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CHAPTER THREE: DEMAND AND SUPPLY OF GOLD
It is important to have a good understanding of the supply and demand dynamics of the gold – it is the supply and demand, when at equilibrium that determines the price of gold. Going forward, the outlook the demand for gold remains robust due to various reasons such as, a fundamental shift in the behavior of reserve banks worldwide, from traditionally being net sellers to net buyers of gold since 2009. Also, strong demand especially for jewelry and investments from emerging markets such as China, and India are driving the demand for gold forward. Further, new advances in the industrial use for gold such as in the area of nanotechnology and medicine, are also contributing to the increasing gold demand.
On the other hand, the supply of gold remains constrained due to the persistent high cost of production from the existing mines, as well as, long gestation period (and high capital expenditure) needed for developing new mines. The 2008 ﬁnancial crisis had thrown a spanner into the works, as investments into new mines were temporary halted due to prevailing global uncertainty. The impact of this delay on new supply from mines will only be felt in the next few years, and will likely put substantial pressure on gold prices to move up steadily from current levels.
This chapter will provide readers with an exposition of what drives supply and demand for gold.
The supply of gold
There are essentially three main sources of supply for this precious metal, namely from mines production, scrap or recycled gold, and from ofﬁcial sector i.e. government and related organizations such as the International Monetary Fund (IMF), and European Central Bank (ECB).
The supply for gold over the last ﬁve years can be summed up by the chart from the World Gold Council (WGC) – see below. The major source of supply has been mine production, which roughly constitute 60% of all supplies. This is not unusual considering that the only way known to produce gold is to mine it; unlike paper money (or ﬁat currency), it is not possible to produce real gold in the laboratory or via a printing press. The second source of gold is what is known as recycled gold or scrap gold, which forms roughly 35% of the supply into the market. Scrap is derived from industrial recycling such as from old mobile phones, electronic gadget and others, and also from jewelry. The amount that is supplied is usually dependant upon the price of gold: higher prices tend to stimulate more recycled gold being supplied.
processing and refining. The first gold coin ever found (Croesus) dates back to 8th century BC. Further. www. Gold mining started as early as 2000BC and the Egyptians were the first recorded civilizations to have mined this shiny metal. The process of producing gold is divided into six different phases which is: finding the ore body. in light of the devaluation of the US dollar and the uncertainties surrounding Europe due to the debt crisis. the third major source of gold supply is the official sector which is the reserve banks and also organizations such as the IMF. The basic principles apply to mining both underground and surface operations in producing gold. Gold is usually mined as a native metal and it is also mined as an alloy predominantly with other metals such as silver or mercury. Native gold occurs in nuggets form or as grains embedded in rocks.com 14 .Demand and Supply of Gold Finally. gold produced from below ground has been the major contributor to the supply of gold. Gold is usually not found in chemical composition with other elements and it is a very rare commodity.aurumainternational. Annual supply for gold ( 5 year average) 1) Mine production The only known way to produce gold is by mining gold ore: as such. Asian central banks such as India and China are now more aggressive in increasing the proportion of gold held in their currency reserves. which traditionally held gold to back their respective currencies during the monetary gold standard. transporting the mined mineral from the mine to the plants for treatment. removing the ore by mining or breaking the ore body. creating access to it.
000 tonnes) is still in existence today. Interestingly.com . For example. and the gestation period required for a new mine to be productive is around 10 years. the process of producing gold is quite extensive in terms of time and money needed to extract the gold to a stage where it can be refined. South Africa used to be the largest producer of gold in the world for a very long time: producing at its peak. It should be acknowledged that the production of gold is well spread out geographically.Demand and Supply of Gold As outlined. The cost of producing the gold is relatively high. all the gold that has ever been mined (around 166. one is not likely to discard them during the annual spring cleaning. and can be found in near perfect state in one form or another. it now produces roughly 269. the “used” gold is often recovered through various mechanical and chemical processes. South Africa’s gold production has been steadily declining by 5. it has since ceded the mantle to China in the 2nd half of 2007. with the exception of Antartica where mining is banned. 2) Recycled gold As gold is indestructible.9 tonnes annually. Scrap gold is a term coined for any gold collected from old fabricated products. China. 1400 tonnes of gold per annum in the 1970’s. It is estimated that the cost of producing one troy ounce of gold from an existing mine currently is around $600/oz. bracelet or necklace is. Gold is mined on virtually every continent on the planet. an increase in price of rubber may affect cost of the huge tires used on the trucks at the open mines. and sold through a bullion dealer to the end users. This is not a surprising as no matter how “old” your gold ring. now produces over 281 tonnes of gold per annum. the third largest economy in the world in terms of gross domestic product (GDP). while an increase in crude oil prices may impact the cost of transporting mined gold to the plants. from small scale operations to major ones like the Anglogold Ashanti’s massive Tau Tona mine in Sesotho. there are hundreds of gold mines.aurumainternational. South Africa. countless times – and thus. like jewelry or gold wafers.6% per annum for the last decade. The global increase in prices of other commodity has also impacted the cost of gold production. which are largely kept for its domestic use and for its currency reserves. Gold has various industrial uses. Recycled gold (which also includes gold recycled from industrial use) is the second largest contributor with 35% of the supply flows (over last five years). 15 www. it can be reused in different forms. Many companies around the world have embarked on scrap gold production business as it can be highly profitable. and often because of the high gold prices. according to the World Gold Council. and others. But. which basically puts a floor to the current gold prices. keeps its value intact. There is an intrinsic value to gold as it can be recycled and reused.
