Because gold is such an extremely underheld asset, people tend to assume that the gold market
is small and relatively insignificant. In the Australian edition of the Daily Reckoning, Greg
Canavan ranks the gold market third in size, beaten out by only the Japanese and American debt
According to the World Gold Council 170,000 metric tons (5.47 billion ounces) of gold have
ever been produced. All but a very small percentage of that still exists, of which about 900
million ounces is held by the official sector and 1 billion ounces are held by private investors.
The last time I checked gold was at $1595 an ounce, so putting those two together totes up to
$3.1 trillion dollars. That is one massive market, but the real story is in the reported gold trade
relative to that size.
The London Bullion Market Association reports the average daily turnover in the gold market is
21.2 million ounces, or 5.6 billion ounces for the year – an annual total market turnover ratio of
That is an absurdly huge number, of course, and the exchange of physical gold can account for
only a small fraction of it. The rest is just paper, unallocated gold that Canavan defines as “gold
you think you own but really don’t.”
That’s the gold market we see, so over the short term gold tends to react to stress just like any
other financial asset. “But in reality,” Canavan says, “physical gold becomes even more valuable
in times of crisis.”
When leveraged holders of paper gold need cash, they sell for whatever they can get. As the
price falls, those still holding paper gold cut their losses and take delivery of physical gold. Even
a small increase in the percentage of physical deliveries can upset the paper gold applecart. The
trade needs physical gold to buy more chips, so demand rises.
That’s why physical gold will keep on correcting the “corrections” of the paper gold market for
as long as the global financial crisis goes unresolved.