October 24, 2013 at 12:09 PM EDT
The Greatest Misunderstanding In The Gold Sector
NYSEARCA:GLD, NYSEARCA:SLV Related posts: Sprott’s John Embry: Greatest Buying Opportunity In The Entire Bull Gold Market The Six Longest and Greatest Percentage Drops In Silver’s History Gerald Celente: We’re Going Into The Greatest Depression Apple Inc. (AAPL): Their Greatest Advantage The World’s Greatest Investor Is Just Like You

record gold holdingsGold Silver Worlds: 2013 was a special year for gold (and silver). Although the year is not over yet, it has been marked by a remarkable evolution, i.e. a disconnect between the demand for physical metal and the price of the metal. Let us quickly highlight a common trend over the course of the year:

  • Gold rush in China and India; delays of one to two months for physical gold deliveries (April 2013).
  • Swiss refineries working day and night to meet gold demand (May 2013).
  • Demand for gold (and silver) coins from the US Mint on its way for best first 6 months (June 2013).
  • Gold price goes under cost of production (June 2013).
  • Gold production flat, discoveries falling (June 2013).
  • Backwardation in gold market (July 2013).
  • Gold forwards rate negative for more than one month, historic record (August 2013).
  • China on its way to surpass 1,000 tonnes of gold imports from Hong Kong (September 2013).
  • Gold forwards rate again negative pointing to tightness in physical market (October 2013).

Even with these headlines pointing to an incredible gold demand and to flat new production, the price of gold has been weak. How is that possible?

The answer is based on the dynamics within the gold market. The demand for physical gold has been driven mainly by the East; Western large investors have been selling gold signaled by the mass exodus from the GLD ETF (the largest investment vehicle for Western investors). Besides, the truth of the matter is that newly mined production only accounts for some 2% of total above-the-ground gold. That is an insignificant portion which truly does not matter in the big picture. The new production is low compared to a very high stock; the technical term for this is “stock to flow ratio.” Precious metals are unique commodities from the point of view that they have a very high stock compared to their flow.

Nobody better than Ronald Stoeferle explains the “gold stock to flow” concept in his In Gold We Trust reports (citing Robert Blumen as well).

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  2. The Six Longest and Greatest Percentage Drops In Silver’s History
  3. Gerald Celente: We’re Going Into The Greatest Depression
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  5. The World’s Greatest Investor Is Just Like You

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