the official sector accounted for 17% of stocks with the United States as the largest holder with roughly 8. South Koreans contributed about 300 tonnes of gold and in return received Won-denominated bonds. This does not normally include the amount of gold that is traded in the form of jewelry.S and many European central banks such as Germany. Italy. kept at Fort Knox.846 tonnes.5 tonnes of gold in its reserves.aurumainternational. iii) Official Sector The above-ground stocks for gold (end 2009) Source :GFMS About one fifth of the above ground gold stocks are held by central banks and other international organizations like the International Monetary Fund (known as official sector). Germany is in second spot with 3. The government of Thailand also embarked on a similar program during this difficult period. The gold-for-bond campaigns further amplified the role of gold as a global currency.401 tonnes and IMF with 2. At end of 2009. The high level of gold holdings is evident for U. especially in times of turmoil and uncertainty. also with much success. 16 www. Reselling or re-trading of jewelry in its original form is not included in gold supply sources.com . France and others. and other industrial use are included in the scrap gold supply sources. as they were previously party to the classical Gold Standard in the previous decades.Demand and Supply of Gold The amount of gold collected from electronic components. Investment bars and coins when they are recycled (not traded) also contribute to this gold supply source. the highest amount of scrap gold supply was recorded in 1998 when during the Asian financial crisis the South Korean government launched a gold collection campaign to shore up its falling foreign exchange reserves. Incidentally.133.
com . Industrial demand for gold (11%) is dominated by the electronics sector but it also includes dentistry and other industrial and decorative applications.aurumainternational. Unlike paper currencies. investment demand also includes gold bars.S Dollar. while China had increased its gold reserves by 400 tonnes between 2003 and 2010. The value of gold is also unaffected by inflation or currency status of the country. Prior to 1999. coins. Further. roughly about 60% of total demand. with the presence of a gold lending market. But. and with increasing gold prices. This gold can then be traded with other nations for foreign currencies. gold in a country’s reserve does not lose its value in the long run. most central banks since 2009 have turned to become net buyers. Also during good times. worth around $55bn in 2009. medals and wafers. amounting to only 510 tonnes. The demand for gold Annual demand for gold falls into three broad categories. namely jewelry demand. Finally. some central banks have also engaged in actively selling down some of their holdings as seen with the central banks of the Philippines (between 2003 to 2009). As such. adding more gold to their reserves as its prices hit new highs.Demand and Supply of Gold It is well known that most countries usually have at least 10% of their reserves in gold. Central bankers tend to diversify their portfolio beyond the usual major currencies such as Euro. Gold offers fundamental strength to the balance sheet of banks: and lately. Jewelry demand forms the largest component.750 tonnes in 2009. It has no counterparty risk (i. Gold is a highly liquid resource that can be used during crisis as witnessed during the Asian financial crisis with Korea and Thailand calling on its citizen to contribute gold to its coffers.e. China and India have been strengthening their gold holdings. This is given that gold has diversification benefits in that. it is possible for central banks to make some returns from their gold reserves. industrial demand and from investments. U. if needed. followed by investments (31%). However. It was widely reported that the Reserve Bank of India purchased 200 tonnes of gold from the IMF in 2009. gold in reserve management plays a very important stabilizing role. 17 www. Yen. Incidentally. investment demand for gold from exchange traded funds (ETFs) was miniscule. it is no one else’s liability but it is your asset) and it represents real purchasing power. the price of gold is not affected by the current monetary policies of the country and is influenced only by the variation in supply and demand. but it surged to more than 1. and Pound Sterling by including physical gold. its returns are not correlated with any other financial assets such as stocks and bond. the actual percentage depends on the country’s reserve management and the prevailing economic conditions.
