The demand and supply dynamics of the gold market underpin the precious metal’s extensive appeal and functionality, including its characteristics as an investment vehicle.
Demand for gold is widely dispersed around the world. East Asia, the Indian sub-continent and the Middle East accounted for approximately 65% of consumer demand in 2011. India, Greater China (China, Hong Kong and Taiwan), US and Turkey represented well over half of consumer demand. A different set of socio-economic and cultural incentives drives each market, creating a diverse range of factors influencing demand. Rapid demographic and other socio-economic changes in many of the key consuming nations are also likely to produce new patterns of demand in the foreseeable future.
Read more in our detailed briefing note about Gold Demand Trends, which also includes commentary on supply.
Jewellery consistently accounts for the majority of gold demand. In the 12 months to December 2011, appetite for jewellery amounted to around US$99.2 billion. India is the largest consumer in volume terms, accounting for 29% of demand in 2011. Indian gold demand is supported by cultural and religious traditions which are not directly linked to global economic trends. Find out more in our special reports The role of gold in India and India Gold Report - India: Heart of Gold - Revival.
The 2007-2009 financial crisis had a significant negative impact on consumer spending. This resulted in a decline in the volume of gold jewellery sales, particularly in western markets, with the United States being hardest hit. However, jewellery demand in India and Asia has since been recovering whilst in China growth in jewellery consumption has been continuous.
Jewellery demand is driven by a combination of affordability and desirability by consumers. It generally rises during periods of price stability or gradually rising prices, and then declines in periods of price volatility. A steadily rising price reinforces the inherent value of gold jewellery, an intrinsic part of its desirability. Several countries, including China and India, offer clear and considerable potential for future growth.
Since 2003, investment has represented the strongest source of growth in demand. The last five years to the end of 2011 saw an increase in value terms of around 534%. In 2011 alone, investment attracted net inflows of approximately US$82.9bn.
Numerous factors motivate both institutional and private investors to seek gold investments. Of the key drivers behind investor demand, one common thread emerges: all are rooted in gold's abilities to insure against instability and protect against risk.The positive price outlook is underpinned by expectations that growth in demand will continue to outstrip that of supply. In turn, positive price expectations themselves have become a driver of further investment demand in gold.
Gold investment can take many forms and investors often choose to invest through a number of different channels for greater flexibility.
The growth in investment demand has sparked numerous innovations in gold investment, ranging from online bullion sales to gold ETFs. There are now a wide variety of investment products to suit both the private and institutional investor. Read more about how to invest.
The use of gold in various electronic, industrial, medical and dental applications (together classed as ‘Technology’) accounts for around 12% of gold demand, an annual average of over 450 tonnes from 2007-2011.
Gold offers high thermal and electrical conductivity, along with outstanding resistance to corrosion. This explains why around two-thirds of all industrial demand arises from its use in electrical components.
Gold's use in medical applications has a long history, reaching back to ancient Egypt. Today, various biomedical applications make use of its numerous attributes, including bio-compatibility as well as resistance to bacterial colonization and corrosion.
Recent research has uncovered a number of new practical uses for gold, including its function as a catalyst in fuel cells, as well as chemical processing and pollution control. The potential to use nanoparticles of gold in advanced electronics, glazing coatings, and cancer treatments offers promising new areas of scientific research.
Find out more about the technological applications of gold.
Gold is produced from mines on every continent except Antarctica, where mining is prohibited. There are several hundred gold mines operating worldwide ranging in scale from minor to enormous. This figure does not include mining at the very small-scale, artisanal and often ‘unofficial’ level.
Today, the overall level of global mine production is relatively stable. Supply from mine production has averaged approximately 2,602.2 tonnes per year over the last five years. The stability of production comes from the fact that when new mines are developed, they’re mostly serving to replace current production, rather than expanding global production levels.
Gold production does experience comparatively long lead times, with new mines taking up to 10 years to come on stream. That means mining output is relatively inelastic, unable to respond quickly to a change in price outlook. Even a sustained price rally, as experienced by gold over the last 11 years, doesn’t translate easily into increased production.
While gold mine production is relatively inelastic, the recycling of gold ensures there is a potential source of readily available supply when needed. This helps to cater for an increase in demand and keep the gold price stable. The high value of gold makes recovery economically viable, as long as the precious metal is in a form that is capable of being extracted, melted down, re-refined and reused. Between 2007-2011, recycled gold contributed an average 37% to annual supply flows.
Central banks and multinational organisations (such as the International Monetary Fund) currently hold just under one-fifth of global above-ground stocks of gold as reserve assets (amounting to around 29,000 tonnes, dispersed across circa 110 organisations). On average, governments hold around 15% of their official reserves as gold, although the proportion varies country-by-country. The advanced economies of Western Europe and North America typically hold over 40% of their total external reserves in gold, largely as a legacy of the gold standard. Developing countries, by contrast, have no such historical legacy and therefore have much smaller gold reserves, typically holding around 5% or less of their total external reserves in gold.
There have been significant changes in official sector behaviour in recent years. While the sector as a whole has typically been a net seller since 1989, there has been a seismic shift in central bank attitudes towards gold. For two decades, the official sector was a net seller of a substantial quantity of gold to the private sector markets around the world. That period came to an end during 2009 and in 2010 was the first year of net buying by the official sector for 21 years.
First, the economies of a number of emerging markets have been growing very rapidly and increasingly these countries are being identified as buyers of significant quantities of gold for their reserves. The primary reason for this has been a desire to move towards restoring a prior balance between foreign currencies and gold that has been eroded by the rapid increase in their holdings of foreign currencies. For this group, gold has also become an increasingly attractive means of diversifying their external reserves.
Additionally, central banks across Europe have reduced their appetite for sales in the wake of the global financial crisis and ongoing difficulties in the euro zone. Since 1999, the bulk of sales from central banks have been regulated by a series of Central Bank Gold Agreements (CBGAs) which have stabilised sales from 15-20 European central banks. However, from 2008 onwards these countries have shown a sharply diminished appetite for gold sales, to the extent that sales have virtually come to a halt over the past three years.
The net result of these shifting dynamics in the official sector has been that, having been a source of significant supply to the gold market for two decades, central banks became net buyers of gold in 2010, with purchases totalling 77.0 tonnes. This commitment deepened in 2011, with purchases of 440 tonnes.
The factors that motivated these purchases remain relevant for the foreseeable future and the official sector is unlikely to re-emerge as a source of significant supply as central banks remain committed to the importance of gold and its relevance in maintaining stability and confidence.
For more on Central Bank gold holdings.
The process of producing gold can be divided into six main phases:
• finding the ore body
• creating access to the ore body
• removing the ore by mining or breaking the ore body
• transporting the mined material from the mining face to the plants for treatment
This basic process applies to both underground and surface operations.
The world's principal gold refineries are based near major mining centres or precious metals processing centres worldwide. In terms of capacity, the largest is the Rand Refinery in Germiston, South Africa. On the basis of output, the largest is the Johnson Matthey refinery in Salt Lake City, US.
Rather than buying gold and then selling it onto the market later, the refiner typically takes a fee from the miner.
Once refined, the bullion bars (with a purity of 99.5% or higher) are sold to bullion dealers. These dealers then trade with jewellery or electronics manufacturers or investors. Avoiding large bilateral contracts between miner and fabricator, this dealer-based bullion market lies at the heart of the supply-demand cycle. It facilitates free flow of the precious metal, and underpins the free market for gold.
Visit the Gold Bars Worldwide website for a wealth of information on the international gold bar market.