Ohh my Gold…!

Part 2: Gold Demand and Supply

Supply side:

The average annual supply of gold is around 4,000 tons over the last 10 years. Gold supply comes from two sources: mining & recycled gold. Total mine supply – which is the sum of mine production and net producer hedging – accounts for two thirds of total supply. Recycled gold accounts for the remaining third.

Mine Production

China was the largest producer in the world in 2015, accounting for around 14 per cent of total production. Asia as a whole produces 23 per cent of all newly-mined gold. Central and South America produce around 17 per cent of the total, with North America supplying around 16 per cent. Around 19 per cent of production comes from Africa and 14 per cent from the Commonwealth Independent State (CIS) region.

Recycled gold

Because gold is virtually indestructible, all the gold ever mined still exists, apart from a small amount which has been lost. At the end of 2015, there were 186,700 tonnes of stocks in existence above ground It is recoverable from most of its uses and capable of being melted down, re-refined and reused.

Recycled gold therefore plays an important part in the dynamics of the gold market. While gold mine production is relatively elastic, the gold recycling industry provides an easily-traded supply of gold when it is needed, thereby helping to stabilize the gold price.

Demand Side:

All over the world, gold has emotional, cultural and financial value, which supports demand across generations. Gold is fashioned into jewellery and used to manage risk in financial portfolios and protect the wealth of nations; it is found in smart phones, and cutting-edge medical diagnostics.

These diverse uses for gold, in jewellery and technology and by central banks and investors, mean that across the decades there is demand for gold from either of the sectors. This self-balancing nature of the gold market means that, typically, there is a sustained base level of demand.

Jewellery

It has always been a dominant area of demand for gold & over the past five years (2011-2015) has accounted for around 50% of world gold demand. India and China are the two largest markets for gold jewellery, together representing over half of global consumer demand in 2015. Gold plays a cultural role in these countries and is bought as a symbol of prosperity on certain auspicious days. Apart from this, under-penetration of other financial products in the society results in investment demand for gold.

Investment

Gold has unique qualities that enhance risk management and capital preservation for institutional and private investors across the globe. As discussed previously, a modest allocation to gold makes a valuable contribution to the performance of a portfolio by protecting against downside risk without reducing long term returns. Today, investment in gold accounts for around one third of global demand.  This demand is made up of direct ownership of bars and coins, or indirect ownership via Exchange-Traded Funds (ETFs) and similar products.

Central banks

Since 2010, central banks have been net buyers of gold, and the demand has expanded rapidly from less than two per cent of total world demand in 2010 to 14 per cent in 2014. Some banks have buy gold to diversify their portfolios, especially from US$-denominated assets, with which gold has a strong negative correlation. Others as a hedge against tail risks or because of its inflation-hedging characteristics (gold has a long history of maintaining its purchasing power).

Technology

Around 9% of the world demand for gold is for technical applications. Majority is from electronics industry, for manufacturing of high-specification components where gold’s conductivity and resistance to corrosion make it the material of choice. Gold is non-reactive and biologically compatible and hence used extensively in dentistry.

Other industries which use gold include space industry and in fuel cells. Recently, gold has been proven to be commercially viable to be used in catalytic converters driving demand from automotive sector. Advances in nanotechnology warrants for new demand driver for the yellow metal. Healthcare & environmental researchers have found various applications of gold nano particles. Commercial applications of these new technologies will result in increasing demand for gold.

To be continued.. ( Part 3: Gold as an investment instrument)

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