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Does Mining Matter? LBMA and the Gold Float

September 21, 2009

When I wrote my article Does Mining Matter?, I would have liked to include some statistics on the total volume of gold trade but I did not know whether they existed or where to find them.

Fortunately, mine exploration analyst Brent Cook has posted an article Confusion will be This Market's Epitaph providing the statistics that I would have liked to have used. Cook's article links to the London Bullion Market Association (LBMA)'s web site containing statistics on total gold clearing.

According to Cook,

According to Paul van Eeden, who has looked at the LBMA transfers in some detail, the LBMA clearing statistics are net statistics. That means it is only the net transfer between LBMA clearing members and not the total amount of gold traded. The actual amount of gold traded could be four to six times larger than the net clearing amount. In that case, Barrick's purchases [of 2.4 Moz] would represent only about 1% of the physical gold traded during July and August.

If 2.4M oz accounts for 1% of total activity over two months, that implies a total volume of 240Moz over two months. Annualized, that gives 1.4 Bn oz of annual gold volume. I do not know what fraction of the world's bullion trade goes through the LBMA but I do know that there are other markets in New York, Zürich, Hong Kong, and the middle East. But the LBMA's numbers are enough to make my point.

While researching the article I encountered objections along the lines that there is no gold for sale at or near the market price other than mine supply. If this were true, then the impact of mine sales would be greater than if there were many other sellers near the market.

In my article The Myth of the Gold Supply Deficit, I cite the following statistics from the World Gold Council:

Total above-ground gold supply:155,000 tonnes/5 billion ounces
Annual gold mine production:2500 tonnes/80Moz

This gives us a total LBMA trading volume of a bit less than 30% of the total gold trading volume (also known as the float). Counting other exchanges and small purchases (from coin dealers) would make this number higher. Mine supply contributes about 6% of total LBMA volume.

Conclusion: the gold market is a very liquid and deep market with plenty of supply available at or near the market prices. Many buyers and sellers are close to the margin. For those who accept my analysis of price formation but believe that the impact of the gold miner as the marginal seller is nonetheless quite significant, these statistics suggest otherwise.

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