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.