More Confusion About Gold Demand

“Nonsensical Gold Commentary” was the title of a recent Mineweb article in which the author, Lawrence Williams, laments that a significant amount of commentary published on gold can be uninformed and misleading. This is ironic, since the bulk of Lawrence Williams’ writings about the gold market (and the silver market) are uninformed and misleading.

When it comes to his gold-market commentary, Mr. William’s most frequent mistake is to focus on the amount of gold ‘flowing’ into China as if this were one of the most important drivers, if not the most important driver, of the gold price. To be fair, in this regard he has a lot of company and much of what he writes on the topic is copied from the wrongheaded analyses put forward by reputed experts on gold.

I’ve dealt with the China gold fallacy in several previous posts*. It is related to the more general fallacy that useful information about gold demand and the gold price can be obtained by monitoring the amount of gold being transferred from one part of the market to another or from one geographical region to another.

Since every gold transaction involves an increase in gold demand on the part of the buyer and an exactly offsetting decrease in gold demand on the part of the seller, it should be obvious that overall demand cannot possibly change as a result of any purchase/sale. And it should be obvious that regardless of whether gold’s price is in a bullish or a bearish trend, some parts of the market and some geographical regions will be net buyers and others will be net sellers. And it should also be obvious that an increase in volume — which requires an increase in both buying and selling — can accompany a price decline or a price advance, meaning that there is nothing strange about a fall in price going hand-in-hand with increased buying or a rise in price going hand-in-hand with increased selling.

Unfortunately, none of these facts are apparent to the gold analysts who attempt to obtain clues about gold’s price performance and prospects by tracking the amount of gold being transferred from sellers to buyers.

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