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Last week I wrote about the incorrect portrayal of the late-September spike in the Fed’s “Reverse Repo” (RRP) operations. Breathless commentary in some quarters had portrayed the RRP spike as an attempt by the Fed to ward-off a crisis, which didn’t make sense. One of the main reasons it didn’t make sense is that a reverse repo takes money OUT of the banking system and is therefore the opposite of what the Fed would be expected to do if it were trying to paper-over a financial problem.

I subsequently saw an article by Lee Adler that provides some more information about the RRP spike. If you are interested in the real reasons behind it then you should read the afore-linked article, but in summary it has to do with a “Fed stupid parlor trick and the temporary shortage of short term T-bills along with the resulting excess of cash.”

According to Mr. Adler: “The two salient facts are that the Fed regularly does two quarter end term repo operations that add to the end of quarter amounts outstanding. They are not a response to any market conditions. The Fed reveals in its FOMC meeting minutes and elsewhere that it instructs the NY Fed to conduct these quarter end operations. It has done so every quarter this year. The NY Fed posts a statement laying out the operations a few days in advance of the end of the quarter.”

I’ve indicated the quarter-end RRP spikes on the following chart. The latest quarterly spike was larger than the preceding three due to the fact that the weekly update of the Fed’s balance sheet happened to be published on the day after the end of the September quarter. Notice that the volume of outstanding RRPs plunged during the first week of the new quarter.

If the pattern continues then there will be another RRP spike during the final week of December, regardless of what’s happening in the financial world at the time.

Here’s an unmodified excerpt from a TSI commentary that was published a few days ago. It deals with something that has garnered more attention than it deserves and been wrongly interpreted in some quarters.

We’ve seen some excited commentary about the recent rise in the dollar volume of Reverse Repurchase (RRP) operations conducted by the Fed. Here’s a chart showing the increase in RRPs over the past few years and the dramatic spike that occurred during the final week of September (the latest week covered by the chart).

For the uninitiated, a reverse repurchase agreement is an open market operation in which the Fed sells a Treasury security to an eligible RRP counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future. The difference between the sale price and the repurchase price, together with the length of time between the sale and purchase, implies a rate of interest paid by the Fed on the cash invested by the RRP counterparty. In short, it is a cash loan to the Fed that is collateralised by some of the Fed’s Treasury securities. The Fed receives some cash, the RRP counterparty receives some securities. Note that the Fed never actually needs to borrow money, but it sometimes does so as part of its efforts to control interest rates and money supply.

As mentioned above, the recent large spike in RRPs has caused some excitement. For example, some commentators have speculated that it signals an effort by the Fed to paper-over a major derivative blow-up. As is often the case in such matters, there are less entertaining but more plausible explanations.

We don’t pretend to know the exact reason(s) for the RRP spike, but here are some points that, taken together, go a long way towards explaining it:

1) The Fed recently enabled a much larger range of counterparties to participate in RRPs. Previously it was just primary dealers, but eligible participants now include GSEs, banks and money-market funds.

2) Reverse Repos involve a reduction in bank reserves, which means that the volume of RRPs is limited to some extent by the volume of reserves held at the Fed. Eight years ago the total volume of reserves at the Fed was almost zero, whereas today it is well over $2T. It could therefore make sense to consider the volume of RRPs relative to the volume of bank reserves.

The following chart does exactly that (it shows RRPs relative to total bank reserves at the Fed). Viewed in this way, the recent spike is a lot less dramatic.

3) Prior to this year RRPs were overnight transactions, but in March of 2015 the FOMC approved a resolution authorizing “Term RRP Operations” that span each quarter-end through January 29, 2016. The Fed has recently been ramping up its Term RRP Operations as part of an experiment related to ‘normalising’ monetary policy.

4) A reverse repo involves the participants parting with the most liquid of assets (cash) for a slightly less liquid asset (Treasury securities), so RRPs are NOT conducted with the aim of boosting financial-system ‘liquidity’. They actually remove liquidity from the financial system.

