Description

Gold is a soft metal with a characteristic yellow colour. It has the highest malleability and ductility of any element and is unaffected by air, water, alkalis and most acids.  Gold is used as bullion, in jewellery, electronics and glass (colouring and heat reflecting).

Biological role: None; stimulatory.
Total mass of element in average (70kg) person: n.a.
Abundance in Earth's crust: 0.0011 ppm

Demand

Physical demand for gold comes principally from fabrication.  The most dominant such activity is the fabrication of jewellery which accounts for almost 80% of fabricated demand.  The Jewellery market alone was estimated to be worth US$40 billion in 2005.  Other fabrication uses for gold occur in the industries associated with electronics, dentistry, decorations, medals and official coins.

In addition, central banks, financial institutions and private individuals buy, sell and hold gold bullion as an investment and as a store of value.

Supply

Gold is unusual in that it is both a commodity and a monetary asset.  Since it is virtually indestructible, all the gold that has ever been mined still exists above ground in some form or another and, theoretically, the majority of above-ground stocks could easily be mobilised.  As a result, any upward spike in price is often met by the resale of above-ground stock and this is one of the reasons why the gold price is historically less volatile than the majority of other commodity prices.  It also explains why gold's forward markets are generally orderly.

GFMS Ltd estimates that at the end of 2005, above-ground stocks represented a total quantity of approximately 155,500 tonnes, of which 64% had been mined since 1950.

The gold that satisfies demand each year comes both from mine production and from the recycling of metal that has been mined in previous years.  However, this secondary source of supply forms a smaller proportion of total annual supply flows than is the case with other major metals.  Over the past five years the largest source of recycled gold has been the jewellery market, followed by sales of gold by central banks.

Price

The use of gold as a store of value and the large quantities of gold held for this purpose in relation to annual mine production have meant that, historically, the potential total supply of gold is far greater than demand at any one time.  Thus, while current supply and demand play some part in determining the price of gold, this does not occur to the same extent with other commodities.  Instead, the gold price has from time to time been significantly affected by macro-economic factors such as expectations of inflation, interest rate changes, exchange rate changes, changes in reserve policy by central banks, and by global or regional political and economic events.  In times of price inflation and currency devaluation, gold is often bought as a store of value, leading to increased purchases and support for the price of gold.

Declining supply and robust demand are providing powerful support for gold prices.  Throughout 2005, jewellery demand increased by more than 4%, driven by strong demand in the Middle East, Turkey, China and India1.

Another factor driving gold prices higher is gold's ongoing role in the world's financial systems.  Gold is money, and it shines in uncertain political and economic times.  The U.S. Current Account deficit has grown to an unsustainable level of over 6% of Gross Domestic Product, oil prices have risen markedly, and the Middle East remains unstable.  Demand from investment has consequently been strong.

1 Based on GFMS 2005 year-end estimates

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