The usual benchmark for the price of gold is known as the London Gold Fixing, a twice-daily (telephone) meeting of representatives from five bullion-trading firms. Furthermore, there is active gold trading based on the intra-day spot price, derived from gold-trading markets around the world as they open and close throughout the day.
Factors influencing the gold price
Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand, including hoarding and dis-hoarding. Unlike most other commodities, the hoarding and dis-hoarding plays a much bigger role in affecting the price, since almost all the gold ever mined still exists and is potentially able to come on to the market at the right price. Given the huge quantity of above ground hoarded gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production or gold jewelry demand.
Central banks and the International Monetary Fund play an important role in the gold price. At the end of 2004 central banks and official organizations held 19 percent of all above ground gold as official gold reserves. European central banks, such as the Bank of England and Swiss National Bank, have been selling a total of approximately 500 tonnes of gold a year from the late 1990s until 2005.
In November 2005, Russia, Argentina and South Africa expressed interest in increasing their gold holdings. Other than Russia, these are not viewed as significant central banks, but any move by Japan, China or South Korea to do the same would be seen as significant. Currently the USA has 75% of its foreign reserves in gold, whereas China holds approximately 1% in gold.
Although central banks do not generally announce gold purchases in advance, some such as Russia have expressed interest in growing their gold reserves again as of late 2005. In early 2006, China, who only holds 1.2% of its reserves in gold, announced that it was looking for ways to improve the returns on its official reserves. Many bulls took this as a thinly veiled signal that gold would play a larger role in China's reserves, which they hope will push up the price of gold. It would however be impossible for China to increase its gold reserves by anything other than a small percentage, since there is simply insufficient gold available in the market.
Inflation fears have also been influential in the past. Inflation is once again rising. The October 2005 consumer price index level of 199.2 (1982-84=100) was 4.3 percent higher than in October 2004. During the first ten months of 2005, the CPI-U rose at a 4.9 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 3.3 percent for all of 2004.
It used to be said that "Gold is the world's frightened bunny". Whenever crisis threatened, the demand for physical gold increased.
When dollars were fully convertible into gold, both were regarded as money. However, most people preferred to carry around the paper dollars issued by their bank rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. This is what happened in the USA during the Great Depression of the 1930s, leading President Roosevelt to impose a national emergency and to outlaw the holding of gold by US citizens.
Paper currencies pose a risk of being inflated, possibly to the point of hyperinflation. Historically, currencies have lost their value in this way over time. In times of inflation, people seek to protect their savings by purchasing liquid, tangible assets that are valued for some other purpose. Gold is in this respect a good candidate, and producing more is far more difficult than issuing new fiat currency, and does not rely on any particular government's health.
War, invasion, looting
In times of national crisis, people fear that their assets may be seized, and the currency may become worthless. They see gold as a solid asset which will always buy bread or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.
According to the World Gold Council, annual gold production over the last few years has been close to 2,500 tonnes. However, the effects of official gold sales (500 tonnes), scrap sales (850 tonnes), and producer hedging activities take the annual gold supply to around 3,500 tonnes.
About 3,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds. For the last few years, the official sector sales of around 500 tonnes have been taken up by retail investors and gold funds.
Supply and Demand
Some investors consider that supply and demand factors are less relevant than with other commodities since most of the gold ever mined is still above ground and available for sale at a price. However, supply and demand do play a role. According to the World Gold Council, gold demand rose 29% in the first half of 2005. The increase came mainly from the launch of a gold exchange-traded fund, but also from jewelry. Gold demand was at an all time record. Demand from the electronics industry is rising by 11% a year, jewelry by 19%, and industrial and dental by 21%.