According to the more vehement gold bears everybody and his brother are poised to pull the plug on the gold market. Posted by James Randolph on September 16, 2011
Pulling the plug on the gold market.
September 16, 2011 – According to the more vehement gold bears everybody and his brother are poised to pull the plug on the gold market. But just what are those maniacal forces, and are they really all that powerful? First you have to understand what really drives the price of gold.
Gold is a very interesting element because virtually all there was when this planet formed is still here, either still in the ground or as part of the above ground supply. Today there exists roughly 165,000 tons of above-ground gold throughout the world, and that will be our point of reference.
In 2010 mines produced 2,869 tons of gold, adding only about 1.6% to the above-ground supply, while jewelry constituted 49% of demand and 28% went into bars and coins. Technology consumed just 11% and the big funds only 8%. When you add it all up, demand accounted for just 2.6% of the total available supplies. So where is all the gold?
Assuming that the Fed hasn’t surreptitiously disposed of any of its reserves – they are not required to disclose such things – then the US holds 30% of global sovereign reserves. What would happen if our central bank decided to alleviate the debt crisis by selling all of our gold? In the first place the current value of our reserves is only around $500 billion, and it’s a pretty good bet that China would scarf it up because they hold a meager 0.6% of sovereign gold and a whole bunch more of US debt.
In fact, central banks worldwide hold less than 17% of above-ground gold, and no bank is likely to completely divest its holdings. The most volatile of holders, the ETFs, would rank as the sixth largest nation with 1.3% of available gold, and still that’s not what you would call a major force.
Even if you factor in growing demand, existing supplies of gold could meet needs for at least 30 years. Clearly the supply of above-ground gold cannot be liquid – otherwise the price would be a fraction of what it is today and the mines would be out of business. That must mean that the current gold price is below the reserve necessary to free up the assets.
The reason for that is obvious. In the global markets gold is real money. There is no such thing as the price of gold – gold only sets the price of currency. You can’t pull the plug on that.
Senior Staff Writer – Certified Gold Exchange