Gold And The Potential Dollar Endgame Part 1

Tyler Durden's picture

Submitted by Joe Yasinski and Dan Flynn of Gold Bullion International,

Part 1 of 3: What supply and demand? It’s all stock to flow these days.

Reading our title has us convinced that somewhere our college economics professors are hanging their heads in shame with all of those x and y graphs scribbled to no avail. Economists the world over can take comfort that the laws of supply and demand still largely rule the marketplace. However, we believe there is a noted exception for a yellow, largely useless metal. A metal that just happens to have shaped the world’s monetary systems for the last several thousand years. Gold’s “supply” traditionally defined as global mining production is virtually meaningless in determining its’ price. How can this be? Analysts pontificate that global supply dynamics are integral in forecasting future metal prices. We can only attribute this to the fact that these analysts still myopically cling to the view of gold as a commodity.

Gold, even when viewed as a commodity, is unique in that it is not consumed. As there is little cost effective industrial application for the yellow metal, little to no “natural” industrial demand exists. Virtually every ounce ever mined from the earth is still above ground, either in a vault or a safe or an earring. An estimated 170,000 metric tons sits above ground, hoarded and unambiguously owned. Given that the annual supply of mined gold is approximately 2,500 metric tons, how is it gold not priced close to zero? After all, there is a 65 year overhang in supply! Despite all that we know of supply and demand dynamics and economic ‘law’, gold’s price is within striking distance of its’ all-time-high – in every currency on the planet.

A major contributing factor to gold’s price is that the vast majority of the stock of physical gold is held in very strong hands. It is largely held privately by very wealthy families or by governments and their central banks. This gold lies very still, some of it not changing owners or locations for decades, if not centuries. These giant holders have little need to ever sell, holding gold as a long term store of wealth or as a central banking reserve asset. Gold naturally appeals to these super-savers because of gold’s history as the ultimate store of value and lack of counterparty. Sure you can buy real estate, art, or classic cars- and the extremely wealthy do. But beyond illiquidity and subjective risk, these assets can become cost centers in themselves with maintenance, storage, insurance, etc. Gold is universally recognized as a wealth asset but is also infinitely divisible, portable, and highly liquid. Gold’s value has been established over a millennia and is ultimately the asset that denominates or values all others.

Rather than supply in the traditional sense, what drives the gold price is the percentage of the existing stock (170,000 tons) that is available for sale on any given day. The percentage of available inventory for purchase is the “flow.” Divide the flow into the stock and you get the STF ratio. A low STF ratio indicates a very high percentage of the existing physical stock is available for sale and a very high number means owners prefer to hoard physical metal rather than exchange it for dollars. So for example, if every ounce of gold was put up for sale tomorrow, the STF ratio would go to one and the price would plummet, likely to near zero. But, what if instead of everyone selling their gold tomorrow, all existing physical owners of gold decided to keep it instead? Could this even happen? Doesn’t conventional wisdom and ‘economic law’ tell us that as the price of gold goes up, there are fewer buyers able to purchase and more sellers willing to dishoard?

In our opinion, conventional wisdom simply doesn’t apply here. Gold, in our opinion is what is often referred to as a Giffen good. A Giffen good is one that actually sees a spike in demand as its price rises. Conversely, demand drops along with price. While the concept of a Giffen good is well known, the number of examples in the real world are slim and usually limited to localized commodity markets in extremis. A golden, glaring exception is the massive example playing out before our very eyes. In typical Giffen behavior, gold was scorned and dishoarded by individuals as well as central banks as the price hovered in the low 100’s. Fast forward to today and gold demand is at to or close to all time highs, even as the price sets new records in currencies around the world.

Many prominent members of the gold community insist that gold is going to appreciate massively because of a huge flood of investment dollars will flow into the metal over the next several years. They may very well be right, and we at GBI certainly hope so. But we can see things developing differently as well. We believe that a massive revaluation of gold denominated in dollars can happen quite suddenly, almost overnight. But not because of any sustained long term demand for gold, but simply because owners of metal simply withdraw it from sale, sending the stock to flow ratio to infinity. This is why understanding gold’s stock to flow ratio is so vital.

