ECON 101: GOLD

SUPPLY

The gold supply depends on new mined gold, recycled "scrap" gold, and the fluctuating investment/divestment currents of Central Banks. Up until 1973 gold was still being used as currency in parts of the world. This is no longer the case. Rather, Central Banks hold gold as part of their currency reserves, with some countries clutching it more tightly than others. For example, of the United States' currency reserves, 60.4% or 8,134 tons are in gold. China and Japan's gold reserves, however, hover around 1%. Though gold makes up only a quarter of Switzerland's reserves, they are famous for rarely selling.

Gold follows a supply/demand mechanism just like any other traded product. If Central Banks are selling a lot of gold, the market supply increases - as it did in the 1990s and early 2000s - and gold prices fall. Then the banks agree to reduce or stop sales and prices rise. In the meantime, banks are lending and borrowing and collecting... all that abstract stuff money-pushers do that makes the world go 'round and motivates us for another dirtbag adventure.

This movement of gold via buying/selling from reserves, coupled with production from "scrap" metals makes up only 1/3 of the annual supply. The remaining 2/3 comes from New Mined Gold, such as the Barrick operation in Argentina (Veladero site) and the potential site in Chile (Pascua Lama).

DEMAND

MY BIG FAT INDIAN WEDDING
The demand side is far more interesting. While the Central Banks utilize gold reserves as a hedge against inflation, the largest demand catagory for gold is jewelry. About one-third of this demand stems from the western markets' taste for gold as a luxury good whose value depends on the subjectivity of societal whimsy. However, the majority of the gold flows to the developing world and specifically India where 80-85% of the 600 tons/year goes to jewelry. The cultural appeal of gold for Indian weddings has proven impervious to market fluctuations; demand for jewelry fabrication has remained high regardless of the overall economy's success or recession. This "wedding buying" demand as economists call it is so reliable that it softens the ups and downs of overall gold prices.

I WANT CANDY
And the final, much smaller catagory demanding gold production is the industrial sector that values gold's unique electrical conductivity properties and potential as a chemical catalyst. And, of course, Mike Tyson and I enjoy the security of mouth gold for crunching down on raspberry hard candies.