gold investment, silver investment

Precious metals investment terms A to Z

Gold Supply

The price of gold, as each price, is determined by the market forces of demand and supply. The supply is the amount of a good offered for sale at each price. Therefore, the gold supply is the amount of a gold offered for sale at a given price. The gold supply in that sense should not be confused with the annual supply of gold widely analyzed by many analysts (we will explain this later).

The annual supply of gold comes from the mining production and recycling. Since the latter follows the price of gold rather than drives it, many analysts focus on the mining production as an important driver of the gold prices. However, nearly all gold in the world that has ever been produced is still held in some form. Therefore, mining adds only about 1 percent to the total supply each year (and in a rather stable and predictable manner). The amount of gold equal to annual mine supply is changing hands in less than a week in the London market alone, therefore the impact of mining production on the gold price is practically negligible. Actually, the gold price significantly influences the mining industry, but not the other round way. Look at the chart 1. As one can see, the mining production has been constantly rising since 2008, but it did not prevent the price of gold from rising until 2012.

Chart 1: Mining production (in tons; blue line, right axis) and average annual gold prices (yellow line, left axis) from 1997 to 2014.

Gold mining supply

Therefore, gold should not be analyzed as a commodity, because it is a monetary asset and no other commodity (maybe except silver to some extent) has a comparatively high stock-to-flow ratio. This is why the mining production is only a tiny fraction of the total gold stock and, thus, does not drive the gold price. The annual supply is thus negligible compared to the overall supply. Hence, investors should ignore commodity-type approaches when analyzing the gold market since they often lead to the wrong investment conclusions.

Instead, they should analyze gold like a currency. Just like with other currencies, the supply of gold comes from the holders of gold who decide to bring it into the market. The supply side of the gold market is dominated by the owners of the world’s existing stockpile of gold. In some sense, every ounce of gold is for sale at some price. It is just a matter of price and people’s preferences. For example, if the supply of gold increases it means that sellers value their gold less intense and are willing to sell it at a lower price. What does influence the supply of gold? There are many factors such as the level of confidence in the economy, the U.S. dollar exchange rate, the level of real interest rates and so on. For instance, when people believe that the U.S. dollar will appreciate, they could bring their gold into market more willingly, increasing the available supply of bullion and exerting a downward pressure on the price of gold.

We encourage you to learn more about the gold price – not only how it is affected by the supply, but also how to successfully use the shiny metal as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.

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