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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Tinky's picture

"sharp down-spikes"?

Not until gold is well into the bubble phase, and we ain't anywhere close yet.

Yen Cross's picture

 "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."

  I find that very disconcerting Tyler.  Who ,and what are the intentions of those holders of inflation?

   When the masses find more value in a potato, than a 20toz ingot, what happens?

blunderdog's picture

Smart traders go all-in on the potatoe market.

Yen Cross's picture

"Smart traders , find a third trade."  That off-sets the tension, from the original trade.

  Excess capital, has been responsible for fantastic innovation...

 Lay off the (roid) Dog Biscuits...

blunderdog's picture

There's no such thing as "excess capital."  The sum total of *all* capital is just called "the world."

There's only one world, and they're not making any more of it.

Yen Cross's picture

Are you using the full capacity of your "Cranium"?  Do you think that, you have the capacity to learn more?

 One World?

blunderdog's picture

I'm a multi-dimensional thinker.  I shouldn't take the piss out of you because I know you'll never get the jokes.  Sometimes I do it, anyway.

Yen Cross's picture

 BlunderPuppy? You are a wanker! You are just beginning to wake up!   I get all of your Jokes.  Get your rump out of bed to trade.

   I see potential in you!


fonzannoon's picture

When the producers of those potato's demand to get paid in gold, what happens?

new game's picture

ok, true fonz, but id rather have gold to buy your patato as i am guessing you would not accept my dirty ass fiat.

all will be relative to the value of the fiat in question.  a zillion dolas for a blow job, no but an oz will get me laid now and i'll have french fries later.

Yen Cross's picture

 Fonz is more then willing, to form a "free trade pact" for your quality potatoes... His fiat is exchangeable, "Legal Tender"...

  Let's discuss trade terms , based on your last 6 months of delivery, and we have an exchange rate.

  The reserve bank of Fonz has 2000kg [xau] of .999(sovereign) as collateral.

fonzannoon's picture

I'm working on it lol. Man the back and forth on here is just awesome.

ekm's picture

Where do you find this imagination?

I see you being very productive as a story teller. Write a book, I say.

Yen Cross's picture

EKM,  whos messing with ya? You aren't your normal "tack sharp" self?

  Is it the short days?  

ekm's picture

Short days for sure. I love sun.


But I have a better explanation:

 God giveth, God taketh away.

fonzannoon's picture

Thats exactly my point to Yen. Forgive me if I am unclear (5th beer). But Yen was concerned when the masses decide they need to eat, and therefore value a potato more than gold. Well what happens when the potato grower demands gold as payment. The masses today all have fiat, and none of them produce potato's.

I was reading a lot of back and forth's with Slaughterer today. I find him intelligent and entertaining as hell. But he trades in paper all day. The thought that the market as we know it may be go through a paradigm change did not sit well with him. The idea that physical markets could take over certainly does not bode well for him, or me, or many others. The key is, will you rail against that possibility just because it goes against your interests, or will you embrace it and prepare as best you can for the possibility?

If shit breaks down I know I fall into the masses category. It is what it is. I caught on late and was already embedded in what I do. But I will be prepared as best I can and I will have tradeable assets that will sustain me until I find a way to start over. At least I hope that is the case. Sorry for the rants. I am pensive this evening.

Yen Cross's picture

Crystal clear to me Fonz. ;-)

fonzannoon's picture

Trust me it was crystal clear to you long before it was vaguely clear to me.

Yen Cross's picture

 Can't go wrong with Slaughterer Fonz... Smart person.

fonzannoon's picture

Slaughterer has forgotten more about trading then I will ever learn. I just meant a little more big picture. When someone does anything for a living, the idea that what they do can become obsolete or irrilevant usually does not settle in very well for them. I am just using him as an example. He could have a fortress of Gold sittng next to stacks of Remnimbi and Sweedish Krona for all I know.  But there is a chance that if this market tanks, and it is the big tank. People throwing Netflix and Panera Bread around every day may need to find something else to do.

ekm's picture

Human beings always and always need a unit of account, numeraire.

