I can’t get no substitution

October’s Macedonian PGM imports have been released. To recap, this is my go-to data on whether substitution of platinum for palladium is taking place in diesel catalysts (for more details see embedded post below) as Macedonia imports PGMs for only one reason – to go in diesel catalysts.

It was not a particularly exciting month. Both platinum and palladium imports picked up from a weak September, and the ratio of palladium was slightly lower than the recent average at 34%. Nevertheless as the second chart below show it would be a stretch to see this as any kind of price-related substitution.

There’s no doubt, by the way, that palladium is costing a lot. The import price of that metal averaged $1700/oz, a new record, and far more than the platinum cost of $890/oz. As such the dollar cost of the two metals’ import was much the same, despite the much larger volume of platinum.

For more details on this measure see these two previous posts.

Global EV sales continue to slump

In November global electric vehicle (EV) 1 sales I estimate were about 160k, 29% lower YoY, continuing the slump seen in recent months.

China accounts for most of the slowdown, being by far the largest market and down 45% YoY, little better than in October. Europe, on the other hand, while still a considerably smaller market, posted another solid growth rate of 49% YoY. The difference between the two markets is largely incentives – much lower in China since mid-year but remaining strong in Europe. The USA looks to be running somewhat lower than last year, though we await better data at year-end.

Overall, as the final chart shows, even excluding China, EV sales in November were no higher than in the same month of 2018.

(Note click on charts to show at full size)

With just one month to go it’s clear 2019 has been a disappointing year. Year-end is hard to predict but on current trends global EV sales are likely to be just under 2m, only 6% higher than in 2018. Chinese EV sales are likely to be flat or slightly down, as are US EV sales, while Europe will be up 40-50%. This will mean while China’s share of global EV 2 sales falls from 56% to just over 50%, Europe’s will have risen to 27% from 20%.


  1. China, USA, Europe, Japan Nissan Leaf. Exclude Chinese light commercial vehicles – another 10k or so – and perhaps another 10k vehicles in the rest of the world, most notably Korea
  2. Again this excludes the large – 130k or so in 2019 – Chinese commercial EV market

Thinking about gold supply & above-ground stock

It seems very important but analysts tend to ignore gold’s voluminous above-ground stocks. I’ve always thought this was a mistake, but I’m still not quite sure the best way to approach it. This is an idea I’ve had but it’s still very much a work-in-progress.

People throughout history have preferred to hold – store or wear – gold rather than consume it, and with very little deterioration very large stockpiles have steadily accumulated, rising by between 1-2% a year (see chart). GFMS 1, the research group, estimate this “above-ground stock” to be around 194,000t, some 55x annual mine supply 2.

This enormous stockpile gives (and is also a consequence of) gold’s financial-asset-like characteristics. But I’ve always thought something hasn’t quite added up about the “above-ground stocks” story. While the gold price is not very volatile compared to many other commodity prices, it seems to react far more to short-term shifts in supply & demand than you would expect of a true financial asset and given such a large inventory. To give an example, imagine all the world’s mines and wells are forced to shut 1/3rd of production for a year. The oil price would go stratospheric; gold would be far more restrained. But I think it would still go up more than a shortfall of 1,000t in a market of 194,000t would suggest 3.

How can we explain this?

One possibility is the stockpile is far smaller than most estimates. I think we can discount this. It is true the calculation is relatively unsophisticated, being essentially the sum of all historical mine production less a small assumption of gold lost forever. And it could overstate stocks if a) historical mine production has been overestimated, or b) losses have been understated, both perfectly plausible. But while over the years there have been lower calculations (see for example here), they are still many tens of times higher than current mine production; similarly even if GFMS’s ceiling of around 3,600t “unaccounted/lost” is too low 4, it is unlikely to be significantly too low.

Another explanation is that gold and gold investors are a special breed. This was suggested by Professor Anthony Neuberger in this 2001 WGC study.

Most private and institutional investors hold little or no gold. Investors who hold gold do so at least in part because gold has certain properties which make it peculiarly attractive in the event of acute political or financial instability. For these investors, gold is not readily substitutable by other assets.

