What You Need To Know About Physical Gold Supply And Demand
Much of the confusion regarding the gold price has to do with gold’s dual nature, being both a currency and a commodity. This confusion is removed when you realize that in terms of supply and demand dynamics gold trades more like a currency than a commodity.
The major difference between gold and perishable commodities is their stock-to-flow ratios, measured by the above ground stock divided by annual production. Gold has a very high stock-to-flow ratio, while commodities like wheat have a low stock-to-flow ratio.
Thousands of years ago people started using gold as money, because gold is immutable, easily divisible, and scarce. Gold is the most marketable commodity. Its long tradition as store of value means extremely little gold has been wasted over history. The vast majority of all the gold ever mined is still with us. Consequently, annual mine production adds about 1.7% to the above ground stock of gold.
![Abobe_ground_gold_stock[1]](https://images-gainesvillecoins.netdna-ssl.com/blog/2022/03/abobe_ground_gold_stock[1].png)
Most above ground gold is held for monetary purposes. Jewelry is a store of value combined with esthetics and status.
At the time of writing the total above ground stock of gold is 205,000 tonnes and global mine output in 2021 accounted for 3,560 tonnes. The stock-to-flow ratio (STFR) is currently 58 (205,000 / 3,560). Gold’s high STFR and the fact that most above ground gold is held for monetary purposes is what makes it trade like a currency.
For a thorough understanding of gold’s price formation, let’s first have a look at supply and demand dynamics of a perishable commodity. Then we will discuss how this differs from the gold market.
Soft Commodity Supply and Demand Basics
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