In ancient Ireland, 'slave girl' was a unit of account, literally. Anything was denominated in slave girls, but of course no slave girls exchanged hands when people bought food.


That is the whole point of Gold, a unit of account that cannot be printed. Funny enough for ancient eire, nobody could print slave girls either.

WAMO556's picture

You then turn the potato into vodka and then put the gold into the vodka (like in GOLDSCHLAGER). There, fixed it or you.

Better off trying to figure out how many angels can dance on the head of a PIN.

eddiebe's picture

A solid 5.

Most investors will wait till gold really starts going through the roof, then they will sell some of their bonds and netflix to ' git in before it gits away'. It all seems to be a gamble, however, 5000 years of ( world ) history of gold as money is hard to overlook.

AUD's picture

This article is more guff trying to work with the quantity theory of money - that it is quantity that determines value. A far simpler, so more logical, explanation is that value is determined by quality.

Only gold has an eternal, unchanging quality, so only gold is a standard of value. Hence the gold standard.

Yen Cross's picture

AUD we miss time zones. I like your posts. ;-)

Yen Cross's picture

Pick me ! Please pick me?

Atomizer's picture

You’ve be picked. The MMT [Modern Monetary Theory] crowd is launching another theatrical play to regain confidence. The curtain hasn’t been raised yet, the audience will see. No spoilers…


Hope you’re doing well – Have a good weekend!

Yen Cross's picture

Atomizer     Well spoken. Just another " Shakespearean tragedy"...   We're all on the same barge...

  Thanks for looking out... Good man you are :-)

new game's picture

i lived thru the 900/oz mania

coke for gold

shit was crazy then.  wow a krugerrand; i fucking want one.

 a bubble of gold> and finally we are on the eve, only this time dolas of fiat for the real deal...

walla, gold the drug of choice:), cures the fear of future blues...

Yen Cross's picture

Good on ya. I'm trying to understand you. usd- or xau?

   Ohhh it's  cny "cyn"/usd " trading band " expansion?

   Old skool .

fonzannoon's picture

This was from Doc Engali on another post

"When the time comes they have us so divided we will take out each other and TPTB will come mop up the rest."

This is what keeps me up at night. This is what makes me walk around my house at 3am looking out my window, and I live in a decent neighborhood and the shit has not touched the fan yet. That sentence is why I spend my day prying open the lids on the brains of the people around me, peeking in to see if any bells are going off. They are not. I spend way too much of my time trying to figure out a way to get people to 1) be concerned 2) direct that concern to the right place. I can't get past 1.

This is quite the conundrum.

WAMO556's picture

They're zombies. Which is why DOC is stuck in möbius loop.either that or taking great green gobs of SSRI's. Just saying.

Dr. Engali's picture

Or maybe I try to consider all scenarios and think of the one most likely. Or the one that TPTB would like to see played out. And when I see them dividing us further apart that tells me that if all hell breaks loose they want us focusing on each other instead of them.

WAMO556's picture

I wouldn't worry too much about the TPTB. They are TOUCHABLE. just a matter of the type of tool that will be used to touch them.

Dr. Engali's picture

One thing I've learned in life is to never underestimate the enemy.

DaveyJones's picture

and never underestimate the identity of the enemy. Criminal law has helped me get to that same intense point. Authority is often the ultimate rapist. You can see it most nakedly in the actualized veterans. (Like Miles Kendig and SgtShaftoe) THey have seen the ugly inside of their fearless leaders in the most tangible undeniable way

DosZap's picture


This is what keeps me up at night. This is what makes me walk around my house at am looking out my window, and I live in a decent neighborhood and the shit has not touched the fan yet. That sentence is why I spend my day prying open the lids on the brains of the people around me, peeking in to see if any bells are going off. They are not. I spend way too much of my time trying to figure out a way to get people to 1) be concerned 2) direct that concern to the right place. I can't get past 1.

This is quite the conundrum.


It's because they are living in DENIAL, and not the river in Egypt.

