Debunking The Gold Demand Myth

Includes: GLD, IAU
by: Thomas Bradshaw

As I have written about and commented on articles about gold (NYSEARCA:GLD), I often encounter arguments that go something like this: "gold demand is soaring, prices should be way higher." Usually this type of argument is centered around Chinese or Indian cultural traditions of using gold as jewelry in wedding ceremonies or for special holiday celebrations. Of course my first thought considering these statements is if it is a historical cultural tradition then that certainly doesn't explain why gold prices are skyrocketing now of all times. This article isn't about Chinese and Indian demand however, I hope to tackle that in the next week or so.

As an amateur economist, I would assume that a skyrocketing asset would be associated with either skyrocketing demand or scarce supply (or some combination of both forces). So this left me wondering what exactly does historical supply and demand of gold look like? The answer to this question wasn't so easy to come by with a few searches on Google (maybe someone more knowledge can help me out in the comments), so I turned to the quarterly reports done by The World Gold Council. The reports I used can be found here.

I couldn't find a downloadable spreadsheet so I had to go through the reports and enter the information into Excel. I quickly found out that the numbers change depending on the report. I assume the changes are explained by revisions done at a later date, but I was limited on time and patience, so I was fine with numbers that were roughly correct for this analysis. If you would like to crunch the numbers in a manner that suits you, be my guest.


The demand numbers go clear back to 1997. Here is a chart with annual total gold demand in tonnes and average annual gold price (I used FRED for my gold prices).

Annual Gold Demand

We can see in the annual numbers that prices started to increase in 2001 while demand for gold was decreasing annually. The big increase in price happens after 2005 - again no huge increase in demand for gold - and then another large increase after the 2008 financial crisis. The annual numbers peak at around 4,500 tonnes in 2011, which isn't all that far off from the 1997 demand of about 4,200 tonnes. So does an increase of 300 tonnes in gold demand explain such a large increase in prices? I am not sure it does.

Let's look at the quarterly demand figures that I assembled from 2007 to the most current report from the 1st quarter of 2013.

Gold Demand Quarterly

We see from the quarterly demand data that there has only been a modest increase in demand while prices have boomed. Whether this recent quarterly threshold of 1,000 tonnes per quarter is going to be sustained in the future is to be seen. Apparently India has imposed taxes on gold imports and European demand is contracting. Chinese demand appears to be gaining, but not at a large enough pace to substantially increase total aggregate demand for gold.


As everyone already knows, supply is equal to demand. If I were to create a graph it would look identical to the previous two graphs. What I thought would be interesting to look at concerning supply is the supply from mining operations and the supply from gold recycling. Unfortunately I did not see supply statistics predating 2002. Please note that the below graph does not include "official sector sales" (which I believe is central banks sales).

Annual Gold Supply

Looking at the graph we see that both recycled gold and mining operations expanded after 2008. Both categories of supply provided increased amounts of gold liquidity to the market place in times of increased demand, but recycled gold dramatically increased its proportion of supply which represents sellers motivated by either hard economic times or increased gold price.


The supply and demand statistics are truly fascinating to study. When I think a bit deeper about what the numbers that I am studying mean, I think that where aggregate supply equals aggregate demand really represents the amount of gold that circulated in the economy and that price is the key variable that represents the differences in supply and demand.

If 1,000 tonnes of gold is exchanged one year at $500 an ounce and 1,000 tonnes of gold is exchanged the next year at $700 an ounce, then surely demand for gold has changed. The above charts don't reflect this change, so I compiled a chart that multiplies quantity by the average price.

Annual Price*Quantity

Looking at the annual chart, it is quite clear that my new, and I think far more accurate, approach to looking at demand shows the clear increase in gold demand leading up to and after the 2008 crisis.

Quarterly Price*Quantity

Looking at the quarterly demand, I see that demand peaked in 2011 and has been on the decline since. This quarterly trend of price and quantity is enough to convince me that demand for gold is currently on the decline, and that is reflected quite obviously in pricing.

For now I am going to label the high demand theory of pricing as a few years dated. But if in the 2nd quarter of 2013 the quantity of gold exchanged increases dramatically, then hey, maybe gold demand can stabilize at these high levels. I tend to doubt it.

Did I miss something, or did I do something wrong? Let me know by commenting - I read every response. Thanks for your time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.