Analysis of Gold

Gold Market

The market can be defined as the interaction between buyers and sellers, with goods and services being exchanged for a consideration, which may be in the form of money or for another good. A market may be physical, where the buyers and sellers meet at a commonplace referred to as the marketplace, or virtual, where the buyers and sellers meet through internet platforms. This mode of online buying and selling is referred to as e-commerce. All physical or virtual markets are affected by various factors in their operations, affecting the prices, quality, and quantity of goods and services exchanged (O’Callaghan 1993). This paper will exemplify the various factors affecting the market of gold as well as the factors affecting the long-term demand and supply of gold.

The gold market is affected by various factors such as government policies, international transactions, and supply and demand market forces. Other factors include speculations and expectations, market demographics, and market potentiality, such as the strengths and weaknesses of competitors. Combinations of all or part of these factors greatly influence the gold market, thereby determining the price, quality, quantity, and value of gold transacted in the market. In addition, these factors shape the gold market’s trend and explain the current and future trends of the market of gold (World Gold Council 2012).

Government policies include fiscal and monetary controls over the free market by reducing or increasing gold supply and demand. Monetary policies entail increasing or reducing the market interest rates, which affect the prices of gold in the market. Fiscal policies, such as liquidity requirements, require commercial banks to deposit some currency with central banks as reserves. In addition, governments (such as the USA) hold gold reserves as a base for their currencies through their central banks. This ensures that most gold is retained in central banks as reserves, thereby reducing the gold supply in the market. In addition, government policies affect investments in gold and gold products.

Market forces of demand and supply affect the market of gold in a colossal way. Market demand is the willingness and ability of gold suppliers to supply specific amounts of gold, given the price. The demand for gold is influenced by the quoted price, technological advancement, and government factors. Supply, the willingness, and ability of suppliers to supply specific quantities of gold at the specified price are affected by technological progress, quoted price, and availability of ores from where gold is mined (Dale 2011).

Speculations and future expectations concerning gold form an integral part of the market, thus greatly influencing market decisions. Speculations and future expectations influence investors’ decisions, influencing the gold market since gold is the preferred means of storing wealth. As an ostentatious commodity, Gold is affected by existing economic conditions, such as inflation, deflation, boom, and recession. With stagnating economic conditions, investors gain confidence making their savings in gold, increasing the demand and value for gold. In addition, the gold market is affected by market demographics, such as the number of gold buyers and sellers. A high number of sellers increases the rate of gold exchange, thereby influencing the market (Bohm 2011).

Market potentiality, such as strength, weaknesses, opportunities, and threats of competitors, greatly influences the gold market. Gold faces increased competition from other valuable metals such as diamond and silver. The increased competition has greatly influenced the value, price, and quantity of gold in the market. Conversely, the market share, which exemplifies the level of transactions in the market, affects the market share of gold (Bohm 2011).

Many generations and civilizations have used gold as a measuring rod and wealth store. The unique characteristics of this precious metal made it one of humanity’s first to be used. The most notable features of this precious metal are the following: gold exists as a pure element naturally; it does not react with other elements in the environment unless under special conditions; finally, it has outstanding conductivity. In the modern world, the use of gold as a measure of value and store of wealth has reduced and is very limited, though gold continues to serve as the basis of almost all monetary systems. Today, the use of this precious metal is mainly evident in the manufacturing of jewelry and electronic gadgets, though the latter only happens in exclusive cases. The quantity of gold held by most banks (especially in western countries) has greatly reduced though gold is still an important tool in preparing balance sheets by central banks worldwide. Nonetheless, the demand for gold in Asian countries (like China) and Eastern Europe nations (such as Russia) has been increasing steadily over the past two decades.

Recently, the investment demand for this metal has been decreasing worldwide, partially because the paper transaction for future exchange has offered an excellent substitute for physical gold ownership and the steady downward trend of gold prices (Dale 2011).

Demand and supply forces significantly shape the gold market, just like any other market. Normally, there are two main sources of gold supply; Central bank vaults and mining. In the current global market, prices of gold, as aforementioned, have been plunging, and as such, mining of gold has become a risky venture that many firms are unwilling to take. The mining supply has been insufficient to fill the high demand for gold in the global market. Central bank vaults have been the main source of gold supply, either through lending or selling gold. Features such as gold leasing have become a common phenomenon in financial markets, and the amount of gold leased by central banks is huge to the extent that production of gold has been sold in the financial market many years ahead into the future (World Gold Council 2012).

