In an old joke, a policeman sees a drunk searching for something under a streetlight and asks what he has lost. The drunk says that he lost his keys, and they both start looking under the streetlight together. After a few minutes the policeman asks the drunk if he is sure he lost them here, and the drunk replies, “no, I lost them in the alley”. The policeman then says “so why are you looking here?”, and the drunk replies, “because this is where the light is”. This joke led to the name “Streetlight Effect” being given to a psychological tendency for people to look for clues where it is easiest. Many gold-market analysts have obviously succumbed to this psychological tendency.

It is obvious that many gold-market analysts have succumbed to the “Streetlight Effect” because they fixate on a tiny fraction of the overall gold supply and they do so because this tiny fraction of the overall supply is where the well-defined numbers are. The rest of the supply, which probably accounts for at least 90% of the total, is ignored because its location can’t be pinpointed and its size can’t be accurately measured. In effect, due to a lack of definitive data they make the assumption that the bulk of the world’s gold supply doesn’t exist. No wonder their supply-demand analyses don’t make sense.

To be more specific, there are many gold-market analysts who focus on the amount of gold produced by the mining industry, the amount of gold in COMEX warehouses, the publicly-reported warehouse stocks in London and the bullion inventories of gold ETFs, as if the sum of these quantities was a reasonable estimate of the world’s total amount of gold in saleable form. This is a huge mistake. Furthermore, they assume that once gold leaves a warehouse for which there are publicly-reported numbers the gold effectively ceases to exist, as if it has evaporated into the air. However, it is far more reasonable to assume that almost every ounce of gold that leaves a publicly-reported inventory remains part of the total supply.

In any case and as I explained last week ^[1], even if the “Streetlight Effect” didn’t apply and the location of every ounce of aboveground gold was known, the information wouldn’t tell us anything about the price and therefore wouldn’t be useful from an investing/speculating perspective.