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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saveandsound's picture


you are absolutly right. interest rates are the key. But not only to the price of gold. That does apply to every asset. It's part of the discounting-equation.

On the long-run equities are doing better then gold. At least for the last 150 years or so. In case the US-dollar looses his reserve-currency status things might change - at least for a while. 

However, what do you think, when are interest rates going to rise again? To me it looks like central banks and politics are not going to allow that to happen. Western Goverments are broke, companies and people are stuck in debt up to the nose.

Inflation - Deflation. Gold is going to have another few good years.

Stay careful and diversify. Don't pay to much attention to ZH guest posts - those guys are just selling their book.

jumbo maverick's picture

I saw gold' s little sister silver the other day. She was wearing thigh high stockings and some super high heels. Wow she was hot!

Al Gorerhythm's picture

I bid one ounce for $10,000.00. Who's got 10 G to swap?

Tall Tom's picture

Astute article.

My elegant summation is as follows...REMEMBER THIS.

I can ALWAYS trade my Gold for Fiat Currency. However there will come a the very near future when...I will not be able to trade my Fiat Currency for Gold.

Take heed to this as the day doth approacheth rapidly.

Marco's picture

Not necessarily at favourable exchange rates though ... government can arbitrarily impose a VAT on gold sales if it wants, you can try to avoid that on the black market but the black market imposes it's own surcharge for risk.

Rip van Wrinkle's picture

So the price goes up?? Even the black market has to have suppy, doesn't it?

Marco's picture

The price to buy goes up (compared to free market prices) but the price to sell goes down ...

The black market needs supply, but it creams more off the top than your friendly legal coin shop. A price you pay for access to their distribution network ... trying to connect directly to street level buyers is of course possible too, but then you shoulder a bigger part of the risk.

Urban Redneck's picture

And what happens to a holder of UST in the USA who exchanges those UST for fiat on Dec 31 vs.Jan 1?

Every risk that exists with gold also exists with other "stores" of wealth, however, the inverse of that is not also true. 

Freegolder's picture

This post by GBI? You all know who are they are? Take a peak:


Some highlights:

Prior to Eaton Vance Mr. Yasinski was Vice President for Salomon Brothers Asset Management covering Manhattan where he was wholesaler of the year in 2003 as the highest grossing salesman in the firm. Mr. Yasinski holds a Bachelor of Arts degree in Finance from The University of Arizona.


In 2008 Mr. Provencher's team was awarded Money Management Institute's (MMI) "Marketing Campaign of the Year" for its work with clients during the Lehman Brothers bankruptcy.  In 2011 his team was again recognized by MMI as “Manager of the Year”.


Prior to Salient, Mr. McCarthy was a Director and derivative product specialist for Merrill Lynch.  His key roles included: engineering market-linked notes, hedging and monetizing concentrated stock positions, and managing the derivative overlay strategies platform. Mr. McCarthy's prior experience also includes: heading the U.S. Corporate Equity Derivatives Group for Calyon Corporate and Investment Bank, and heading the Fixed Income Sales team at Sumitomo Bank Securities.


Before joining, he spent 18 years at Merrill Lynch most recently as First Vice President (FVP) of services responsible for service delivery for ML’s Banking and Brokerage business. Prior to that he was FVP of operations in ML’s proprietary asset management division responsible for retail operations and services of its Mutual Funds,


Prior to Chilton, Mr. Singh was at Morgan Stanley in the investment banking division where he worked on large financial sponsor and strategic company transactions.


Steven Feldman, Chief Executive Officer/Co-Founder Mr. Feldman was a partner at Goldman Sachs where he was the founder and head of the global infrastructure fund with over $10B under management and served on numerous corporate boards.


These guys are also offering their keen support to Fofoa (draw your own conclusions) and selling a service related to electronic dealing/storage of gold (they sing the praises of buying physical gold rather than an ETF, including the benefits of no counterparty risk). They also say:

Sterling Trust is a non-bank trust company. Since 1984, Sterling Trust has specialized in providing quality non-discretionary custodial services on self-directed IRAs, business retirement plans, and personal custodial accounts as well as escrow and paying agent services. From its corporate offices in Waco, Texas, Sterling Trust services individual and business retirement accounts in all 50 states.

Since Sterling Trust's only business is the administration of self-directed accounts, it has become a leader in providing specialized services designed to maximize your ability to control and manage your account assets.

Gold Bullion International serves as an agent to Sterling Trust. Precious metals are acquired by Gold Bullion International, but accounts are in the care of Sterling Trust, the custodian for precious metals IRAs.

On the day ZH posts about Germany and its gold, perhaps readers should consider all of the above points, it's a funny old world.

orangegeek's picture

US Dollar key to confirming markets' directions, in spite of rising markets and rising dollar today.

fonzannoon's picture

You never answered the question earlier today. other than the euro, what is the dollar rising against?

Everybodys All American's picture

The index is trading normally against a basket of currencies. The US Dollar trades in many different currecy pairs though. Take a pick.

Orly's picture

And about to see a major ramp against the Japanese yen...

Did I mention major?


ajax's picture


Don't bother coming to Switzerland with your US dollars.

