How exactly does the gold market work? Similarly to all other industries, the gold industry is largely determined by supply and demand. In this article we are going to take an in-depth look at the factors that determine both the supply and demand of the gold market, and how this impacts investors as they make decisions on investing in gold.
Over the past couple of decades, the gold market has grown and diversified greatly. The amount of gold that has been bought annually since the early 1970s has roughly tripled, causing the gold markets to flourish worldwide.
Around the world, gold has an important cultural, emotional, and financial value. There are many reasons gold holds such a high value, and these reasons differ according to different regions. The value of gold is largely influenced by national socio-cultural factors that are accompanied by local market conditions, as well as bigger macro-economic drivers.
So, what are the diverse uses that gold has, and how are they significant? From jewelry to technology, and central banks to investors, gold holds significance. These different sectors of the gold market reach points of prominence at different times throughout the global economic cycle.
Underpinning gold's robust quality as an investment asset is its diversity of demand and self-balancing nature.
This means that the demand of gold is diverse, and changes over time - for example the demand of gold for jewelry decreased at the beginning of COVID-19 due to lockdown restrictions making it difficult to have large celebrations at which gold jewelry typically is gifted. At the same time, the demand for gold in technology rose due to the amount of people shifting their work from office spaces to their homes.
Let’s take a more in-depth look at the sectors of gold, and how they impact the demand of gold.
The largest source of annual demand for gold per sector is jewelry. Jewelry accounts for around 50% of the total annual demand for gold. Though, over the past couple of decades, the demand for gold jewelry has been declining.
The largest jewelry markets are located in India and China, which account for just over 50% of the global total demand for gold jewelry. Within these markets there is a demand for purer, higher-carat gold.
As an asset class, gold holds unique properties. It has been demonstrated that modest allocations to gold can reduce volatility and minimize losses during periods of market shock by protecting and enhancing investment portfolio performance.
Wise investors accept gold as a reliable and tangible long-term source of value that moves independently of other assets.
Gold plays an important role in global central bank reserves, a major gold holder. The 2008 financial crisis brought about a major shift in central bank behavior towards gold, prompting a reassessment of its role and relevance in managing reserves. While emerging market central banks have ramped up official gold purchases, European banks have halted sales, making the sector now a significant source of annual gold demand.
Gold is an industrial metal that is used in a wide range of appliances. Specifically, the demand of industrial gold is driven by the electronics sector, accounting for 80% of the gold used in technology.
The electronics that we all use on a day-to-day basis have gold within them. It would be quite difficult to make an electronic device without gold. Within electronic devices, gold is used most commonly with most types of semiconductor chips. The metal is either used to aid in the forming of thin bonding wires or as a coating. The physical and chemical properties of gold make the metal an irreplaceable part in the construction of high-end technology.
The supply of gold is met in two major ways - mining and recycling. Mining gold accounts for the largest supply of global gold at around 75% of the supply each year. Recycling gold makes up for about 25% of the supply of gold, which makes up for the slow production rate of newly mined gold, helping to sustain the demand for gold.
Four decades ago, the vast majority of mined gold came from South Africa. In recent years gold mining operations have become increasingly more geographically diverse. Today, gold mining is a large, global industry that takes place on every continent with the exception of Antarctica.
Since 2008, the overall levels of mine production have grown significantly. Though, new substantial discoveries for mining are becoming increasingly rare.
On top of this, there is a long list of steps that mining companies must complete in order to begin the mining process. Often, it will take a decade between discovering the deposit to beginning production.
The long process of gold mining is explanatory of why mine production does not respond quickly to prices.
Luckily, gold holds such strong properties that nearly all of the gold that has ever been mined is still accessible in one form or another.
What does this mean for us?
Gold can be recycled from both jewelry and technology. At least 90% of recycled gold is derived from jewelry, while the remaining 10% is extracted from technology.
To meet the demands from the gold market, gold that no longer serves a purpose in the form that is currently in can be recycled. Gold that is recycled is refined and processed to guarantee the quality before being made into something new.
Due to the quick process that is involved in recycling gold, whenever there is a price or economic shock, recycling is the source of gold supply that is most immediately responsive.
Investors have always sought a stable investment, and gold has proven to be an excellent hedge against other markets. Though before you begin to invest in the gold industry, it is necessary to know when the ideal time to open and close a trade is. Understanding the structure of the gold market can be used as a tool to analyze profitability and help identify the right time to open and close a trade.