Gold is an investment vehicle, a reserve currency, but also a high demand metal for the global jewelry industry and at a smaller scale also for other usages, especially in electronics. These sectors are the main consumers of gold.

But where does it come from and to what extent? The supply comes from three main sources. Most importantly, of course, there is the production in mines. Less noted, but not to be ignored is the supply of recycled gold flowing into the market each year and also sales from central banks. Especially the source of recycled gold gains attention when traveling through cities or even more remote areas. “Will buy gold”-signs can be seen more and more frequently, at least in Germany. After years of abstinence, gold has made its way back into the investment considerations of individuals and institutions. The price, which has risen very steadily since 2001, contributes to making waste gold a trade item again. It should be noted, that throughout history, periods, when gold was “out”, have frequently alternated with periods, in which gold was considered an investment vehicle.  From 1982 to 2001, it was more or less “out” . From 2001 to 2007 gold prices rose, but no one seemed to care. This can also be considered “normal”. The “in” and “out” cycles last 20-30 years. Thus, the current cycle with its starting point in 2001 is still very young. The low point in 2001 was accompanied by the closure of the last remaining precious metals counters and also of many gold mine funds.

If one considers the current period, one will realize that the importance and extent of gold as an investment vehicle has indeed increased somewhat, but the demand for investments is only slighly higher than industrial demand. The largest share of the world-wide gold demand is still made up by the jewelry industry. The investment portion was only at 19% in 2006 – but it is just this portion, which is about to change and this trend is in the medium term met by a problem on the supply side. The mine production does not increase significantly anymore.

Let us take a closer look at the supply and demand trends in the first half of 2009:

Taking these data into consideration, some interesting trends can be detected. The mine production is not very flexible, due to limited deposits and difficult extraction, but it does rise slightly with a rising gold price. Rising prices of precious metals also makes recycling more attractive – here, we see an almost 100% increase compared to 2007. What is striking, is that central banks sold large amounts of gold when prices were low at the beginning of the millennium and this behavior has almost swung to the other extreme with rising prices. – only 38 tons were sold in the first half of 2009 as opposed to 484 tons in the year 2007. Once an upward trend consolidates, central banks will sell very reluctantly. Interesting trend.

Considering the demand side, it becomes very clear, that the so-called “gold bubble”  is hardly a reality. The demand for physical investments shows a positive trend, bat can hardly be called explosive. The industrial demand declines, as is expectable in times of recession; the demand for investments is stable or rises.

On the whole, there was an excess supply in the first half year, that has not lead to pricing pressure, however. This is, fundamentally speaking, a relatively strong sign. In the long run, as can be seen from the figures, the mine production can by no means satisfy the gold demand. If central banks on the supply side should continue to be cautious and industrial demand rises only slightly, there will be a significant supply gap. Such tendencies will rather be pushing prices up.

Golden greetings,

Yours, Aureus