Can you imagine a manufacturer of automobiles (or any producer of a good with a declining marginal utility) deciding to just sit on his newly manufactured automobiles and let them stock up in perpetuity or would he offer them for sale, for as many dollars as he can get? Of course he would sell for dollars because he must monetize his production. As with almost every commodity, widget, or car – the suppy/demand dynamics are fairly straight forward. The manufacturer needs to exchange those automobiles for cash or they’re worth nothing to him. For a holder of gold, there is no need to exchange his stock for dollars, especially if there is an avalanche of dollars pursuing that stock of metal.

If the dollar avalanche comes, can you imagine a massive owner of gold - perhaps a central bank in a surplus nation or billionaire family, preferring to stockpile gold as a reserve eschewing the current offer of dollars? Or do you see these savvy economic actors dishoarding their store of value in exchange for quickly devaluing dollars (like the auto manufacturer)? Once you can see why one makes sense and another doesn’t, you’re on your way to understanding how gold is priced and how major pricing moves can have almost nothing to do with traditional supply/demand dynamics. There never needs to be a massive flow of dollars into gold for it to go unimaginably higher. Existing owners need only remove their stock from sale. And tying it back to Giffen, when physical gold goes into “hiding” the demand of people bidding with their dollars will increase in proportion to the increasing price.

It’s useful to understand the concept that dollars bid for assets. When dollars bid to buy a stock over and over (high velocity) the price goes up. If all dollars stopped bidding for AAPL the price goes to zero. In reality, dollars value Apple stock. Gold is a unique asset in that it denominates, or values currencies. Dollars don’t bid for gold. Gold bids for dollars. If you’re having a hard time with this idea, think of an extreme, like Weimar Germany or Zimbabwe. A gold owner accepts or rejects a sum of dollars as a suitable trade for their metal. When they reject this bid, it drives the STF ratio higher and higher. Why would gold holders cease to bid for dollars? For the same reasons we all hoard gold, as protection of real purchasing power from a failing fiat currency. Where will the flow come from? Central banks certainly aren’t selling anytime soon, ditto for our fine Asian friends. On a micro-level, we have seen recently in places like Greece and Spain that there is a finite quantity of gold that flows into the market when times get tough. What happens when the citizens run out of gold bangles to sell and everyone else starts hoarding? On a macro-level, what happens when surplus nations no longer save in US dollars and instead save in gold? What happens if the “flow” of gold slows to a trickle, or even stops all together? We can easily paint a multitude of scenarios that don’t require all that much imagination. Will dollars frantically chase after gold? Perhaps, but will the holders of gold bid for those dollars? What will that imply about the dollars purchasing power relative to others goods and services?

It is up to the reader to decide which of the two following turn of events is more likely. Is it more likely that the human superorganism will come to the realization that their dollars are being debased and gradually steer more and more of their assets into gold or is it more likely that existing owners of gold, who long ago came to the same conclusion and likely purchased gold to hedge that very outcome, will first choose to remove theirs from sale?


The answer lies in this question, who values gold higher? The new incremental buyer, or the existing owner? Sure, we could get to astronomical gold prices through a flood of new buyers, but we could have an even more dramatic move overnight if existing gold owners cease bidding for dollars with their gold. Or, maybe, some combination of the two. The only problem for a new investor is one of those scenarios can play out over years while the other can happen virtually overnight.

What happens to the “price” of gold when it ceases bidding for dollars? Zero. Or infinity. Take your pick.

We have some ideas about why this hasn’t happened to date, and how you may be able to identify a S-T-F ratio to infinity unfolding before our very eyes.

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Select your preferred way to display the comments and click "Save settings" to activate your changes.'s picture

Stop posting so many stories. I have things to do.

Dr. Engali's picture

I'll drink to that. However I do like this article and I look forward to the next installment. I hope I'm sober enough to understand it.'s picture

Yes, sir!


OK. Got my drink and a couple cigs. That does feel better. So much for my chores.

LetThemEatRand's picture

What the fuck.  You've earned it.  Go re-read a few chapters of Atlas Shrugged and tell yourself that you are an intellectual who gets it.  

AgShaman's picture

Get high......then go and buy some gold and silver

Nothing else matters...

Michaelwiseguy's picture

Al Qaeda = The Base

Phase 2 of the 3 step process has begun.

Go after the perpetrates and banksters involved, and bring them to justice.

