The Gold supply and demand dynamics is a key factor determining the price of gold. To understand price movements in gold we must first understand the supply and demand of gold. The worldwide annual gold demand is approximately 3766 tons and it mainly comes from the jewelers, investors and industrial consumption. New gold that is brought to market comes from new mine production and gold recycling.
Gold Demand
Gold demand comes from all around the world. Asia and the Middle East take a little over two-thirds of new demand. Out of total annual demand 57% is used for jewelry, 31% are bought by investors, and 11% is used in various industries.
Gold demand for Jewelry
The jewelry industry accounts for the largest portion of demand. Gold is mostly used in rings, earrings, and necklaces. Jewelry sales in the West have been declining since 2008 but the demand in Asia has been increasing. The demand for jewelry sales is driven by a combination between affordability and consumer sentiment.
Gold demand for Industries
Gold is a desirable metal for industry because it does not tarnish or corrode. It can be drawn into wire, hammered into thin sheets, and its alloys with other metals. It is used in a wide variety of applications because of its unique characteristics.
Gold offers high thermal and electrical conductivity and is an important component in the electronic industries where itâs used in electronic components and printed circuit boards among other things. Gold is used in the dental industry for fillings. It is also used in a number of applications in the medical field.
Gold is a key component for diagnostics such as pregnancy testing and testing for food-borne pathogens. Gold nanoparticles are used as drug delivery vehicles to treat cancer and cardiovascular diseases.
Gold demand for Investing
Investment demand for gold from both individuals and institutions is one of the fastest growing areas. It has increased in popularity because of its superior ability to insure against risk. The increased investment demand has created new investing vehicle ranging online bullion sales to gold EFTs.
Gold Supply
New supply of gold mainly comes from new mine production (59%), gold recycling (35%), and sales (6%) from central banks and other institutions.
Gold Supply from mine production
There are several hundred gold mines throughout the world; in fact there is one on every continent except for Antarctica. They range from small scale productions to enormous operations. The overall level of global gold mine production is stable. Supply from mining operations adds approximately 2500 tons per year. New mines that are added serve to maintain current production and not much more new capacity has been added.
Lead times for getting new mines in production are very long. It takes on average 10 years for a new mine to come online which means that the output is inelastic and unable to respond to quick changes in demand.
Gold supply from recycling
Gold recycling is a faster way of bringing gold to market than new mine production. This industry can respond to changes in demand faster. Most of the recycled gold comes from old broken jewelry that is melted down, re-refined and reused.
Gold supply from Central banks
Central banks and other organizations such as the IMF hold a little less one fifth of worldwide gold stocks. Most counties central banks hold a portion of their reserves in gold. Central banks as a whole had been net sellers of gold since 1989 but that change in 2009 when they for the first time in two decades became net buyers. The largest institutional buyers of gold come from the emerging market economies and they include China, India, and Russia among others.
Total gold supply above ground
It is estimated that all the gold that has been mined throughout human history totals about 165,000 tones which equals about 5.3 billion ounces. Out of this all gold 51% can be found in jewelry, 17% is held by central bank, 18% is held by investors, 12% is found in industrial applications, and 2% is unaccounted for.
How much is 165000 tons? It might sound like an awful lot but you can stack it on a tennis court 60 feet high. And that is all the gold that exists in the world today.
Summary
Many analysts expect demand to continue to increase in 2011 and the coming years. The increase in demand has mostly comes from investors. Supply is inelastic and slow to meet new demand. It takes an average of 10 years to bring a new mine online. Continued increase in demand from investors may lead to higher prices future.