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Global gold market

02 may 2022

Gold is a reliable wealth preservation tool in crises

The role and place of gold in the world monetary system 

Gold has been known to people from the earliest times. Since it occurs in nature in a free (native) state, and not only in the form of compounds, perhaps, gold can be considered one of the first metals discovered by people.

In different periods of the development of the world economy and monetary relations, the role of gold changed. However, its function as a reliable means of wealth preservation remained unchanged.

There are 4 stages in the evolution of the place of gold in the global monetary system:

1. In the period of the gold standard, from 1867 to 1914, this precious metal was the only form of world money;

2. From 1922 to 1939, the time of the gold exchange standard, when banknotes could be exchanged for foreign currencies of other countries (US dollar and pound sterling), which could then be exchanged for gold;

3. In the period from 1944 to 1971, the Bretton Woods monetary system was in effect. Along with gold, the US dollar became an international reserve currency and the only national currency formally convertible into gold. The official price of gold was $35 per troy ounce.

4. From 1976 to the present day, the Jamaican currency system has been and is still operating, within which the gold standard and gold parities (pegging the currencies to gold in domestic and international transactions) have been cancelled.

As one can see, the national currencies of most states should have been backed by 100% gold at the initial stage. However, the leading role of the precious metal has been progressively weakened, and the functions of the world reserve currency were performed, first by the British pound, and later by the US dollar. Nevertheless, it is gold that people pay attention in crises, uncertainties, tense international situations and wars.

World demand for gold

As of 2020, gold ranked sixth as a traded commodity in the world. In 2021, as the global economy recovered, the global demand for this metal amounted to 4.021 thousand tonnes (up 10%) compared to 3.759 thousand tonnes in the previous year. This was the minimum value since 2009, when this figure first fell below 4 thousand tonnes. The decline in the global demand for gold in 2020 was due to the spread of the COVID-19 pandemic.

Currently, global demand for gold is recovering. Its structure is as follows: 53% is for jewellery; 28% for bars and coins; 11% for central banks, and 8% for technologies.

Diagram 1

The structure of the global demand for gold, %

analyt_02052022_1.png

Captures: Blue - Jewellery. Red - Bars and coins. Green - Central banks. Violet - Technologies.

In 2021, demand for jewellery increased by 67%, for investments in bars and coins by 31%, for gold used in technologies by 9%. Central banks have stockpiled 463 tonnes of gold, up 82% compared to 2020, pushing global reserves to near a 30-year high level.

Leading countries in terms of gold reserves and production

The undisputed global leader in terms of gold reserves is Australia, with 11,000 tonnes of gold (20.3% of the world’s reserves) concentrated in the depths of the country. It is followed by Russia with its 6,800 tonnes, South Africa - 5,000 tonnes, the USA - 3,000 tonnes, and China - 2,600 tonnes. The 10 largest countries account for about 71.5% of the global reserves of this metal.

According to preliminary data provided by the US Geological Survey, China will rank first in the world in the gold production in the amount of 370 tonnes by the end of 2021. The top five gold mining countries include Australia with its 330 tonnes, Russia - 300 tonnes, the USA - 180 tonnes, and Canada - 170 tonnes.

For a long time, South Africa was the largest gold miner. Since 1920, about 50,000 tonnes of this metal have been extracted in the country, which is almost one third of all the gold mined in the world. In 1993, South Africa accounted for 30% of world gold production, or 619 tonnes, a record volume in the history of gold mining.

Over time, this figure started to decline. In 2007, South Africa yielded the palm to China, where 275 tonnes of gold were mined compared to 252 tonnes in South Africa. In 2010, Russia outstripped South Africa for the first time and produced 192 tonnes compared to South Africa’s 189 tonnes, and since then, Russia has been constantly increasing its production volumes.

In 2020, only 96 tonnes of this metal were mined in South Africa, which is explained by the excessively harsh, in my opinion, restrictive measures introduced by the South African government in connection with the COVID-19 pandemic. The Minerals Council of South Africa (formerly the Chamber of Mines) estimates that 75% of the country’s gold mines are unprofitable or barely profitable. From 2016 to 2017, the cost of gold production rose by 18% to $1,010 an ounce, well above the global average of $878 an ounce.