9/11 BUILDING 7- The Undeniable Truth



Muppet of the Universe's picture


Step 1. 

l2 futures/equities trade

Step 2.

Get working method and trade it

Step 3.

Take profits and buy:

Buy fresh water filtration system, non-electric.

Buy emergency food

Buy organic seed.

Buy emergency shit, medical etc.

Buy physical assets + guns.

Buy necesary goods (tp & floss, toopaste, soap)

(optional: buy farmland not in US, and not in socialist country

Also, consider leaving US...)


Once PM pandemic hits retards, begin selling half metals and buy more guns, cars, houses. farmland.

Expect gold to double in 3-7 years.  Retard phase to begin 5-10.

DaveyJones's picture

I liked the headline except the word "potential"

Muppet of the Universe's picture

Barry introduces new level of shtf-ism.  Guy seems to really hate human life.  So that timeline is more flexible under barry,

but you shouldn't over-react until barry goes full retard.

Michaelwiseguy's picture

It's not going to be as bad as people think it will be.

Follow the Iceland model. Why reinvent the wheel?'s picture

I've come to conclusion that I should drink more more often.

Muppet of the Universe's picture

red betty, ufo raspberry hefeweizen.  or angry orchard   ;D  np.

EnslavethechildrenforBen's picture

Palladium is currently undervalued at 50% off it's all time high of $1100

DosZap's picture

Palladium is currently undervalued at 50% off it's all time high of $1100

Yeah, and what was it 5yrs ago?, I remember it when I THOUGHT about purchasing some at $256.00.

All the PM's/Semi Pm's are UP.

savagegoose's picture

i did get some at $250 ish, but its still sitting in my e-gold account awaiting the fed gov to  release the funds. :(

thing with Pd , is really is a consumable metal  for industrial use, if industry is going down the shit hole,. no amount of inflation will increase its demand,.

so if you see good times coming before even darker times. get some. i should have traded my gold to silver back then, it was only $6, but then i thought silver was dead.

nmewn's picture

Drinking more, more often, seems to help.

On the dollar crashing (as the sheeple demand more free shit thrown their way) I'm reminded of the old story of the man who fell out of the window of a he plummeted past the 20th floor he was heard to remark, so far so good ;-)

DaveyJones's picture

perfect analogy but I would add that as he looked over, the skyscraper was falling faster than him  

nmewn's picture

lol...yes...perception is reality, till its not ;-)

DaveyJones's picture

nice phrase, a palindrome really 

Ignatius's picture

Yes, and I figured out that I've enough money now to drink myself to death.  But why don't I?

I marvel at the 'skid row' alchoholics.  These are a rare breed that can carry this addiction to its bitter end. Superstars in their own right and we don't even see it. I kneel before thee....

Muppet of the Universe's picture

You must have just woke up...  Or called it quits after l2 fed reserve.  See there's this thing, its called brainpower.  No one in US has any.  Iceland fucked up, they made mistake, but they learned.  = brainpower.  US are retards.  giant conglomerate of video game addicts, heroin junkies, 1950s fantasy land muppets, and general retards.  See iceland has this thing they like to do, like limit who gets into their country.  Dumb ppl, are not on list.   America = melting pot, remember?

Michaelwiseguy's picture

It only takes 2 weeks for simpering liberal progressers dumpster diving for their dinner, for them to come around.

Don't sweat it.

merizobeach's picture

Your indictment, which I also found humorous, reminded me of a theory for calculating group intelligence.  We all know the adage, "individuals are smart, but groups are dumb"; obviously, though, that is a gross generalization, even in the face of so much circumstantial evidence.  Because certainly, some groups are smart, and some individuals are also dumb.  So the idea goes like this: calculate a best estimate total intelligence score (a composite of IQ, EQ, and any other scores deemed relevant) for each individual, scored on a scale like IQ.  When estimating the intelligence of a group, multiply each individual's score together with a score of 100 = 1.00, a score of 110 = 1.10, a score of 90 = 0.90, etc.  So if a group consisted of any number of average intelligence individuals (all with individual scores of 100), then the group itself would have an intelligence score of 100, but if a single person of 90 intelligence joins the group, the multiplier brings the whole group's score down to 90, and the group collectively could be anticipated to act in a less intelligent manner.  Similarly, two people together who each have individual scores of 90 would collectively function with only an intelligence of 81; it would take an individual with an intelligence of 125 teamed together with these two to produce of group of people that could act with an average intelligence.  That said, smart people acting collectively, then, can produce feats of intelligence greater than an individual would have capably conceived.  By this logic, joining a mensa or TED Talks seminar (silently, perhaps, so as not to dilute the intelligence of the group), one might become more intelligent, at least temporarily.  Just a general theory, for sure, but at least a vague attempt to quantify so much circumstantial evidence.

