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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fasTTcar's picture

I own 3 "cash for gold" locations in Canada.


The only reason I sell gold is to be able to buy more.


Gold is the profit, not the fiat.

Urban Redneck's picture

120 tons in 2011

150 tons in 2012 (est)

That a lot gold to be parting with considering how bad the economy in Italy is.

Ness.'s picture

"I moved here from Canada and they think I'm slow.. ay'

We made Luongo cry.


Gold is golden.

Atomizer's picture



Peabody, one would fancy you to doh an inventory ohn physical gold holdings and recheck our ledgah to IOU obligations. We need these numbers immediately. Hoh soohhn can you, one's old bean, compile this? Peabody replies, this meay be ah difficult task one's lord; we have splashed out all these yeaaars covering any trace leading beck to us.

fonzannoon's picture

this guy does not seem to account for the bazillions of dollars of paper gold bought and sold every day. or did i miss something? 

Dr. Engali's picture

Fonz do you ever read FOFOA ? He talks a lot about freegold. It can be a challenging read sometimes, I don't recommend it if you've been drinking.

fonzannoon's picture

Hey Doc I actually meant to ask you about that. I saw you mention FOFOA a while back and you said it was heavy reading. I will take a crack at it at some point. It is worth the look?

THE DORK OF CORK's picture

Sure , the guy knows what he is talking about but I disagree with much of it........................


He is not a gold standard Ron Paul type thats for sure.


But I believe  a Fiat system is much more powerful then some gold bugs imagine.

fonzannoon's picture

I have spoken to several people since O scored a Victory. They all laugh and say "Hey I remember you talking about Gold, now that O won I guess I really gotta buy some eh! Hearty belly laugh. We are not even in the 2nd inning of this thing. Scratch that this is still batting practice.

dick cheneys ghost's picture

If you read FOFOA, start from the beginning (August 2008), it will make more sense....

DaveyJones's picture

it's the fundamental simplicity of FOFOA that makes it challenging and enlightening. It's like a good philosophy class

Dr. Engali's picture

Hey Fonz. I think he is worth reading. The Dork is right I don't agree with everything, he is a Euro backer, but he has some great thoughts to ponder on.

lasvegaspersona's picture

Dr. E

to call fofoa a Euro backer is not correct, I have not ever seen him 'back' anything...he does not advocate...just cals it as he thinks it is. 

I would say he admires the archetecture of the Euro and the way it uses gold campared to the way the Fed uses (or does not use) gold.

I'd also say he sees it surviving. I'll bet personally he does not care much one way or the other  though. According to him we get freegold by default with or without the Euro.

Dr. Engali's picture

You are more accurate in you description. I should have chosen my words better.

DoChenRollingBearing's picture

Well done, lasvegas, + 1

He also explains things like stock-to-flow, strong hands, etc.

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.

Hulk's picture

With all the games being played, the Euro may be backed by gold that doesn't exist...

blunderdog's picture

Derivative transactions are all net-zero, thus irrelevant.  Hee hee.

Wakanda's picture

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

Really?  I can choose infinity?  I mean really-really?

I'm gonna start drinkin' now.'s picture

As your attorney, I advise you to take a hit out of the little brown bottle in my shaving kit.

GeezerGeek's picture

When gold reaches infinity I will rush out to buy the whole world with my single dry 1 oz. Not that I'd know what to do with it, of course, but it would be cool, for a moment, to own the whole thing.

Mercury's picture

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.


This drives a lot of people nuts. But this is what human beings have settled on as a universal store of value. Deal with it.


When we discover a way to permanently bank electricity that will replace gold in this regard but until then...

Atomizer's picture

When we discover a way to permanently bank electricity that will replace gold in this regard but until then...


Did you hit the B key instead of T key?

Mercury's picture


People would be happy to receive payment in the form of electricity in exchange for good or services if they could store or "bank" it indefinitely without loss (or with very little loss).  It would be even better if you could transport it easilly without loss too.  Electricity has universal utility and therefore universal value. Therefore it would be an even better store of value than gold.


But such a thing is not possible and almost certainly never will be.

Dr. Sandi's picture

Energy is power, Bitchez!

Atomizer's picture



Do you remember how the UN Oil for Food Scandal worked out? Rejuvenating carbon tax credits for [insert consumer reward point system plan] will end in the same fashion. CCX & GCX exchanges were already beta tested. How did it work out? {crickets}

Bank on repeating the same mistakes and hoping for a new outcome! BTW, offering a new Green Energy/Carbon credit card is under discussion. The new hair brain idea is to visit businesses to purchase environmentally safe products and receive a 'Super-Sized Point Reward'. Essentially, the same business model disguised under a new agenda.

Mercury's picture

Oh it's much worse than that.  Harold Raines, the CEO who drove Fanie Mae into the ground and skipped town after a huge payday, owns the patent for the hoped for exchange on which carbon credits will be traded.  I shit you not. The world needed a genius like him to come up with the idea because how else would buyers and sellers ever figure out how to exchange something of value on their own?  He was all tee-d up last time around to sit his fat, rent-seeking ass in the middle of this river of money when the idea got shot down but there will likely be another attempt at that whole project in term II.

Atomizer's picture



Franklin D. Raines 

Amazon to offer eco-friendly shipping, carbon credits?,813,970.PN.&OS=PN/7,813,970&RS=PN/7,813,970


Someone is going to get carpet burns over this same fuck up. Does dragging an employee over the office carpet constitute a carbon tax revenue?

razorthin's picture

Tesla knew how to harness infinite energy, and distribute it without wires.  Funding pulled.  Infinite supply meeting any demand is worthless to TPTB, especially when the copper and petroleum it controls are taken out of the equation.

This is why many of us still sit in the dark and cold after 2 weeks.

