Speculators Dump Gold But Price Goes Up Anyway


Judging from futures and alleged jewelry demand, the price of gold ought to be falling. But it isn't. Let's explore what's happening with the price of gold and why.

The above chart is courtesy of Barchart. The anecdotes are mine.

In the futures world, for every long there is a short. Contracts net to zero.

The commercials are producers who sell their gold and the broker-dealers who are hedged. 

COT Report Categories

COT Report Categories

Speculators Dump Gold But Price Goes Up Anyway

Speculators Dump Gold But Price Goes Up Anyway

Note that commercials are down 111,290 contracts since February. This is not "covering shorts" as often claimed. Rather it reflects speculators dumping contracts. 

Managed money dumped 125,456 contracts. Yet, the price of gold rose from $1,644.60 to $1,751.70.

Let's go back further, to August 2010.

Gold August 2010

Gold August 2010

I picked that date because the open interest to today is quite similar. 284,561 contracts short in August 2010 vs 274,322 today. The price of gold was then $1,249.

The level of shorts has little to do with the price of gold except as a measure of short-term price fluctuations. 

Normally when speculators add contracts, the price of gold rises and when speculators are liquidating contracts, the price falls. But not even that is happening now.

What About Jewelry?

According to the World Gold Council, demand for Gold jewelry in 2019 fell 6 percent overall to 2,107 tons. How did the price of gold react?

Gold vs Jewelry Demand

Gold Price vs Jewelry Demand 2019

The price of gold does not follow marginal jewelry usage either.

Marginal Utility?

The subject of marginal utility of gold and jewelry came up in a Twitter discussion this weekend.

Misunderstanding the Supply of Bitcoin and Gold Leads to Silly Projections 

I covered the topic recently in Misunderstanding the Supply of Bitcoin and Gold Leads to Silly Projections

People confuse jewelry buying with the demand for gold and bitcoin mining with supply of Bitcoin. 

Contrary to popular myth, the supply Bitcoin goes up every day. This is why halving the mining rate of Bitcoin did nothing for the price. 

Similarly, people confuse demand for new gold jewelry as the demand for gold. 

Charts like this perpetuate all kinds of silliness.

Distribition of Global Gold Demand

That chart does NOT represent the demand for gold.

It says, 52.44% of incremental usage was used in Jewelry. So what? Did that set the price of gold or affect it at all?

Misconceptions About Gold

The best explantionation of the demand for gold comes from Pater Tenebrarum at the Acting Man blog. He was my teacher in Austrian economics.

Tenebrarum wrote Misconceptions about Gold as a guest post on my blog in June of 2007 under the pseudonym Trotsky, a name he regrets. 

Gold was $650 at the time.

Gold Supply and Demand

If gold's price were determined by fabrication demand alone (jewelry and industrial uses), it could not possibly trade at a price of $650 oz.

Many gold analysts, from the mainstream to fringe groups such as the Gold Anti-Trust Action Committee (GATA) claim that they can predict what the gold price will do by adding up annual fabrication and investment demand (as well as dehedging demand by miners) and contrasting the resulting total with annual supply (mine supply, central bank selling, disinvestment and scrap). In short, they analyze the gold market in the same manner as they would analyze the copper market.

It should be immediately obvious that this can't be correct. After all, nearly the entire gold ever mined (approximately 150,000-160,000 tons) is still here. In short, the total potential supply of gold is some 97-98% greater than the gold produced every year (approximately 2,600 tons).

Jewelry Demand vs. Monetary Demand

One can further illustrate gold's unique nature as money with a study of gold prices vs. jewelry demand. If record fabrication demand for gold (jewelry) must be good for the price of gold, then a historic high in jewelry demand should in theory coincide with a high gold price.

However, record high jewelry demand in 1999 - 2000 in actual fact coincided with a 20 year bear market low in the gold price - the exact opposite of what traditional commodity supply/demand analysis would suggest.

We can therefore conclude that there must be a source of gold demand that is of far greater importance than the jewelry and industrial demand components, and that demand constitutes the true driver of the price of gold in terms of fiat money.

Indeed, there is. This demand component is called 'monetary demand'. Monetary demand and the supply of gold is actually best described as the 'degree of reluctance of the current owners of gold to part with their gold at current prices' since, as mentioned above, some 160,000 tons are owned by somebody already.

Jewelry Usage

Jewelry demand is about 500 tonnes or so out of a supply total now up to 190,000 tons or so, minus some percentage lost or tied up in priceless art.

Assume 20,000 tons of gold lost or in art, and we can calculate new jewelry demand as 500/170,000 = .0029. 

The idea that jewelry has a meaningful impact on the price of gold is thus ridiculous.

Unfortunately, the World Gold Council itself spreads jewelry nonsense as the "demand for gold".

Bloomberg, the Wall Street Journal, and countless other also perpetuate the myth so it's no wonder people are confused.

Gold vs Faith in Central Banks

Gold vs Faith in Central Banks 2020-01-01 PNG

Demand for gold is a actually a reflection on faith in central banks.

When people believe central banks have everything under control, the price of gold falls. 

