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Commodity Insights
Gold
Introduction
For thousands of years, gold has occupied a unique role in the financial countries with large gold mining projects or increases in mining input
systems of cultures worldwide. Unlike virtually every other commodity, costs (such as the price of oil) can constrain supply. On the other hand,
gold has value far beyond its applications in industry. While business sectors discoveries of new gold deposits or declines in input costs can increase
including dentistry, electronics and jewelry use gold in their products, there supply. One factor that consistently affects supply is the price of gold
is simply not enough commercial demand to explain the very high price itself. When gold prices increase, mining gold becomes more profitable,
markets assign to the yellow metal. However, the high price is no mystery. so more supply comes on to the market. The opposite happens when
Since the beginning of civilization, humankind has viewed gold as a proxy prices decline. Similarly, changes in demand from industry, traders,
for money and wealth. This reality has made it one of the most fascinating central banks or sovereign wealth funds can move gold prices.
and misunderstood commodities. 2. Central bank policies – The actions of central banks can have a big
The supply of above-ground gold is limited. Gold deposits are difficult to impact on gold prices in two ways. First of all, central banks make
find, and extracting the metal from gold mines is an expensive and time- decisions to contract or grow the money supply in their countries.
consuming endeavor. Analysts estimate that the total supply of gold in the These decisions ultimately drive investment demand for gold since fiat
world is around 170,000 tonnes, which if melted in to a cube would measure currencies (e.g., US dollar and euro) compete with gold as a store of
21 meters on each side. Put another way, if all of this gold covered Centre value and a form of money. Secondly, central banks hold large gold
Court at Wimbledon, it would rise to 9.8 meters above the ground. reserves. Their decisions to accumulate or sell reserves can move the
After it is mined, refiners process gold into bars and sell them. Buyers then gold market.
transform these gold bars into items such as coins, jewelry and electronic 3. Economic data – Economic data, particularly in the United States,
components, or they store the bars and hold them as an investment. can impact gold prices. Because the US dollar is generally viewed
As with supply, gold market demand is also international and includes a as the world’s reserve currency, weak employment or GDP numbers,
variety of different industries and traders. Fast-growing Asian economies for example, often result in a weaker dollar against other currencies.
including India and China have increased their demand for gold in recent Typically, gold benefits from US dollar weakness as it is a competing
years. form of money.
4. Demand for financial instruments that invest in gold – Investment
Fundamental Facts instruments such as exchange-traded funds (ETFs) represent an
There are several common factors that typically move the price of gold: increasingly important segment of gold investing. Most gold ETFs
1. Supply and demand – As with any commodity, the balance between purchase physical gold and store it for their traders although some
ETFs invest in gold futures, options or other gold derivative products.
output and market demand determines price levels. When supply Demand for these instruments can impact gold prices.
levels diminish, prices tend to go up. Factors such as political unrest in
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