Understand the factors that move gold prices to trade better

 

In order to get an insight on the price dynamics of gold, one needs to understand the global demand and supply of this precious metal.

Global supply of gold mainly comes from 3 sources:
Production output from gold mines
Recycling of gold
Sales from Central Banks

The largest supply of gold annually comes from natural sources – 60% is mined. Although there are many gold mines around the world, gold production have stayed relatively static at around 2600 tons a year. Even with the increase in demand for gold in recent years, new mines take years to prospect and come into production. Therefore the gold supply is relatively inelastic to demand despite rising prices.

The second largest source of supply is from recycling, comprising almost 40% of the gold supply between 2008 – 2012. The high value of gold is the main motivating factor to recycle and reuse the metal from recycling.

Central Banks used to be net sellers of gold before 2009, however the trend reversed as Central Banks turned net buyers in the bid to boost their holding of gold reserves.

Global demand for gold is driven by four (4) major sources. They are:
Jewellery fabrication industry
Industrial & Technology Applications
Central Banks
Investors

The primary source of demand for gold is undeniably the jewellery industry, which accounts for 36% of global demand annually. Its rarity, together with its exceptional colour and unique beauty make it the top choice of jewellers all over the world.

Demand for gold jewelleries is influenced by a wide set of factors such as economic growth, consumer expectation towards gold price and most importantly, gold price itself. There is clearly an upward trend on gold demand, especially from gold consumers in India and China. Both countries dominate the consumer market for gold and account for almost 60% of the global jewellery sector. This buying trend is largely fuelled by the growing middle class in both countries and the ingrained cultural significance of gold among the people there.

Gold is widely used in various industries including aerospace, medicine, electronics and dentistry due to its technical properties. Its superior conductivity in both heat and electricity, surpassed only by copper and silver, makes it one of the most reliable conductive metals to be used in a wide range of applications.

Central banks and multinational organisations like the International Monetary Fund (IMF) play an important role in gold demand. They currently hold just under one-fifth of global above-ground stocks of gold as reserve assets. Central banks typically hold gold as their reserves to act as a shield to their currency – the more the gold reserves a country’s central bank holds, the stronger its currency.

Gold price is often closely associated with central banks via the monetary policy decisions which are related to interest rates as gold prices are closely related to interest rate. For example, during periods of high inflation, central banks may employ contractionary monetary policy which may cause a hike in interest rates and subsequently movement in gold prices. Recently, the announcement of the possible tapering of Quantitative Easing by Ben Bernanke has caused a boost in gold price.

Since 2003, investment has been one of the strongest driving forces of gold demand. It is undisputedly, the most popular investment out of all the precious metals in the market. As of second quarter 2013, gold investment accounted for 40.51% of gold demand in USD value. Although there has been a downward trend in gold prices in recent months, the investment case for gold remains compelling as it is still widely viewed as an attractive alternative investment. The increased availability and accessibility of gold investment has certainly contributed to the growing demand in gold investment.

The reasons for investing in gold have traditionally been: portfolio diversification, hedging against inflation and currency fluctuation and long term store of value. In the past decade, the increased demand for gold investment has sparked numerous innovations, ranging from the metal itself to the more sophisticated mutual funds and gold ETFs. This certainly enables different investors of varied risk appetite to invest via diversified channels with greater flexibility.

In the next segment, we will look at the various gold investments available in the market place.

To find out more about trading in gold futures, speak to your Futures Broker’s Representative or drop us an email at rhbib.futures.bdev@rhbgroup.com