Indian’s tend to regard gold. Every home in India aspires to have at least a small piece of gold to signify its wealth. It should also be noted that the demand for gold jewelry is highly seasonal.Demand and Supply of Gold Annual demand for gold (5 year average) Source: GFMS. outpacing GDP growth which averaged around 8% p. In China. www. gold jewelry are often given as presents. WGC *Includes identifiable and non-identifiable investment 1. Jewelry demand Globally.150 tonnes. gold demand in this fast growing country averaged around 13% p. there is a noticeable increase in the demand for gold in India. worth $19bn. In the last 10 years. according to WGC. as well as. a form of investment. The first quarter demand for gold is also considerably high due to the spillover effect of demand from the fourth quarter. As such.a. gold demand would see an increase in the fourth quarter of the year as several festivals are celebrated in different parts of the world during this time. Over the last five years. During festival periods such as Diwali.a. It is well regarded as a form of money and as a tradable. both as jewelry. and for special occasions such as a child’s birth or wedding. The demand for gold jewelry is often driven by social and cultural aspects of a country. India is the largest consumer market for gold with 27% share of this.000 tonnes of above ground stock (around 11% of global total).com 18 . India imported 600 tonnes of gold. and a store of value. and accounted for 15% of the global demand. followed closely by China. It has 18.aurumainternational. the Middle East also sees strong demand for gold especially jewelry. during the Lunar New Year in February. and this was worth around $55bn in 2009. about two thirds of gold demand is made up of jewelry. a Hindu religious celebration in October. Outside of Asia. liquid asset in this country. In 2009. the average demand for this sector was roughly 2. Using gold jewelry as a fashion accessory is increasingly becoming common in other parts of the world.
as its income rises. the intensity of gold consumption which measures the consumption of gold per capita for India is still quite low. At around 0. of around 30%. 10% of which is held in gold! India certainly has a high affinity to gold. GDP) like India’s is still relatively low (0. However.4g per capita.3g per capita) compared to that of more developed nations like the U. Bloomberg. positive impact on the country’s gold demand and on prices globally. this will have a significant.com . This reflects the countries large population and low incomes. China & India’s gold intensity consumption still low.1g per capita) and Taiwan (1. Nonetheless. it lags that of developed countries like U. interestingly enough. GFMS.Demand and Supply of Gold Another factor that drives the strong demand for gold jewelry is the increasing amount of disposable wealth in the developing nations such as India and China. As its intensity of gold consumption improves on the back of increased economic prosperity. and propensity to save improves. demand and gold prices are likely to move up further.S.S (1. this intensity value is likely to shift higher towards that of developed countries and as a result. but growing Source: WGC estimates. IMF China’s intensity of gold consumption (which compares consumption per capita vs. India has one of the highest saving rates in the world.aurumainternational. 19 www.4g per capita).
exchangetradedgold.aurumainternational.etfsecurities. Locals. expats.com.2bn (as at 21 December 2010). for example the world’s largest gold ETF. Investments Investment demand constitute about 30% of the annual demand for gold. HIS Global Insight. Zurich Kantonalbank.com. Overall.Deutsche-Boerse.com.100 tonnes of gold. www. ETFs demand for gold main driver of investments Data: www. the SPDR Gold Trust (GLD) now holds 1. this is made up largely by demand for physical gold from gold-backed exchange traded funds (ETFs). Turkey experienced an increase in gold jewelry demand from 1990s as new varieties of gold jewelry that captured the essence of tradition in modern designs became very popular.gold.000 tonnes of gold (see chart below) – its asset under management is roughly $71. Turkey is one of the second biggest exporters of gold jewelry in the Middle East 2. www. and this number is fast growing as the increasing global uncertainty drives more investors to invest in such ETFs.juliusbaer. coins and others. in 1999. One of the key areas of strong demand is coming from ETFs. As a result. Dubai is a major hub for gold jewelry trading.com. tourists and business visitors flock to the Middle East countries to buy gold jewelry in different designs at competitive prices.London Bullion Market Association.www. Chart: WGC. Finans Portfoy.Demand and Supply of Gold Among the Middle East countries.com 20 .org www. but today the amount has grown enormously.com. www. they accounted for only a small portion of demand. bars.ishares. ETFs are estimated to hold close to 2. and also from private investors in the form of wafer. Exclusive shopping festivals are held in Dubai to improve sales of gold jewelry.www.
