When it comes to gold, much of the focus is on the demand-side drivers of price, including interest rate expectations and whether the U.S. dollar is strong or weak. But what about gold’s supply side?
Gold’s supply side is almost entirely overlooked, yet it’s very important in determining gold prices. During periods when gold mining supply falls, gold prices often soar. This was the case in the 1970s, between 1998 and 2009, and again in the period from 2017 to 2020. By contrast, when gold mining production surges, as was the case between 1981 and 1998, and again from 2010 to 2016, gold prices often slump.
But mining supply is only one kind of supply. There is also secondary recovery — the recycling of gold from used appliances and melted-down coins and jewelry. Secondary recovery, however, does not appear to be a price driver, but rather responds to prices. The higher the price of gold, the more incentive there is to recycle it.
Finally, there is the supply net of "official transitions." Official transactions refer to the buying and selling of gold by central banks. Since the 2010s, central banks have been steadily buying gold; this has reduced the amount of gold available to private sector purchasers and probably driven the price of gold higher.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