5) A corollary to point 4) is that because RRPs involve the temporary REMOVAL of money from the financial system, the Fed cannot possibly bail-out or support a bank (or the banking industry as a whole) via RRPs. In effect, a reverse repo is a form of monetary tightening. It is the opposite of “QE”.

6) The recent large increase in the volume of RRPs could be partly due to a temporary shortage of Treasury securities — a shortage that the Fed helped create via its QE and that the US Federal Government has exacerbated by reducing the supply of new securities in response to the closeness of its official “debt ceiling”. That is, the Fed could be using RRPs to alleviate a temporary shortage of government debt securities. However, we suspect that interest-rate arbitrage is playing a larger role, because the RRP participants are getting paid an interest rate that in today’s zero-interest world could look attractive.

7) Lending money to the Fed is the safest way to temporarily park large amounts of cash.

Gold was money in the distant past and it will probably be money in the distant future, but there is no developed economy in which gold is money today. In this post I’ll explain why.

People who argue that gold is money often confuse what should be with what is. They explain why gold-money would be vastly superior to any of today’s fiat currencies and their explanations are probably 100% correct, but they are sidestepping the issue. There is no doubt in my mind that gold is far better suited to being money than something that can be created at whim by commercial banks and central banks, but the fact is that gold is presently not money.

Part of confusing what should be with what is sometimes involves the claim that governments can’t determine what is and isn’t money. This is akin to someone claiming it can’t rain while standing in the middle of a rainstorm.

The hard reality is that governments routinely do many things that they shouldn’t be able to do. Governments shouldn’t be able to force people into slavery, but they sometimes do it. They call it conscription or the draft. Governments shouldn’t be able to steal, but they do it on a grand scale every day and call it taxation. Governments shouldn’t be able to monitor almost all financial transactions and most internet communications, but they do. They call it national security or keeping us safe from terrorists and drug traffickers. Governments, either directly or via their agents, shouldn’t be able to siphon away the purchasing-power of savings and wages, but they do it under the guise of economic stimulus. Governments shouldn’t be able to put obstacles in the way of peaceful, voluntary transactions, in the process greatly increasing the cost of doing business and thus reducing living standards, by they do it every day and call it regulation. One particular government (that of the US) shouldn’t be almost continuously intervening militarily in multiple countries around the world, but it is. They call it peace through strength or keeping the world safe for democracy.

So, please don’t insult my intelligence by asserting that governments don’t have the power to determine what is money!

Another common mistake made by people who argue that gold is money is to emphasise gold’s store-of-value (meaning: store of purchasing-power since value is subjective and therefore can’t be stored) quality. However, there are many things that have been good stores of value that obviously aren’t money, so acting as a store of value clearly isn’t the defining characteristic of money.

Which brings me to a critical point: Before you can logically argue whether something is or isn’t money, you must first have a definition of money. And since we are dealing with something that affects everyone, the definition must be practical and easily understood.

The only practical definition of money is: the general medium of exchange or a very commonly used means of payment within an economy. By this definition, gold is not money in any developed economy today. By this definition, the US$ is money in the US, the euro is money in the euro-zone, the Yen is money in Japan, the Australian dollar is money in Australia, etc.

Once something is the general medium of exchange it will generally be used as a unit of account. The unit-of-account function stems naturally from the medium-of-exchange function. Also, for something to be good money it should be a good long-term store of purchasing power, but, as noted above, being a good long-term store of purchasing power is clearly not the defining characteristic of money. Being a poor long-term store of purchasing power would almost certainly preclude something from being money in a free market, but we do not currently have a free market. Do not confuse what is with what should be!

Now, I acknowledge that it is possible to concoct definitions of money that lead to the conclusion that gold is money, but such definitions either aren’t practical, or are focused on a characteristic of gold that is shared by some obviously non-monetary assets, or are simply wrong.

