5 forces of gold: what makes the gold price?

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Gold 5 Forces

Supply & Demand

EXCLUSIVE

1. Overview of the Market Forces2. Gold Production3. Central Banks4. Industrial Demand5. Jewelry Business6. Investment Demand

TABLE OF CONTENTS

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W W W. G O L D R AT E F O R TO D AY. O R G

http://www.goldratefortoday.org/

OVERVIEW

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1. Gold is a rare metal

2. All extracted and still available gold has a total weight of 165 thousand tons

3. If the precious metal were melted into a cube, it would measure only 20 meter (65.6ft) into each direction

GOLD PRODUCTION

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1. One third of gold entering the market comes is from recycled sources (jewelry, industry etc.)

2. Two third of the gold originates from gold mines

GOLD PRODUCTION

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1. In 2010 gold could be found at more than 19,500 places

2. At present there are more than 400 mines in the world

3. Gold mining is geographically dispersed

GOLD PRODUCTION

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1. The world gold production stood in 2010 at 2,500 tons (see slide 7)

2. Forty per cent of the annual gold production and mining comes from South Africa, the United States, Australia and Russia

3. European gold production is insignificant

GOLD PRODUCTION

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1. Per year hundred times more gold is mined than in the whole the 19th century

2. Currently within two years more gold is mined, as in the one thousand years of the Medieval Times

3. Thanks to advances in technology, it is even feasible extracting gold from stones containing only 1 gram gold per ton

GOLD PRODUCTION

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GOLD PRODUCTION

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1. The Forbes Global 2000 includes 12 gold companies (see table on next slide)

2. The biggest is the US Newmont Mining

3. Six companies are from Canada, two from South Africa, and one from Australia, Peru and Russia

GOLD PRODUCTION

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GOLD PRODUCTION



1. Central banks, international entities (e.g. International Monetary Fund) and governments are the single largest holder of gold in the world

2. These institutions controlled end of 2009 16.2 per cent (26,780 tons) of the worldwide available gold

CENTRAL BANKS AND GOLD

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1. All, ever produced gold is estimated to be 165,000 tons (5.321 billon ounces)

2. This corresponds to a market value of 7,950 billion US dollar, based on a gold value of 1427 per ounce

3. The gold fund SPDR Gold Shares held 1,300 tons 2010, making it the 6th largest gold holder after France and before China


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1. In 1999, 19 institutions signed the Washington Agreement on Gold (WAG). This ten year agreement restricts the sale of gold by its members to 500 tons annually

2. Signatories are the central banks having the Euro, the European Central Bank, the central banks of England, Switzerland and Sweden


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1. Central banks in the West have been net sellers of gold, whereas those in the East have bought more gold than they sold

2. In the last years, several central banks, notably from Russia, India and China, have announced plans to increase their gold reserves


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1. As a consequence, in 2009 central banks have become for the first time in 20 years net buyers of gold

2. In that year, net buying resulted in 470 tons of gold. The invigorated interest in gold can be traced back to the financial crisis, as this precious metal can be used as a hedge


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1. As a consequence, in 2009 central banks have become for the first time in 20 years net buyers of gold

2. In that year, net buying resulted in 470 tons of gold. The invigorated interest in gold can be traced back to the financial crisis, as this precious metal can be used as a hedge


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1. Gold played a major role for the economic policy of a state, as many countries either issued gold coins as means of payment, or pegged their national currency to gold

2. This leads to a fixed exchange rates and fosters international trade


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1. The monetary system, in which the standard economic unit of account is a fixed weight of gold is called gold standard

2. Most Western countries followed this system from the end of the 19th century until the 2nd World War


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1. Under the gold standard, central banks had the duty to keep the gold reserves at a certain levels to guarantee the gold pegging of their currencies

2. The successor of the classical gold standard was the Bretton Woods System (1946 – 1971)


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1. Under the Bretton Woods System many countries fixed their exchange rate to the US dollar. And the US Central Bank fixed the dollar to gold (with around US$ 35 per ounce)

2. The end of Bretton Woods introduced floating exchange rates which diminished the role of gold as part of the monetary policy


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1. Therefore, gold as part of the reserves of central banks shrunk from 60 per cent in 1980 to 8.6 per cent in March 2005

2. In September 2010, gold constituted 10.1 per cent of central banks’ reserves


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1. Only between 10 and 15 per cent of the annual gold production is used for industrial purposes

2. Between 2008 and 2009 industrial demand for gold dropped by 13 per cent

INDUSTRIAL DEMAND FOR GOLD

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1. In 2010 the gold supply stood at 4108 tons (2659 tons from mine production, neg. 116 tons hedging, 87 tons central banks sellings and 1653 gold recycling)

2. Demand from industry was 420 tons, or 10 per cent.


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1. This is 287 tons for the electronics industry, 50 tons for dentistry, and 83 tons for other industrial purposes. In contrast, jewellery demand was 2060 tons.


