Exchange-traded funds (ETFs) and derivative markets, such as futures and options, have grown significantly in recent years, providing investors with convenient methods for gaining exposure to gold and silver without directly owning the physical metal. However, the massive size of these markets, which are often multiples of the physical market, raises questions about their impact on gold and silver prices. In this blog post, we will explore the influence of ETFs and derivative markets on physical gold and silver prices and consider the potential implications of this relationship for the precious metals market.
The Multiples of ETF and Derivative Markets Compared to the Physical Market
According to the World Gold Council, as of September 2021, the total value of gold ETFs globally stood at approximately $215 billion. In comparison, the annual production of physical gold in 2020 was around $200 billion. This highlights the significant size of the gold ETF market compared to the annual production of physical gold.
Similarly, the size of the gold futures market is many times greater than the physical gold market. For example, the daily trading volume on the COMEX gold futures market can reach several hundred billion dollars, far surpassing the daily volume of physical gold transactions.
The large size of the ETF and derivative markets for gold and silver have expanded rapidly in recent years, far outpacing the growth of the physical market. This significant disparity between the size of the ETF and derivative markets and the physical market can have a profound impact on gold and silver prices, as the trading activity in these markets can create artificial supply and demand dynamics.
Artificial Supply and the Impact on Gold and Silver Prices
The large size of the ETF and derivative markets can create a perception of abundant supply in the gold and silver markets, which may put downward pressure on prices. Since ETFs and derivatives are essentially paper representations of gold and silver, they can be bought and sold with ease, contributing to the perception that these metals are more readily available than they are in reality.
In contrast, the physical market for gold and silver is constrained by factors such as mining production, recycling rates, and the limited availability of above-ground stocks. The influence of ETFs and derivative markets can distort the true supply and demand dynamics for physical gold and silver, potentially leading to lower prices than what would be observed in a market based solely on physical metal transactions.
What If All the Money in ETFs and Derivative Markets Were in the Physical Market?
If all the funds currently invested in gold and silver ETFs and derivative markets were instead directed toward the physical market, it is likely that the prices of these metals would be significantly higher. The increased demand for physical gold and silver would put upward pressure on prices, as market participants would compete for a limited supply of the actual metals.
Furthermore, the removal of artificial supply created by ETFs and derivative markets would provide a more accurate reflection of the true scarcity of gold and silver. This could lead to a reassessment of their value, potentially resulting in higher prices as investors recognize the limited availability of these precious metals.
Conclusion
The massive size of ETFs and derivative markets, when compared to the physical gold and silver markets, can have a significant impact on the prices of these metals. The artificial supply created by these financial instruments may contribute to lower prices than what would be observed in a market based solely on physical metal transactions.
If all the funds currently invested in ETFs and derivative markets were instead directed toward the physical market, it is likely that gold and silver prices would be higher, reflecting the true scarcity of these metals. As such, investors should carefully consider the influence of ETFs and derivative markets on gold and silver prices when making investment decisions.