What influences the gold rate?

The gold market responds to supply and demand. That’s why it’s important to know its fundamentals to be able to understand how the price of gold can fluctuate.

Move your mouse over every “cause and effect” for more detailed information.

Cause		Effect		Possible Ramifications
Growth in world money supply		Inflationary pressures		Declining confidence in paper money		Higher gold prices
Volatile stocks and oil prices		Safe haven		Increased demand for gold		Higher gold prices
China		Trade surplus		Rotation into commodities		Higher gold prices
Low gold price in 90s		Cuts in exploration		Failing production		Higher gold prices
Low interest rates		Hedging curtailed		Less supply		Higher gold prices
Credit crisis		Interest rate cuts by the fed		Weaker US dollar		Higher gold prices

How much gold is in the gold market?
According to the National Geographic Society, there is a total of 165,000 tons of above-ground gold in the world, with still-to-be mined gold estimated at around 26,300 tons. Incredibly, some 98% of all the gold that has ever been mined is still available today.

Industrially processed gold is almost fully recycled and this high stock-to-flow ratio helps explain why gold is thought to be suitable as a monetary basis.

Demand for gold
With its 1.2 billion population, India is the world’s largest gold buyer. The Chinese market is potentially larger, but has only entered the gold market relatively recently – China’s share of world gold has increased from 10% to 22% in the past few years.

At the end of 2011 China created the Pan Asian Gold Exchange (PAGE) to be an international market for negotiable futures contracts. PAGE thus competes against New York’s Commodity Exchange (COMEX) and the London bullion market (LBMA) on the gold market and helps to influence the gold rate, with all futures contracts fully covered by physical gold and silver, different to both the COMEX and LBMA.

Where does gold demand come from?
The jewellery industry is by far the biggest player on the gold market. The influence of investors on the gold market is, by contrast, modest, although exchange-traded funds (ETFs) covered by gold have greatly increased in popularity in recent years. The ETF share of the gold market is still, however, small, with gold bars and coins making up a larger share.

Developing gold demand

The amount of gold available is limited.

Of the total amount of money taken up in investment portfolios around the world, gold makes up only 0.7%. Central banks have been and continue to be active in the gold market as gold buyers, the US Central Bank being the largest, with more than 8,000 tons of gold, but China has historically had only a modest role. Partly as a result of its huge dollar reserves, however, China is rapidly growing its gold reserves. In common with China, the governments of Mexico, Korea, Thailand and Turkey have also recently been increasing their gold positions.

Have a look at our overview of the factors that contribute to a change in gold demand and its consequent effect on the gold rate.