Gold Supply

The price of gold, as each price, is determined by the market forces of demand and supply. The supply is the amount of a good offered for sale at each price. Therefore, the gold supply is the amount of gold offered for sale at a given price. The gold supply in that sense should not be confused with the annual supply of gold widely analyzed by many analysts (we will explain this later). The annual supply of gold comes from recycling, net hedging and mining production.

Gold Recycling Supply

The major source of gold scrap is jewelry (about 90 percent), while gold extracted from technology provides the remaining 10 percent. In 2017, 1,160 tons of gold came from recycling. Gold scrap supply strongly depends on the gold prices. If they increase, people have stronger motivation to recycle gold, and vice versa.

Gold Net Hedging Supply

Some gold producers (or other precious metals market participants) hedge themselves, as hedging allows them to lock in prices, reducing the risk of unanticipated loss. As value of mined gold is subject to price risk until it is sold, the gold miners hedge their production. However, in 2017, gold net hedging was negative, as it amounted to -30,4 tons of gold. So, due to low volatility of gold prices, there was a net de-hedging, a first such year since 2013.

Gold Mining Supply

Many analysts focus on the mining production as an important driver of the gold prices. However, nearly all gold in the world that has ever been produced is still held in some form. Therefore, mining adds only about 1 percent to the total supply each year (and in a rather stable and predictable manner).

In other words, the amount of gold equal to annual mine supply is changing hands in less than a week on the London market alone, therefore the impact of mining production on the price of gold is practically negligible. Actually, the gold price significantly influences the mining industry, but not the other way round.

Just look at the chart 1. As one can see, the mining production has been constantly rising since 2008, but it did not prevent the price of gold from rising until 2012.

Chart 1: Gold mining production (in tons; blue line, right axis) and average annual gold prices (yellow line, left axis) from 1997 to 2014.

Gold mining production (in tons; blue line, right axis) and average annual gold prices (yellow line, left axis) from 1997 to 2014

Therefore, gold should not be analyzed as a commodity, because it is a monetary asset and no other commodity (maybe except silver to some extent) has a comparatively such high stock-to-flow ratio. This is why the mining production is only a tiny fraction of the total gold stock and, thus, does not drive the gold price. The annual supply is thus negligible compared to the overall supply. Hence, investors should ignore commodity-type approaches when analyzing the gold market since they often lead to the wrong investment conclusions.

Gold as a Currency

Instead, they should analyze gold like a currency. Just like with other currencies, the supply of gold comes from the holders of gold who decide to bring it into the market. The supply side of the gold market is dominated by the owners of the world’s existing stockpile of gold. In some sense, every ounce of gold is for sale at some price. It is just a matter of price and people’s preferences. For example, if the supply of gold increases it means that sellers value their gold less intensely and are willing to sell it at a lower price. What does influence the supply of gold? There are many factors such as the level of confidence in the economy, the U.S. dollar exchange rate, the level of real interest rates and so on. For instance, when people believe that the U.S. dollar will appreciate, they could bring their gold into market more willingly, increasing the available supply of bullion and exerting a downward pressure on the price of gold.