Market participants tthat shape the supply and demand for gold are gold mining companies and gold recyclers, central banks, various industries (jewelry, electronics etc.) and of course also investors (gold bars and coins, or indirectly by means of exchange traded funds).
1. Gold Production and Mining
Gold is a rare metal. All extracted and still available gold has a total weight of 165 thousand tonnes. If the precious metal were melted into a cube, it would measure only 20 meter (65.6ft) into each direction.
One third of gold entering the market comes is from recycled sources (jewelry, industry etc.). The rest is from gold mines.
In 2010 gold could be found at more than 19,500 places. At present there are more than 400 mines in the world. Gold mining is geographically dispersed. Forty per cent of the annual gold production and mining comes from South Africa, the United States, Australia and Russia. European gold production is insignificant. The world gold production stood in 2010 at 2,500 tonnes (see table below). This is more than hundred times the production of the 19th century. Currently within two years more gold is mined, as in the one thousand years of the Medieval Times. Thanks to advances in technology, it is even feasible to extract gold from stones containing only 1 gram gold per ton.
The Forbes Global 2000 includes 12 gold companies. The biggest is the US Newmont Mining; six are from Canada, two from South Africa, and one from Australia, Peru and Russia.
2. Central Banks and Gold
Central banks, international entities (e.g. International Monetary Fund) and governments are the single largest holder of gold in the world. These institutions controlled end of 2009 16.2 per cent (26,780 tonnes) of the worldwide available gold. All ever produced gold is estimated to be 165,000 tonnes (5.321 billon ounces). This corresponds to a market value of 7,950 billion US dollar, based on a gold value of 1427 dollar per ounce.
The central banks with the five largest gold reserves end of 2010 are the United States (8,133 tonnes), Germany (3,401 tonnes), the International Monetary Fund (2,846 tonnes), Italy (2,451 tonnes) and France (2,435 tonnes).
Interestingly, the private gold fund SPDR Gold Shares (not in this list) held 1,300 tonnes of gold in 2010, making it the sixth largest gold holder, after France (2,435 tonnes) and before China (1,054 tonnes).
In 1999, nineteen institutions signed the Washington Agreement on Gold (WAG). This ten year agreement restricts the sale of gold by its members to 500 tonnes annually. Signatories are the central banks having the Euro, the European Central Bank, the central banks of England, Switzerland and Sweden. During that time, the central bank of England and Switzerland were the main sellers of gold.
Central banks in the west have been net sellers of gold, whereas those in the East have bought more gold than they sold. In the last years, several central banks, notably from Russia, India and China, have announced plans to increase their gold reserves. As a consequence, in 2009 central banks have become for the first time in 20 years net buyers of gold. In that year, net buying resulted in 470 tonnes of gold. The invigorated interest in gold can be traced back to the financial crisis, as this precious metal can be used as a hedge.
Gold has played a major role for the national monetary policy, as many countries either issues gold coins as means of payment, or pegged the national currency to gold. This monetary system leads to fixed exchange rates. Here the standard economic unit of account is a fixed weight of gold is called gold standard. Most Western countries followed the classical gold standards from the end of the 19th century until the 2nd World War. Central banks had the duty to keep the gold reserves at a certain levels to guarantee the gold pegging of their currencies.
The successor of the gold standard was the Bretton Woods System (1946 – 1971), under which many countries pegged their currencies to the US dollar. And the US Central Bank fixed the dollar to gold (with US$ 35 per ounce).
The end of Bretton Woods introduced floating exchange rates which diminished the role of gold as part of the monetary policy. Therefore, gold as part of the reserves of central banks shrunk from 60 per cent in 1980 to 8.6 per cent in March 2005. In September 2010, gold constituted 10.1 per cent of central banks’ reserves.
3. Industrial Demand for Gold
Between 10 and 15 per cent of the annual gold production is used in the industry: From 2008 to 2009 industrial demand for gold dropped by 13 per cent.
In 2010 the gold supply stood at 4108 tonnes (2659 tonnes from mine production, neg. 116 tonnes hedging, 87 tonnes central banks sales and 1653 gold recycling). Demand from industry was 420 tonnes, or 10 per cent. This is 287 tonnes for the electronics industry, 50 tonnes for dentistry, and 83 tonnes for other industrial purposes. In contrast, jewellery demand was 2060 tonnes.
