The history of gold reaches back more than 1000 years. People have used gold for centuries to store wealth, as a form of currency and to produce jewelry. Nowadays, jewelry remains the most important market for gold; gold is also used in electrical engineering and medical applications; however, in 2009, gold suddenly became popular as an investment. Two years ago, investment demand for gold made up less than 5% of total demand, in 2008, this increased to 6% and, in 2009, investor demand for gold reached an all-time high of 33% of total demand.
Tendencies in the world gold market in 2009
Supply
In 2009, total global gold supply amounted to 4,287 tonnes, representing a 8% increase on 2008, mainly due to an increase in gold mining output, along with a corresponding increase in the volume of gold scrap processing.
According to provisional statistics produced by Gold Fields Mineral Services Limited of London (GFMS), global gold mining output in 2009 amounted to 2,572 tonnes, a 7% increase on 2008 figures. This represented the highest rate for the last 6 years. Indonesia, Russia and the People’s Republic of China were the leaders in gold mining for 2009. Indonesia made a considerable contribution to the increase in global gold production, with a 66% increase on the previous year’s production figures, mainly due to operations at the country’s two largest mines: Grasberg and Batu Hijau.
The world’s leading gold producing countries in 2009, %
Note: Totals may not add up due to rounding error.
China remained the world’s largest gold producer for the third year running. The volume of gold production in China increased by 11% over the last year and amounted to 324 tonnes.
Among the top 10 leading gold producers, only the USA and South Africa experienced a reduction in the volume of gold production.
In 2009, Russia remained one of the world’s top five gold mining nations. Russian gold mining increased by 9% – from 189 tonnes in 2008, up to 205 tonnes in 2009. The increase in precious metal production was mainly provided by the Chukotskiy Region, Kamchatka Area and Amur Region.
Another important source of the world’s gold supply is scrap. As a consequence of the global financial crisis and record highs in gold prices, the supply of gold from scrap increased by 27% and reached a high of 1,674 tonnes. The main suppliers of scrap gold were India and European countries.
At the same time, gold sales from official reserves dropped off dramatically in 2009, amounting to only 41 tonnes, which represented a 82% decrease on the previous year. Changes in the sale dynamic of gold by the formal sector mainly arose as a result of a decrease in sales by the signatories to the Central Bank Gold Agreement. This agreement is intended to stabilize the world’s gold prices and mitigate the risk of excess supply by limiting bullion sales by European central banks. The last version of this Agreement, which covers a five-year period, was signed on 27 September 2009 by the European Central Bank and the central banks of 18 other European nations. Gold sales by signatories to this agreement amounted to 157 tonnes, although the annual “ceiling” for gold sales was 500 tonnes. Countries that did not sign the agreement mainly purchased gold to supplement their national gold reserves.
Demand
Jewelry is still by far the most important market for gold. In 2009, demand for gold by jewelry manufacturers reached a record minimum for the last 21 years of 1,759 tonnes. According to GFMS specialists, this was due to high gold prices (especially those denominated in depreciated national currencies), as well as the difficult business environment. The largest decline in metal consumption by manufacturers of jewelry was observed in India, Turkey, Italy and the USA.
Demand for gold from other industry sectors reduced by 5% to 658 tonnes.
Global gold consumption in 2009, %
Note: Totals may not add up due to rounding error.
In addition, in response to increasing prices, repurchases by producers of gold that they had previously hedged to mitigate the effects of declining prices contributed significantly to total demand. According to GFMS, de-hedging accounted for 254 tonnes in 2009, 28% lower than in 2008.
Investment demand
The investment demand for gold includes the demand for gold bullion, implied net investments and coins. In 2009, the investment demand for gold was unprecedentedly high, and was almost double 2008 figures, reaching 1,901 tonnes, thus exceeding the demand from the jewelry industry. According to GFMS, the volume of implied net investments increased by more that 4 times and amounted to 1,429 tonnes. This was due to concerns among investors over increased rates of inflation, the risk that counterparties would fail to fulfill their obligations, the low level of actual interest rates, US dollar fluctuations, and the rally in the gold market in the second half of 2009. Meanwhile, data on gold purchases from a number of central banks also whipped up interest in gold as an investment. The implied net investments comprised a variety of financial instruments: warrants and gold certificates, exchange-traded funds (ETF), metal accounts, gold futures and other derivatives. Exchange-traded funds (ETF) have become more and more popular among investors, and their attractiveness can be explained by high liquidity, along with the availability and provision of physical stockpiles of gold. The 19 ETFs monitored by GFMS increased by 1.5 times on 2008 figures, and amounted to 1,839 tonnes in 2009.
There was also an all-time high in the demand for gold coins (229 tonnes in 2009, compared with 187 tonnes in 2008).
However, the year saw a 52% decrease in demand for gold bullion, which aссounted for 187 tonnes. This decrease is primarily related to Southeast Asian countries and India, who are traditional buyers of gold bullion.
Gold prices
In addition to the fundamental supply and demand dynamics of the global gold market, global gold prices are affected by a number of other factors, including the geopolitical and economic environment, speculative trading, the USD exchange rate, rates of inflation and the levels of interest rates.
2009 saw record high levels of gold prices. The average evening price fixed for gold on the London Stock Exchange was USD 972.35 per ounce, some 12% higher than the previous record set in 2008.
2009 started with a rally in gold prices, triggered by the growing investment demand due to concerns among investors over the possible decline in stock prices and the risk that counterparties would fail to fulfill their obligations. However, the record price from the previous year was not surpassed. Later, in the second quarter of 2009, gold prices continued to grow due to the weakness of the US dollar, an increase in oil prices and growing concerns among investors about inflation rates. When the first signs of global economic recovery emerged, this weakened investors’ interest in gold, along with slack demand for the metal from jewelry manufacturers, contributing to a price adjustment by mid-2009. The next increase in prices began in September, when the evening price fixed for gold reached USD 1,000 per ounce. This continued until December and gold prices peaked on 3 December 2009 at USD 1,212.5 per ounce (fixed evening price), surpassing the 2008 maximum. The overheated market and subsequent strengthening of the US dollar contributed to the price adjustment. The latest London fixed price for gold was USD 1,087.5 per ounce.