In conclusion, if something is money then the average person will know it is money because he will be regularly using it as a medium of exchange in his daily life. In other words, money cannot be a secret to which only an elite group is privy. Gold is therefore not money at this time. If it were, we wouldn’t be in such a precarious economic situation.

So if gold isn’t money, then what is it? That’s an interesting question that warrants a separate post.

The US stock market successfully tests its low

I wrote in a TSI commentary published on Sunday that the S&P500 Index (SPX) appeared to have completed a successful test of its 24th August low early last week. This view meshed with the price action and the fact that by some measures, most notably the Investors Intelligence Bull/Bear Ratio, last week’s test occurred in parallel with extreme negativity.

More evidence of a successful test of the low emerged on Monday 5th October when the number of individual stocks making new 52-week lows collapsed while the number of individual stocks making new 52-week highs rose significantly on both the NYSE and the NASDAQ.

The SPX is now less than 1% from substantial resistance at 2000. I suspect that this resistance will cap the SPX’s rebound for now, but that it will be breached before year-end. Based on a number of long-term indicators, I also suspect that the July-September downturn was the first leg of a cyclical bear market and that several months of range-trading will be followed by a decline to well below the 24th August low.

The gold-mining indices are finally showing signs of strength

The gold-mining indices broke out to the upside last Friday. Furthermore, the breakout was solidified on Monday when the HUI/gold ratio closed decisively above its 40-day MA for the first time since April.

The breakout could still be a ‘head fake’, but it should be given the benefit of the doubt until proven otherwise.

Kinross Gold (KGC), the most under-valued of the major gold producers, broke above the top of a well-defined intermediate-term price channel on Monday. Based on this price action my guess is that it will rise to around US$2.40 within the next three weeks.

Ben Bernanke, Master of Tautology

Former Fed chief Ben Bernanke has apparently argued that poor productivity has held back growth in the US. This is like arguing that growth has been held back by a lack of growth, since the ONLY way that per-capita economic growth can happen is via an increase in productivity.

As a run-of-the-mill Keynesian, Bernanke is clueless about how fudging interest-rate signals and creating money out of nothing make an economy less efficient. If he had a clue he’d be arguing that the Fed has held back growth in the US.

This post is an excerpt from a recent TSI commentary.

Excited talk of a silver shortage has made its annual reappearance. This talk is always based on anecdotal evidence of silver coins or small bars being difficult to obtain in some parts of the world via retail coin dealers. It never has anything to do with the overall supply situation.

Shortages of silver and gold in certain manufactured forms favoured by the public will periodically arise, often because of a sudden and unanticipated (by the mints) increase in the public’s demand for these items. Furthermore, the increase in the public’s demand is often a reaction to a sharp price decline, the reason being that in the immediate aftermath of a sharp price decline the metals will look cheap regardless of whether they are actually cheap based on the fundamental drivers of value.

These periodic shortages of bullion in some of the manufactured forms favoured by the public are not important considerations when assessing future price potential. The main reason is that the total volume of metal purchased by the public in such forms is a veritable drop in the market ocean. For example, the total worldwide volume of silver in coin form purchased by the public in a YEAR is less than the amount of silver that changes hands via the LBMA in an average trading DAY.

If gold continues to rally over the weeks ahead then silver will also rally. By the same token, if gold doesn’t rally over the weeks ahead then neither will silver. In other words, regardless of any anecdotal evidence of silver shortages at coin shops, silver’s short-term price trend will be determined by gold’s short-term price trend. Furthermore, if the gold price rises then the silver price will probably rise by a greater percentage, the reason being that the silver/gold ratio is close to a multi-decade low (implying: silver is very cheap relative to gold).

A final point worth making on this topic is that the claims of silver or gold shortages that periodically spring-up are not only misguided, they are dangerous. This relates to the fact that the most popular argument against gold and silver recapturing their monetary roles is that there isn’t enough of the stuff to go around. The gold and silver enthusiasts who cry “major shortage!” whenever it temporarily becomes difficult to buy coins from the local shop are therefore effectively supporting the case AGAINST the future use of gold and silver as money. You see, a critical characteristic of money is that obtaining it is always solely a question of price.

