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The Essence Of Gold Supply And Demand Dynamics

Jan Nieuwenhuijs profile picture
Jan Nieuwenhuijs


  • To understand the price of gold, first, one needs to understand the true nature of its supply and demand dynamics.
  • For perishable commodities, it does make sense to conceive a supply and demand balance.
  • Gold mine production is positively correlated to the gold price, but with a lag of about ten years.

Gold trades more like a currency than a commodity.

To understand the price of gold, first, one needs to understand the true nature of its supply and demand dynamics. Because gold is immutable and has been used as money and a store of value for thousands of years, virtually nothing ever mined has been lost. There are vast above-ground stocks of gold, and mine production only adds 1.6% to these stocks annually. Accordingly, gold has a very high stock to flow ratio, and thus trades more like a currency than a commodity. This is the true nature of gold's supply and demand dynamics. Many consultancy firms, however, present gold's supply and demand dynamics like that of a perishable commodity, which is misleading and causes deep misconceptions regarding gold's trading characteristics and price formation.

In this article, we will analyze consultancy firms their gold supply and demand statistics and how this can be misleading to conclude the market is in deficit or surplus(supposedly leading to higher or lower prices). Then we will drill down into more general supply and demand dynamics - comparing gold to other commodities - and finally, we will have a look at how gold trades as a currency.

Gold Supply And Demand Balance Data Is Misleading

Every quarter consultancy firms like Refinitiv - or more specific, their GFMS team - publish a supply and demand balance for gold. All supply categories picked by GFMS are matched to all their demand categories, resulting in a surplus or deficit at the bottom of the line. My main objection to these numbers is the "balance approach."

Below is the most recent balance published by GFMS on gold supply and demand, stretching from 2009 through 2018. The key takeaways are:

  • Mine production makes up the majority of total supply.
  • Jewelry demand

This article was written by

Jan Nieuwenhuijs profile picture
Jan Nieuwenhuijs is a financial researcher and gold analyst at Gainesville Coins. Nieuwenhuijs mostly writes about gold, covering topics such as the global physical gold market, derivative markets, central banks' gold policy, and the international monetary system.

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Comments (17)

18 Jan. 2020
Thanks for sharing this very informative article. I looked at HMRC & Eurostat website but seems like there are no easy way to find "Monthly or annual net flow through the UK" gold data. Would you be interested in sharing data links?
E.D. Hart profile picture
@Jan Nieuwenhuijs :
Exceptionally well written and relevant article. Many gold analysts are ignorant of these relationships. I will look forward to your future articles with bated breath, cheers,
E.D. Hart profile picture
Cheers...keep the research and sound writing coming--very much appreciated.
Paul T. Lambert profile picture
Gold supply and demand? Surely you jest. Who needs real gold when Wall Street banksters can instantly create unlimited amounts of fake no-gold paper gold at the touch of the keyboard? Not just "can," but "do," and almost every day, too -- which explains the nonsensical, fraudulent price "action" we are forced to suffer so often, even if it's unsustainable in the long run.
Maga infinity profile picture
Fed is anything you can tr
valslkv profile picture
I like articles like the above one - pretty clear, well defined and confirmed by extensive data sets. I was especially interested in the chart reflecting comparative yearly growth of gold mines production vs. price of gold. It clearly demonstrates how price of gold shows to everybody the real level of inflation, hence the real value of your money savings. Thank you, author!
Jan Nieuwenhuijs profile picture
Thank you. Always nice hear people appreciate it.
Otter Investment profile picture
Perhaps I am missing something, but you seem to assume that the new supply of gold being mined will remain at or near current levels. From what I have read, it is increasingly harder to find high productivity mines and, before long, less Au will be mined each year (unless the price of gold rises to match the increased cost to get each ounce out of the ground).
Jan Nieuwenhuijs profile picture
But what if the price rises?
Very well written and understanding of the gold market, congratulations Jan. Of course I look forward to read your coming articles especially on gold futures. thx a lot.
Jan Nieuwenhuijs profile picture
Thank you!
11 Dec. 2019
You got the stock to flow and gold's unique monetary properties part right, but you are missing the ratio of two ratios. That is what drives the price of gold. Not supply and demand relative to stock to flow.
Stoneclone profile picture
I think you should expound on the relationship between money supply and Forex valuations to the price of Gold and its ETF's. Looks ignored in this well written article.
Jan Nieuwenhuijs profile picture
The article is not about "what is driving the gold price" but about its supply and demand dynamics.
Stoneclone profile picture
Got it, but you cite the "price" of gold, and the "price" of gold is denominated in currencies. Can't ignore it.
Jan Nieuwenhuijs profile picture
In economics everything that can be exchanged is a currency. If you want.
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