A Nanny Moose's picture

Your disdain for Rand demonstrates more cultist sociopathy, than that which you claim exists in all of her books, and newsletters combined.

Being a perpetual dick demonstrates that you've long since lost the battle of ideas, and must resort to personal attacks.

Muppet of the Universe's picture

don't owwry about that idiot.  he either stopped learning years ago, or is incapable of it.

fiddler_on_the_roof's picture

Every sentence in this article is copied from FOFOA without attributing any original reference to FOFOA.

ZH would have directed GBI to avoid any reference, what a bunch of sore losers thse two.

Freegold's picture

FOFOA spreading the word :) Soon everybody will understand what gold really is. Inflation protection? Sure, if you understand that hyperinflation of the dollar has already happend.

If you can wait a month or maybe a cpl of years there is no better "investment" When it's price go trough the roof everybody will buy it as a store of value.

50K+ gold coming to a town near you soon!

Bendromeda Strain's picture

FOFOA is wrong about silver, period. I could not care less what his anonymous deep throat shamans intimated. You really think people will want grains of $50k gold, but oz of silver will crash as it "forgets" its American monetary history? Unadulterated bullshit.

FOFOA cultists should go back to slaughtering chickens and reading the entrails or entering a trance from the vapors of my gym socks.

Hugh G Rection's picture

Drink and listen to Mossad blow up trucks on 9/11

Hahaha Stupid Goyim, it's a Jew World Order, and you're useful idiots!

Schlomo Bergstein's picture

Please stop being anti-semitic please or I will rerport you to the ADL, SPLC, ACLU and the FED.

Ignatius's picture

"You forgot Poland." -- G W Bush

Hugh G Rection's picture

I do apologize, I temporarily awoke from my white guilt holohoax programming.

I will sacrifice a Palestinian baby in honor of our Talmudic rulers, and file two tax returns this year.

Long Live King Bibi! Bomb, bomb, bomb... bomb, bomb Iran!

Theosebes Goodfellow's picture

Ditto on the next installment. What's "sober" mean? After all, to quote Robin Williams, "Reality is just a crutch for people who can't cope with drugs!"


vast-dom's picture

infantilization of populace with hot bitches, sans stoner teddy bears:

Crisismode's picture

You are a complete fucking idiot.

Enough said.


fuu's picture

I thought that was funny.

philipat's picture

Correct in a free market, which we don't have. The Fed, via the Bullion Banks, can and will continue to cap the price of PM's via the selling of Crimex (aka Comex) naked paper shorts, which the CFTC will ignore (The Government has a block exemption). They want to do this because they do not want the Fiat game exposed for the Ponzi that it is should Gold go through the roof. ("Currency Stability" being one of the Fed's mandates).

Urban Redneck's picture

The London Gold Pool failed and its "privatized" offspring will fail.

Muppet of the Universe's picture

I honestly believe you should all shut the fuck up, and thank the lord that the markets keep metals from exploding upward.  You got all this time to acquire metals.  Illuminati giving you golden ticket b/c u brave enough to face reality, and u complaining shit isn't crashing fast enough?  R U HIGH?

It's like you don't have any brains at all.  I'm fucking astonished.

Urban Redneck's picture

Your construction of strawmen is obscuring your own view of your surroundings, or perhaps it's the blinders of arrogance. Regardless,

on an individual level, the current functioning of the gold market does allow those individuals with the financial resources to participate additional opportunity to profit- by postponing an appreciation of the gold price (or a severe dislocation of the price of debt fiat).

Greed, however, also has its costs, for every thousand ounces that is bought, and comes out of the market only to be lost in boating accidents or locked away by central banks, how many of those of ounces were pried away from savers who were forced into the market by economic desperation?

On a societal level, the costs are astronomically higher, wars are financed and economic suffering is exported globally with inflation in order to postpone the realization of an ever increasing cost of mean reversion.

