Is Bitcoin Demand Hurting The Price Of Gold?

by: Dave Kranzler

Bitcoin buyers are not physical gold buyers.

The large buyers of physical gold do not care about cryptocurrencies as a Central Bank asset.

The price of gold is affected by the supply of paper gold issued by the Comex market makers.

This analysis focuses on the retail investor demand for gold and Bitcoin. Institutional investors, for the most part, do not invest in gold or cryptocurrencies.

I want to dispel a false narrative about Bitcoin and the price of gold. The mainstream and alternative medias have been propagating the idea that the frenzied capital flowing into Bitcoin is affecting the price of gold negatively. The idea is that Bitcoin is an alleged safe haven asset (very unproven, untested) that is diverting capital away from the precious metals. For instance:

As gold loses steam after rallying to 12-month highs, one market expert says he is seeing bitcoin (sic) take a chunk out of the yellow metal.


This notion has no validity. The U.S. retail investor bought 27 tonnes worth of U.S. Mint gold eagles in 2016 (985k ozs) Year-to-date this year, U.S. retail has bought 20 tonnes of gold eagles (715k ozs) (U.S. Mint statistics). This is less than 1% of the total amount of gold produced + scrap recycling annually. Even including the gold that is purchased in the U.S. over and above US Mint sales, the amount of gold buying in the U.S./EU is so small relative to large buyers of gold that it has little to zero affect on the global price of gold (and silver). Sorry Americans, but you're just not that important.

Demand from the large gold "consumers" will likely exceed supply in 2017. China/India/Russia combined purchase more gold mined in 2017 than in 2016 (Gold demand). Global mine production was about 3100 tonnes in 2016 - it should be slightly below that in 2017. Total supply including recycled gold was roughly 4500 tonnes in 2016. Per the data in that link, you can see supply/demand was estimated to have been equivalent in 2016. In terms of the degree to which the physical gold market affects the market price of gold, those are the primary sources of demand. At the margin, countries like Turkey will also affect the market price. Turkey has already imported over 320 tonnes of gold YTD in 2017, a record amount.

Another method of measuring the demand for gold is to look at the gold tonnage in SPDR Gold Trust ETF (NYSEARCA:GLD). Per the data available in that link, at the end of 2016 GLD held 822 tonnes of gold. As of December 13th, 2017, GLD held 844 tonnes of gold. If demand for Bitcoin was "diverting" investment money away from gold, it's reasonable to assume that the gold tonnage in GLD would have declined this year.

The point here is that the demand for gold is determined primarily by the large eastern hemisphere countries in which the populace and Central Banks continuously accumulate gold for investment, consumption (jewelry) and bank reserves. Bitcoin has done nothing to displace this demand - demand which, at the margin, exceeds mined supply.

The biggest influence on the market price of gold is the Comex paper gold futures market (all of the statistics in this section are contained in the link). At its peak in September, the gold contract open interest on the Comex was over 580,000 contracts. This represents over 58 million ounces, 1,644.3 tonnes, of paper gold. The Comex warehouses on average store 8 million ounces of gold. The ratio of paper gold to physical gold is in excess of 6:1. There's no other commodity contract other than silver that has, at any given time, a ratio of contract open interest to available underlying that is greater than 1.2 or 1.3x. If the Comex was required to limit the issuance of gold futures contracts to an amount that reflected the amount of gold held in Comex gold vaults and designated as available for delivery, the price of gold would likely soar.

This idea the speculative obsession in Bitcoin is negatively affecting the price of gold is thus nothing more that a flawed analysis used to promote Bitcoin.

Disclosure: I/we 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.