Written by Jordan Eliseo, Chief Economist, ABC Bullion and Project Subcommittee Member, Gold Industry Group
Stock to flow is arguably the most important concept for investors to understand in order to appreciate why gold is not a ‘commodity’, but rather a monetary metal.
Stock to flow is calculated simply by dividing the total existing supply of a particular commodity by the annual production of that commodity.
So for example, if in the world right now there were 100,000 tonnes of tomatoes sitting in warehouses around the world, and in any given year, global production of tomatoes equalled 10,000 tonnes, then the stock to flow ratio would be exactly 10, indicating that it would take 10 years of annual production to meet the current existing stockpile.
This is of course not the case with tomatoes. Nor for that matter is it the case for traditional industrial or agricultural commodities like oil, copper, iron ore, wheat, soybeans etc.
Unlike gold (and silver to some extent), those commodities are produced, mined or harvested for one reason only, which is that they are consumable. So whilst on any given day there is oil moving through pipelines or sitting in tankers, and of course there are silos to hold wheat, ultimately these are temporary storage or transportation hubs.
They merely facilitate the movement of said commodity from its place of production to its place of consumption.
Therefore, for most commodities, the stock to flow ratio is around, if not below 1. This means that the existing stockpile of these commodities is often not even equal to one years worth of current production.
This makes perfect logical sense as there are significant costs associated with drilling for, harvesting or mining for commodities, as well as costs for storing and transporting commodities, and turning them into finished products.
Therefore, the only reason it is done is because there is demand from end users of those commodities, who are willing to pay for them.
Gold is different. Nearly all of the gold that has ever been mined across the course of human history still exists today. And whilst a large portion of it will seldom be traded, irrespective of the price, theoretically, all of it can be delivered back to the market, provided the current holder is happy with the price others are willing to pay.
What this gives way to is an incredibly high stock to flow ratio for gold. With annual production averaging around 2,700 tonnes per annum (for a quick refresher on annual gold production, we recommend you read the Investor Series article on Gold Supply, written by fellow gold analyst Bron Suchecki) for the last decade – and roughly 178,000 tonnes in existing supplies, gold’s stock to flow ratio is roughly 65. This means that it would take 65 years of annual production to match the existing supply of the metal.
Whilst the figure is not quite so high for silver (unsurprising due to silver’s quasi industrial/monetary status in the modern world) what the chart right highlights is precious metals have a stock to flow ratio that is unique, relative to other more traditional commodities.
Another way of looking at the stock to flow ratio is this; annual production represents only 1.55% of existing supply. Even if production doubled to nearly 5,500 tonnes annually (and this won’t happen with ever lower ore grades), it would still only translate to a 3% increase in overall above ground supplies.
Despite the fact we don’t consume gold, we do still go to considerable expense to find gold, mine it, refine it and store it.
And we do that for the same reason today that society across the millennia have mined for gold. Simply put, gold has always been recognised as the ultimate store of wealth and measure of value.
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