Gold, What Determines The Price

The prices of the precious metal, given the great global breadth that this market covers, both in terms of supply and demand, are affected by numerous factors. Let’s see the most important.

The price of gold continues its phase of weakness despite some bullish accelerations which often show us false hopes. The trend remains rather weak and will remain so for a relatively indefinite period. It will be interesting to follow these appointments precisely to understand if the market has come out of this impasse. As I mentioned in a previous article, the price of gold quoted in dollars differs from that quoted in euros which we are more used to thinking about here. The difference is not negligible even if the prices tend to have a good correlation. So to have a more precise perspective, we should also take into account the exchange rate of the single European currency. Purely academically, if the value of the Euro tends to decrease, to counterbalance the price of gold (in Euros) would tend to appreciate. Correlations always show their most fascinating aspect.

Just this month, a few days ago, gold in international markets recorded its lowest values. Many initially predicted that a still-falling gold price would lead to mine closures; nevertheless, so far most gold producers have chosen to cut costs rather than shut down their operations altogether. Companies have taken several approaches to make these cost reductions effective, including lowering wages and cutting headcount. But perhaps the most common approach has been to cut back on exploration – many gold prospectors are directing all their money to their existing operations rather than looking for gold elsewhere.

For now, though, there is no shortage of gold. In terms of where it is mined, China, Australia, and Russia were the top three producers in 2014. Respectively, they mined 450, 270, and 245 million tonnes of the yellow metal.

China also figures as one of the world’s main consumers of gold, and in 2014 it bought 813.6 tons of the metal. This is certainly a staggering amount. But even more impressive is that in 2013 purchases were 38% higher than today’s value. According to Reuters, Chinese gold consumption was particularly high in 2013 due to the sharp decline in the price of the metal in the second half of the year.

In the world rankings, the first position is contested by China and India. And the latter is also an important market for gold since in 2014 it consumed 842.7 million tons of metal. Although both countries recorded rather exorbitant numbers, China and India still saw a decline in gold consumption from 2013 to 2014. And this has meant that the title of the world’s largest gold consumer is often drawn among namely China and India. Out of curiosity, in the current year, it is thought that India will once again conquer the highest peak of the podium.

But aside from these sporting notes, in terms of supply and demand, investors need to be aware that most of the gold ever mined still exists and is accessible – for example, as jewelry or bullion. On the contrary, many other metals, including silver, are consumed and can hardly be recovered. Or the recycling costs are exorbitant, thus making it less convenient. This means that the final price of gold is also determined by these components, such as recycling, which is effectively included in the supply/demand relationship.