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Gold Trading: Why This Precious Metals Is Such A Valuable Commodity

Where Does Gold Come From & How Does It Impact the World's Economy?

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Why is Gold Valuable?

For thousands of years, gold has occupied a unique role in the financial systems of cultures worldwide. Unlike virtually every other commodity, gold has value far beyond its applications in industry.

While business sectors including dentistry, electronics and jewelry use gold in their products, there is simply not enough commercial demand to explain the very high price markets assign to the yellow metal.

However, the high price is no mystery.

Since the beginning of civilization, humankind has viewed gold as a proxy for money and wealth. This reality has made it one of the most fascinating and misunderstood commodities.

Looking to trade gold? See our gold trading guide here.

How Much Gold Has Ever Been Mined?

The supply of above-ground gold is limited.

Gold deposits are difficult to find, and extracting the metal from gold mines is an expensive and time-consuming endeavor.

Interestingly, gold isn't just in the ground, it is also in our oceans. Ocean waters hold approximately 20 million tons of gold (more than mankind has ever mined). However, each liter of seawater only contains about 13 billionths of a gram of gold. Yes, billionths.

There is no getting away from the fact that gold is rare. Analysts estimate that the total supply of gold in the world is around 170,000 tonnes.

If all of this gold covered Center Court at Wimbledon, it would only rise 9.8 meters above the ground.

Or to put it another way, if it was all melted, it would fit within an Olympic swimming pool with room to spare (as the picture below demonstrates).

All the gold in the World as one cube
All the gold ever mined if it were melted into a cube. Demonocracy

What Is the Spot Price of Gold Today?

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What Drives the Price of Gold?

According to the World Gold Council, annual volume of gold production has tripled each year since the early 1970s, while the amount of gold purchased each year has quadrupled. The price of gold has risen from $45.75 in 1972, the first year private ownership of gold became legal again, to its levels today.

There are several common factors that typically move the price of gold:

  1. Supply and demand
  2. Central bank policies
  3. Economic data
  4. Demand for financial instruments that invest in gold

Supply and Demand

As with any commodity, the balance between output and market demand determines price levels. When supply levels diminish, prices tend to go up.

Factors such as political unrest in countries with large gold mining projects or increases in mining input costs (such as the price of oil) can constrain supply.

On the other hand, discoveries of new gold deposits or declines in input costs can increase supply.

One factor that consistently affects supply is the price of gold itself. When gold prices increase, mining gold becomes more profitable, so more supply comes on to the market. The opposite happens when prices decline. Similarly, changes in demand from industry, traders, central banks or sovereign wealth funds can move gold prices.

Central Bank Policies

The actions of central banks can have a big impact on gold prices in two ways.

First of all, central banks make decisions to contract or grow the money supply in their countries. These decisions ultimately drive an increase in gold trading since fiat currencies (e.g., US dollar and euro) compete with gold as a store of value and a form of money.

Secondly, central banks hold large gold reserves. Their decision to accumulate or sell reserves can move the gold market.

Fort Knox inside gold vault
Inside gold vault at Fort Knox via Pixabay

Economic Data

Economic data, particularly in the United States, can impact gold prices. Because the US dollar is generally viewed as the world’s reserve currency, weak employment or GDP numbers, for example, often result in a weaker dollar against other currencies. Typically, gold benefits from US dollar weakness as it is a competing form of money.

Demand for Financial Instruments that Invest in Gold

Investment instruments such as exchange-traded funds (ETFs) represent an increasingly important segment of gold investing. Most gold ETFs purchase physical gold and store it for their traders, although some ETFs invest in gold futures, options or other gold derivative products. Demand for these instruments can impact gold prices.

Where Does Gold Come From?

Miners extract gold from the ground on every continent except Antarctica. The largest producers of gold historically include the following countries:

World's Biggest Gold Producing Countries

Top 10 Gold Producing Countries

For many years, South Africa was the dominant gold producer of the world now it struggles to maintain its position in the top 10 as countries with a far larger surface area such as China and Russia have overtaken them.
RankFlagCountryAnnual Production (metric tons)
#1Flag of ChinaChina455
#2Flag of AustraliaAustralia270
#3Flag of RussiaRussia250
#4Flag of USAUnited States of America209
#5Flag of CanadaCanada170
#6Flag of PeruPeru150
#7Flag of South AfricaSouth Africa140
#8Flag of MexicoMexico125
#9Flag of IndonesiaIndonesia100
#10Flag of UzbekistanUzbekistan100

Which Countries Have the Most Gold?

These are the officially reported figures (correct as of November 2017) of gold reserves held by each country.
It is worth remembering that Central Banks don't typically allow independent audits therefore the "real" figures may be significantly higher or lower than the figures below. There is speculation that China and Russia in particular have been buying up significant gold reserves in recent years.
RankFlagCountryAmount of Gold (tonnes)
#1Flag of USAUSA8,134
#2Flag of GermanyGermany3,374
#3Flag of ItalyItaly2,452
#4Flag of FranceFrance2,436
#5Flag of ChinaChina1,843

What Are the 4 Main Uses of Gold?

After it is mined, refiners process gold into bars and sell them. Buyers then transform these gold bars into items such as coins, jewelry and electronic components, or they store the bars and hold them as an investment.

As with supply, gold market demand is also international and includes a variety of different industries and traders. Fast-growing Asian economies, including India and China, have increased their demand for gold in recent years.

Four groups comprise the major demand components for gold:

Use of GoldDescription
JewelryThis industry fabricates gold into watches, rings, earrings and necklaces among other items. Jewelry manufacturers have been a mainstay of gold demand for centuries.
TechnologyBecause gold conducts electricity and does not tarnish, many industries use gold in their products. Connectors, switches and relay contacts on cell phones contain gold, for example, as do CPU memory chips and motherboards. Gold is also used in salts to treat arthritis patients and on space vehicles to reflect radiation.
Private InvestorsIndividuals and investment funds that want protection from inflation and market crises view gold as a way to preserve wealth. Investment demand for gold manifests itself through the purchases of gold bars, coins and funds that invest in the metal.
Central Banks & Sovereign Wealth FundsMost central banks and sovereign wealth funds hold gold reserves. Although none of the major world economies has a formal gold standard, many countries including the US, France, Germany, Italy, Switzerland and China hold substantial gold reserves as a way to instill confidence in their fiat currencies.

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