With centuries of history as a store of value in times of uncertainty, gold is experiencing high levels of demand. However, before people consider investing in precious metals, they must understand what drives that demand and know what gold and silver can offer and what can't. How does the price of gold coordinate players in the gold market? Investors, miners, central banks, funds, individuals, etc. How has the price of gold historically influenced the behavior of each of these agents? This question is rarely asked by market specialists, and yet it deserves an explanation.
Indeed, we can see that the price of gold has a significant influence on the behavior of market players and vice versa. Industrial demand (less than 10% of total demand) depends on several applications that take advantage of the physical and chemical properties of gold, in particular its conductivity. The health of this sector is therefore a key element for strong demand. For these two components, rising gold prices encourage substitution (copper in industry, platinum in jewelry).
Finally, it is important to note that there has been a steady fall in industrial demand, probably reinforced by more efficient use (less gold per unit produced). In other words, a stronger increase in the supply of recycled gold in a bull market will undoubtedly result in a greater reduction in demand for gold by central banks. Therefore, gold prices may be affected by the basic theory of supply and demand; as demand for consumer goods such as jewelry and electronics increases, the cost of gold may increase. This diversity in demand for gold and the self-balancing nature of the gold market underpin the strong qualities of gold as an investment asset.
In this sense, a long-term increase in the price of gold is only possible if mining production costs increase, if the holders of gold maintain it permanently, or if the demand for investments increases. Since gold is not exhausted and is mainly used as a store of value, the price of gold is not established between what is produced and what is consumed. He tried to “demonetize” gold by pushing a narrative that gold is useless in making the dollar appear stronger. Beyond the structure of supply and demand for gold, it is important to relate the evolution of supply and demand to the price of gold.
In the 1980s, consulting firms such as Gold Fields Mineral Services (GFMS) began publishing reports on the supply and demand of gold. On the supply side, an increase in the price of gold generally involves a slight reduction in mining supply, as well as a fairly marked increase in the supply of recycled gold. Thousands of years ago, people started using gold as money, because gold is immutable, easily divisible and scarce. The dollar is likely to drive up the price of gold due to increased demand (because you can buy more gold when the dollar is weaker).
An accurate summary of the supply and demand for gold would cover the global physical volume of gold transactions, but would not include the net balance. Fifteen of the last seventeen years, the net flow of gold (import minus export) through the United Kingdom correlated positively with the price of gold. Finally, an interesting conclusion is that gold sellers are willing to sell their gold without necessarily considering the price. These reports have confused millions of gold investors and believe that the price of gold is determined by the difference between annual mining production and newly manufactured products.