The stock-to-flow ratio as the most significant reason for gold’s monetary importance — :

As the above comparison shows, the US dollar as a representative of fiat currencies has the worst values on terms of all three criteria. Especially the last two figures illustrate quite starkly why the dollar is not suitable to function as stable money. Gold by comparison proves superior in two cases, and is only bettered by silver in terms of the mean value. This confirms once again that gold is the primary monetary metal.


The great fallacy of „high gold demand“

Since gold is not a consumption good, the tacit assumptions employed by nearly all gold analysts are not applicable. This has major implications regarding the validity of the bulk of mainstream gold analysis and will be discussed in more detail at this juncture.[3]

Why is it decisive that gold is not a consumption good? For one thing the supply of and demand for gold is not necessarily separable on an interpersonal level. Every gold owner can at any time enter the market as a seller, but also as a buyer. That may sound trivial, but it is a major difference to consumer goods, which are used up. One cannot usually expect that a market participant who buys a consumer good does so in the manner of a speculator based on certain expectations about future prices.

Consequently, there are usually largely separate groups of people involved in the buying or selling of specific consumer goods – producers sell them, consumers buy them.[4] Moreover, by consuming consumer goods, consumers deprive them of their function and need to acquire the goods concerned anew if they want to have the function at their disposal again.

What does this mean for the price determination of gold? The majority of gold analysts regard demand as the sole decisive influence on price determination and thus assumes that the decision of gold owners whether to sell their gold is solely determined by demand. Once a market participant has decided to buy an ounce of gold and agrees with a seller on the price, gold analysts determine gold demand based on the fact that a transaction has taken place. If this happens more often than in a previous time period, demand is said to have increased.

Should more trades have been recorded, many analysts conclude that due to “higher demand for gold” its price must rise. Is this even a valid conclusion? No, all that has happened is that the number of trades has increased. Whether this is due to a change in supply or demand cannot be stated. Such a statement would, however, be valid in the consumer goods area. If a supermarket always has a good available at a constant price over two similar time periods and sells more of it in the second than in the first time period, one can conclude from the statistically ascertainable sales figures that demand has increased.

Let us assume that as a result of a certain event, the preferences of market participants shift toward gold. Demand increases significantly in that case, but there doesn’t even have to be a trade, because the supply side also exhibits a stronger preference for holding gold, if for instance a currency reform is feared. As a result, there doesn’t even have to be a higher gold price evident, despite a massive increase in demand, if no one wants to sell their gold and no trade is recorded that would reflect the current market price.

The other confusing aspect of the gold price is that the supply is also not a number. Supply, like demand, is the willingness of buyers to offer a quantity of gold at a range of prices. Nearly all gold supply, in this sense, is an expression of the reservation demand for gold by the people who own it. The only exception to this are miners who are price takers. Because mine supply is so small compared to the existing gold, miners have minimal impact on price. They are for the most part price takers who sell at a price determined by the reservation demand of everyone else who owns gold.

The reason why people aren’t spending all their money today is that they exercise a reservation demand for money, expecting it to have greater usefulness to them in the future. Reservation demand is therefore essential for price determination. Due to gold’s monetary importance it is therefore also decisive in gold’s case who values it more highly: the new, incremental buyer, or the existing owner. The majority of gold analysts however concern themselves exclusively with “exchange demand” and therefore assume that the gold price can be predicted with a trivial consumption model. If one wants to quantify demand in this way, one must rely on the only available data in the form of the number of trades at specific prices. We believe that this can lead to significantly erroneous conclusions in the case of gold. The amount demanded and supplied must always balance at whatever price is determined in the market. Focusing on such quantities can however give us no information about past or future prices.



Every holder of gold is automatically on the supply side, since he is at any time a potential seller of gold. There will always be a price or a combination of prices and circumstances that will lead market participants to sell their gold. For some this will only be at a significantly higher price level, for others however also at a markedly lower price level (for instance due to a deflationary collapse). The decision not to sell gold at the current price level is therefore just as important as the decision to buy gold.

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