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Are We Running Out of Gold?
(November 18, 2002) Exactly how deep is the gold market? Should anyone be concerned with the disparity between the huge volume of gold traded in the “paper” market versus the short supply of actual gold available? Are shrewd buyers absorbing all the gold bullion available, knowing how hard it is to obtain physical gold in any significant quantity? Goldcorp tries to buy some gold…
The gold market is an international one which sets a price every day based on every known factor of current supply and demand. Gold trades wherever the sun is shining, starting each day in London, then on to hundreds of other locales including New York, Tokyo, Sydney, New Delhi, Turkey, Paris, and ending up back in London 24 hours later. This soft, yellow metal is not nearly as useful as iron, or copper, or even lead, but is desired and traded by every culture in the world, and billions of dollars worth trade every day.

What is gold good for? It measures wealth, and benchmarks the value of that currency which is exchanged for it.

For instance, on Friday, November 16, 2002, some 54,000 contracts of gold, 100 ounces each, were traded on the Comex in New York. That represents a total dollar volume of $1.728 billion. Of course, that was paper gold, representations of gold, and not the gold itself. For traders, hedgers, and speculators, the gold itself is not necessary – trading in Comex futures contracts is more convenient than actually having to handle, secure, transport, and assay the actual physical forms of gold bullion.

But what if you want physical gold bullion – how big is that market? How much gold could you buy, and take delivery of, without unduly rocking the market? This question occurred to Rob McEwen, chairman of Goldcorp, one of the premier mining concerns in the world. Last year Goldcorp itself produced some half a million ounces of gold, primarily in the Red Lake district in Canada, a yield worth some $160 million at today’s prices.

In an interview on, Mr. McEwen was asked about some gold purchases that his own firm pursued not too long ago, and his answer shows just how little gold is out there for immediate delivery:


MINEWEB: Was Goldcorp, as alleged by some, attempting to drive the gold price higher in the second quarter when it bought bullion at an average cost of $323? Were you trying to tip it past $330 with physical buying?

ROB McEWEN: I was curious to see what the breadth of market was. I had had some conversations with some large bullion dealers and at one point was just asking what the breadth of the market was and I said if I was to enter into, if the Bank of England was selling I thought it would be great fun to bid for their entire allotment and I said how long would it take me to acquire 20 tonnes of gold? 640,000 ounces. They said it would take 2 days to buy physical gold. They said no problem. So 3 weeks later I went back to test that statement and I put in an order to buy 40,000 ounces. They came back and said the market is moving a little faster than normal with gold coming up to 320. The normal spread in the market is 50c, they said today it’s 75c and 40,000 ounces suddenly became a big order. They gave me the wider spread and I said I would take it. They came back and said they could do the 40,000 ounces, but if I wanted any more it would take two weeks to take physical. There is something weird in this market when the assumption is the nominal liquidity is out there and broad, but when you go to physical, you have trouble getting it. So the real liquidity I think is much diminished. If we can, through our actions encourage other people to buy gold and other producers to withhold gold, maybe it would bring about a tightness that would be beneficial to the industry. I mean, 40,000 ounces! We hold over 5 tonnes today, and it’s curious when you look at the piece of papers that we hold in our wallets and think that this is based on the good faith and credits of the various countries. We have more gold than 30 countries now, sitting in our vaults.

MINEWEB: If you were to try and sell it, do you think there is enough liquidity to sell it quickly. Have you thought about testing it in reverse?

ROB McEWEN: Not yet. But that is a good point.

MINEWEB: Why isn’t the low liquidity driving the price? Why are we not seeing far greater volatility?

ROB McEWEN: I don’t know, it is phenomenal what lease rates are 25 or 40 basis points which is probably the lowest it has been in years, yet the price of gold is going up. And there is supposed to be physical problems making physical delivery. They don’t coincide? There is something peculiar happening in the market place.


This is a remarkable story – McEwen, no stranger to the gold markets, places an order for 40,000 ounces of gold, a little over a ton, and the market considers this a “big order” when it was learned that he wanted physical delivery. Although some 5.4 million ounces of gold contracts traded on the Comex this past Friday, that is to say, over 165 tons of “paper” gold, a ton-and-a-quarter of real gold becomes a “big order” when it must be actually delivered.

What this exposes is the smallness of the physical gold market. And it’s not like the Chairman and CEO of one of the world’s largest gold mining concerns didn’t know the market in gold. He just found, despite the huge amount of gold traded every day via contract (the $1.7 billion traded in New York on Friday), that the amount of gold bullion available in the pipeline at any one time is a fraction of that.

Let’s take another example – the gold Eagles struck by the U.S. Mint. Gold Eagles are the most popular gold bullion coin in this country, and so far this calendar year 2002 (mid-November), the Mint has sold some 325,000 ounces of gold Eagles. That is just a little more than 10 tons of gold.

So if the Mint is only using a dozen or so tons of gold in a year to supply the U.S. gold bullion market, and some 2400 tons are mined in the world each year, then you can certainly argue from the U.S. Mint’s production figures that we Americans are not getting our share of the world’s gold!

Of course, even though gold Eagles are the most popular form of gold bullion in America, there are other bullion choices. And there’s no way to tell how much of all the various bullion coins and bars of gold are being bought by U.S. gold investors. But assuming that total gold bullion demand in this country is, say, ten times the size of gold Eagle production, that still makes U. S. investor demand only 130 tons a year.

If that figure is true, then United States investor demand for gold bullion amounts to only about 5% of the gold mined in the world. Compared to our share of the world’s GNP, and our inordinate consumption of the world’s other resources, our demand for the world’s gold at this time seems downright anemic.

Such a low level of bullion gold off-take in the richest country on earth means the potential is there for a huge increase in demand as American investors (and who isn’t an investor?) look for both a safe haven and also a potential source of capital gains.

Will there be enough gold to meet that increased demand? Absolutely. Just not at today's prices.

And during a flight from the dollar by American and world investors, will there be temporary shortages, or at least, bottlenecks, in obtaining enough physical bullion to meet the increased demand? No doubt.

Many people argue, and Mr. McEwen’s experience certainly reinforces, the view that although plenty of gold contracts and commitments trade every day, when it comes to actual unencumbered gold bullion available, there’s just not a lot out there. Demand has exceeded newly mined supply for four years running, and the shortfall has been made up primarily by sales and leasing of central banks’ reserves.

So what happens if we soon encounter significant shortages of physical gold? Well, when it comes to significant shortages in any commodity market, there is one truism that has stood the test of time:

Higher prices are the only known cure for any commodity shortage.


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