Investing in Gold: How it all began

What is gold? It’s a universally acknowledged precious metal that has always been highly valued. Let’s take a closer look on one of the most fascinating commodities, promising wealth and driving so many people crazy.


Why is gold so valuable?

For centuries, gold has held a unique position in the financial systems of various countries globally. Moreover, unlike almost all other commodities, the value of gold can be significant beyond its industrial usage.

However, this is not very surprising. Since the very start of civilisation, people have thought of gold as a source of money and well-being.


Is there a limit to the amount of gold?

Gold supplies, located above the ground, are very limited. Major gold deposits, hiding deep under the surface, are difficult to find and extract. Besides, gold mining is a very expensive and tedious venture.

Interesting fact! The oceans also contain gold in their waters. Actually, they hold almost 20 million tonnes of gold. To put this in perspective, we haven’t mined such an enormous amount throughout the history.

The minus of gold in the water is that each litre of seawater absorbs around 13 billionths of one gram of gold. Therefore, even the oceans’ supplies won’t help us with the fact that gold is a rare metal.

According to some recent estimates, the world’s total supply of gold is approximately 170,000 tonnes.

Price drivers: what makes the gold value move

A bit of a gold price history: according to the World Gold Council, every year since 1970s, the annual production of gold has tripled. In 1972, the gold price fluctuated around $45, while today’s gold rate is $1190 (October 2018).

There are several major factors that can influence the gold price movement:

  • Demand and supply The same as with any other commodity, the balance between supply and demand is one of the key factors, forming the price for gold. When the level of supply decreases, prices immediately go up. Supply can be limited due to political unrest in major gold mining countries, or due to the increased input costs for mining. Vice versa, supply can increase, due to the discovery of new gold deposits or reduced mining input costs.
  • Policies of the central banks Central banks can significantly affect gold prices. They make decisions to grow the supply of money in their countries, which inevitably causes a boom in gold trading. Additionally, central banks hold large reserves of gold. Therefore, their decision to sell or to accumulate gold reserves can also move the price.
  • Economic performance If to speak particularly about the United States, economic data can influence gold prices. The US dollar is considered the global reserve currency, therefore, weaker GDP numbers or employment rates may cause a weaker USD against other currencies. In general, weakness in the USD makes gold stronger as gold works as safe haven currency.
  • Demand for ETFs investing in gold Exchange-traded funds (ETFs) represent a very important part of gold investing. The majority of gold ETFs buy gold and keep it for their traders, however, some exchange-traded funds invest in gold derivatives, such as options or futures.

Where does gold come from? Top 10 gold producing countries

How much gold is there in the world? It would be fair to say that gold deposits are distributed on every continent, except Antarctica. Meanwhile, the top 10 countries, producing gold, include the following:

Which are the richest in terms of golden supplies?

The officially reported gold reserves, held by each country are the following*:

*Please note that central banks usually don’t allow independent audits, so the real figures may significantly differ from the indicated in the table above.


Main uses of gold

Well, now we know who owns the largest deposits of gold and who are the leading gold producers, it’s time to find out what is gold usually used for? Exactly what are the major applications of this precious metal?

After it is mined, gold goes to refineries, where the metal is processed into bars. Then it is sold and transformed into jewellery, electronic components, coins, or simply stored as bars and held as investments.

Gold is much in demand across various industries and finds its use for trading purposes. In recent years, the fastest growing economies, such as China and India, have significantly increased their demand for gold.

The four main uses of gold include the following:

  1. Jewellery
    The industry of luxury goods uses gold to manufacture rings, watches, necklaces, earrings, etc. For centuries, gold has been appreciated and highly demanded by jewellery producers. And has been standing its ground ever since.
  2. Technology
    Gold is a good electricity conductor, therefore many industries use it widely for various purposes. CPU memory chips, motherboards, various switches, connectors and relay contacts contain golden pieces. Gold is even applied for building space vehicles in order to reflect radiation.
  3. Investments
    Gold has always been considered a good way to retain wealth, therefore investment funds and individual investors view gold as a protection from possible market crisis or inflation. The investment demand is reflected through the acquisition of coins, golden bars, or funds investing in gold.
  4. Central banks and wealth funds
    As we already mentioned, central banks and different funds hold significant gold reserves. Many of the world’s economies, such as China, Switzerland, Germany, Italy, France and the US maintain gold reserves to support confidence in their national currencies.

    The article can be found here: https://capital.com/investing-in-gold-how-it-all-began