Views on Life & on Equity Investing

Wonder, Wealth & Abundance

Stock to Flow ratio

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For an equity investor this ratio is like number of trained plumbers for Astral Polytechnic PVC pipes or number of technicians for Toyota or Suzuki cars in the market. It’s almost like network effect.

While the entire amount of gold ever mined totals approximately 190,000 tonnes (the stock), annual production is about 2,900 tonnes (the flow). If you divide the stock by the flow you get a stock-to-flow ratio of 66 years. Silver meanwhile has a stock-to-flow ratio of ~22.

Platinum and palladium have a ratio of 1.1 and 0.4 respectively. Although typically lumped together with gold and silver as precious metals, annual production is a much more significant factor. If either of these metals start being hoarded prices will rise leading to higher supply and falling prices.

Gold isn’t as valuable because it is so rare, but quite the opposite: Gold is valued so highly because annual production relative to the existing stock is so small. Putting it differently: not only scarcity, but primarily the relative constancy of the available stock is what makes gold unique. This characteristic was attained over centuries and can no longer be altered. This stability and security is a crucial precondition for creating confidence.

Reference: https://materials-risk.com/the-gold-stock-to-flow-model/

Written by amitdipsite

August 15, 2020 at 5:38 am

Posted in Uncategorized

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