While the #gold price is languishing around $1,650 per ounce (-10% so far in 2022), interesting things happened in Q3 in regards to physical demand.

But first, a quick look at where the gold price gets determined and where it is being traded.

Gold futures, the most liquid gold-linked instrument, trade at the COMEX (Commodity Exchange) in lots of 100 ounces per contract. On October 31st, around 138,000 contract were traded, representing 13.8 million ounces (or 430 tonnes). For comparison, the annual global mining output is around 3,600 tonnes. Most futures positions, however, are closed before expiration, and only very little gold comes to delivery (544 tonnes so far this year). Since most futures trades do not involve any movement of physical gold it is often referred to as “paper” gold trading. However, due to the sheer volume, this is where the price is often determined. The tail wagging the dog.

London is the global center for trading of physical gold. According to the London Metal Exchange, $60 to $70 billion worth of gold is traded, on average, per day. At prices around $1,750 per ounce this is equivalent to 1,000 – 1,250 tonnes. According to the London Bullion Market Association (LBMA) there were “only” 9,443 tonnes of gold in London vaults at the end of September. Which implies the entire vault holdings, and three years worth of global mining output, being turned around every 1 to 2 weeks.

The LBMA admits that as much as 95% of “physical” gold trading consists of “unallocated” gold. Which means the buyer receives a claim against a pool of gold – no claim on a particular list of numbered gold bars or a particular, clearly labeled, section of the vault. “Allocated” gold, however, is accompanied by a list of bar numbers, and clear segregation from the unallocated gold pool. This smells a bit like factional reserve banking, where a banking branch will hold only very little cash in its vault against a much larger amount of customer deposits. However, a run on cash in a bank branch can be easily remedied by bussing in fresh cash from the central bank. With gold, this is impossible. Given the insane turnover, it is questionable if London gold trading can be called “physical”, or if is rather “paper”, too.

The World Gold Council tries to keep track of “real” physical gold movements. This is what we learned from their just-released Q3 report:

Global mining supply, at ~3,600 tonnes over the last 4 quarters, has recovered from the COVID-related dip. Recycling (mostly old jewelry sold by individuals) is the other large source of supply at 1,160 tonnes. Sales by ETF (Exchange Traded Funds) make up the smallest part. Central banks, in aggregate, have not been selling gold since the Great Financial Crisis:

The demand side is dominated by consumers, especially from Asian countries. Purchases of gold in form of jewelry as well as in coins and bars have recovered from the COVID-related dip. Industrial use plays only a minor part. ETF, usually accumulating gold, have been sellers in Q2 and Q3 :

In Q3, central banks have purchased a record 399 tonnes of gold, lifting the year-to-date amount to 673 tonnes (most since 1967):

Those record purchases have been executed quietly, and they did not have any impact on the gold price (on the contrary, it fell).

Who are those buyers? The WGC gives us a partial list:

The problem: adding up those numbers gets us only to 88 tonnes. An excel spreadsheet with every monthly change in gold holdings by country contains a few other names, but the sum does not exceed 120 tonnes. So how do we get to 399 tonnes? A question has been filed with the WGC.

Naming those central banks could be sensitive. So far, all buyers came from ’emerging’ economies, whose central banks have very little gold holdings and hence a lot of ‘catching up’ to do. However, should a central bank from a developed country start buying gold in significant quantities, this could signal mistrust in the stability of the international monetary system. Panic-buying could be the result.