Richard M. Salsman is president and chief market strategist of InterMarket Forecasting, which provides quantitative research and forecasts to guide the asset allocation decisions of pension sponsors, mutual funds, banks, hedge funds, and investment managers. He received his B.A. in law and economics from Bowdoin College (1981), his M.A. in economics from New York University (1988). Mr. Salsman has published numerous books and articles on capitalism, banking, the gold standard, forecasting, and investment strategy. His most famous book is “Gold and Liberty” (1995). His work has appeared in The New York Times, The Wall Street Journal, Barron’s, Forbes, Investor’s Business Daily and The National Post (Toronto). He is also a Chartered Financial Analyst.
Capitalism Magazine: For some time now the ‘gold bugs’ have been claiming that in addition to outright sales, the central banks have been holding the price of gold down by leasing gold to various sellers. Another reason, they say the price is depressed is through forward gold sales by the major gold mining companies. Would you like to comment on that? To what extent do these types of sales influence the market.”
Richard Salsman: These factors influence the gold price very little. The gold price isn’t falling because central banks are selling; central banks are selling because the gold price has been falling. Whenever the gold price falls, in any currency, it makes sense to buy financial assets. Stocks and bonds tend to move inversely with the gold price.
The volumes of gold associated with things like mining strikes in South Africa or turmoil in Russia (these were the excuses for a rising gold price in the 1970s) or central bank gold dealings or mining company forward sales — are a tiny fraction of the world stock of gold.
“Gold bugs” fail to recognize that the relevant supply of gold is not the annual increment issuing from gold mines — instead, it’s the total above-ground stock worldwide. Today this gold stock is more than 3 billion ounces. It has accumulated, of course, for centuries. The annual increment to that stock is only about 1.5%. Gold dealings of the kinds mentioned in headlines are a lesser fraction still. The total gold stock rises each year — and never falls — because unlike other commodities (excepting silver), gold is produced for purposes of accumulation, not consumption. And it’s held not for industrial use but primarily as a hedge against inflation – or it’s held less when there’s deflation.
More fundamentally, whenever an analyst cites just one side of a gold transaction, he drops context. Yes, central banks may sell gold, but for every seller, there’s a buyer. It’s not “selling alone” or “buying alone” that determines price — but buying and selling jointly. And it’s other factors that determine the intensity of buying and/or selling anything.