Gold: a scarce resource

Gold is rare

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Gold is extremely rare: According to all geological experience it is found only in low concentrations in rocks. Its average concentration in the Earth's crust is 0.005 parts per million.

In the world, there are currently somewhere between 120,000 and 140,000 tonnes of gold 'above ground'. To visualise this imagine a single solid gold cube with edges of about 19 metres (about three metres short of the length of a tennis court). That's all that has ever been produced.

Divided amongst the population of the world there are about 23 grams per person, about 1.2 cubic centimetres each. This equates to about $250 - $350 worth per person on Earth, depending on the current price.

Gold still underground: Where it is known about with reasonable confidence, and can be extracted economically, un-mined gold appears on the books of mining companies as reserves. There remains as reserves about 40% of the total of gold above ground, i.e about 50,000 tonnes. South Africa has 50% of the world's known stock of un-mined gold.

Gold production

Gold is difficult to find in commercial quantities. It also takes time, typically 5 years, and plenty of money to bring mines into production. In this sense the supply side of the gold equation is relatively constant.

One of the features of this is that boom times encourage investment which takes a considerable time to work through to production and eventually to worked out mines. After a boom, when investment decisions may be made on over-inflated expectations of ultimately achievable prices, there is a tendency to subsequent overproduction and poor prices for a considerable period.

The gold price boom of 1979/80 resulted in steadily increasing production all over the world from a stable base of 1200 tonnes annually to a peak of above 2600 tonnes in 1999. All major producing countries except South Africa substantially increased production in this period.

Production then levelled out and started to dip slightly, as mines were exhausted and poorer mines shut. Also the uninspiring gold market encouraged a decrease in exploration which now means there are a lower number of new mines coming into production than is expected to be required by the market.

Gold is still being mined and refined at the rate of almost 2,600 tonnes per year. Thus the world supply of above ground gold is increasing at just over 2% annually.It is considered that lack of exploration expenditure in the 1990s, coupled with the inherent delays between discovery and production mean than the gold supply will remain inelastic and is likely to reduce slowly over the coming few years.

In 2004, the geographical breakdown of major global producers (in tonnes) was as follows:

South Africa342.7

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Gold consumption

Gold is not really 'consumed' in the sense that it doesn't get used up, but its demand runs at about 3,800 tonnes per year, notably faster than it is being mined. Gold demand is very much harder to evaluate than production, because while production is concentrated in a relatively small number of mines demand is distributed throughout the world. This makes it difficult for anyone to build a statistically accurate picture.

Some of the difficulties are as follows: (1) Many buyers of gold are deliberately secretive. (2) The recycling of scrap gold does not lend itself to measurement because recycling can utilise scrap supply and meet a demand without going anywhere near a statistician. (3) Unallocated gold is difficult to measure because it is often notional.So all figures which report gold demand should be reviewed sceptically.

However, undeniably by far gold's major demand comes from jewellery manufacture [2,727 tonnes in 2002]. The main other demand comes from retail investment, i.e. from gold's use as a private reserve asset [340 tonnes in 2002]. The amount used in industry, e.g. in electronics and dental surgery combines to a further 340 tonnes.

The following table summarises global gold demand [tonnes] by usage:

Retail Investment459270360156349340322

The geographical breakdown of demand illustrates its jewellery based nature. Because of its importance in Indian marriage ceremonies India leads the table. The USA is second because of the broad affordability of gold jewellery for a large section of the world's richest society.

Geographical breakdown of the world's gold consumers:

Nations/RegionsConsumption (Tonnes)
SE Asia285
Saudi Arabia228
Gulf States165
South Korea124

A shortage of Gold

There is a supply side shortage of gold bullion. Average annual demand over 5 years is about 3,800 tonnes and mined supply is a bit less than 2,600 tonnes. A further 15% [600 tonnes] of annual demand is met from scrap jewellery and bullion and the remaining significant shortage of almost 20% [about 800 tonnes] is being met by sales of central bank gold reserves.

Much of the selling is done in relative secret but some of the central banks publish details:
- Germany: sold 12 tonnes of gold in 2001, as commemorative gold coins.
- Holland declared a policy of selling 300 tonnes over 5 years from 1999. The Dutch do not advertise their sales in the market as they happen. They have sold 100 tonnes in year 1. 27 tonnes in year 2. 9 tonnes in year 3, and 33 tonnes in year 4 (so far).
- Portugal sold 15 tonnes in December 2002 and 30 tonnes in February 2003, apparently as a result of options taken out in 1997/8.
- Switzerland plans to sell 1,300 tonnes. They have sold annual amounts of 120, 220 and 283 tonnes, project a further 283 tonnes in 2003 and will cease selling after 2004.
- The UK has sold 395 tonnes in a public auction programme which finished in March 2002.

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