Mercury's picture that never happened.

Hulk's picture

You fantasy wrecker you...

holdbuysell's picture

I disagree with your assumption that the capture of energy is scarce.

Start by researching Nikola Tesla.

Mercury's picture

OK, if you brush up on the laws of thermodynamics, entropy and the history of perpetual motion machines.

holdbuysell's picture

My apologies for the terse tone in my above reply...long week.

I'm with you on the perpetual motion machine point: they belong with unicorns and fairies.

I'm suggesting that, based on Tesla's and others' works, we do know how to access energy in ways that very well may be capable of making the oil paradigm irrelevant, and thus the petrodollar along with it. Much of this has been buried due to national security issues.

Below are some specs and a WIPO patent application of a device that was reduced to practice. I saw this working in a video. Is it a hoax? Maybe, but then it sure was an elaborate one, especially after reading the patent application (this device is buildable but requires skill to do so) and noting the device specs.

Clearly, this device would wear out over time and require repair.

Definitely would welcome your thoughts in the space.

Closed Path Homopolar Machine

Summary of Machine Parameters:

Rotor o.d: 14.0 inches
Rotor Length: 9.25 inches
Internal Rotor Diameter: 6 inches
Shaft Diameter (at widest point): 2 inches
Speed: 7200 rpm
Field: 15,000 gauss @ 150 watts field input
Voltage Output: 2.9 volts C @ 15,000 amperes
Drive Motor (DC) input (no load): 1.8 - 1.9 hp (1340-1470 watts) windage & friction
Drive Motor input (loaded): 10.8 Kw, 14.5 hp
Machine Internal Resistance: 6-10 micro-ohms
Output Power: 43.7 Kw (maximum achieved 45.8 kw)
Power gain of Machine: 45.8 / 9.3 (drag due to current withdrawal) = 4.92

In the above figure the 150 watts consumed in exciting the magnet is a negligible factor.

A Lunatic's picture

As long as gold is priced in dollars it's true value cannot be known. Gold is to the economy as 2nd amendment rights  are to the Constitution and my guess is the percentages of those prepared to excercise either remedy are about three to five percent of the population. The more things change, the more they stay the same, bitchez.

Atomizer's picture

Appears to be a long night for many re-education centers. Buyer’s remorse tingles from their pocketbook, panic ensues..


Nixon Ends Bretton Woods International Monetary System 

Recycling Petrodollars 

All the glory has filled the media pipelines.. Let’s take a look.


‘Obama gotz been elected. Deal with it. And you know what thatz about’.

blunderdog's picture

    who values gold higher? The new incremental buyer, or the existing owner?

It's called "The Goldbug's Paradox."

Flakmeister's picture

Hey, I love gold but before getting a woodie about the collapse of the dollar, it will be telegraphed by the price of oil....

The sudden fall of Saudi Arabia is the "predictable black swan" for the USD..... 


blunderdog's picture

Good thought, but don't worry, we'll turn SA into a US protectorate in about 2 hours if comes right down to it.

DaveyJones's picture

good point with the possible correction that we'll try to turn SA into a US protectorate. This game can only go on so long

Mercury's picture

I'm not sure about gold being a Giffen good though; particularly in respect to it's being an inferior substitute for something else.

If anything it's a superior substitute in situations where the inferior stuff won't work or no longer works.  I'm not sure what that's called in economics but, for instance, for many tasks a plastic knife (or plastic whatever) works just fine but for more serious tasks/situations you want the real thing.


If you live and work in San Diego maybe you can get around to work/errands/recreation just fine in a cheap but serviceable, semi-disposable golf cart - a toy basically.  But if the roads go to hell and it's suddenly cold and rainy all the time or dangerous or you need to travel long distances to do important things - then that expensive but well made and sturdy ATV in your crazy friend's garage is looking pretty nice.

blunderdog's picture

Gold's not a Giffen good at all, but they're trying to map some economic concepts onto a model that's currently falling apart.   Like many things, it's useful to think through their concept, even though it's technically "wrong."

NidStyles's picture

" I'm not sure what that's called in economics"


Inelastic Utility.

Mercury's picture

Of course...right, thanks!  The strong steel knife and the sturdy truck have greater utility than the plastic knife and the golf cart but it makes less sense (for other reasons) to use them for more mundane or simple tasks.


So, what I'm getting at is that: although gold can be used to buy pretty much anything there are lots of reasons you wouldn't want to use it to pay bills or buy a sandwich.  In fact, Fiat money works fine in "nice" conditions when everything is running smoothly and everyone is comfortable with the situation.  When those conditions change you want the superior substitute.

blunderdog's picture

The big problem is that there are incredibly obvious reasons for why "transaction tokens" SHOULD be divorced completely from "media used to store value." 

No one wants to carry their "store of value" around everywhere, but it's when they're walking around that they most often want to engage in transactions.  THIS is why the gold-standard is always abandoned, and also why most people don't care about returning to it.

I suspect it'll come back (in some form) briefly in the future, but it's not like it's a solution. It's just a transition to a different set of problems for awhile.

chockl's picture

Exchange those frn's time is running out.

Yen Cross's picture

 An age old story...   Time to go {Robin Hood} on { Blankfeins, MOMO-PROP desk} <>

Roger Knights's picture

I like this thread, but there's a weakness in this claim: "Central banks certainly aren’t selling anytime soon."

CBs may "loan" their gold to their country's big banks when the latter are in distress, as they will be when the Greek haircut takes effect. This loaning will never be paid back, of course. But national politicians will demand that the loans be made. (This may already be going on.) The banks then sell the gold to raise cash. This means that sharp down-spikes in gold's price are likely, and that they will occur when they seemingly shouldn't. Traders beware.