Gold worth $8 trillion

July 19, 2018

Pat Heller

According to the World Gold Council (WGC), at the end of 2017 there are about 6.1 billion ounces of physical gold extant in the world. This does not count gold still in the ground or in the water waiting to be mined or extracted.

Of this total, just over 1 billion ounces are held by central banks, governments, or other official organizations such as the International Monetary Fund (IMF) or the Bank for International Settlements (BIS).

Almost 3 billion ounces exists in jewelry form, though much of this owned in India and China, the world’s two largest gold-consuming nations, is owned as a source of wealth rather than for adornment.

Another 1-1/4 billion ounces is in the form of coins and ingots, which are held in the long term almost exclusively for investment purposes. Exchange traded funds (ETFs) and similar investment entities held about 80 million ounces.

That leaves about 850 million ounces used in other fabricated products or otherwise not accounted for elsewhere.

While the World Gold Council produces an impressive amount of statistical data, I do not consider it to be fully accurate. Back in 2003, the Chinese government started accumulating significant gold reserves. I learned of it at the time but did not receive sufficient corroborating evidence until 2005 to report on it.

In April 2009, China finally admitted that it had acquired about 14.5 million ounces of gold since 2003. Sadly, the WGC statistics never showed this demand in its data nor what were the sources of this gold in their data on supplies. I am convinced that the Chinese government has continued to accumulate physical gold above and beyond the quantities it is reporting to the IMF – which the WGC still does not fully include in its supply, demand, and inventory statistics. It is possible that some of this extra gold it has acquired may be part of what the WGC considers to be unaccounted for.

As of the end of 2017, the 6.1 billion ounces of physical gold, at $1,306 per ounce, was worth about $8 trillion. That is not a significant figure in global finances, especially since only a small fraction of physical gold ever changes hands during the course of a year. For example, outstanding U.S. Treasury debt is about double that amount. As of June 30, 2018, all of the stocks in the Standard & Poor 500 Index had a combined market value of around $23 trillion.

However, global daily trading volume of paper contracts for gold for the 12 months ending June 30, 2018, averaged about $150 billion, almost 10 times the average volume of daily trading in the 30 stocks that make up the Dow Jones Industrial Average.

In last week’s column, I discussed the unusual activity in the settling of mature COMEX gold and silver contracts where the owner asks for delivery of the underlying metal. It is possible that the mysterious activity in the gold and silver paper trading markets may be covering up for a growing shortage of physical supply.

Early this week, gold and silver prices had fallen to their lowest levels since mid-July 2017. If the U.S. government is aggressively working with its primary trading partners and allied central banks to suppress precious metals prices, such activity cannot last over the long term. In my judgment, current prices are likely to be perceived as a bargain buying opportunity when we look back at them within the next couple of years.