Gold importing countries

Global gold imports in 2020 amounted to $375 bn, up $79 bn from 2016, when the figure was estimated at nearly $296 bn.

Five of the world’s largest gold importers (Great Britain, Switzerland, the USA, Turkey, and India) bought more than two thirds (68.8%) of the global volume of the precious metal.

Diagram 2

The share of the importing countries in the global gold imports, %

analyt_02052022_2.png

 

Captures (from top to bottom): Great Britain, Switzerland, the USA, Turkey, India, Hong Kong, Singapore, China, the UAE, Italy, Canada, Germany, Australia, Thailand, Austria, and Others.

Diagram 2 lists those 15 countries that purchased 94.8% of all the gold imported in 2020. Among the above countries, the fastest growing gold markets since 2019 were the US (+258.1%), Austria (+193.1%), Turkey (+123.5%), and Italy (+86.4%).

Among the countries that reduced gold imports were China (-74%), the United Arab Emirates (-68.7%), India (-29.7%), and Thailand (-28.1%).

From a geographical point of view, European countries bought the largest amount of gold in 2020, for $202 bn (53.9% of global purchases). Asian importers ranked second with their 32%, while North America accounted for 11.6% of international gold purchases. The smallest gold volumes were imported by Oceania (1.7%), Africa (0.7%), and Latin America (0.04%)1.

Gold exporting countries

In 2020, global gold sales amounted to $417 bn. This is almost $90 bn more than in 2016 when global gold supplies were estimated at $327 bn.

The 5 largest exporters of gold (Switzerland, Hong Kong, the United Arab Emirates, Great Britain, and the USA) accounted for 44.2% of the world exports of this metal. Russia ranked sixth in the world in terms of gold sales in international markets, and the value of the Russian gold exports increased by 222.9% from 2019 to 2020.

Diagram 3

The share of the importing countries in the global gold exports, %

analyt_02052022_3.png

Captures (from top to bottom): Switzerland, Hong Kong, the UAE, Great Britain, the USA, Russia, Australia, Canada, Singapore, Thailand, Germany, Japan, Guinea, Iraq, South Africa, and Others.

Diagram 3 shows those 15 countries that shipped 73.3% of global gold exports in 2020 by value.

From 2019 to 2020, the fastest growing gold exporters were Russia (+222.9%), Iraq (+214.2%), Guinea (+187.2%), and Thailand (+75.7%).

The only country to decline in gold export sales was the United Kingdom, which saw a year-on-year decline of minus 8%.

Meanwhile, it is quite remarkable that two countries, Great Britain and Switzerland, take key positions in the world gold trade. In 2020, they accounted for 22.3% of global gold exports and 46.9% of global gold imports.

In the case of Switzerland, this is explained by the fact that this country is a kind of a transit point, a global centre for gold trading. Part of the gold (several tens of tonnes and sometimes hundreds of tonnes annually) ends up in Swiss banks.

One of the most important reasons for the large scale of export-import operations with gold in Switzerland is that there are gold refineries in the country used by many countries mining this precious metal. Four of the world’s five major refineries are located in Switzerland such as Valcambi, PAMP, Argor-Heraeus, and Metalor. It is here that about 70% of the world’s gold, on average, is processed per year.

As for the UK, it is characterized by a steady and significant excess of gold imports over gold exports. At the same time, London is the world centre for exchange trading in gold. There are powerful gold vaults in Great Britain. Many banks in London offer opening accounts of both non-cash and cash (physical) gold to their clients from around the world. It is also noteworthy that England accounted for over 90% of all gold exports from Russia for the period from 2019 to 2020.

Six countries with the largest gold reserves

Worldwide, there are 35,218.6 tonnes of gold in the vaults of central banks, of which 10,772.2 tonnes are within the Eurozone. At the same time, the Eurozone states as a whole own a significant share of gold reserves in their total reserves, up to 59.1%.

1. According to official data as of April 2022, the United States has the largest gold reserves in the world. There are 8,133.5 tonnes of gold in the US Gold Reserve Vault at the Fort Knox military base, as well as in the FRS vault. This represents 78.6% of their total reserves, the highest proportion among any country in terms of foreign exchange reserves.

