By Dave Brown – Exclusive to Gold Investing News
The German born 19th century socialist and political economist Karl Marx, once wrote, “Although gold and silver are not by nature money, money is by nature gold and silver.” This convertible characteristic and consistent purchasing power of the physical asset of gold has been historically observed; as others have noted that regardless of the value of the currency involved, one ounce of gold could be utilized to purchase a very respectable man’s suit at the conclusion of the Revolutionary War, the Civil War, the presidency of Franklin, and it is said even during the Roman era to obtain a fashionable toga and footwear. The primary catalyst for the value of gold has always been a function of the supply and demand dynamics of the global marketplace.
A unique property of gold is that it is the only commodity produced for accumulation, and virtually all gold mined throughout history continues to exist in some capacity as above-ground stock. The supply of gold is a function of mine production, gold recycling, and central bank reserves.
Gold has been produced from mines on every continent except Antarctica, where mining it is prohibited. The overall level of global mine production is relatively stable, with new mining developments serving to replace current production, rather than to disrupt total global supply. New mines can take up to 10 years to come on stream, with comparatively long lead times required for production, which means mining output is relatively inelastic and unresponsive to short term demand and price fluctuations. Gold recycling helps to stabilize the gold price, as the relative value of gold makes it cost-effective to recover it from the majority of its uses, as it is possible to melt, refine and reuse. Recycled gold has contributed to over 25 percent of annual supply flows. Central bank reserves hold approximately 20 percent of above-ground stocks of gold as reserve assets, with many governments maintaining around 10 percent of their official reserves as gold.
Financial asset prices, at the most basic level, are really the discounted present value of what investors believe those assets will be worth far into the future. This demand side of the equation is driven by three primary markets: jewellery, investment, and industry.
As an item of discretionary consumer spending, jewellery demand is driven by a combination of affordability and desirability by consumers; however, Indian and Middle Eastern gold demand is supported by cultural and religious traditions which are not directly linked to global economic trends. A considerable volume of the investment demand is transacted in the over-the-counter market, which makes it difficult to quantify. The World Gold Council estimates that escalating investment demand has represented the strongest source of growth since 2003, attracting net inflows of approximately USD $32 B in 2008. Gold’s historic characteristic of insuring against financial uncertainty and economic instability underpins the key benefit for investment demand. The industrial properties and dental uses for gold have generally accounted for over 10 percent of gold demand. It is an excellent conductor of heat and electricity, and is extremely resistant to corrosion and bacterial colonization, which make it functional for electrical components, biomedical applications, as a catalyst in fuel cells, chemical processing and controlling pollution.
The geographical diversification and assortment of competing interests for the precious metal is likely to combine with changing socio economic and demographic shifts in order to produce new patterns of demand. The geographical demand for gold is extended around the world, with a concentration in India, the Middle East and South East Asia accounting for approximately 75 percent of global consumption. India is the largest consumer of gold in volume, although the US is the largest market for gold jewellery related to total retail value.
The ‘spot’ price of gold is a theoretical base trading price upon which all gold business is based, and does not include the cost of minting, insuring, or shipping. Each market reacts dynamically to news in real time, and prices are ‘set,’ and continually ‘re-set,’ by the frequently changing supply and demand factors, input by thousands of investors, dealers, central banks, governments, mining companies, and other traders. The gold market amounts to billions of dollars each day, and no single individual can ‘set’ the price, as numerous contributing factors will impact the price. A global reference for gold prices is the London afternoon gold price fix as it represents maximum trade volumes adjusting for differences in time zones for US, European, Middle Eastern and African market activity. A London morning fixing is useful for the European markets, as 5 market-making members of the London Bullion Market Association are also members of the London fixing. Other market participants that wish to trade on the fix are required to do so through: Deutsche Bank, Societe Generale, Barclays Capital, Scotia Mocatta, or HSBC. This fixing process approximates an open auction method with bids and offers netted off throughout the market before the final bidding process is conducted. Of all commodity markets, the gold market is probably the largest and most free market in the world, as it was in the time of Karl Marx.