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1. Gold’s superior characteristics make it a well-regarded metal for industrial purposes

2. For example, with one ounce of gold it is possible to produce a thread of 150km

3. One ounce of gold can also be made into a gold foil of 40m2


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1. In the industry gold is mostly used for electronics, optics and medicine

2. The advantages of this material are it is highly conductivity, resistant to corrosion and lack of toxicity


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1. In the electronic industry, gold is used for wiring and as electrical connectors

2. Other uses are in the commercial chemistry

3. In dentistry, gold alloys are used in tooth restorations


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1. In medicine, gold can be applied as conductive coating

2. As gold reflects infrared light 98%, this metal is used as a coating on glasses and mirrors


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1. Besides the increasing number of appliances for gold in the industry, this demand also expands due to the strong economic performance of emerging countries

2. Currently, only the minority of gold is used in industrialized countries.


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1. Besides these uses, gold is, or will be used for the following purposes:

gold-based therapeutics, diagnostic technologies based

on gold as catalysts in industrial

processes for water purification and advanced consumer

electronics


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1. In 2010, gold processed to jewelry accounted for 54 per cent of all gold purchases, making jewellery the biggest contributor to gold demand

That is a rise of 17 per cent from 2009 to 2010

JEWELRY DEMAND FOR GOLD

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1. The increase is even more remarkable, as the gold price increased in the same period by 26 per cent

2. The biggest buyer of gold for jewelry is India, with 745 tons, followed by China (400 tons) and the United States (128 tons)


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1. Gold has been used for jewelry for 6,000 years

2. The reasons are its rarity, ease of mechanical processing, resistance to corrosion and its exceptional color


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1. As gold in its pure form is often considered as too soft (and expensive), it is combined with other metals

2. The measure of fineness or carats reveals the gold content, ranging from 14 carat (999 fineness) to 24 carat (585 fineness)

3. The fineness of gold is guaranteed by a hallmark


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Carat and Fineness of Gold

Carats Fineness Percentage Comments

24 999 99.90% Pure gold

24 990 99.00% Popular in China

22 916 91.60% Popular in India

21 875 87.50% Popular in Middle East

19.2 800 80.00% Standard in Portugal

18 750 75.00% Standard international caratage

14 585 58.50% 583/58.3% in USA



http://goldratefortoday.org/demand-gold-jewelry/carat-fineness-gold/

1. Another decorative use of gold is as gold foil, also called gold leaf

2. Gold foil has been used since the ancient world

3. It is thinner than the wave length of the visible light and can be applied to non-metallic surfaces, such as books and architectural elements


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1. Besides producing gold jewelry, this precious metal can be applied as a galvanized coating to plastic and metal

2. With the technique of fire gilding, porcelain and ceramics can also receive a golden surface. As a gold-mercury allow, gilding has been known for more than 2,000 years


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1. Fire gilding used to be the only way to apply a durable golden surface to silver, bronze and base metals

2. The method of gilding was qualitatively extended in the late 19th century by the invention of galvanized coating


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1. In 2010 investment demand for gold totalled 1,333 tonnes

2. This is 995 tonnes for bars and coins and 338 tonnes were purchased by exchange traded funds and similar products (Gold Bullion Securities, SPDR Gold Shares, Central Fund of Canada etc.)

INVESTMENT DEMAND FOR GOLD



1. Compared to 2009, gold demand was down by 2 per cent in terms of quantity, but rose 23 per cent in value terms

2. In 2006 – 2007 private investors held accumulated for the first time more gold than all central banks together (also see table)




1. Investing in gold is possible by buying the physical metal, or by means of securities trading.

2. Gold bars can be as light as 1 gram 3. Bars held by central banks as gold

reserves have a weight of 400 troy ounces (12.4 kg)


W W W . G O L D R A T E F O R T O D A Y . O R G


1. For trading purposes, the kilobar (100 gram or 35.27 ounces) is more commonly used

2. Gold coins are issued by the national mint

3. The most popular ones are the South African Krugerrand, the Canadian Maple Leaf and the American Eagle Gold Coin.




1. Investors can also purchase certificates, funds, or exchange traded funds.

2. Here, no physical gold is purchased, which therefore does not incur shipping and storage fees.

3. Certificates depend on the solvency of the issuer and do not influence supply and demand at the commodity exchange.




1. Another option are shares of gold mines. Big mining companies are Newmont Mining, Anglogold and Freeport McMoran

2. It is also possible to invest in development (Gold Corporation and SeaBridge etc.) and exploratory companies




1. Gold Mine shares can have higher returns in terms of increasing share prices and dividends

2. On the other side, Investing in gold companies also brings about higher risks, for example production downtimes due to mine shaft collapses, management mistakes, political influences and insolvencies.




1. Even higher returns are promised by futures and options




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