The supply of physical gold coming onto the market is less important than it used to be in determining gold prices, according to the analytical monthly GOLDynamics published by B.R. Inc. in Pennsylvania. Also, concerns about growth in gold-mine output, and rising sales by the U.S.S.R. and China during the next few years, may be overstated.
During the 1970s, says the monthly, the supply of gold was found to be highly influential in determining the gold price. Increases in supply were associated with price declines, and decreases in gold supply were associated with price increases. During the first part of the 1980s, this relationship weakened, and by the mid-1980s, had disappeared.
Two factors account for the weakening of the relationship: the appearance of mature futures and options markets, and the increasing use of paper gold as an alternative asset by fund managers.
As for the disappearance of the relationship, the monthly says that if the connection between gold supply and price was found simply to erode over time, there would be little surprise. Instead of the expected supply/price inverse connection, the relationship became direct during the mid-1980s, with a rise in supply associated with a rise in price.
The monthly’s conclusion? It suggests the physical gold supply data contain large errors after 1982.
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