Comments on the following charts will be emailed to TSI subscribers.

1) Gold

2) The HUI

3) The Dollar Index

4) The S&P500 Index (SPX)

I last wrote about BitGold (XAU.V), which is now called Goldmoney, most recently in a blog post on 26th May. In the linked post I expanded on my view that the company had a great product from the perspective of customers, but a very over-priced stock. I concluded that at some unknowable future time the “it’s a great product with smart management therefore the stock should be bought at any price” bubble of enthusiasm would collide with the “it will always be a low-margin business and therefore deserves a low valuation” brick wall of reality. Although the stock price has since dropped about 20%, the valuation of the stock still appears to be extremely high considering the profit-generating potential of the underlying business. It is therefore fair to say that the bubble of enthusiasm hasn’t yet collided with the brick wall of reality.

Every month, Goldmoney reports what it calls “Key Performance Indicators” (KPIs) of its business. These KPIs seem impressive at first glance and seem to justify the stock’s market capitalisation. For example, the company reported that at the end of August it had C$1.5B of customer assets under management (AUM), an amount that is several times greater than its current market cap of C$235M (55M shares at C$4.27/share). However, unlike a mutual fund that charges a fee based on AUM, Goldmoney charges nothing to store its customers’ assets (gold bullion). This means that the larger the amount of Goldmoney’s AUM, the greater the net COST to the owners of the business (Goldmoney’s shareholders).

This is an important point. Based on Goldmoney’s current fee structure, it will always lose money on customers who use the service primarily for store-of-value purposes. Under the current monetary system this is where PayPal has a big advantage over Goldmoney. Nobody views their PayPal account as a long-term store of value, but many of Goldmoney’s customers view the service as a convenient way to store their physical gold. They don’t want to spend their gold, they want to save it.

Another KPI that looks impressive at first glance is “Transaction Volume”. For example, the company reported total transaction volume of C$47M for August. However, not all transactions attract fees and for the ones that do the fee is 1%. This means that the revenue to Goldmoney will always be less than 1% of the total transaction volume.

What’s important in assessing the stock’s valuation is the revenue to Goldmoney relative to its costs. This information is not presented in the company’s monthly KPI reports, but it is presented in the quarterly financial statements. Unfortunately, the latest quarterly statements aren’t useful because a major acquisition happened after the 30th June cutoff date. The next quarterly statements will be more informative, but we probably won’t get a good indication of Goldmoney’s real financial performance and earning potential until the December-quarter results are published early next year.

At this stage I don’t have enough information to value Goldmoney, although I suspect that ‘reasonable value’ is a long way below the current price. I’ll post some updated thoughts when I have a clearer view of what the stock is worth, which might not be until February next year. In the meantime I’ll stay away. I have no desire to own the stock and, despite the apparent valuation-related downside risk, no desire to short the stock.

I’ve placed a small bet (via put options) that the senior US stock indices will drop to test their 24th August lows by mid-October. At the same time I acknowledge the potential for a sharp move to the upside over the next 2-3 days in anticipation of and in reaction to the Fed’s 17th September interest-rate decision. That’s why my bearish bet is small.

The chart pattern of the S&P500 Index (SPX) suggests that there will be a sharp move over the days immediately ahead, although it doesn’t point to a particular direction. One possible outcome involves an upside breakout within the next two days from the contracting triangle drawn on the following chart and then a downward reversal. This is the near-term outcome that would confuse the greatest number of traders, which is why I favour it.

I never risk money on guesses about what any financial market is going to do over time periods as short as a few days, but it’s still fun to guess.

What I mean by the title of this post is that the central-bank tightening that almost always precedes an economic bust is never the cause of the bust. However, it’s a fact that economic busts are indirectly caused by policy mistakes, in that policy mistakes lead to artificial, credit-fueled booms. Once such a boom has been fostered, an ensuing and painful economic bust becomes unavoidable. The only question is: will the bust be short and sharp (the result if government and its agents stay out of the way) or drag on for more than a decade (the result if the government and its agents try to boost “aggregate demand”)?

