Gold Rush – Overview of Global Demand and Supply of Gold

JP Morgan once famously said “Gold is money, everything else is credit.”


Interestingly, many scientists believe that most of the accessible Gold, on which till few decades back our entire monetary system was based on, is extra-terrestrial in nature and brought to Earth by asteroids from outer space. Ever since then (as per World Gold Council estimates) around 197,576 tonnes of gold has been mined throughout history, of which around two-thirds has been mined since 1950.
Further, since gold is virtually indestructible, this means that almost all of this metal is still around in one form or another. If every single ounce of this gold were placed next to each other, the resulting cube of pure gold would measure around 21 metres only on each side. As on end of 2019, this entire stock of the yellow metal was present in below form.

The end deployment break-up of gold has remained largely stable over the past decade. Minor change has been a decrease in jewellery contribution to 47% by end of 2019 from 50% in 2010 – the same has been lapped up by investments in Bars & Coins as the share of this segment increased from 17.2% in 2010 to 20% in 2019.


Annual Supply of Gold:
The supply of physical gold in the market majorly comes from either mining of Gold or recycling of already available metal. The total supply of Gold last calendar year was 4,812 tonnes out of which approximately 72% came from mining.

Globally, China is the leading country in Gold mining with almost 12% share. Other major mining countries include Australia, Russia, United States, Canada, Indonesia, Peru, Ghana, Mexico and Uzbekistan. These ten countries mine almost 60% of the total gold that is mined annually. India’s mining production over the past few years has been just slightly above 1.5 tonnes annually.

Annual Demand of Gold:
Demand of Gold is majorly driven by four sectors:

Jewellery: The sector accounts for almost fifty percent of the annual demand of the metal. India and China traditionally have been the biggest market for this sector and contributed to almost 55% of the current jewellery demand.

Investment: Investment constitutes almost thirty percent of annual gold demand. Investors allocate Gold in their portfolios to protect purchasing power, reduce volatility and minimise losses during periods of market shock. The investment is mostly in either physical bars/coins or ETFs. In 2019 two thirds of the investment was done in physical gold and the balance one third in ETFs.

Top ten countries contributed to almost eighty percent of the physical gold investment demand as depicted in below chart. Here again, India and China were the major markets.

Central Banks: The past decade has seen a fundamental shift in central banks’ behaviour with respect to gold, prompted by reappraisal of its role and relevance after the 2008 financial crisis. Emerging market central banks have increased their official gold purchasing, while European banks have ceased selling, and the sector now represents a significant source (almost fifteen percent) of annual demand for gold. As per World Gold Council, Central Banks sold 7,853 tonnes of gold between 1987 and 2009; between 2010 and 2016 they bought 3,297 tonnes (a larger portion of this was bought by central banks of Russia, China, Turkey and India).

Country Holding (tonnes)Change %(tonnes) since 2010% of total reserves
United States8,133.460.0079.08%
Germany3363.60-43.1774.96%
Italy2451.840.0070.54%
France2436.010.5965.04%
Russian Federation2298.721649.6822.24%
China P.R., Mainland1948.31894.223.31%
Switzerland1040-0.106.67%
Japan765.220.003.07%
India65395.267.4%
Netherlands612.450.071.52%
Turkey523.95518.1035.79%
Taiwan422.380.04.59%

An interesting anecdote is how RBI did a large purchase of 200 tonnes in 2009 in utmost secrecy. IMF had announced the sale of 403t of gold to improve its balance sheet holdings post the Global Financial Crisis and gave central banks the right of first refusal. RBI bought 200t of that and did a press release after the purchase. The then governor Subbarao later narrated “There was surprise, appreciation, even envy in the bullion and currency markets – and widespread speculation as to why we had done it.” People speculated that it was done to redeem India’s honour, eighteen years after the 1991 balance of payment crisis. Subbarao, however later clarified that RBI saw gold as a good long-term investment and a reliable reserve asset. Post 2009 purchase, RBI did not add incremental gold to its holdings for the next eight years. Starting 2018 however, RBI has again started increasing the gold investments and has added almost 100 tonnes over the past three years. (Read more about India’s forex journey since independence at this : A brief history of India’s Foreign Reserves)

Technology: Gold is utilised in various technical applications including electronics, industrial and dentistry. This sector commands balance seven percent of the overall annual demand.

Interesting Trivia About Gold Price:
Over the past couple of decades Gold price growth and US Federal Bank’ balance sheet growth (a proxy for global money supply) had been playing a game of catch up. In the run up to the 2007-08 global financial crisis the gold price increase significantly outpaced the increase in money supply which corrected once Fed started pumping money in 2008-09 as a response to GFC. Subsequently, there were periods of divergence, however both again started to converge just before Covid.
As a response to Covid, Federal Reserve has been expanding its balance sheet at an unprecedented scale. Though, Gold prices have increased but nowhere commensurate to the increase in Fed’s balance sheet. This is being cited as one of the indicators by market participants that there is further steam left in gold rally.

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