Al Gorerhythm's picture

It's an immeasurable equation, as you suggest. It has no yardstick, no watermark, no numeraire and has a depreciation component built into it at creation. It's like bobbing for turds.; you just don't want to play the game.

The other part of the sick banker's creation is that they charge workers a wealth-stripping fee in order to use it, thereby transfering the collective wealth of nations from the workers to the bankers. The government is wilfully in collusion with the bankers, the enablers, firmly attached to the hind teat of the monetary/wealth pig-syphon, taxing the wealth of workers through the currency system. They, bureaucrats, need it to survive.

Give us our money back. Give us our wealth back. Give us our liberty back. Fuck them, let's take it back.

IBelieveInMagic's picture

This is an overly simplistic argument. It is two step.

The USD strips wealth from the rest of the world (due to to reserve status enforced militarily) and the bankers in turn get a bigger share of what is stripped. Hence, we are all benefiting to some extent but we resent others getting a bigger slice of the pie (No, I am not in the financial industry).

Well before gold becomes supreme, we will come to blows and at that time, gold wealth will be moot (given the destructive weapons that is owned all around). MAD is what is keeping everyone participating in keeping this status quo going. 

All major powers tend to externalize their problems to hold internal core and the US will not be any different. Before we descend into civil war conditions, we will be led into war with other nations. This is standard playbook for TPTB.

So I would argue, we should be hoping we can keep the status quo going for our relative well being...

Al Gorerhythm's picture

What blathering nonsense. You keep believing in that hope and magic stuff you're smokin'. The mathematics of the situation with regards to the bankruptedness of debt based money to settlement accounts is irrefutable. You could refute it but your argument will be found lacking. Fiat currency is global and simply credit,an IOU as payment but not settlement. It's FIAT, dummy. No intention to settle. Period.

Internationally, bankers are priveleged the right to print money, not create wealth. They print money credits and charge interest to use it, that's how credit extension works. Governments legislate it into existence by issuing bonds against spending bills and tax workers to perpetuate the scam, thereby getting their cut. Your venerated status quo is a scam; a con. You state that there is a beneficial outcome via relative well being, well, relative to what? Surly not a gold standard or commodity standard (for something second rate). Just ask a Greek or Spaniard how well the scam has worked out for them. Just because it hasn't hit you yet, doesn't mean it won't. You need a huge toke on some Austrian smelling salts.

nmewn's picture

Saw that one earlier Al.

I thought this offered a window into the commenters soul...

"So I would argue, we should be hoping we can keep the status quo going for our relative well being..."

The old "Yes, we know its a corrupting, unethical, immoral and ultimately destructive scheme to everyone in our society but lets keep doing it because the consequences of stopping it are unthinkable"

God help us.

Al Gorerhythm's picture

Yup. It's the old "I'm all right, Jack" attitude. It's not a head in the sand issue, it's a head up the ass perspective. He brushes off the obvious with ("Simplistic") derision when it is just plain simple. Morally bankrupt world wide. It's OK to strip the world of its wealth just as long as we get to benefit from their theft. Fuck me! What a prick.

IBelieveInMagic's picture

It's just my observation. You think we are in the ME and elsewhere for nothing (humans are amoral, might is right). Unfortunately, a gold based system would drastically reduce our ability to consume and our consumption based economy would collapse resulting in civil war like conditions. 

The bottom line is that the current system is to our advantage as a nation (gold investors may not see it that way) -- else we would have attempted to dismantle this long back. You are in denial if you are not recognizing the fact that, for example, a hair dresser in this country can tool around in a Hummer on her income only due to this fiat-credit arrangement (for at least 40+ years) which, as someone upstream rightly observed, will never be repaid.

You may be leading a pious self sufficient life (growing your own food, manning your machine gun from across your moat around your castle, etc.) but not everyone in this nation can be accomodated if they wished to adopt similar life style -- our economy works only by each of us consuming others' services/goods (mostly frivolous junk) until resources run out and can't be secured. Thereafter, we will be forced to adopt to changes but don't expect TPTB to voluntarily make changes on their watch given the fact that no one has a crystal ball of how the future plays out. Hence, they strive to perpetuate the status quo.

I know this may not fit in with your world view but no need to get your knickers in a twist over it. 

Al Gorerhythm's picture

"It's just my observation. You think we are in the ME and elsewhere for nothing (humans are amoral, might is right). Unfortunately, a gold based system would drastically reduce our ability to consume and our consumption based economy would collapse resulting in civil war like conditions. "

It wasn't just an observation; you condone it only in order to maintain your entitlements. Might is right, eh? Say no more.

blunderdog's picture

If you want to UNDERSTAND stuff, you need to be able to separate your personal values from the OBSERVATION process.  Take a look at what's happening and pretend to be a space-alien with no moral considerations for a minute. 

Some folks can't separate their emotional responses from their perceptions.  If this is a challenge you face, you may be better off just trying to understand the work of those folks who do it naturally.

(Personally I don't quite agree with the presented argument about "keeping things going," but the overall conception looks about right.  As I see it, the plan is just to "keep things going" until one other major player falls apart--then muscle into place a new arrangement.)