When there was an Evil Empire, these costs would be justified by the liberation of the oppressed through victory. Now, however, the SNAP status quo is justified by the oppression of the masses and the erosion of civil liberties.

The nominal monetary price of gold does not reflect the actual costs of the long term institutional manipulation of that price to individuals and society.

Beam Me Up Scotty's picture

That works until people see paper gold is worthless and start taking possession of physical gold. Those buyers typically have strong hands. What happens when Germany decides it wants all of it's gold at home? Or what happens when China decides it would rather spend our dollars for gold instead of treasuries?

Newager23's picture

I like it when there are interesting articles posted about gold. This is another one. It makes you think: At what point does gold become hard to find? And when that time occurs, how much will gold be worth? I think we can all answer the second question: A LOT more than the current price.

I've been a gold bug since 1991, when I began investing in gold. I'm still amazed that so few have figured out what I did way back then: gold is the ONLY safe investment for the long term.

The article points out why gold is the only safe long term investment: It is hoarded. But more importantly it is liquid. Those two qualities make it a very unique asset. This is something that the anti-gold antagonists, such as Warren Buffet, fail to understand (or perhaps that understand it so well they are scared of gold).

I want gold for those two reasons. But I also want it for other reasons. Let’s talk about those and why more and more people are going to hoard gold in the coming years.

1. Debt. This is becoming more and more obvious to the masses. We have a huge amount of debt to service and roll-over annually. At some point the balloon is going to pop. Who’s debt pop’s first? Japan, Europe, or the USA? Place your bets.

2. High Oil Prices. People love to deny peak oil, but trust me high oil prices are not going away and are strangling economic growth. Once we get to $150 oil, the global depression will be in full swing.

3. High Taxes and Regulations. How can America and Europe grow their economies with high taxes and a multitude of regulations? The average small business must literally cheat to make a buck, and it is getting worse.

4. The decline of the US Dollar as the international reserve currency. This might take a few years to unfold. But the trend will not help the US economy, nor the global economy.

5. The decline of the bond market. This is inevitable. Again, it might take a few years to play out. But once interest rates rise, we will likely have a run to gold.

That’s enough for now. Note that gold's little sister - silver - will come along for the ride. And she has even less inventory than her big brother. (for gold and silver mining stocks)

Thisson's picture

Look, I agree that buying gold is a responsible thing to do and there is no counterparty risk.  That said, this article is CRAP because there are plenty of other risks that do apply.

For example, you cannot have a meaningful discussion of gold without discussing interest rates.  Why?  Because interest rates set the opportunity cost of holding gold, which has no yield.  Since it has no yield, when interest rates rise, it looks less attractive - and vice versa. 

This has important implications in a low-rate (ZIRP/NIRP) environment like we have now.  Why?  Because if interest rates revert to the mean and increase, we would expect the price of gold to decline accordingly.  In other words, there is a risk to owning gold.  Now, could this decrease be offset by a lot of destruction of credit that increases gold's relative purchasing power?  Sure, it could.  But the bottom line is we don't know which force is of greater magnitude, so like Hugh Hendry says, we should remain agnostic and structure our investments accordingly.

Moreover, I think it's assinine to suggest that Gold is a Giffen good.  Do YOU buy more of it when the price of gold increases?  I sure as hell don't.  I buy more when price declines.  Now, it's true that fear increases and desire for gold as a hedge against calamity increases, but desire alone isn't demand.  Demand means both willingness and ability to pay has increased.  That doesn't happen with gold.  Or at least this: nobody has made a convincing argument that gold is a Giffen Good.  If anything, Gold is perhaps a Veblen good.  But that's another conversation.

Lastly, I disagree with you that Silver has all of the same positive factors going for it that gold has.  Don't get me wrong, I like both gold and silver.  But one is the ideal money, and the other is a substitute good.  One can regain it's "monetization premium" without the other gaining a similar premium.  One is not consumed as a production good, the other is.  Silver Bugs think that the upside to silver is that it can regain its money premium while at the same time its scarcity can result in a short squeeze.  These are two mutually exclusive outcomes, in my view.

I think metals are great, but I think a lot of PM bugs haven't thought through their attributes completely, especially concerning their interactions with interest rates.  In summary, piling into metals is not riskless.