Gold market basic informations

Whether you are speculating for gold’s price, a gold mine stock, or buying tangible gold  these informations are worth to know:

Demand for gold

Gold consumption is distributed throughout the world, so demand for it is not so easy to estimate. Numbers may be inaccurate, but annual demand is usually between 3400 and 4200 t. This consists of the following main factors:

  • Up to 66% of gold is used to make jewellery.
  • Pivate reserve assets (gold bars, coins etc.) demand the second largest portion of gold
  • Medical, industrial and scientific use is responsible for the rest of gold consumption.

The top 3 gold consumer countries are 1. India, 2. China and 3. USA.

Supply of gold

Gold production is concentrated around a couple mining locations / mines so we have exact statistics about annual production. It is usually between 2000 – 2600 t.
Most of gold is mined in South Africa and China.
It is notable that some extraction methods become unprofitable in case of gold’s price is too low [average extraction costs were 317$ / oz in 2007, but it varies with technology]. This may cause decreasing supply of gold.

Personal and state reserves

Gold can be stored for unlimited time and it is retrievable from almost any form of application – unlike most commodities. Mankind has mined 165 000 tons of gold so far and most of it is still available.

This means 2 things in case of gold’s price is high enough:

  • People can eg.: melt down their jewellery in order to sell it. Many people acted like this during the financial crysis.
  • People and countries may sell their gold reserves. (These are in a form that can be sold on the gold market without any previous efforts.)

However news about countries selling gold reserves can be misleading in some cases. Eg.: Germany sold 150 000 oz from their gold reserves in 2011, but not in the open market. It was sold to the Ministry of Finance to mint commemorative coins  (details here : http://www.zerohedge.com/news/germany-sells-150000-troy-ounces-gold-october-not-why-you-think )

Balance of gold’s market

As you saw, annual demand for gold is between 3400 and 4200 t but supply is only 2000-2600 t per year. So the right equation for gold market is:

increasing gold reserves + annual consumption (for jewellery etc.) = selling of gold reserves + gold production

As you see, market balance can not work without gold reserves.