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The Tiny Size of the Gold Market

By: Jason Hommel

-- Posted 6 June, 2007 | | Discuss This Article - Comments: Source:

One of the reasons that big money managers, and the world's wealthiest people, don't understand gold, and silver, is that human beings, even very, very smart people, just do not understand very large numbers, nor relative size.

Money in U.S. banks, M3, is growing at a rate of about 12% per year, or more.  So, in the last 12 months, it grew by about $1.3 trillion dollars, which is $1,300 billion dollars.

he world gold market grew this year at a rate of about 1.5%, as the world's mines produced about 2500 tonnes, and it has been estimated that there is about 155,000 tonnes of gold in the world.

People also don't understand weights and measures.  Big money managers must learn how many ounces of gold are in a tonne.  And itís troy ounces, not avoirdupois ounces, and gold is measured on the world stage in metric tonnes, spelled tonnes, not short tons.

1 metric tonne = 32,150.7466 troy ounces.

So, how much is 2500 tonnes of annual world gold production worth?  Well, times 32,151 ounces, its 80 million ounces. 

And how much is 80 million ounces of gold worth, at $675/oz.? 
It's worth only $54 billion dollars.

See, big money managers simply don't know the numbers!  They also probably fail to account for the value of that new gold.  Comparing dollar for dollar, it compares like this:

$1300 billion of new money printed.
$54 billion dollars worth of new gold mined, at $675/oz. 

So, the U.S. is actually creating new paper money at a rate 24 times as much as new gold.  (1300 / 54 = 24!)

And of course, this is hardly a fair comparison.  I'm comparing U.S. dollars to world gold production.   We should compare total world paper money creation rates, to world gold mining rates.  But that's a lot of work, and I don't know if I can source it all out.  My well researched guess is that the U.S. dollar is only about 1/4 of the world total increase of paper money.   (It is widely admitted that other nations are now printing up money even faster than the U.S.!) So, let's multiply by a factor of 4. 

$1,300 x 4 / 54 = 96!

Thus, the world is creating new money at about a rate nearly 100 times faster than the world's value of new gold.

So, again, how much is $1300 billion of new U.S. money created this year?

Well, that's about how many dollars China now has.  And China has continued to announce that they should buy gold to diversify.  People just don't understand what this means for gold prices, because they don't understand large numbers, nor do they understand the numbers in the gold world.

A "wise allocation" would be 50-100% at this stage.  But a more realistic, "foolish" allocation would be at least 5-10%.  But what happens if China tries to spend that $65 to $130 billion on gold, when annual world gold production, 2500 tonnes, at $675/oz., is worth only $80 billion?

It's anyone's guess, so go ahead and guess.  I'll wait.  But that's just China.  

With gold now rising since the bottom in 1999 or 2001, people are now beginning to look at gold, and paper money, they are beginning to discover the relative size of these markets, or read articles like this one. 

So, investors, the world over, may have about $40 trillion worth of investments to allocate and spend on gold.  What if 5% of that went into gold?  That's $2 trillion dollars, or $2,000 billion.

What will happen when that much money is going to move into gold, when the world's annual gold production is a mere $54 billion?

How much gold is traded in a year?  Most of the gold in the world is not traded, it is held, for a very, very long time, for times just such as now, when the world wakes up from the delusion of paper money. 

Some of the best guesses that I've read are that only about 5,000 tonnes of gold trades each year, which is about twice what is mined annually.  Some gold is recycled.  And central banks "add" to the supply through selling. 

There is a big issue over how much gold the central banks regularly sell, and have sold.  With good reason, because, officially, the world's central banks hold 33,000 tonnes of gold.  If half of that is leased out, then buying back that much gold on the world market is also going to cause gold prices to rise substantially.

Let me back up a minute, to help explain that.  In 1999, European banks decided to limit how much gold they would sell per year to 500 tonnes, and no more than that, so as to avoid hurting the gold price.  (They were also leasing gold, which also adds even more to supply.)  Good timing.  They picked the exact bottom of the gold market, so they were right that their prior, uncoordinated sales, and leases, were hurting gold prices.  In fact, it spooked the market so badly, to limit gold sales, that gold prices rocketed up from about $260 to $330/oz in less than a week, and that explains the vertical spike you see on gold price charts going back to late 1999.

It was exciting, if you were paying attention. 

ow, this was not "new gold sales".  Nor was it "less gold sales".  It was merely an announcement of "not more than 500 tonnes/year" of gold sales.  But really, it was a confirmation of major gold sales. 

Today, we have many confirmations of major gold buying, on the horizon.  China will be buying someone's gold.  CalPERS manages over $234 billion for California employees, and is bullish on commodities now, including gold. 

I read that "Barclays Capital did a survey of their institutional clients and 70% of them said they would have 5% of their assets in gold in three years time." 

I don't know what these money managers are thinking.  If they knew about the relative size of the gold market, the price would be $2000/oz. by tomorrow morning.  As it is, the gold price is likely to hit $2000/oz. within 3 years, and most will still miss the big easy gains.

Quite a few who manage up to $100 million have contacted me, asking me for my help.  But what can I do?  I'm not selling my silver.

I can point them to the largest and most trusted refiner in the U.S. which is Johnson Matthey.

How else can I help?  I sell a "look at my portfolio", but let me explain.  I spend the money on ads to get the word out.  Not to brag, but just so you know the size, it allows me to spend about $400,000/year, which is not much in relation to my capital gains, which are somewhere about 100% per year, on average.

My "look at my portfolio" newsletter shows my own well-diversified portfolio (worth about $12.5 million) invested in about 30 natural resource exploration and development stocks.  (It was worth about $15 million in May, 2006, and about $5 million in November, 2005.)  Again, this is not bragging, but rather, itís very important to know the relative size of things in the investment world.  Many of the stocks in my portfolio are looking to raise anywhere from $50 million to $500 million to get started mining, so if you are looking for investment opportunities of that relative size, my portfolio can help point you to some of the best companies in the industry.  But if you are looking for investment opportunities greater than that size, then you ought to avoid the overvalued major mining companies, and buy gold.

If you manage around $10 million, my advice is different; you ought to acquire as much silver as possible, up to about 25% of your portfolio.  It may take about 10 orders of $250,000 each to get $2.5 million worth of silver, and you may push up silver prices about a quarter per ounce, and you may end up squeezing some of the largest coin shops in the U.S., so be careful.

And if you need to invest less than $10,000, then don't worry about the stocks in my portfolio.  Just count yourself fortunate to be managing the right size of money to be able to actually put 100% of it into silver, and be glad that you don't have to be burdened with the responsibility of researching stocks.  Instead of researching stocks, it will probably pay you more to get a second job, working for people who have more money than they know what to do with.  Then, spend as little as possible, to invest as much as possible into silver.

-- Posted 6 June, 2007 | | Discuss This Article - Comments:

Last Three Articles by Jason Hommel

The Dollar is Done - Deal with It
7 November, 2011

BIS Changed Silver Data (From $203 to $93 Billion in Silver Liabilities?)
6 July, 2011

Dear Capitalists of the World
26 May, 2011

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