The International Gold Industry

Supply and demand for gold
Gold is unusual in the sense that it is a commodity as well as a monetary asset. Since gold is in principle indestructible, all the gold that has ever been produced still exists in one form or the other. At the end of 2010 the consultancy company Gold Field Mineral Services (“GFMS”) estimated that the total global stocks of gold were 168,000 tonnes. Thereof some 64% has been extracted and produced after 1950. The biggest part of the demand is generated by the jewellery industry. During the past few years the demand by this industry has exceeded the total mine production of gold.

Due to its particular physical properties, gold also has an industrial application. Substantial amounts are used in dental care as well as in the electronics, space and pharmaceutical industries. 

The supply of gold to the market takes place via mine production, via recycling of gold from metal scrap and through gold loans and gold sales from official reserves. The official gold reserves in various central banks are estimated to account for nearly 18 % of the total existing gold reserves.

The history of gold
As far back as 4,000 years ago, approximately one tonne of gold per year was mined from gold deposits found in what is now modern-day Egypt, Sudan and Saudi Arabia. The first gold containing coin was produced already in the year 800 B.C. It is believed that the first solid gold coin was created in the 6th century B.C. by the King Krosos of Lydia.

During the glory days of the Roman Empire, new deposits were discovered in Portugal, Spain and Africa. It is estimated that the production during that period of time amounted to five to ten tonnes of gold per year. Gold mining diminished dramatically from the sixth century until the fifteenth century. During these extended periods of time, the yearly worldwide gold production was less than one tonne per year. However, in the middle of the fifteenth century, interest in gold increased. An important source of gold was derived from the mines of West Africa (today's Ghana), where five to eight tonnes of gold were mined per year. In addition, the Spanish conquests in South America (Mexico and Peru) during the beginning of the seventeenth century resulted in an increase in gold supply. Towards the end of the century, between ten and twelve tonnes of gold per year were mined from these regions. During the eighteenth century, substantial quantities of gold were mined in Russia as well, which resulted in an increase in the yearly worldwide production by approximately 25 tonnes towards the end of the century. One year before the California gold rush (1847), the worldwide production had increased to approximately 75 tonnes, of which almost half came from Russian mines alone. The discovery of gold in California signaled a turning point in the history of gold. In 1853 alone, 95 tonnes of gold were taken from these mines. At about the same time, substantial gold discoveries were also made in Australia.

Worldwide production increased rapidly and after a few years amounted to nearly 300 tonnes per year. As far back as 1898, South Africa had surpassed the USA as the world's leading producer of gold. Nearly 40 percent of all gold mined to date comes from South African mines. The Kalgoorlie (Australia) deposits, newly discovered in 1893, contributed to the increased production, as did the discovery of alluvial gold in the Canadian Klondike. The production of gold decreased in many countries during the beginning of the twentieth century. The gold price increases at the end of the 1930's resulted in a brief recovery, but it wasn't until the price of gold rose dramatically in the 1980's that production again increased. Many older mines were reopened and intensive exploration resulted in numerous substantial gold discoveries. Between 1980 and 1990, the production of gold in the western world rose from 962 to 1,744 tonnes per year, and has then continued to increase to a yearly level of some 2,500 tonnes as at the turn of the millennium.

The world’s gold production
In 2010 the global gold production increased by 80 tonnes and reached the level of 2,652 tonnes, what is 3% more than in 2009, reversing three previous years of decline. Growth in the global production levels came from a number of new projects worldwide, coupled with a production growth in China, Australia and Argentina.

In 2010, for the fourth year running, China became the country to produce most gold in the world and, thereby, overtook the first place from South Africa, which had been the worldґs largest gold producer since 1905. After recording a modest rise in production in 2008-2009, Chinese gold production grew strongly in 2010, with output increasing 6% to 344 tonnes. Productions in South Africa fell by almost 9 %, the chief cause of this being lower gold contents; the country’s average contents were reduced by 10% during the year. Latin American production increased by a total of 30 tonnes, notably in Argentina, Brazil and Mexico, due to new projects and expansions came on stream.

In 2010, the gold production in Russian  decreased by 2 tonnes from 205 tonnes in 2009 to 203 tonnes in 2010.

The gold price
The average price for gold in the world market has increased within 2010 having come nearer to a mark 1,226 USD for ounce. In comparison with 2009 growth has made approximately 17 %. For August, 2011 the price for gold already made 1 755,81 USD for ounce, and continued to grow steadily throughout all 2011.

Geographic breakdown of production, gold grade and production costs

Gold is produced in mines in all the continents of the world except in the Antarctic.

During a long period in the 20th century, South Africa dominated as the number-one global gold producer. In 1970 it produced 1,000 tonnes, which was 70% of the global volume at this point in time. Thereafter, South Africa’s proportion has fallen, and in 2007 China took the lead as the worldґs greatest gold nation, with almost 11 % of world production.

The gold grade of the ores varies globally depending on the particular ore bodies. Generally, the gold content at the largest South African mines amounts to 8-10 g/tonne, while smaller South African mines produce 4-6 g/tonne. Much of the gold in the world is produced in open-pit mines, where the gold content of the ore is generally lower than in deep mines, with gold content of 1-4 g/tonne.

Production costs the world over vary a lot, depending on whether it is a case of mines or open-cast, how deep down the gold deposits are, the type and characteristics of ore bodies and the gold content. The average stated cash production costs for commercial information-producing larger western mining companies for 2010 amounted to 551 USD/oz, which is 18% more than in 2009. In the first half of 2011, average global total cash costs rose 12% to 602 USD/oz. 

The global trading of gold
The global trading of gold consists mainly of a bigger part that takes place via the over-the-counter market (OTC), i.e. directly between various market players. This market segment is then divided in spot transactions and various forms of derivative transactions such as futures and options. The OTC-market is open around the clock, and the main centers for such trades are London, New York and Zurich, where larger transactions take place (central banks and mining companies). The minimum trade size in this market is 1,000 troy ounces (oz). In Dubai and other cities of the Far East OTC-transactions also get concluded, however in smaller size. OTC-trading is organized manually via telephone as well as via an electronic trading system.

In order to support the market pricing mechanism, a reference price for gold is established twice a day in London, the so called “London fix”. Settlements on the market are organized in a similar way as on the international currency market via accounts in various banks. The standard size is a “London Good Delivery Bar”. The settlement currency is normally in US-dollars.