Commodities : Gold
Gold demand :
Gold is in the category of precious metals. It has several uses:
- Jewelry: gold is used for making jewelry.
- Industrial: gold is used in computers, high technology and construction. Indeed, gold has the virtues of corrosion resistance and high electrical conductivity.
- Money: Gold is used by central banks to compensate for the currency issued.
In 2007, the demand has exceeded supply and we could then understand that the price of gold rises, the commodity becoming rare. The average gold production since 2001 to 2007 drop of 1% per year while the price increased by over 15% averaged over the same period.
But with the economic and financial crisis that affects us now, the trend has reversed. The demand is indeed in decline while production remains stable.
Gold supply :
We also note that mine production is about 2500 tons per year. As for mineral reserves, they are around 50000 tons. You surely do some math right now 50000/2500 = 20. There are 20 remaining years of gold mining if no other reserves are found during this time. This is a very very long term investment.
Gold Evolution :
Gold is listed under physical form, on the London Stock Exchange and, as futures, at New York. World prices are fixed in U.S. dollars per ounce of gold. Apart from these organized markets which are dealing with large quantities, there are companies trading in gold and precious metals open to individuals and various transformers and users.
You will therefore understand, the gold price varies according to supply and demand. You must then pay attention to the following numbers: the evolution of gold reserves of central banks, goldsmiths applications, including India and China, industrial demand, costs and production volumes, state of mineral reserves … However, this is not the only determining factor.
As a precious material, it also acts as a safe haven. In periods of economic crisis or war its value will rise sharply because of inflation and a flight to quality flows. We can still challenge the notion of safe haven given the high volatility due to a short-term speculation. This makes therefore a very risky asset although it is not integrated in the collective thought due to media especially. So there has speculative purchases and sales based on monetary uncertainty.
The price of gold rises as the dollar declines. This is called negative correlation between the dollar and the ounce of gold which is illustrated perfectly with these two charts of the EUR / USD and gold.