Gold Derivatives: Gold Derivatives: - World Gold Council

CHAPTER 1 THE PHYSICAL GOLD
MARKET
This chapter describes the various elements of the physical market and their characteristics.
The main points made are:
· most of the gold which has ever been mined has been accumulated rather than consumed;
much of it could return to the market again. The level of production, though
it has increased substantially over the last century, at 2,500 tonnes/year, is small
compared with the stock of gold already produced (estimated at 140,000 tonnes).
Production does respond to the level of the gold price, but the full effects take several
years to work through (1.1).
· demand for industrial and dental gold accounts for 400 tonnes/year, or around
17% of production. The great bulk of the demand for gold is for jewellery. Gold
jewellery is often an investment good, or a store of value, as well as a consumption
good. Demand is therefore likely to depend on expectations about future returns from
holding gold as well as on the current level of the price. Income, cultural and social
and other factors are also important determinants (1.2).
· private investment holdings of gold are substantial (around 25,000 tonnes). Investment
demand is sensitive to economic conditions in the Middle and Far East where it
is most widely held, and to confidence in the financial system. Net investment demand
is likely to be much more sensitive to expectations about future returns than to
the price level. Official sector holdings (35,000 tonnes) have been fairly stable over
the last twenty years, though worries about the possibility of future sales have been a
major influence on the market in the second half of the 1990s (1.3).
1.1 Production
Gold has been mined since time immemorial, but levels of production have increased
rapidly since the mid-1800s. At the beginning of the twentieth century,
total production amounted to 450 tonnes per year 1 . By the end of it, production
exceeded 2,500 tonnes/year 2 . With this growth in production, more than a third
of all the gold that has ever been mined has been extracted in the last thirty
years 3 .
The comparison of production levels with the total quantity ever produced is
relevant to gold in a way that is quite unlike other commodities. Most of the gold
which has been produced has not been permanently consumed; much of it could
at some time come back to the market. Much of it will be traded largely on the
1
Central Bank Gold Reserves: An historical perspective since 1845 by Timothy Green, World Gold Council,
Research Study No. 23, London 1999.
2
Gold Survey 2000, Gold Fields Mineral Services Ltd (GFMS), London, 2000.
3
Gold Survey 2000, GFMS, London, 2000.
Gold Derivatives: The market impact 15