The most commonly cited historical case of a policy mistake directly causing an economic bust is the Fed’s gentle tap on the monetary brake in 1937. This ‘tap’ was quickly followed by the resumption of the Great Depression, leading to the superficial conclusion that the 1937-1938 collapse in economic activity would never have happened if only the Fed had remained accommodative.

Let’s now take a look at what actually happened in 1937-1938 that could have caused the economic recovery of 1933-1936 to rapidly and completely disintegrate.

First, while commercial bank assets temporarily stopped growing in 1937, they didn’t contract. Commercial bank assets essentially flat-lined during 1937-1938 before resuming their upward trend in 1939.

Second, outstanding loans by US commercial banks were roughly the same in 1938 as they had been in 1936, so there was no widespread calling-in of existing loans. That is, there was no commercial-bank credit contraction to blame for the economic contraction.

Third, the volume of money held by the public was higher in 1937 than in 1936 and was roughly the same in 1938 as in 1937.

Fourth, M1 and M2 money supplies were roughly unchanged over 1937-1938, so there was no monetary contraction.

Fifth, the consolidated balance sheet of the Federal Reserve system was slightly larger in 1937 than in 1936 and significantly larger in 1938 than in 1937, so there was no genuine tightening of monetary conditions by the Fed at the time.

Sixth, an upward trend in commercial bank reserves that began in 1934 continued during 1937-1938.

Seventh, there were no increases in the interest rates set by the Fed during 1937-1938. In fact, there was a small CUT in the FRBNY’s discount rate in late-1937.

What, then, did the Fed do that supposedly caused one of the steepest economic downturns in US history? The answer is that it boosted commercial-bank reserve requirements.

All of which prompts the question: How did a 1937 increase in reserve requirements that didn’t even lead to a monetary or credit contraction possibly cause manufacturing activity to collapse and unemployment to skyrocket?

It’s a trick question, because the increase in reserve requirements clearly didn’t cause any such thing. The economic collapse of 1937-1938 happened because the recovery of 1933-1936 was not genuine, but was, instead, an artifact of increased government spending and other attempts to prop-up prices. The economy had never been permitted to fully eliminate the imbalances that arose during the late-1920s, so a return to the worst levels of the early-1930s was inevitable.

Many analysts are now worrying out loud that the Fed will repeat the so-called “mistake of 1937″, but the real problem is that the Fed and the government repeated the policy mistakes of the late-1920s and then repeated the policy mistakes of 1930-1936. The damage has been done and another economic bust is now unavoidable, regardless of what the Fed decides at this week’s meeting.

To paraphrase Jim Grant, gold’s perceived value in US$ terms is the reciprocal of confidence in the Fed and/or the US economy. That’s why the things I refer to as gold’s true fundamentals are measures of confidence in the Fed and/or the US economy. I’ve been covering these fundamental drivers of the gold price in TSI commentaries for about 15 years.

Note that I use the word “true” to distinguish the actual fundamental drivers of the gold price from the drivers that are regularly cited by the majority of gold-market analysts and commentators. According to many pontificators, gold’s fundamentals include the volume of gold being imported by China, the volume of gold being transferred out of the Shanghai Futures Exchange inventory, the amount of “registered” gold at the COMEX, India’s monsoon and wedding seasons, the amount of gold being bought/sold by various central banks, changes in mine production and scrap supply, and wild guesses regarding JP Morgan’s exposure to gold. These aren’t true fundamental price drivers. At best, they are distractions.

In no particular order, the gold market’s five most important fundamental drivers are the real interest rate, the yield curve, credit spreads, the relative strength of the banking sector, and the US dollar’s exchange rate.