but the central bank has been approving gold imports. Gold is used in the following industries: namely electronics. • Gold is an effective portfolio diversifier as it lacks correlation with mainstream financial assets. (This is perhaps the most compelling reason to own gold). thus driving demand further. In the future. Industry observers noted a big jump in delivered gold import through the local gold exchange. nanotechnology.S dollar devaluation. Gold investments demand in China have shown a marked improvement in 2009. it does not run the risk of being worthless through the default of the issuer. • It is a safe haven asset in times of financial and geopolitical crisis.aurumainternational. and space and engineering. which are favored by Chinese investors. • It is a hedge against any currency weakness. Gold demand in China gained in the 1H2010 as the government set measures to cool down the over-heating property market and falling equity prices. Chinese are buying more gold to hedge against inflation as the country’s tightening monetary policy drives money out from properties and stocks.Demand and Supply of Gold Gold’s use as an investment dates back many centuries and it derives its role as a safe haven. we are likely to see gold being used in many other new industries. Since gold does not have default risk. according to the World Gold Council. As a result. into gold. Unlike a bank that issues paper or financial instruments. 3. About 70-80% of the gold imported in first 10 months of the year was made into mini gold bars or wafers. It is envisaged that demand from gold as an investment will remain robust going forward especially from emerging countries. medicine. Essentially. the demand for gold as investment will be rooted in factors such as concerns over the continued U. a store of value and monetary assets. as the investments is held by individual. Although the government has not officially encouraged private investments in gold.com . Industrial demand Gold has a long and fascinating history of use in a diverse range of industries and applications. Demand for gold from industrial use currently accounts for around 11% of total demand with around 400 tonnes consumed per year. Moving forward.4%). 21 www. and an increase in volume of gold being traded. hyper inflationary expectations. spurring the move into gold. China’s inflation showed a sharp hike (Oct 2010 its CPI jumped 4. China imported 209 tonnes of gold in first 10 months compared to 45 tonnes for all of 2009 (an increase of five folds). investors choose to own gold because: • It is a hedge against inflation in the long-run. the owner of physical gold such as gold wafers or coins like the Krugerrand is not exposed to default risk. the fastest pace in two years and above the government’s target of 3%. continuing high levels of geopolitical uncertainty and increased acceptance that gold can play a vital role to diversify an investor’s portfolio. • Gold is typically less volatile compared to stocks and other commodities.
The need for biocompatibility in part relates to corrosion resistance. In addition. a rapidly developing field is revealing several unknown uses of gold. Gold is also used in the art industry. information technology and other high performance and safety critical applications. there should be no detrimental health issues. Millions of Indians consider gold to be an excellent ‘rejuvenator’. Gold plating and gold coating is given to various artistic pieces to preserve the nature of the art and retain its beauty. Dentistry demand contributes about 2% of the overall industrial gold demand. Germany and Japan. All these other industries uses contribute to 2-5% of the total gold demand. immortality and health. Dental alloys using gold is manufactured predominantly by USA. The earliest recorded medical use of gold was by the Chinese in 2500 BC. making it highly resistible to tough weather conditions and this property is essential in electronic components. skin ulcers and measles. This demand has been considerably stable in the past decade. such as the inner ear. Recently researchers have uncovered new uses of gold in the latest technologies. where gold is ingested with herbs to promote vitality. It has been used to treat rheumatoid arthritis with the most widely used drug called Auranofin which is taken orally. The use of gold in medicine and dentistry dates back thousands of years. A typical daily dose of gold would include one or two milligrams in a mixture of herbs. Gold is also used in dentistry due to its biocompatibility malleability and resistance to corrosion.Demand and Supply of Gold Due to its high electrical and thermal conductivity. it is also used as stents in arteries for heart surgery. gold has also been used as possible treatment of cancer. It is the single largest industrial application for gold. as gold threads are used in decorating arts. This unique resistant metal has long been associated with gods. but fluctuations in demand are also seen as manufacturers cope with rising prices. For the longest time. This means that industrial gold demand will likely continue to increase in the future. When the alloy is placed in contact with the patient’s body. and over the years. and consume it regularly. gold can be used as a catalyst in various chemical processes. Gold offers a high degree of resistance to bacteria. Moreover gold never corrodes. gold is used extensively in electronics. Industrial grade catalysts based on gold can deliver superior performance. for example. making it the material of choice for implants which are at risk of infection. or in eyelids. researchers have investigated gold compounds to cure ailments.com . Since then numerous cultures have utilized gold-based medicinal preparations for the treatment of various conditions including small pox. *** 22 www.aurumainternational. especially telecommunications. which some commentators estimate to reach a few tonnes of gold per year. for example Ayurvedic medicines on the Indian sub-continent. Nanotechnology. It is the metal of choice for numerous electronic applications. The optical industry too uses gold as it reflects heat and laser. The demand for gold in electronic components has increased greatly in the last ten years. Ayurvedic use constitutes a significant source of demand for gold.
Demand and Supply of Gold 22 www.aurumainternational.com .
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