In other words those who hold gold like gold as gold, not as just another financial asset, whereas most other investors don’t like gold as gold, and never the twain shall meet. Take, for example, a central bank. This argument says that hold gold as it is a unique asset of last resort, and so are unlikely to either sell it, even when the price goes a lot higher, or add more, even if it goes a lot lower. In general this means the effective potential ownership of gold is much smaller than for other financial assets, and as such the market is more internalised and hence susceptible to short-term flows.

A third, and the one I want to explore, is related to both of these – that not all gold is the same. Of course we know it is held in different forms – of the 191,000t of stocks not lost or unaccounted for, GFMS estimate 5 91,600t is held as jewellery, 23,800t other fabricated products (but not coins) 6, 42,400t as private sector investment (ETFs, bars & coins) and 32,500t by central banks. My argument would be that some of this, such as ETF gold, is far more liquid than others, say certain jewellery or fabricated products and as such is likely to play a more important role in price formation.

One way to deal with this would be to exclude some of the stocks. Neil Meader, in a 2015 presentation, explored some of these issues here and offered a somewhat lower total. You could be more radical, for example, by look at the investment stocks (bars, coins and ETFs). This would reduce global above-ground stocks to 42,400t. If you added in central banks and OTC investment you would be nearer to 80,000t.

The risk here is in excluding too much. Jewellery does come back to the market and in response to price signals – especially high-carat jewellery in places like India. My alternative suggestion is that you weight each category of gold stocks in terms of how liquid they are. The idea would be that if, say, gold jewellery is being melted down and turned into bars, the global gold stock is becoming more liquid. If gold bars are being melted down and turned into jewellery, it is becoming more liquid.

Something similar happens to measures of the money supply, where the difficulty historically has been whether you should look at cash, or cash and current account, or those and savings accounts and so on (M0, M1 etc). The Divisia measure deals with this by aggregating them according to how much they provide transaction services, and its proxy for this is the relative interest rates on each type.

Unfortunately in gold we don’t have an interest rate to do that. And this is where it gets tricky. The question is how easily such gold can return to market. One measure could therefore be the cost of transforming the product into London Good Delivery metal. For ETFs this is almost zero. For bars and coins it is relatively small. For jewellery it is higher. But it doesn’t quite measure what we want. After all the cost of transforming low caratage western jewellery presumably isn’t much higher than high-carat jewellery, but it is less likely to happen as the western jewellery has higher value-added elsewhere. So possibly a better measure is gold as a % of the items value – near 100% for investment gold, quite low for western jewellery and industrial gold.

Calculating neither of these will be easy. And so I’m just going to give some guesses. I’m going to weight ETF and institutional gold holdings at 1, retail investment at 0.7, high-carat investment jewellery at 0.5, western-style jewellery at 0.3 (note I’ve made some assumptions about the split between these) and other fabricated products at 0.1. Central banks is a tricky one – they hold mostly London Good Delivery Gold, so highly liquid, but there is a lot institutional stasis preventing both buying and selling. I think the former wins out – so I’ll go for 0.8 – but I could see good reasons for a much lower figure.

Applying these weights to the current 191,000t of actual above-ground stocks gives a a weighted figure of 91,000t (which I’ll call, slightly inaccurately, the liquidity-weighted gold stock, LWGS), made up of 2,400t of other fabricated stocks, 16,500t of adornment jewellery, 14,700t of high carat investment jewellery, 25,400t of bars/coins, 26,000t of central bank gold and finally 6,100t of ETFs and other institutional stocks.

Does this aid analysis? Obviously it means for a given size of gold move the market will have a harder time absorbing it. New mine supply every year represents about 3-4% of this weighted gold stock compared to 1.5-2% of the total gold stock.

Of course while new mine supply needs to be absorbed, it is no longer an indication of how much the gold stock is growing by. That which is diverted into technological uses, for instance, doesn’t add at all much on my measure.

The annual increase in the liquidity-weighted gold stock looks like this.