Over the past 2 years gold’s true fundamentals have usually been mixed, meaning neither clearly bullish nor clearly bearish. What has tended to happen during this period is that when one of the fundamentals has moved decisively in one direction it has been counteracted by a move in the opposite direction by one of the others. For example, when credit spreads began to widen (gold-bullish) in mid-2014, the flattening of the yield curve (gold-bearish) accelerated. For another example, when the yield curve reversed direction and began to steepen (gold-bullish) in January of this year, the real interest rate turned upward (gold-bearish) and the banking sector began to strengthen relative to the broad stock market (gold-bearish).

Charts illustrating the performances over the past 5 years of the first four of the above-mentioned fundamental drivers of the gold market are displayed below. The first chart shows that the 10-year TIPS yield, a proxy for the real US interest rate, made a 2-year low in April of this year but has since moved to a 1-year high and into the top third of its 2-year range. This is bearish for gold. The second chart shows that a proxy for US credit spreads has been working its way upward since mid-2014 and recently broke to a new 2-year high. This is bullish for gold. The third chart shows that the US yield curve began to steepen in January, which is bullish for gold, but its performance over the past two months casts doubt as to this driver’s current message. And the fourth chart shows that after being relatively weak from July-2013 through to January-2015, the bank sector suddenly became relatively strong early this year. This driver has therefore shifted from gold-bullish to gold-bearish.

The overall picture painted by these charts is that gold’s fundamentals are still mixed, although there is perhaps a slight bearish skew due to the new 12-month high in the real interest rate. I’m anticipating a shift towards a more gold-bullish fundamental backdrop, but it hasn’t happened yet.

This post was inspired by an exchange between Martin Armstrong of Armstrong Economics and one of his readers. In an earlier blog entry Mr. Armstrong wrote: “The wealth of a nation is the total productivity of its people. If I have gold and want you to fix my house, I give you the gold for your labor. Thus, your wealth is your labor, and the gold is merely a medium of exchange. So it does not matter whatever the medium of exchange might be.” One of his readers took exception to this comment and argued that money should be tangible and ideally should be gold or silver.

Mr. Armstrong’s reply is worth reading in full. After giving us an abbreviated history of money through the ages, he sums up as follows:

“Paper money is the medium of exchange between two people where one offers a service or something they manufactured, which is no different than a gold or silver coin requiring CONFIDENCE and an agreed value at that moment of exchange. You can no more eat paper money to survive than you can gold or silver. All require CONFIDENCE of a third party accepting it in exchange. For the medium of exchange to be truly TANGIBLE it must have a practical utilitarian value and that historically is the distinction of a barter system vs. post-Bronze Age REPRESENTATIVE/INTANGIBLE based monetary systems predicated upon CONFIDENCE.”

I agree with Mr. Armstrong’s central point. Many gold advocates assert that gold is “real wealth” and has intrinsic value, which is patently wrong. Value is subjective and will change based on circumstances. For example, you might place a high value on gold in your current circumstances, but if you were stranded alone on an island with no hope of rescue then gold would probably have no value to you. Gold has exactly the same intrinsic value as a Federal Reserve note: zero.

However, he is very wrong when he states: “…it does not matter whatever the medium of exchange might be.” On the contrary, it matters more than almost anything in economics!

The problem with today’s monetary system isn’t that the general medium of exchange (money) has no intrinsic value. As noted above, money also had no intrinsic value when it was gold. The problem with today’s monetary system is that an unholy alliance of banks and government has near-total control of money. Banks have the power to create new money at whim, as does the government via the central bank.

Aside from the comparatively minor problem of causing the purchasing power of money to erode over time, the creation of money out of nothing by commercial banks and central banks distorts the relative-price signals that guide investment. This happens because the money enters the economy in a non-uniform way. In the US over the past several years, for example, most new money entered the economy via Primary Dealers who used it to purchase financial assets from other large speculators. The stock and bond markets were therefore the first and biggest beneficiaries of the new money, which led to an abnormally-large proportion of investment being directed towards strategies designed to profit from rising equity prices and low/falling interest rates. Such investment generally doesn’t add anything to the productive capacity of the economy. In fact, it often results in capital consumption.

