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By Martin Hutchinson
Gold is different from other commodities in many ways. Still, the price of the yellow metal depends on the same three factors as oil or wheat: supply, demand and financial conditions. Put them together, and the 20pc increase since August might only be the beginning.
Start with supply. Production from mines totalled 2,414 tonnes in 2008, worth $88bn at the November 16 price. There will be more this year, but less from 2010 onwards. It will take years for new mines to come on stream. Recycling from scrap jewellery and official gold sales were worth $40bn in 2008, but those sources aren’t likely to cough up much more.
One central bank has even become a buyer. India recently purchased 200 tonnes of gold from the International Monetary Fund. If China decided to put 10% of its $2.3 trillion of official reserves into gold, it would need to buy up almost three years’ worth of production, at the current price.
Such a big move isn’t likely, but smaller shifts from central banks – selling less – could be enough to move the price, as long as other demand keeps up. That’s likely. The long period of ultra-easy money may not be undermining the monetary system, but many people fear it might. Some of them will buy some more gold, just in case. With yields on government bonds so low, gold looks like cheap insurance.
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