We can see that in the 1990s the global LWGS grew less slowly than the total gold stock (or put another way the total gold stock was becoming less liquid), a function largely of liquid central bank gold being sold and converted into less liquid Asian jewellery. But starting in 2001, and gradually building up to 2009, the annual increase in this liquidity-weighted gold stock accelerated as this process reversed, with a splurge of investor buying. Since the the liquidity-weighted gold stock has continued to grow proportionally faster than the total gold stock, with the exception of 2013, when a wave of ETF selling saw liquid gold melted down and converted into less-liquid jewellery into China.


  1. Note all the charts in this piece are based on GFMS Refinitiv supply/demand data, with historical data from the USGS
  2. The only slightly comparable commodity would be silver – see here for a new look at its inventory
  3. A similar argument can be made if gold demand was to fall by 1,000t suddenly – in theory investors should rush in from other assets – in practice I think the price would fall substantially
  4. And it oddly hasn’t changed in nearly two decades, I think
  5. Compared to the total stock these breakdowns are evidently more open to error
  6. I’m a bit puzzled what this is, to be honest. The bulk of industrial demand is electronics, at around 300t a year, which would account for this but surely much of that is thrown away or recycled?

Central bank gold buying easing from 1H frenzy

If faltering jewellery demand is a a reason to be concerned about the strength of the underlying gold market, central bank buying has been a clear positive, with 2019 set to be another record year for net purchases.

As of October, the latest available data for most countries, there has been a net addition of 550 tonnes to central bank reserves, 17t more than in the whole of 2018 and far ahead of the amount seen in 2017.

Purchases are slowing, however. By the end of the first half of 2019 net purchases had already reached 390t, an average of 65t/month. In the last four months 160t have been purchased, a slower 40t/month. This figure might rise a little – some countries report late, and the trend tends to be higher – but is unlikely to change much.

To what extent is this a concern? A key reason for the H2 slowdown is Russia, the bedrock of global central bank gold accumulation. Here purchases in 1H were broadly inline with previous years, but since then have been much more muted. This is in line with a new policy adopted by the Central Bank of Russia to reduce gold accumulation and has meant an increased rate of Russian gold exports. As such it looks set to be a drag on the global total going forward, albeit one that was inevitable at some point.

Also helping purchases in 1H 2019 was a resumption in Chinese central bank gold buying after a few years hiatus. This too seems to have slowed a bit in 2H but it is too soon to know whether October’s zero purchases marks another cessation of buying or is a temporary pause.

What has prevented an even more rapid slowdown, however, has been an acceleration in purchases from Turkey – on nearly 140t YTD, far higher than in previous years. Whether this will continue is a difficult one to call. Turkey’s central bank gold policy is somewhat confusing given they also hold private-sector gold against reserve requirements (these numbers exclude that), but there has been a policy shift in favour of gold in recent years.

Finally, there is the Rest. And in recent years these have been the great hope of the gold market with a number of big purchases, particular in Europe from Hungary and most impressively Poland. In 1H 2019 other countries added 160t of gold, far more than ever before. In 2H so far barely 10t have been added. However the nature of these purchases mean that they tend to be lumpy.

Indeed if we look at central bank activity, here shown as the number of central banks buying or selling in a month, we see an increase through 2018 in purchases, and a decline in sales, which has since reversed (note I’m excluding the BIS here, correctly, and Turkey, incorrectly, which in most months would add 1 to the purchases line).

If we choose a less granular measure, say 5t/month, the trend is even clearer (note exceptions above).

Source (all charts) – IMF and national central bank websites

So it does look as if there has been a slowdown in central bank buying, and not just because of Russia, which is the biggest impact. One explanation could be the high price, which might make the case for switching into gold harder to explain. But its worth remembering that the pace of buying in 1H 2019 was unprecedented, and current rates are still quite positive. The main concern I have is that Turkey is unlikely to be as reliable a buyer as Russia.

Over time this remains a positive part of the market, and I expect central bank purchases to continue, not least because of the imbalance in global holdings shown here (each country is resized to reflect the size of its gold holdings). For more details see here.