Instead of saying “it does not matter whatever the medium of exchange might be”, what Mr. Armstrong should have said was: it does not matter whatever the medium of exchange might be, as long as it is chosen by the free market. Putting it another way, the government should stay out of the money business.

Here’s the wrong way to think about gold supply: “Although gold’s aboveground inventory is huge compared to current production, only a tiny fraction of this gold will usually be available for sale near the current price. Therefore, changes in mine supply can be important influences on the gold price.” I’ll now explain the right way to think about gold supply.

Whenever I point out that the supply side of the gold market consists of the entire aboveground gold inventory, which is probably somewhere between 150K tonnes and 200K tonnes, and that the gold-mining industry does no more than add about 1.5%/year to this inventory, an objection I often get is that only a tiny fraction of the aboveground inventory is available for sale at any time. This is of course true, and nobody who has a correct understanding of gold supply has ever claimed otherwise.

If all, or even most, of the aboveground supply were for sale at the current price then the price would not be able to rise. The price can rise and fall by substantial amounts, however, because there is always a huge range of prices at which the owners of the aboveground supply are prepared to sell. Moreover, this range is constantly changing based on changing personal circumstances and assessments of the market. In addition, some holders of existing aboveground gold will be planning to hold forever. These plans, which are themselves subject to change in response to changing circumstances, also factor into the formation of the gold price, in that a decision to withhold X ounces of supply can have a similar effect to a decision to buy X ounces.

As I write, gold is trading in the $1120s. It is therefore certain that a tiny fraction of the aboveground supply is currently changing hands in the $1120s and that there are plans in place to sell other tiny fractions in the $1130s, the $1140s, the $1150s, and all the way up to some extremely high number. Some people will also have plans to sell gold if the gold price falls below a particular level and there will be millions of people who have no specific selling intentions who will decide to sell in the future for some currently unforeseeable reason. At the same time there will be countless plans in place to buy at certain levels and millions of people with no present intention to buy who will, for reasons that aren’t currently foreseeable, decide to buy in the future.

It is the combination of these myriad plans that determines the price. Furthermore and as mentioned above, over the days ahead many of these plans will change. For example, some gold-buying/selling intentions will change based on what happens to the stock market or the bond market.

How does the gold-mining industry fit into the situation?

The gold-mining industry is not materially different from any other seller except that its plans are not price sensitive. Specifically, every year it will sell an amount that’s equivalent to about 1.5% of the total aboveground supply regardless of price. At this time four years ago it was selling gold in the $1800s and it is now selling roughly the same amount of gold in the $1100s. It is the ultimate price-taker. To put it another way: whatever price arises from the changing plans of gold owners and potential owners, that’s the price at which gold producers will sell.

On a related matter, due to the huge existing aboveground supply of gold there should never be a genuine shortage of physical gold. Obtaining more gold should always be solely a question price. A consequence is that the gold market should never go into “backwardation”, that is, the spot gold price should always be lower than the price for future delivery. Just to be clear: in an abundantly-supplied commodity market the futures price should be higher than the spot price by enough to eliminate the risk-free profit that could otherwise be had by selling the physical and buying the futures. That’s why it would be very significant if the gold market were to make a sustained and sizeable move into backwardation. Such a development would indicate that holders of the aboveground supply were withdrawing their gold from the market en masse and/or that the gold futures market was breaking down due a collapse in trust. Even the small and brief backwardations of the past two years have some significance*, although recent gold backwardation episodes have more to do with near-zero short-term US$ interest rates than gold supply/demand. The point is that gold backwardation is only important because the existing aboveground supply in saleable form dwarfs the rate of annual production.

In summary, the price of gold is where it is because of the range of prices at which existing holders intend to become sellers and the concurrent range of prices at which potential future holders intend to become buyers. These ranges are constantly in flux due to changing perceptions and circumstances.

*Keith Weiner has written extensively about the significance of gold backwardation at https://monetary-metals.com/.