Al Gorerhythm's picture

You mean I have to adopt an immoral, cold, calculating, antipathetic, sociopathic mindset to establish a considered observation? No thanks. I'd rather respond to stimuli as I experience them and respond accordingly. In this instance, anger, mixed with a high percentage of outrage, is a measured response on my part. I can be just as cold and calculating as the next guy, but it's what to be calculating about that's important.

When it's time to hang a banker, those perpetrators of war, the thieves of wealth, the occupiers of our national public institutions (how many Goldman Sachs plants hold public office), then just ask. When it is time to try the treasonous government employees who enable the crimes against the constitution and the republic, call me. It will be an emotionless act on my part. After due process, that is.

blunderdog's picture

     You mean I have to adopt an immoral, cold, calculating, antipathetic, sociopathic mindset to establish a considered observation?

ONLY if you're trying to *understand* the world.  If you're happier in ignorance, by all means: keep behaving like a mindless nerve twitching in a vat if you prefer emotional reaction to knowing why things are as they are.

Understanding isn't for everyone.  Look at the average crackhead.

Al Gorerhythm's picture

Bullshit. I can read the tea leaves. I see the world's problems as emanating from the minds and machinations of cold and calculating sociopaths. We aren't in this mess because of the moral behaviour espoused by caring and honest men. This is a world that I can't support. You live in it if you like but I intend, with every fibre in my being, to change it as much as I can. I realize that I am not persuasive over very many but I will do my bit, in a calculated but very pissed off frame of mind.

blunderdog's picture

Mazel tov!  We all do what we can.

takeaction's picture

Did you guys see this....100% Disaster..

Share this one Tyler..


blunderdog's picture

Layoffs are good for the equity bulls.

Everybodys All American's picture

Not really. Only because Bernanke kept kick saving the markets with QE has it been good.

A Lunatic's picture

What's the big deal? All you have to do is take the total number of layoffs, wait three days and revise it down to an acceptable number................

Dr. Sandi's picture

Same crap happens every day. Give it a rest. The OTHER asshole won.

Take a look at the post-election car crash fatality numbers. Apparently 240 people realized they couldn't stand 4 More Years and went out and crashed their car.

Cathartes Aura's picture

from the link,

Had Romney won, many of these companies would now be hiring.

zomg - if only the other guy had won, the economy would be saved!!!   we would have hired, and people would be buying new houses, and cars, and having more babies, and going shopping!!!!  but now we're all going out of business - 48 hours, end of the world!!

seriously, I realise some of the reasoning, but these stories read as temper tantrums - either you were going to the wall last week, but had your fingers crossed you could successfully do some cuts and stay open - or you're not a very astute business owner in the first place. . .

while I understand campaign promises *cough fiction* once they're installed, there is NOT that much difference between figureheads.

DaveyJones's picture

it's a false hope thing Cath....we were so close...if we could only remove this one guy........if I only still had hair's picture

Exactly. Government itself is the problem.

DaveyJones's picture

and that we're all bald

but we keep shaving

DaveyJones's picture

I thought the whole key to aging was to deny the present progressive

Global Douche's picture

One of my best friends who runs a company near Rat-lanta told me how O's big re-election caused over 40 of his 100+ workers to call in sick the next day. three of them quit - stating how Barry would pay for them. I'm available for work and he won't hire me in part because I won't move to the hellhole he has to deal with. 

WillyGroper's picture

it started long b4 08.

blame him all you want. this was the plan of both parties. agenda 21. micro living on soylent green. 

ajax's picture


I sincerely hope Obama can get a third term in office.


jughead's picture

No problem, during his second term he'll make SCOTUS appointments who will declare drones to not only be persons (Drones United), but also give them the right to vote...which will give him a drone army to pack Congress and the State legislatures with his minions, who will in turn repeal the 22nd Amendment!'s picture

But they only planned, what, 30,000 drones to be patrolling American skies in the next decade or so. That's insignificant electorally.


Uncle Sam Prepares To Unleash Up To 30,000 Drones Over America For "Public Safety"

Harbanger's picture

I feel much safer knowing that.  Is there any lock the locksmith who made it can't open?  Not.  Drones, human or othewise are just that, drones.  They're always confused.

Lore's picture

Tell that to the families of their victims.

GeezerGeek's picture

I sincerely hope Obama gets a life term. And I don't mean in the White House.

THE DORK OF CORK's picture

 "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"


Maybe the deflation policey  in the Eurozone is all about releasing gold from not so strong hands.


They don't withdraw because they can't - they must release it to pay for goods and services.


The evidence is in - Europe does not have any national credit that could be used for productive purposes - it has a collection of gamers called private central banks pretending to be part of their host countries.


They pump and dump & pump  dump & pump & dump until all capital is exhausted.

Dr. Sandi's picture

Some scary insight there, Corker.

Look at Portugal. All of the gold in the 'weak hands' of Jose Blow and millions of compatriots has been scooped up by the Cash 4 Gold centers. And it's a fair guess that the Cash 4 Gold guys have some deep international pockets that look like private or central banks.

Urban Redneck's picture

Same story in Italy, the volumes crossing the Swiss border to be refined are insane.