Some Things We Didn’t Know About the Gold Market

Posted on September 30, 2021

By Paul Vanguard, for BullionMax.com

Forbes contributor Clem Chambers taught us some things we didn't know about the gold market . Most gold buyers are concerned about inflation or its opposite, deflation. Chambers himself is more concerned about the former. It really doesn't matter. Gold does well in both scenarios.

Assessing gold's liquidity

We know gold is about as liquid an asset as they come. Yet trading data would tell us otherwise. A quick comparison with bitcoin shows that the top crypto trades as much as 5% of its market cap daily. Gold, on the other hand, only traded $1.5 billion (less than 2% of its total market cap). So what's up with that?

Chambers blames it to a great degree on gold being a market of "middlemen", where most of the traded gold is actually "paper gold" or a derivative in some form.

But is that really what's going on? After all, buying physical gold is a slightly more difficult prospect than opening up Robinhood on your smartphone. Without the paper-gold derivatives market (which we are very well aware is disconnected from the physical gold market), you might have trouble finding people willing to part with their gold.

Physical gold favors buy-and-hold

Most people who buy physical gold don't intend to flip it. (Just like most people who buy houses plan to live in them for a while.) That's one reason the turnover in gold as a percentage of its $9 trillion market cap is so incredibly low compared to cryptocurrencies, or a blue-chip stock like Apple. For comparison purposes, gold's market cap is five times larger than all the world's cryptocurrencies and nearly four times larger than Apple's $2.36 trillion.

Buying or selling BTC or AAPL is as close to frictionless as modern technology can make it. You can do this from your smartphone and you probably won't pay a commission on a stock sale (transacting crypto still has costs that vary widely, from pennies to Benjamins). You can do this on a whim.

Owning physical gold is different. Even though gold as a commodity is fungible, physical gold isn't. My 1974 Krugerrand is scuffed and weathered; it's been places. When I hold it in my hand, I think about the Kimberley Mine and consider the coin's as old as I am. I wonder who owned it before, what they used it for. This Krugerrand wasn't locked into an acrylic capsule or tucked safely away in a plastic binder. This coin lived a life I can only imagine.

Gold bars aren't that much different. Every bar of gold bullion BullionMax sells has its own serial number (okay, it's not that big a deal, because the Good Delivery certification requires it). That means every bullion bar is unique.

Leaving those considerations aside, owning physical gold is physical. It's tangible. It's unhackable, untraceable and doesn't vanish when the power grid goes down. That's incredibly comforting, especially when you live in a place that has earthquakes or hurricanes or other natural disasters.

And yes, you have to make slightly more of an effort to buy gold. (You have to pick: coin or bar? Weight?) You have to wait a few days for the package to arrive. It's not an instant-gratification process.

Call gold a "barbarous relic" as much as you like. That kind of talk doesn't convince gold owners to sell.

So it the gold market illiquid?

That's a tough one to answer. Chambers does a good job here:

One way to look at this is that gold as an asset sits a long way from the market. While colossal amounts stagnate underground little is accessible in the market itself. There are lots of middle men promising proxies to gold...

"Proxies to gold" here refers to futures, derivatives, the stuff we deride as "paper gold."

It means that gold isn’t going to be an instantly reacting asset. It’s effectively caged by a set of systemic factors that make it less reactive than you might expect. This leads to turgid trading because it will only go up as the value of money goes down and that is slow even though its effects are extremely damaging to wealth over extended periods.

In other words, while we're always seeing daily moves in the spot price, they mostly come from speculators and derivatives. That's where the vast majority of supply and demand come from. (And you can't buy gold (or any precious metal) at spot price anyway.)

In sum: the gold market, although huge, isn't as economically sensitive as more high-volume markets. That's because most physical gold isn't physically traded (how often do the world's central banks empty their vaults?). Most owners of tangible, physical gold aren't speculators looking to flip a few gold eagles for a quick buck.

Most owners of tangible, physical gold, from nations to you and me, buy gold hoping they'll never need to sell it. It's the ultimate Plan B.


Paul Vanguard is a lifelong precious metals enthusiast and a proud member of the BullionMax team.