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Analysis of Gold

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Gold Market

Market can be defined as the interaction between buyers and sellers, with goods and/or 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 market place, 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 markets, physical or virtual, are affected by various factors in their operations, affecting the prices, quality and quantity of goods and/or services exchanged (O’Callaghan 1993). This paper will exemplify the various factors affecting the market of gold as well the factors affecting the long-term demand and supply of gold.

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

Government policies include the fiscal and monetary policy controls over the free market thereby 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 requirement, require commercial banks to deposit some currency with central banks as reserve. In addition, governments (such as the USA) hold gold reserves as a base for their currencies through their central banks. This ensures that most of gold is retained in central banks as reserves, thereby reducing 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. Demand of 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 advancement, quoted price as well as 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, thereby influencing the market for gold since gold is the preferred mean of storing wealth. Gold, being an ostentatious commodity, is affected by existing economic conditions, such as inflation, deflation, boom and recession. With economic stagnating economic conditions, investors gain confidence making their savings in gold, which increases the demand and value for gold. In addition, market for gold is affected by market demographics, such as the number of gold buyers and sellers. 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 market for gold. Gold is facing 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).

Gold has been used both as a measuring rod and as store of wealth by many generations and civilizations. The unique characteristics of this precious metal made it one of the first to be used by humanity. Most notable features of this precious metal are the following: gold exist 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, use of gold as a measure of value and store of wealth has reduced and is very limited, though gold still 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 that is held by most banks (especially in western countries) has greatly reduced though gold is still an important tool in preparing balance sheet by central banks all over the world. 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 also as a result of the steady downward trend of gold prices (Dale 2011).

The market of gold just like any other market is greatly shaped by the forces of demand and supply. Normally, there are two main sources of gold supply; Central banks 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 not willing to take. Mining supply on its own 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; this is done 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 is very dynamic, and this underscores the appeal that this precious metal has on the global arena, its unique features as an investment medium. Demand for this precious metal is largely diffused all over the globe. India and Eastern Asia and Middle East consumer demand roughly represented 67 percent of the global consumer demand in the year 2012. United States of America, China, India and Turkey accounted for approximately half of the total global market demand for gold in the same period. For each market, gold demand is driven by socio-economic and cultural factors, unique in 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 make up the largest consumers’ 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 the year 2013, investment drew a net inflow of roughly $ 80 billion. A number of factors stimulate both private and institutional investors to venture into gold business through investment in gold. The key factor has always been the capability of gold to remain stable even in times of the economic downturn or even 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 and more often than not investors opt for a diversified portfolio so that they have more flexibility. The rapid growth in investment demand has brought about many innovations in the investment into 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 demanded in the same period. Gold is an attractive metal in the industrial use due to its physical and chemical properties. Most notably, its occurrence in pure form features numerous outstanding advantages which allow make various industrial items of complexities. Gold is also an excellent conductor of electricity, and its resistant 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 with the exception of 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 every year in the past decade. This stability in production is attributed by new mines replacement of the redundant ones instead of increasing global production, meaning the net increase in 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 market is efficient, 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, and as such recycling of 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 for excess demand, and thus bringing the demand and supply for gold to equilibrium. Recycling is made possible by the high value of this metal. Additionally, 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 a major competition from diamond and silver, and this trend is leading to reduction of its price. In fact, the two precious metals are following 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 undervaluation of stocks of gold. This undervaluation of gold stock is making it possible to buy large gold stock - a mode of wealth investing that carries a surety of future increment. Currently (as at 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).

 
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