On Thursday gold futures retreated to below the psychologically important $1,200 an ounce level for the first time this month.
Gold bounced off a near 4-year low of $1,148.20 an ounce mid-March but the metal is trading more than $110 an ounce below its 2015 high reached in January.
The gyrations in the gold price just this year is perhaps understandable considering how the paper market in the metal has grown exponentially in recent years.
A new report by Thomson Reuters GFMS shows that it is one of the most leveraged financial markets with trading volumes many multiples of annual mine output.
Global trading volumes in 2014 was three times more than the 183,600 tonnes of the precious metal that have been produced in human history.
At an estimated $22 trillion trading value per year, the gold market dwarves turnover on the Dow Jones Industrial Index and that of the S&P 500 combined, German and UK government bonds and even some of the top currency pairs.
The volumes of gold transferred in 2014 as reported by London Bullion Market Association clearing members, totalled approximately 157,000 tonnes, with a value of $5.9 trillion.
“This trade, often between commercial banks themselves, may result in the physical shipment of gold, or merely a paper reallocation of bars within a vault.
“Even the above figure does not represent the total value of gold transactions globally. As a rule of thumb, the net transfers are roughly one‐third of the total loco London market volume. The changing dynamics of the market and the proliferation of trading centres in the Far East in particular mean that loco London trade is now closer to 70% of the world total as against its historical share of 90%.
“This share changed during 2014 in particular and we can therefore assume an average market share of perhaps 80% for the year as a whole. This leads to turnover of roughly 589,000 tonnes for the year overall, with a value of approximately $22 trillion, or roughly 188 times mine production.
“This ample liquidity (most of the time) is why, like most currencies, gold usually trades at full carry.”
GFMS forecast gold to average $1,170 an ounce in 2015 with a modest recovery in 2016 with a base case of $1,250 an ounce “as buying in Asian markets picks up and institutional investment demand in these markets also serves to offset the recent decline in OTC gold demand from the West.”
The supply side, the research company says, is likely to see “the continuation of a constrained investment environment and lower mine output by 2016. Scrap supply should also be close to levelling off and hedging is likely to remain a feature, albeit not a defining one, of the market.”