred , the two shareholders of XYZ.Bill holds a 70 % stake, and Fred 1%. Fred decides to sell their shares immediately , and Bill is waiting for higher prices . Despite the fact that Fred sells his shares right now, Bill’s decision to play a much more important role in the process of pricing, because it controls 70 times more shares than Fred .
Objection : Copper metal can also be considered a huge deal ” on the ground” when you take into account the metal, which is ” stored ” in buildings and other structures.
A: It does not exist in a form ready for sale. No matter how high the price of copper will never be economically feasible to demolish the building with the purpose of they contain copper. Therefore, electricity and sewer pipes can not be considered reasonable offer.
Gold – a single -commodity , which the ratio of ” stock-to- use ” is so great that the “use” can be ignored. This idea is disclosed in detail in the article Steve Matthews (Steve Matthews), chief commodities strategist at one of the hedge funds .
“It should be noted that nothing else but gold has such a huge margin in 7019 days. This leads us to the conclusion that the right way to trade in gold – is to trade them as foreign exchange trading, and not raw materials. You need to ask someone else about the recommendations . I refuse to give them , because gold is beyond my analytical model of supply and demand “, – says Matthews .
By the way , we believe that the remaining stock in 7019 days ( number of days of supply , ” stored above ground “, provided that production is no longer taking and investment demand remains at the current level ), which is referred to Matthews understates the situation. We evaluate such a reserve in 13,000 days ( 35 years) , for comparison, the stock of copper in the range of 30-90 days.
Objection: In the last forty years have seen a fuzzy inverse relationship between the amount of gold and the price of it. The chart below shows the development of gold mining since 1900. It shows the reduction of production in the first half of 1970 ( bull market in gold ), continuous growth since the beginning of the 1980s until 2000 ( Golden Bear ) and then cessation of growth during the current bull market. This is interpreted as evidence that the change in production affects the price of gold. How do we explain the negative correlation ?
Answer: The most logical – is to assume that this attitude does exist, but only the increase in production is due to the growth of prices . Due to the extremely slow growth of the price impact on the volume of production it seems that the drop in production pushes the price up and its growth leads to lower prices . In fact, the level of production today – it’s a reaction to price late 1990s . This delay occurs because it takes several years earnings growth , to stimulate the exploration , which in turn, via several years production will increase . On the other hand, only a long period of low profitability will force the mining industry cut production and exploration.
In the 1960s, the rising cost and the fixed price of gold has led to a drop in production in the first half of 1970 , while the explosive growth of profitability in the 1970s led to increased exploration , leading to an increase in the construction of mines and production growth in 1980 – ies.
Since the profitability of gold mining in the 1980s, remained acceptable and investors expect a new bull market in gold , the industry has continued to increase in production throughout this decade . Only in the second half of the 1990s, falling profitability of gold mining beginning to really feel what caused the almost complete halt exploration . The result of this stop was the cessation of growth in gold production in the last 10 let.No note the growth of the ratio of gold / CRB in the last 15 months, which is an indicator of growth in profitability of gold mining . The cycle is repeated.