By David Chaston
In our first part, we looked at demand for gold. In that review, we found that volume demand is declining for jewellery, is stable and low for industrial use, has recently been negative for ETFs and large hedge funds. The only rising sector is for individual investors, but these rises aren't large enough on their own to grow total demand.
Demand has been stable for at least the last ten years. It ended at levels from where it started, having sunk minorly in the intervening years.
In our second part, we looked at the supply of gold. Here we found that output from mines is growing. In fact, given that it takes about five years to bring a new mine into production, and the substantial run-up in price all occurred withing the past five years, it seems reasonable to expect future mine output to grow strongly.
We also found that supply from recycled scrap is rising as well, no doubt 'encouraged' by the recent high prices.
For many years, governments had been net sellers from their official holdings and this added to market supply. However, this trend has reversed recently and governments have become net buyers and adding to their holding. But the net impact of this activity is very small.
Supply has been rising modestly over the past ten years.
In fact, over those ten years, supply has exceeded demand - just. Sellers have offered 36,200 tonnes, whereas buyers have taken 35,300 tonnes. And that includes the buying/selling market forays by governments.
Over this same period, the price of gold has risen impressively. But it is clear that it is not fundamental demand-and-supply forces driving this rise. It is 'fear', and from this review it seems fair to attribute all this to a growing body of 'small investors' who see gold as a safer store of wealth than the alternatives. (See also Bernard Hickey's interview with New Zealand Mint's Michael O'Kane on why New Zealand is seen as a safe haven for gold investors.)
It is also clear that the group has grown to be a significant influence in the market, buying more than 25% of all gold per year, taking up most of the volumes from other sectors that have been falling. (See also Amanda Morrall interview here with Pathfinder Asset Management's John Berry on investor enthusiasm and reasons for caution).
Gold is often touted as an important component of a balanced investment strategy, and the fast-rising recent price history has made that a compelling proposition. But physical gold delivers no income, only a capital gain or capital loss.
The state of the world economy, the levels of public and private debt, the size of the 'money printing' responses will all weigh on investor comfort levels, and directly influence investor demand for gold.
But it does appear that world gold supply is likely to continue to grow strongly over the next decade, with new capacity dependent on the current high prices holding.
Whether investors will continue buying at these prices is an open question - but gold demand by investors 'only' requires 140,000 more one-ounce buyers than one-ounce sellers per year to soak up the recent supply growth trends.
We maintain a daily review of the prices for coin, bars, bullion, and scrap and you can find that data here »
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