Commodity in focus (March): Gold

Fri 24 Mar 2023
Posted by: Richard Cree
Trade News

Nugget of gold shining brightly with other nuggets in background

The Daily Update continues its series exploring the latest developments from the world of traded commodities. This week we look at serial safe harbour investment, gold.

For thousands of years gold has been the world’s go to storer of value. It is relatively rare, but not ridiculously so, it is easy to transform into ingots or coins, and it has a colour that makes it very distinct, so it is easy to identify. And, unlike other metals, its colour doesn’t tarnish.

But, as with all commodities, its value is only what a society decides it is worth. Through the ages lots of different people and cultures have decided gold is something to be coveted.

For many years, gold was used in coins and currencies were backed by gold reserves that underpinned their value. But this was a flawed system, constantly suspended by hard-pressed nations. US president Franklin Delano Roosevelt removed the dollar from the gold standard in 1933, ending it as a global monetary system.

All the glitters

That was far from the end of gold as a valuable commodity. Global production of gold reached approximately 3,100 metric tons in 2022, when the world’s leading producers (metric tons) were:

China                    330

Australia              320

Russia                   320

Canada                220

US                         170

UK gold

According to Statista, in 2020, gold production in the UK amounted to just 28kg, down from peak production of 202kg in 2011.

However, the UK is a major player in gold. The London wholesale gold market is the largest in the world and the UK is one of the two dominant countries in the global gold price survey.

In 2021, it was the world’s second largest exporter of gold in a year when global sales for gold exported by all countries totalled US$393.9bn.

The top exporters of gold during 2021 were:

Switzerland         $86.8bn (22% of world exports)

UK                         $41.4bn (10.5%)

Hong Kong          $30.8bn (7.8%)

UAE                      $28.7bn (7.3%)

US                         $27.7bn (7%)

The top importers of gold were:

Switzerland         $92.4bn (23.5)

India                     $55.7bn (14.1%)

UK                         $53.7bn (13.6%)

China                    $43.7bn (11.1%)

Hong Kong          $29.1bn (7.4%)

According to the World Gold Council, The best estimates currently available suggest that around 208,874 tonnes of gold has been mined throughout history, of which around two-thirds has been mined since 1950.

Represented as solid cube of pure gold this would measure 22 metres on each side.

Bank reserves

Much of the gold in existence is held by central banks in their vaults.

A country has gold reserves for several reasons, but mainly as an insurance policy against economic crashes. The global financial system is based on fiat currency; paper-based (and increasingly digital) money, that has no physical assets to back it. 

For security purposes, some countries choose to store their gold reserves outside of their own banking systems. In the UK for example, the Bank of England stores not only the UK’s gold reserves, but a number of other countries’ reserves too.

According to the World Gold Council, the countries with the greatest gold reserves (metric tonnes) were:

US                         8,133.5

Germany              3,366.8

Italy                      2,451.8

France                  2,463

Russia                   2,241.9

The UK had 310.3 metric tonnes placing it at 16th in the list (2019). However, because it holds gold for other countries, the amount of gold in London is much higher.

The London Bullion Market Association (LBMA) reports that as at end February 2023, the amount of gold held in London vaults was 8,990 tonnes (a 0.5% decrease on the previous month), valued at $527.4bn, which equates to approximately 719,239 gold bars.

Safe asset

Gold’s traditional role as a ‘safe haven’ asset during times of economic uncertainty was demonstrated during the pandemic in 2020. In August that year its price reached the historic high of $2,067.15/oz. 

Moreover, the total annual gold supply was 4% lower y-o-y (4,633t), the largest annual fall since 2013. The drop can be largely explained by pandemic-related disruption to mining and production, offset by a marginal 1% increase in recycling to 1,297.4t for 2020.

In recent weeks, gold has spiked again amid concerns about banking stability following the collapse of Silicon Valley Bank and Signature Bank in the US and the forced sale of Credit Suisse to UBS. Rumours of other banks being in trouble continue to swirl around global markets.

This week, gold prices retreated from their highest level in a year in volatile trading with spot gold dipping 0.47% to $1,978, CNBC reported.

Gold dropped about 2% on Tuesday as Treasury yields jumped, easing worries over the banking crisis prompting some investors to cautiously return to riskier assets, reported Reuters.

However, instability has not disappeared, meaning that gold will always be an attractive option. Even as its price ebbs and flows, someone will always believe in it.

Golden nuggets: facts about gold

  • 80% of gold today is used in ornaments and jewellery
  • Gold is a highly efficient conductor, able to carry tiny currents and remain corrosion-free. A typical smartphone contains $2 worth of gold
  • NASA uses gold on space vehicles that travel on voyages where the possibility of lubrication, maintenance and repair is absolutely zero