Love gold or hate it, you can’t ignore it. Every year, we conduct a review of the supply and demand dynamics that affect the price of the yellow metal. The review always throws up interesting facts and the list below is a potted summary of our key findings.
A summary of key facts follows. The full 14 page report, written by my colleague James Timpson on 15th July 2016, is available to download here.
Demand for gold in jewellery is in decline. Jewellery formed 84% of total demand for gold in 2000, but last year it was only 56%. One reason is cost (the gold price has risen strongly over the period), but another reason is fashion. When I got married in 2000, I chose a gold wedding band, these days, many people choose platinum. Western jewellery choices are largely irrelevant however. China and India together comprise almost 60% of global jewellery demand.
Your smartphone has gold in it. On average, 0.027 grams of gold. Because of its conductivity and corrosion free properties gold is also used in TVs, calculators, GPS units and other electronic devices. Demand for gold in electronics has fallen recently as the slowdown in global GDP (Gross Domestic Product) growth impacted consumer goods sales. Japan and China together comprise 53% of total fabrication of gold for electronics.
When the gold price rises, people sell their jewellery, and the contribution of scrap to the global supply of gold increases. This shouldn’t be surprising. We have all seen the “Cash 4 Gold” adverts. If you want to extract the gold from your old mobile phone there are You Tube videos to show you how.
Your next dental filling is unlikely to be a gold one. Dentistry gold demand has declined steadily over the last 10 years as laboratories switch to non-precious alternatives.
Gold mining production has increased steadily over the last 6 years, proving that a higher gold price increases investment in technology to extract gold that couldn’t have been mined using older methods. However, capital expenditure cuts in 2013 have resulted in a reduction in the number of projects going live and so gold mining output is likely to fall. China, Australia, Russia, the US, Peru and South Africa are the top six gold producing countries. The largest gold mining company in the world is Barrick Gold, based in Canada (the seventh largest gold producing country).
Europe (excluding Russia) produces just 1% of annual world gold supply.
Central banks hold gold as part of their reserves. At the end of 2015 a fifth of all the gold ever mined was held by central banks. Central banks have a habit of selling gold when it is cheap and buying it when the price is high. The UK didn’t buck the trend when selling almost 400 tonnes of gold at low prices between 1999 and 2002.
Gold’s highest closing price was $1,900 per ounce on 5th September 2011. It is now almost a third lower.
- In our Global Asset funds, COURTIERS took profits on a short gold position in 2014. Since then we haven’t traded gold at all. Gold investment is easier than ever thanks to ETFs (Exchange Traded Funds), and investment (ie., just holding the metal) now accounts for 37% of total demand for gold. There is a broad positive relationship between gold and inflation – as inflation rises, the gold price tends to rise. Uncertainty is also a trigger for a rising gold price – the vote by the UK to leave the EU resulted in a large uptick in the gold price on 24th June.
Most of the data and facts in this article are sourced from Metals Focus Gold Focus 2016, published in March 2016. Additional sources include GFMS Thomson Reuters, BBC, the World Gold Council, IMF, the World Economic Forum and Bloomberg.
The demand for gold jewellery has fallen. Sixteen years ago it was 84% of global demand and now it's only 56%. There are a couple of reasons for this. One is price and the other is fashion.
When I got married in 2000 I chose a gold wedding band. These days everyone chooses platinum. And of course the price is really influential for people too. But our jewellery choices are largely irrelevant because it's China and India that comprise almost 60% of global demand for jewellery.
Electronics is really interesting. There is gold in your smartphone. There is gold in a TV, in a calculator, in a GPS device. It's such a great conductor that it's in lots of electronics that we take for granted these days. But before you think about stripping the gold out of your phone, let me tell you at current prices it's only worth about ninety pence. But the demand for electronics has slumped slightly because global slow-down and global consumer demand has fallen.
The scrap part of the market is really important and when gold prices rise people do start selling jewellery. A few years ago when the prices spiked, you will all remember the "Cash 4 Gold" envelopes coming through your door, offering for you to post your gold off and get immediate cash returns. Nowadays you can find videos on YouTube telling you how to take apart your smartphone and extract the gold. When the prices rise, that's what people do.
The use of gold in dentistry has really fallen. You don't see that many people wandering around these days with gold fillings, and that's because the laboratories have moved to none-precious alternatives.
Gold mining has actually increased over the last six years. We're all told there's a limited amount of supply of gold in the ground, but we are mining more of it at the moment and that's because technology's improved so much it allows us to extract gold nowadays that we couldn't extract twenty/thirty years ago. So investment has been key, and our extraction methods are better, but a couple of years ago when money was a bit tighter post the great financial crisis, we have seen a reduction in that investment. Therefore we expect that extraction will fall slightly - gold mining will decrease, because of cuts made to investments three or four years ago. Now, the biggest producers of gold in the world; one country per continent. So in Europe it's Russia. It's China in Asia and it's Australia down in the southern hemisphere. The US is a large producer of gold as is Peru. These are huge producers of gold. South Africa is the last one on the African continent - the six largest countries producing gold in the world. Now the largest gold producing company in the world is Barrick Gold and it's based in Canada, which is the seventh largest producing country.
Europe has a very very small part to play in global gold production, and actually without Russia us Europeans are virtually insignificant, producing less than 1% of global gold each year.
Central banks are a very important part of the gold industry. At the end of last year a fifth of the gold ever mined was held by central banks as part of their reserves. Central banks have got a pretty bad habit though. They tend to buy when the price is high and sell when the price is low. This is a crazy relationship but it holds over the last sixteen years, and those will remember Gordon Brown selling the UK's gold reserves - between 1999 - 2002 he sold 395 tonnes of gold at a much lower price than we are seeing in the market today.
The highest price that gold reached was actually just over $1,900 (per ounce) and that was on the 5th September 2011. We're now 35% off that level, much lower gold prices now than we had back then.
COURTIERS Global Asset Funds
We talked about gold jewellery demand declining and actually it's been compensated for by the increase in investment demand, which has ballooned to 37% recently. It's much easier now for the average individual to get gold exposure, to take gold positions in their portfolio, and that is because of the invention of Exchange Traded Funds. COURTIERS did have a position in gold back in 2014 and we made some money on the gold price falling. But recently we have found there are better ways of taking out some protection on your portfolios, and for that we've tended to use some put options, which protects in the event of an equity market decline, not just a change in the gold price.
Warning – the views expressed in this summary and any video and video transcripts are reached from our own research. COURTIERS cannot accept responsibility for any decisions taken as a result of reading this document, watching the featured video or reading the video transcript and investors are recommended to take independent professional advice before effecting transactions. The price of stocks, shares and funds, and the income from them, may fall as well as rise. Past performance is not necessarily a guide to future returns.
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