Gold has captivated humanity for thousands of years. Its lustrous yellow color, malleability, and resistance to corrosion have made it highly prized for use in jewelry, artifacts, and currency. While gold’s intrinsic properties remain unchanged, its market value has fluctuated wildly throughout history in response to supply and demand. So who ultimately controls the value of this precious metal?
Supply of Gold
The supply of gold consists of the total amount that has been mined throughout history and the new gold that is mined each year. Unlike other commodities, the existing stock of gold never gets used up or consumed. Almost all the gold that has ever been mined still exists today in one form or another. This means the supply of gold grows by about 1-2% each year from new mine production.
The top gold producing countries are China, Australia, Russia, United States, Canada, Peru, Indonesia, Ghana, Mexico, and Uzbekistan. In 2021, global gold production reached 3,370 metric tons. The majority came from mines, but a smaller amount was produced from recycling existing gold objects and jewelry. While gold can be found all over the world, it is expensive to mine as deposits become harder to access and grades decline. High-grade gold ores are becoming exhausted, so new mines today rely on processing large quantities of lower grade ore to produce each ounce of gold.
Levels of new gold supply are determined largely by two factors: the economics of gold extraction and politics surrounding mining policies. When the price of gold rises, mining lower grade deposits become economically feasible. Governments also play a role, as they regulate mining activity and levy taxes on operations within their borders. Overall, annual gold supply increases when prices are high and falls when prices decline. But changing levels of production happen relatively slowly since mines take many years to develop.
Demand for Gold
The demand side of the equation comes from investors and consumers who buy gold as an investment, reserve asset, or jewelry for adornment. Gold investment demand has three primary components:
- Retail investors
- Institutional investors
- Central bank reserves
Retail investors represent the largest source of gold demand, purchasing coins, bars, and jewelry. Institutional investors like hedge funds, pension funds, and insurance companies account for a significant portion of investment demand as well. Central banks hold gold as part of their reserve assets, diversifying away from currencies like the US dollar. Additionally, demand for gold jewelry remains high in countries like India and China where gold is a traditional part of weddings and gift-giving.
Investment demand tends to move with macroeconomic factors like inflation, economic growth, interest rates, and currency fluctuations. When financial markets experience volatility or geopolitical uncertainty arises, gold often benefits as a safe haven investment. The gold price also generally moves counter to the US dollar, so demand rises when the dollar declines and vice versa. Consumer demand for gold jewelry and other products, on the other hand, depends on discretionary income levels and cultural preferences.
Gold Price Discovery
Gold trades on various exchanges and platforms around the world, but there are three primary benchmarks that set the official gold price each day.
- London Bullion Market Association (LBMA) Gold Price
- COMEX/CME Gold Futures
- Shanghai Gold Exchange
The LBMA Gold Price auction takes place each business day in London, determining gold’s spot price. The LBMA price heavily influences other gold trading venues. COMEX gold futures, traded on the CME exchange in New York, represent the primary futures market where gold prices are discovered through trading activity. The Shanghai Gold Exchange facilitates gold trading in Chinese renminbi and serves as a benchmark for gold demand within China.
These markets provide price transparency and continuous liquidity for gold trading. Buyers and sellers from around the world interact on these exchanges, with each transaction slightly moving the price up or down. The gold price emerges as trades match bid and ask prices among market participants. Because these markets are so large and active, no single actor can unilaterally control the gold price for any sustained period.
Factors Influencing Gold Prices
While no individual can dictate the gold price outright, there are several factors that influence the market’s ups and downs:
- Inflation
- US dollar moves
- Interest rates
- Central bank policy
- Economic growth
- Geopolitics
- Supply and demand
As a hard asset that acts as a store of value, gold performs well when inflation rises or currency values decline. Rising interest rates also make gold less attractive compared to yield-bearing assets. Central banks occasionally engage in gold buying or selling that impacts the market, though most gave up regular market interventions long ago. Robust economic growth reduces gold’s safe haven appeal, while geopolitical tensions and weak growth can boost it. Lastly, fundamental supply and demand dynamics anchored in production costs and user activity influence gold’s value at the margin.
Key Gold Market Participants
While many groups participate in the gold market, a few stand out as influential players whose actions impact gold prices the most:
Central Banks
Central banks hold massive gold reserves and occasionally buy and sell gold to stimulate or suppress the market. But continuous large-scale manipulation is unsustainable in practice. Central banks in emerging countries remain net buyers to diversify reserves, while developed world central banks have pulled back from gold trading.
Speculators
Speculators make short-term bets on gold futures contracts and exchange-traded funds. Their trading volumes are substantial enough to sway prices but typically reverse over time. Speculators amplify gold’s ups and downs but are not long-term price drivers.
Jewelry Industry
Jewelry fabricators represent a major source of physical gold demand, especially in Asia. Fluctuations in the gold price influence the profit margins and demand of this industry. Jewelry demand tends to rise with discretionary incomes during economic growth.
Gold Mining Companies
Miners extract new gold supply from the ground. Their production costs determine industry profitability at different gold price levels. High prices enable profitable output from more challenging deposits. Low prices may halt marginal production until values recover.
Retail Investors
Individuals buying gold coins, bars, and jewelry make up the largest source of gold demand. Retail investors tend to buy more gold when prices decline and as a safe haven. Their sheer numbers give this group influence over prices.
Gold Price Manipulation Conspiracies
Stories of gold price conspiracies often focus on manipulation by large banks and governments. Some allegations hold merit, while others do not stand up to scrutiny. Valid cases typically involve short-term periods of coordinated action.
For example, a confirmed gold price manipulation scheme by major banks to suppress the price emerged in the LIBOR scandal investigations between 2004 and 2012. Traders colluded to time market sell orders and spread misinformation to depress gold for brief periods before reversing. However, sustained long-term manipulation proved impossible due to market scale and dynamics.
Governments engaged in overt gold price manipulation through the 1960s via the London Gold Pool before that framework collapsed. Today central banks occasionally buy or sell gold in substantial quantities, temporarily influencing the market. Yet continuous control would exhaust their resources without achieving any lasting impact on underlying supply and demand factors.
In summary, gold prices fluctuate due to many complex and interrelated factors. No single entity consistently determines the gold price. While short-term manipulations occur, gold ultimately reflects macroeconomic fundamentals over longer periods. Its diverse global marketplace makes prolonged control unrealistic despite theories suggesting otherwise.
Key Takeaways
- Gold supply comes from mine production, recycling, and central bank selling. Production costs and mining regulations impact supply.
- Investment demand, jewelry demand, and central bank reserves drive gold demand.
- Gold trades globally on various exchanges with continuous price discovery.
- Factors like inflation, interest rates, currency moves, geopolitics, and economic growth impact the gold price.
- Central banks, speculators, consumers, miners, and retail investors influence the gold market.
- Brief gold price manipulations are possible but sustained control is not realistic.
Conclusion
In conclusion, no single entity fully controls the complex global gold market. The gold price emerges as the balance between supply and demand factors. While short-term manipulations can occur, sustained long-term control of the gold price is unrealistic due to the scale and diversity of market participants. At any given time, the prevailing gold price reflects a dynamic equilibrium between miners, central banks, investors, speculators, consumers, and others trading the precious metal worldwide.