The best example is Greenspan's great moderation when he was consider the maestro. Gold fell from $850 to $250.  

Mario Draghi's "Whatever it Takes" speech is another key example.

Alleged Gold Shortage

The second widely perpetuated myth is that there is a shortage of gold. 

That's pretty funny given there is roughly 190,000 tons of supply. 

The myth stems from short-term demand fluctuations for certain forms of gold, typically coins, resulting in price spikes for that form, but not gold itself.

Shills then come out of the woodwork and profess buy gold while you still can. 

What If?

Another popular shortage argument pertains to futures. 

The futures battle cry is "If only everyone would take delivery, we would run out of gold" and the commercials would be ruined. 

The commercials would not be ruined or they would have been ruined long ago. They were short the entire run from $250 to now. The commercials are either hedged or they are the producers who sell their production via futures.

Moreover, futures speculators do not reflect a demand to own gold, they reflect a demand to rent gold with leverage. 

We would not run out of gold if everyone took delivery, but the price would indeed rise.

Gold is Not the New Unobtanium

Even the Wall Street Journal falls into the trap of perpetuating these myths. 

For discussion, please see No WSJ, Gold is Not the New Unobtanium: Where to Buy?


Comments (25)
No. 1-14
Tony Bennett
Tony Bennett

"Demand for gold is a actually a reflection on faith in central banks."


Jerome Powell (Friday))

Question: “Are the latest Fed policies likely to lead to more income inequality in the United States?

“Absolutely not. "


No amount of Federal Reserve craziness will be off limits.




I thought that folks in India traditionally held physical gold in the form of jewelry as opposed to coins.


“Gold is a way of going long on fear,” renowned investor Warren Buffett once said.

Well we've had covid-19 and now we have daily riots. And we don't really know what Trump might do with respect to the Army being brought in. That's fear.


The problem is you pay for gold with dollars like other commodities and you measure the value in dollars. Gold is volatile as shown by the chart. Until you can get away from measuring things in dollars and everyone accepts dollars, then you can start talking about gold. I'm a little surprised gold hasn't gone past $2000/oz based on the Fed's actions so far.


Here's a link to a nice chart of the COT:


I’d prefer to hold Gold than be charged interest on my savings as do many others I suspect. Gold’s a keeper at the moment.


I guess, jewelry is a non-starter for trading, but what is more tradable, gold bars or gold coins?


Every currency with the exception of the $US and those tied to it are hitting historic lows versus gold.


"Gold is money. All else is credit." - J.P. Morgan (in testimony before Congress)
People will re-learn that lesson soon, the hard way.


Thank you. Now I understand.


Thank God a financial post and not a shit post about politics like everyone else.


"Many gold analysts, from the mainstream to fringe groups such as the Gold Anti-Trust Action Committee (GATA) claim that they can predict what the gold price will do by adding up annual fabrication and investment demand (as well as dehedging demand by miners) and contrasting the resulting total with annual supply (mine supply, central bank selling, disinvestment and scrap). In short, they analyze the gold market in the same manner as they would analyze the copper market."

Are there any actual quotes from GATA to support this claim about them?


I have read the figure of 160,000 tons of gold as above ground stock for decades. There were 3200 tons mined last year. If you took an average of 2000 tons a year for the last 50 years, we shoud have 250k tons, not the same old 160k tons.


i spent a long time in gold industry and what i observed are the following re gold price drivers

  • gold was not priced as 'money' in the 90s because of positive real debt/gdp ratios and screamingly good productivity - so its price reflected only marginal commodity demand. the [price was primarily set by the world's largest god miners and their hedging prices
  • the rise from 2002-2011 was a compounding of 3 trends
    • reflation of gold as 'money' as US debt started to rise
  • fall in USD relative to major currency baskets as always happens from birth of each new economic cycle - which also reignites inflation
  • then the hard depreciation of USD post GFC where USD found an artificial new trough low in 2011 + rising debt drove increased 'gold as money buying'

So you have to think of gold price as having 3 main drivers

  • rate of change of intrinsic USD purchasing power (ie speed with which fiat is perceived to be losing value. thats a net of gdp minus inflation rate minus M2 change)

  • USD relative to other currency baskets (ie extrinsic)

  • commodity demand - the 3rd and least of the forces - which is why nealry all broking analyst forecasts on gold price are incorrect - because they generally focus almost exclusively on net supply/demand and marginal price of production theory. which is just intellectual gibberish

By using this I was able to anticipate the heavy drawdown in US gold price from 2011 to 2015 - tripled my money in the bear rally in 2016 - and now building a big position for the next move back to 1900+USD

mathematically i dont think there's any coincidence that is was 4 years and 4 months from Sept 2011 peak to Dec/Jan 2015/16 low and its now been 4yrs 4 months to end of May 2020

that is purely a reflection of the USD cycle

A note also re COT. if you go back and have a look at the 2015/16 bear really - youll see COT was completely misleading - only specs were long initially

COT is only a good indicator on trends. It is a contrarian indicator on inflections either in direction or sharp changes in price velocity - because producers are always looking for 'one step down' and specs 'one step up'.

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