Gold is sought after not only for investment purposes and a strong jewelry market, but it is also used in the manufacturing of certain electronic and medical devices.The demand for gold, the amount of gold in the central banks’ reserves, the value of the U.S. dollar and the desire to hold gold as a hedge against inflation and currency devaluation, all help drive the price of gold which has remained over $1,100 an ounce despite the commodities panic.
Gold Prices 1975 – Present
Value of the U.S. Dollar The price of gold is generally inversely related to the value of the United States dollar a weaker dollar is likely to drive the price of gold higher. During times of economic uncertainty and when the dollar is weak people prefer to invest in gold, through vehicles such as gold funds or coins. Gold is seen as a hedge against a depreciating dollar. However, if the dollar was to appreciate the opposite would occur.
Central Bank Reserves – Central banks hold gold as well as paper reserves, recently Central Banks have been buying more gold than they are selling, the first time this has happened in decades. As the central banks diversify their monetary reserves – away from the paper currencies they’ve accumulated and into gold – the price of gold rises. Due to the greater uncertainty that exists since the recession of 2008, many countries have diversified further into gold. Many of the world’s nations have reserves that are composed primarily of gold, including the United States, Germany, Italy, France, Portugal, Greece and the Euro area.
Worldwide Jewelry and Industrial Demand – In 2010, jewelry accounted for approximately 54% percent of gold demand, which totaled 3,812 tonnes, according to the World Gold Council. India, China and the United States are the largest consumers of gold for jewelry in terms of volume. Increasing demand is leading to pressure on prices. Another 12% of demand is attributed to medical and industrial uses for gold, where it is used in the manufacturing of medical devices like stents and precision electronics like GPS units.
Gold Production – Major players in worldwide gold mining include China, South Africa, the United States, Australia, the Russian Federation and Peru. Gold mine production increased by about three percent in 2010 to about 2,652 tonnes, according to GFMS as several new large-scale mines began operations. Despite this small increase, however, gold mine production has been in a decline since the early 2000s. One factor is that all the “easy gold” has already been mined; miners now have to dig deeper to access quality gold reserves, as a result the costs of gold mine production has increased affecting prices.
Wealth Protection – During times of economic uncertainty, as seen during the recession of the late 2000s, more people turn to investing in gold because of its enduring value. Gold is often considered a “safe haven” for investors during uncertain times. When the expected or actual returns on bonds, equities and real estate fall, the interest in gold investing increases, driving up its price.