2. Gold reserves in Germany amount to 3,358.5 tonnes, a share of gold in its total reserves is high and makes 78.2%.

3. Italy has the third largest gold reserves in the world equal to 2,451.8 tonnes. This is 70.8% of all its reserves.

4. France has 2,436.5 tonnes of gold reserves, which is 66.1% of all its reserves.

5. Since 2012, Russia has increased its gold reserves to 2,298.5 tonnes. However, this accounts for 21.5% of its foreign exchange reserves only. As you can see, this is much less than in the US and EU countries. This indicator is several times inferior even to that in the states that have smaller volumes of gold than our country has. For example, the share of gold in the international reserves of Portugal (382.6 tonnes2) and the Netherlands (612.5 tonnes) is 79% and 69%, respectively.

6. Gold reserves in China are 1,948.3 tonnes. This is only 3.3% of its total reserves. But with China, not everything is so simple ...

China and its gold reserves

The fact is that today, the People’s Republic of China is the largest gold producer taking the lead in this industry since 2007. At the same time, China is constantly increasing its imports of this precious metal. Therefore, there is every reason to believe that the largest reserves of the yellow precious metal are currently accumulated in China.

In 2019, with an average gold price of about $1,393 per troy ounce, China’s imports of the precious metal (in physical terms) amounted to 915 tonnes. This is more than 3 times the volume of the China’s domestic gold production. It turns out that in 2019, the increase in the China’s gold reserves was 1,295 tonnes (380 tonnes (mining) + 915 tonnes (imports)).

According to the most conservative estimates, if we sum up production and official imports, there are at least 10,000 tonnes of this precious metal in the country’s vaults. In recent years, all import operations have been carried out through Hong Kong. In 2015, more than 1,300 tonnes were imported. If we sum up all imports since 2010, more than 5,000 tonnes of this precious metal have been imported into China. Gold imports to this country have increased by 750% since 2010, which is evidence that China is actively accumulating this metal.

Gold is not exported from China. This means that all gold bars, coins, and jewellery that enter the country or are produced in China remain at the disposal of the Chinese citizens and the government. At the same time, national banks are actively buying bars and coins on world markets. Thus, the figure of the gold and foreign exchange reserves announced above are just the figures of official statistics for the world community, hiding China’s huge gold reserves.

Gold in crises is a strategic resource

Gold trading is concentrated in three most important centres such as the London Bullion Market, the US COMEX, and the Shanghai Gold Exchange. Over 90% of the global gold trading sessions are carried out in these centres. There are also local centres of the secondary market, both non-exchange and exchange ones.

As the history of gold pricing shows, it adds up in price in the periods of upheavals and disasters, when investors, still considering gold the most reliable asset for investment, increase demand for it. That is why when predicting prices for this precious metal, first of all, macroeconomic factors and the international situation are taken into account.

Table 1

The average gold price, 2000 to 2022, $

analyt_02052022_4.png

Captures: Цена - Price. Годы - Years.

Gold is considered one of the most stable assets in terms of volatility both during crises and in the context of an “revival” of the economy. This is clearly confirmed by the current situation, when in a time of uncertainty and a special military operation, the price of gold shows a positive trend.

Today, gold costs almost twice as much as platinum ($1,975.9 compared to $1,010.9 per troy ounce3). And this is despite the expansion of sanctions against Russia; Russia ranks second in the world in the platinum production after South Africa. Western restrictions are spurring an increase in global demand for platinum, which is used in the oil refining and chemical industries, as well as in the production of catalysts, due to fears that Russian mineral companies will find it difficult to supply abroad.

Moreover, from 2000 to 2021, the average gold price per ounce was $1,060.0. For comparison, the cost of platinum for the same period was about $1,141.0 per ounce. So far, the average price ratio is in favour of platinum. But there is every reason to believe that gold price will remain good and gold will not be inferior to platinum in value since the tense international situation will continue, and new packages of sanctions imposed on Russia lead to a break in established trade, economic relations and logistics chains and may lead to the disruptions in supply of both energy carriers and other resources significant for the global economy.

Margarita Obraztsova for Rough&Polished

1 excluding Mexico but including the Caribbean.
2 The volume of gold reserves in countries.
3 as of April 19, 2022.