Gold Bullion: Bottleneck? Or Not Enough to Go Around?

Credit Writedowns is carrying a piece by Jeff Clark of BIG GOLD, discussing the ins and out of the current shortage of gold bullion: Is it a bottleneck? Or—more ominously—is there a supply shortage?

Clark does a fine job of outlining the relevant data, before coming squarely on the side of “bottleneck” with a nifty little metaphor:

It’s no different than the store that sells old-fashioned wooden rocking chairs suddenly getting swamped with customers when an antique dealer declares they’ll be valuable collectibles in the future. Collectors rush to buy, and the store doesn’t have enough rocking chairs in its warehouse. But they’re not running out of wood.

Quite right. So it’s a bottleneck. 

But then Clark goes on, and makes a series of observations about the bullion market—particularly silver—which are all quite smart, all worth mulling over:

1. According to International Strategy and Investment Group, gold ownership currently represents 0.6% of total financial assets. If it rose to just 1.2% – still less than half its 1980 level – it would require an additional 917.1 million ounces, or 16% of aggregate gold worldwide. This amount is equal to about 10 years of current global production.
2. Investment demand represented 53% of all gold demand in 1979; today, it represents just 32%. Coin demand represented 37% of all demand in 1979; today it’s less than 14%.
3. Gold and gold mining stocks represented 26% of all global assets in 1981 (high inflation), and 20% in 1932 (high deflation). Today, gold and gold mining shares represent about 1% of global assets.
4. The market cap of the entire gold industry is about the size of Microsoft, is less than Exxon Mobil, and is 10 times smaller than the banking industry. The whole of the silver industry is smaller than Starbucks.
5. Silver mine production is insufficient to meet current demand. The only way silver needs are fulfilled is from scrap coming to market. Miners don’t produce enough on their own.
6. There are approximately 40% more earthlings right now than there are ounces of gold that have ever been mined. That includes every ounce used in jewelry, electronics, and dental. Further, if every ounce of supply last year were made into coins and bars for investment purchase, it would amount to less than two one-hundredths of an ounce, or about half a gram, for every man, woman, and child on earth. This means 0.018% of the global population – about one in every 55 people – could buy a one-ounce gold coin this year.

Clark goes on a bit more, but the kicker is the following:

Andy Schectman of bullion dealer Miles Franklin told me last summer that, “Based on what I know, it’s my opinion that if 5% of this country put 5% of their money into gold, there would be nothing left tomorrow morning.” In other words, even if supply is sufficient at present, what happens if demand, say, doubles, as the above data show is possible?

Again: Quite right.