What is gold? It’s a universally acknowledged precious metal that has always been highly valued. Let’s take a closer look on one of the most fascinating commodities, promising wealth and driving so many people crazy.
Why is gold so valuable?
For centuries, gold has held a unique position in the financial systems of various countries globally. Moreover, unlike almost all other commodities, the value of gold can be significant beyond its industrial usage.
However, this is not very surprising. Since the very start of civilisation, people have thought of gold as a source of money and well-being.
Is there a limit to the amount of gold?
Gold supplies, located above the ground, are very limited. Major gold deposits, hiding deep under the surface, are difficult to find and extract. Besides, gold mining is a very expensive and tedious venture.
Interesting fact! The oceans also contain gold in their waters. Actually, they hold almost 20 million tonnes of gold. To put this in perspective, we haven’t mined such an enormous amount throughout the history.
The minus of gold in the water is that each litre of seawater absorbs around 13 billionths of one gram of gold. Therefore, even the oceans’ supplies won’t help us with the fact that gold is a rare metal.
According to some recent estimates, the world’s total supply of gold is approximately 170,000 tonnes.
Price drivers: what makes the gold value move
A bit of a gold price history: according to the World Gold Council, every year since 1970s, the annual production of gold has tripled. In 1972, the gold price fluctuated around $45, while today’s gold rate is $1190 (October 2018).
There are several major factors that can influence the gold price movement:
- Demand and supply. The same as with any other commodity, the balance between supply and demand is one of the key factors, forming the price for gold. When the level of supply decreases, prices immediately go up. Supply can be limited due to political unrest in major gold mining countries, or due to the increased input costs for mining. Vice versa, supply can increase, due to the discovery of new gold deposits or reduced mining input costs.
- Policies of the central banks. Central banks can significantly affect gold prices. They make decisions to grow the supply of money in their countries, which inevitably causes a boom in gold trading. Additionally, central banks hold large reserves of gold. Therefore, their decision to sell or to accumulate gold reserves can also move the price.
- Economic performance. If to speak particularly about the United States, economic data can influence gold prices. The US dollar is considered the global reserve currency, therefore, weaker GDP numbers or employment rates may cause a weaker USD against other currencies. In general, weakness in the USD makes gold stronger as gold works as safe haven currency.
- Demand for ETFs investing in gold. Exchange-traded funds (ETFs) represent a very important part of gold investing. The majority of gold ETFs buy gold and keep it for their traders, however, some exchange-traded funds invest in gold derivatives, such as options or futures.
Where does gold come from? Top 10 gold producing countries
How much gold is there in the world? It would be fair to say that gold deposits are distributed on every continent, except Antarctica. Meanwhile, the top 10 countries, producing gold, include the following:
Which are the richest in terms of golden supplies?
The officially reported gold reserves, held by each country are the following*:
*Please note that central banks usually don’t allow independent audits, so the real figures may significantly differ from the indicated in the table above.
Main uses of gold
Well, now we know who owns the largest deposits of gold and who are the leading gold producers, it’s time to find out what is gold usually used for? Exactly what are the major applications of this precious metal?
After it is mined, gold goes to refineries, where the metal is processed into bars. Then it is sold and transformed into jewellery, electronic components, coins, or simply stored as bars and held as investments.
Gold is much in demand across various industries and finds its use for trading purposes. In recent years, the fastest growing economies, such as China and India, have significantly increased their demand for gold.
The four main uses of gold include the following:
The industry of luxury goods uses gold to manufacture rings, watches, necklaces, earrings, etc. For centuries, gold has been appreciated and highly demanded by jewellery producers. And has been standing its ground ever since.
Gold is a good electricity conductor, therefore many industries use it widely for various purposes. CPU memory chips, motherboards, various switches, connectors and relay contacts contain golden pieces. Gold is even applied for building space vehicles in order to reflect radiation.
Gold has always been considered a good way to retain wealth, therefore investment funds and individual investors view gold as a protection from possible market crisis or inflation. The investment demand is reflected through the acquisition of coins, golden bars, or funds investing in gold.
- Central banks and wealth funds
As we already mentioned, central banks and different funds hold significant gold reserves. Many of the world’s economies, such as China, Switzerland, Germany, Italy, France and the US maintain gold reserves to support confidence in their national currencies.
How to trade gold: start with CFDs
People invest in gold for a number of reasons, however, the following are the major uses of gold as a trading tool:
- Hedging against inflation
- Hiding from financial instability
- Speculating on prices
- Diversifying trading portfolios
Gold has always been considered as an attractive financial instrument. Still, working as a good protection mechanism in times of economic instability, it may also be risky, due to the possible decline in its price.
However, if you’re not looking to actual purchase gold bars, you may consider another interesting option: contracts for difference.
Trading CFDs on precious metals, gold in particular, provides you with a number of benefits:
- You don’t need to buy real gold bars, store them and hope their price go up. You just speculate on the difference in gold prices.
- You trade on margin. Contracts for difference are leveraged products, meaning that you may deposit only a portion of your own money to place a trade, the rest is covered by your broker.
- Trading contracts for difference provides you with a unique opportunity to benefit from the downward price movement. Speculating on the price fluctuations, you can go long (when the price goes up) or short (when the price goes down) and still make profit from both directions.
Important: If you trade CFDs on commodities, including gold, please, bear in mind that many retail investors lose money when trading. You should consider whether you can afford to take the risk.
Gold is a unique phenomenon: a precious metal and a popular commodity, an industrial material and a hedging instrument, a proof of wealth and a source of income. So many characteristics and so many applications. Time to find yours.
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