Supply of Gold

The gold market has two main sources of supply: mining and recycling. The chart below illustrates the two major trend shifts in gold supply during the past ten years. Firstly, central banks, whom for many years were net sellers of gold, are now net buyers. This reflects eroding confidence in the US$ and the Euro as emerging markets’ Central Bankers diversify to gold for safety.

Gold Supply Graph

The second trend in the supply graph is the increasing amount of supply from recycling over the past ten years. In 2002 the total supply from recycled gold was 835 tonnes or 23% of supply compared with 1,694 tonnes or 45% of supply in 2009. In 2011 it accounted for 40% of supply. As it is an unsustainable source of gold, a peak in the “Cash for Gold” industry will see a reduction in this source of gold supply to the market and will push prices higher. This is reinforced by the reduction in sales of jewellery on the demand chart on
the following page.

“While the average gold content per tonne in 1950 was more than 8 grammes, it is now about 0.8 grammes per tonne”,
‘Special Report – Gold’, Erste Bank Austria, July 2011.
“In spite of expenditures being at a record high (in excess of US$5.3 Billion in 2010) the number of deposits and total amount of gold being found remains modest.”
‘Recent Trends in Gold Discovery’, NewGenGold Conference, Perth, Australia. 22-23 November 2011

 

Demand For Gold

There are five sources of demand for gold; jewellery, physical investment (bars and coins), fund investment, industrial and Central Banks. Industrial use of gold accounts for approximately 10% of demand and has increased slightly over the past ten years. The graph outlines three trends that can be seen clearly in the demand graph: jewellery demand has subsided since 2005, investment demand has increased in the past ten years and central bankers are now net buyers (as discussed in the previous section).

Gold Demand Graph

Demand for physical investment (bars and coins) has increased in the last three years. More investors have become aware of third party risks associated with funds like ETFs (Exchange Traded Funds), because of their use of swaps, loans, futures and leverage in the derivatives markets. In the last three years, investors have moved towards outright ownership of physical gold through bullion services like that of GoldHold.

This trend is evident as physical investment and fund investment diverge from 2009.