The supply and demand of gold are very dynamic, underscoring the appeal that this precious metal has in the global arena and its unique features as an investment medium. Demand for this precious metal is largely diffused all over the globe. India, Eastern Asia, and Middle East consumer demand roughly represented 67 percent of the global consumer demand in 2012. The United States of America, China, India, and Turkey accounted for approximately half of the global market demand for gold in the same period. For each market, gold demand is driven by socio-economic and cultural factors unique to each state, creating a vast demand for this precious metal. The dynamic demographic scenario (especially in Eastern Asia), backed by the salient socio-economic variations in some of these states, makes up the largest consumer market of gold, which is probably the main culprit behind the nature of demand in these states (Bohm 2011).

Investment Demand

Investment demand has accounted for the biggest source of the growth in the demand for this precious metal. Since the onset of the year 2000, the value terms of gold increased by over 400 percent. In 2013, investment drew a net inflow of roughly $ 80 billion. Several factors stimulate institutional investors to venture into the gold business through investment in gold. The key factor has always been the ability of gold to remain stable even during an economic downturn or financial crisis. For most risk-averse investors, this is the most crucial aspect which makes gold one of the most lucrative and attractive investment ventures (Dale 2011).

In the gold market, investment can take many forms; investors opt for a diversified portfolio to have more flexibility. The rapid growth in investment demand has brought about many innovations in the investment in this precious metal.

Technological Demand

Technological demand for gold takes the form of various medical, electronic and industrial uses of gold, and in the year 2012, it accounted for approximately 11 percent of the total global consumer demand for gold. This is equivalent to roughly 400 tons of gold demand in the same period. Gold is an attractive metal for industrial use due to its physical and chemical properties. Most notably, its occurrence in pure form features numerous outstanding advantages which allow making various industrial items of complexities. Gold is also an excellent conductor of electricity, and its resistance to corrosion makes it a suitable candidate for many industrial applications (Bohm 2011). Its appliance in medical spheres is also pegged on its characteristics. In the modern world, gold is used in many biomedical applications due to its resistance to microbes’ corrosion and its compatibility with most biomedical items.

Supply

• Mine Production

Almost all the gold that is in existence in the world is produced through mining, in the entire world except Antarctica, where such activities are forbidden. There are numerous gold mines on the globe today, ranging from small miners to large miners. Currently, the level of gold production from mines is fairly constant. Supply from these mines has produced an average of 2600 tons of gold annually in the past decade. This stability in production is attributed to new mines replacing redundant ones instead of increasing global production, meaning the net increase is negligible (Dale 2011).

Additionally, the supply of gold is inelastic due to the nature and process of mining gold. Normally it takes up to a decade to prepare a mine for full production and, as such, response to a quick change in demand is slow. Even when prices are stable and the efficient market, it is difficult to respond to demand through an increase in gold production from mines (O’Callaghan 1993).

• Recycled Gold

Gold mine production is fairly inelastic, so recycling gold becomes an important course to ensure there is a potential source for the precious metal whenever demand surpasses supply. Recycling plays a big role in maintaining the stability of gold prices by catering to excess demand, thus bringing the demand and supply for gold to equilibrium. Recycling is made possible by the high value of this metal. Gold does not lose its properties, which makes it unique, and as long as it is possible to re-melt it and produce various items, its reuse will remain an important venture in the supply of gold. Over the last five years, recycled gold accounted for about 40 percent of the annual supply in the gold market (Dale 2011).

Conclusion

Currently, gold is facing major competition from diamond and silver, and this trend is leading to a reduction in its price. The two precious metals follow a head-shoulder bottom reversal since the price of gold exceeds the price of silver only by a smaller margin. In addition, there has been an undervaluation of stocks of gold. This undervaluation of gold stock makes it possible to buy large gold stock – a mode of wealth investing that carries a surety of future increment. Currently (as of November 21st, 2013), the price of gold (the spot gold price) averaged at $1,243.40, with one ounce of gold bar costing $1,283.1, ten oz gold bar trading at $12,869.19, and a kilo bar (which is approximately 32.15 oz) being traded at $40,974.69 (World Gold Council 2012).