Gold’s superior characteristics make it a well-regarded metal for industrial purposes. For example, with one ounce of gold it is possible to produce a thread of 150km, or a gold foil of 40m2.
In the industry gold is mostly used for electronics, optics and medicine. In the electronic industry, gold is used for wiring and as electrical connectors. The advantages of this material are it is highly conductivity, resistant to corrosion and lack of toxicity. Other uses are in the commercial chemistry. In dentistry, gold alloys are used in tooth restorations. In medicine, gold can be applied as conductive coating. As gold reflects infrared light 98%, this metal is used as a coating on glasses and mirrors. Besides the increasing number of appliances for gold in the industry, this demand also expands due to the strong economic performance of emerging countries. Currently, only the minority of gold is used in industrialized countries.
Besides these uses, gold is, or will be used for the following purposes: gold-based therapeutics, diagnostic technologies based on gold, as catalysts in industrial processes, for water purification and advanced consumer electronics.
4. Demand in the Jewelry Business
In 2010, gold processed to jewellery accounted for 54 per cent of all gold purchases, making jewelry the biggest contributor to gold demand. That is a rise of 17 per cent from 2009 to 2010. The increase is even more remarkable, as the gold price increased in the same period by 26 per cent. The biggest buyer of gold for jewelry is India, with 745 tonnes, followed by China (400 tonnes) and the United States (128 tonnes).
Gold has been used for jewelry for 6,000 years. The reasons are its rarity, ease of mechanical processing, resistance to corrosion and its exceptional color.
As gold in its pure form is often considered as too soft (and expensive), it is combined with other metals. The measure of fineness or carats reveals the gold content, ranging from 24 carat (999 fineness, or 99.9% gold content) to 14 carat (585 fineness, or 58.5% gold content). The fineness of gold is guaranteed by a hallmark.
Another decorative use of gold is as gold foil, also called gold leaf. Gold foil has been used since the ancient world. Gold foil is thinner than the wave length of the visible light and can be applied to non-metallic surfaces, such as frames, books, furniture and architectural elements.
Besides producing gold jewelry, this precious metal can be applied as a galvanized coating to plastic and metal. With the technique of fire gilding, porcelain and ceramics can also receive a golden surface. As a gold-mercury alloy, gilding has been known for more than 2,000 years. This used to be the only way to apply a durable golden surface to silver, bronze and base metals. The method of gilding was qualitatively extended in the late 19th century by the invention of galvanized coating.
5. Investment Demand for Gold
In 2010 investment demand for gold totalled 1,333 tonnes. This is 995 tonnes for bars and coins and 338 tonnes were purchased by exchange traded funds and similar products (Gold Bullion Securities, SPDR Gold Shares, Central Fund of Canada etc.). Compared to 2009, gold demand was down by 2 per cent in terms of quantity, but rose 23 per cent in value terms. In 2006 – 2007 private investors held accumulated for the first time more gold than all central banks together.
Investing in gold is possible by buying the physical metal, or by means of securities trading. Gold bars can be as light as 1 gram. Bars held by central banks as gold reserves have a weight of 400 troy ounces (12.4 kg). However, for trading purposes, the kilobar (100 gram or 35.27 ounces) is more commonly used. Gold coins are issued by the national mint. The most popular ones are the South African Krugerrand, the Canadian Maple Leaf and the American Eagle Gold Coin.
Investors can also purchase certificates, funds, or exchange traded funds. Here, no physical gold is purchased, which therefore does not incur shipping and storage fees. Certificates depend on the solvency of the issuer and do not influence supply and demand at the commodity exchange.
Another option are shares of gold mines. Big mining companies are Newmont Mining, Anglogold and Freeport McMoran. It is also possible to invest in development (Gold Corporation and SeaBridge etc.) and exploratory companies. Gold Mine shares can have higher returns in terms of increasing share prices and dividends. On the other side, Investing in gold companies also brings about higher risks, for example production downtimes due to mine shaft collapses, management mistakes, political influences and insolvencies.
Even higher returns are promised by futures and options.