Hi there Joe "Which camp is correct?" I prepared the chart below...

Hi there Joe

"Which camp is correct?"

I prepared the chart below using data from the recent WGC Supply and Demand report to try to put some of the arguments into perspective.

To the left of the central axis are factors that contribute to the gold available for sale.
To the right of the central axis are factors that remove gold from the pool that is available for sale.
The "Surplus*" is gold unsold to end buyers that is being "warehoused" and is available for sale.


Source: Table 4: Gold supply and demand World Gold Council presentation
http://www.gold.org/supply-and-demand/gold-demand-trends

What I find interesting is that the difference between end sellers (market participants who will sell gold and never buy it back) and end buyers (market participants who typically always buy gold and rarely or never sell) is surprisingly small at 13.6 tonnes.

This means that the purchases made by central banks (and other institutions - read
sovereign wealth funds), Indian jewellers, and coin collectors have a fairly neutral impact on the price of gold, being supplied almost directly by mine production and recycling. I would argue that while these movements from end sellers to end buyers reference the price of gold, because supply and demand are well balance they don't have much impact on the price of gold.

This leaves the ETFs and the "Surplus" (which is the buying of bullion banks).

The correlation between changes in the price of gold and changes in ETF inventories (based on GLD) is about 0.88, which is very high indeed. On most days when ETFs sell, the price of gold goes down. On most days when ETFs buy, the price of gold goes up.

The raw data suggests that they have a disproportionately large influence over the direction of the price of gold.

I can understand why some gold investors might find US-European influence over the price of gold through the ETFs so frustrating, given the much larger bullion movements elsewhere in the world. But for the time being, that is where you find the tipping point.

Cheers