My son laughed in my face last week,because of my belief in Au/Slvr, as insurance and real money.He and his spouse live in a home that cost 4x's as much as the one I OWN, and drive Mercedes,and other new models.They both have a job, making $50k-$100k +,and are frugal with cash,but own ONE thing, or real net worth one vehicle outright.

( the Mercedes, and it was free,a gift from her employer,he gave three away to emps for their service when he sold out.)

He also laughed at me for stocking up on food,and water.I told him I was not stocking up on it for myself and my wife,but my IGNORANT kids that I knew I would have to be feeding,that have been warned,but choose to ignore.He did not laugh after that comment.

Both my kids are older, and are content with their Walter Mitty lives. Sounds like your acquaintances.

papaswamp's picture

Food Stamps (SNAP)..hasn't updated their report since 28 September. They are supposed to update every month....hmmm

Yen Cross's picture

GOA in Vegas, re-election party...

Itch's picture



Timeless argument, but it still all rests on one thing; whether or not people are willing to believe in the intentions of the people holding the gold. Yes, they might see value in it at the moment, they may well have done so for several thousand years, but they used pencils for a long time too. Regardless, can the supply and demand argument be made redundant? The article above says it’s a moot point.

 Considering that the above argument does not concern itself with ordinary supply and demand dynamics to make its case, partly due to the fact that those dynamics are rightly quoted as largely stable, (and indeed goes on to remind us all that gold is practically useless, true), rather it depends on the weight of historical human interpretation, and we can go on to say that any stably mined commodity could act in the same way, only if enough people believed in it or not; in another dimension, gold could be umbilical cords by people born on the Septembers of every year, they too are of stable supply. Of course that’s a shitty example, but it’s irrelevant, as too are gold supply and *demand dynamics

Hence the big problem, apart from the obvious stuff which we are all sensible enough to neglect (it could be graphite since we don’t use pencils anymore); the holders of the gold could never let you believe that the metal was on a par with umbilical cords, much like Columbus could never let the Indians know that silly trinkets were not on a par with the value of their land.

This is not an argument against gold in the present tense though, or the people that wish to rightly keep their money safe at this moment in time... this is a frivolous attempt to make people see, contrary to what has been implied above, that there are no temporally infinite set-theoretical certainties when it comes to how people perceive value. There will be no "game, set and match" or “economic checkmate” move for how people will continue to perceive what their labour is worth. Gold could be made worthless by giving everyone on the planet a single piece of the supply, for example. What i am trying to say is that the worth of gold lies largely in the fact of those that are holding it, their argument; they have it, you have been convinced you want it.

The moral of the story is that everything will always be worth whatever the rest of us are willing to pay...whether its shiny or sinewy. If you are a realist though, you will go with the shinny stuff at the moment. But is gold the best of a bad situation? Whether sinewy or shiny, it depends whose holding it and when.



blunderdog's picture

   there are no temporally infinite set-theoretical certainties when it comes to how people perceive value.

Shh...folks 'round here tend to hate on the Austrians in any screeching goldbug thread.  This is one of those.

Yen Cross's picture

Should read, " There are no "finite-theoretical" oxymoronic "quantum" thoughts,] like comparing theory & Being Human<>

 Blunderdog, you need to brush up on the " prepositional phrase", side of things.

Itch's picture

Beautiful Yen, if only it made sense...i got you on a technicality there.

Yen Cross's picture

Fetch me a EGG ROLE,  Aanonymous.

blunderdog's picture

I'm thrilled that you're following my work, but you don't do it very well.  Simplicity is the key to good writing.

Yen Cross's picture

" grammetical educate"?

 ¶ The,


 ¶ Ends


  ¶ here

Itch's picture

Heh, its gibberish Yen, sorry mate. 

Yen Cross's picture

I'm not your mate Chinese, troll...  Hey Hop Sing,  lay of the Bonanza re'runs...

WAMO556's picture

Crossing swords again??? BAD BOY! Very, very bad boy. How does: cuz, bro, shipmate strike ya?