first majestic silver

How Big Is The Gold Market Really?

August 9, 2015

Disclosure: I am/we are long PHYSICAL GOLD AND SILVER. (More...)I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Summary

  • With recent volatility, everyone is jumping on the "hate gold" bandwagon.
  • However, the gold market is much larger and much more important than most care to know.
  • The Gold market is neither "barbarous" nor a "relic." It is a highly sophisticated, liquid and deep market. It is more important today than ever.

Gold has certainly shown some great volatility recently. And with the recent price drop, there's also been a lot of noise coming from pundits in the gold community. Consequently, this seems to be a great time to ask certain basic questions about this, in many ways, little understood market. For example, just how big is the gold market? What role(s) does gold play in the modern financial frontier? Why does it still matter today?

To start, let's consider the size of the global market for gold. The total above ground stock of physical gold is officially reported by the World Gold Council to be around 180,000 tons at the end of 2014. That's around 5.7 billion ounces. At today's dollar price of gold (around $1100) gold price, that's about $6.3 Trillion dollars.

It seems like a lot, especially since gold is one of the rarest elements on earth. But this figure could be a gross underestimation of the real supply because people have been accumulating gold long before anyone was trying to keep track of it! Additionally, and perhaps as China has recently demonstrated, no one really wants to talk too loudly about how much gold they have. If you doubt me on this, think about what you might say if someone asked you how much gold you have and where it was located.

Tempted to fudge the details a bit? Exactly.

Of course, only a percentage of that total stock of gold (180,000 tons) should be considered the financial market for gold. Jewelry still makes up a significant percentage of the total gold stock - close to 50%. However, that figure can be also be misleading considering that in many cultures such as China and India (the two largest consumers of gold), gold jewelry is often bought with the dual purpose of serving as an ornament and as a store of wealth.

Nevertheless, even if we give jewelry the benefit of the doubt, the financial market for gold still ends up being gargantuan - reaching a market capitalization of $3 Trillion by conservative estimates. This especially proves true once we start to take into account all the available gold-related financial instruments; exchange traded funds, futures, derivatives, and OTC markets. The numbers start to get quite staggering when we take a deeper look into the size and volume of the gold market in its entirety.

Market Breadth:

To put the size of the global market for gold into perspective, consider the following graphs.

The sheer size of the gold market makes it one of the most readily available and accessible financial assets in the world today. The World Gold Council reporting on its size has this to say,

"Gold ranks higher than all European sovereign debt markets and trails only US Treasuries and Japanese government bonds. Thus, simply based on size…the gold market can provide significant depth and liquidity for large reserve portfolios, as it is only surpassed in size by two sovereign debt markets (US and Japan)." (pg. 6 Liquidity in the Gold market)

It follows that gold is the third largest reserve asset held by central banks around the world behind only dollar and euro denominated assets. The financial market for gold is so large it's only logical comparison is the sovereign debt markets of other countries. Given that sovereign debt is what backs sovereign currencies, this places gold on the same playing field as currencies.

Market depth and liquidity:

Additionally, the depth of the gold market and its liquidity are nearly unparalleled. Average trading volumes for gold are among the largest of any financial asset and in most cases are actually greater than the major sovereign debt markets, excluding only US treasuries. This reality is illustrated in the following charts.

While these figures are believed to be an accurate representation, they do not paint the entire picture as they represent only the movement of physical gold trades. Since, many trades between different bullion banks and firms are often netted against one another, it often misrepresents the true volume. To this point, the WGC reports,

"many dealers estimate that actual daily turnover is an absolute minimum of three times the amount of transfers reported by the LBMA and could be upwards of ten times higher. This would put global OTC trading volumes anywhere between $67 and $224 billion. Using the more conservative estimate of $67 billion means that average daily trading volumes in gold are larger than the UK gilt market and the German bund market combined."

Long story short, generally speaking, we may be seriously underestimating the amount of gold traded every day.

In addition to exceptional market depth, the gold market is extraordinarily liquid, boasting some of the tightest bid-ask spreads. (Tight spreads means minimal transaction cost for getting into or out of an asset. Whereas wider spreads indicate a greater cost to investors.) Average spreads in the global OTC gold market are anywhere from $.50 to $.85 per oz. Depending on the dollar price per ounce, that comes out to be around 0.04% to 0.07%. Once again, only the market for US treasuries can boast spreads as tight as gold. This puts gold on an entirely different playing field than any other competing asset.

Conclusion: Gold is a big deal!

As one can see from the aforementioned market data, the gold market is clearly one of the largest and most important financial markets in the world today. And the trend is growing, not declining as so many in the mainstream financial media would like you to believe. The data speaks for itself. Gold is neither barbarous, nor a relic. It is a highly sophisticated, evolved and active market. The breadth, depth and liquidity of the global gold market attest to this fact.

But, there's actually something more to be gleaned from this data on the gold market - something somewhat hidden, but extremely important. And that is that the data implies that, in terms of size, depth and liquidity, the only comparable markets to gold are sovereign debt markets. This is quite significant because, as one may notice, sovereign debt is a very different type of asset compared to gold. One market is subject to downgrades in quality, risk premiums, and ultimately default. The other is not. Can you guess which one is which?

The WGC describes the contrast between these two markets quite eloquently,

"unlike sovereign debt markets, gold's lack of credit risk allows for the gold market to get larger without any negative implications. Meanwhile, as sovereign debt markets grow, the increased credit risk dilutes the quality of the existing stock of debt." (pg 16 in Liquidity for Gold Market)

Sovereign debt markets are the markets that stand behind sovereign currency - what we use as money today. The market for treasuries is the market for dollars. The market for Italian, Spanish, German debt makes up the market for euros. The market for UK gilt, is the market for the pound.

Meanwhile, the gold market…well, it's simply the market for gold. As the above charts clearly illustrate, the gold market is far and away the highest quality asset traded on such scale. In other words, gold is far and away the safest money available today. If you don't have some already, you may want to consider getting your hands on some.

Dickson Buchanan is a Precious Metals Specialist at Euro Pacific Precious Metals. He received his MA in Austrian Economics from King Juan Carlos University in Madrid, Spain, and is currently enrolled in the doctorate program. Dickson joined the Euro Pacific Precious Metals team in 2012 after returning from his economic studies abroad.


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