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Gold, investors' choice

May 27, 2020

May 27, 2020

Gold marketDmitri Demidenko

Gold market: peculiarities of pricing and structure

When trading commodities, it’s important to be aware of their demand&supply’s structure and dynamics. A typical example is oil, which is recovering lost positions by leaps and bounds amid expectations of growing demand and surplus reduction, as main global economies have started to reopen. Unlike Brent and WTI, gold is less sensitive to the physical asset market’s state. However, it can punish any time a trader who ignores fundamental analysis.

Jewellery production and investment prevail in the gold global demand structure. In 2019, they accounted for 48.5% and 29.2% of demand, respectively. Central banks’ share in gold purchases was 14.8% while industrial use accounted for 7.5% of gold consumption. The latter indicator is important. The thing is it is much higher for silver. The shutdown of industrial enterprises led therefore to a faster slump of [XAG/USD][1] if compared with [XAU/USD][2]. As a result, the gold-silver ratio soared to historical peaks. Against the backdrop of the recovering global economy, the ratio may be expected to drop. It means, we’d better bet on silver’s faster growth against gold.

Dynamics of global demand for gold

![LiteForex: Gold, investors’ choice][3]

Source: WGC.

The relative share of investment in the structure of the gold global demand grew up to 49.8% while the share of jewellery production dropped to 30.1%. Consumption of gold reduced almost in all sectors, except for ETFs and coins, as compared with October-December and January-March 2019.

Dynamics of quarterly demand for gold

![LiteForex: Gold, investors’ choice][4]

Source: WGC.

A change in a demand structure is an important pricing factor. When it happens, we may say a current trend is stable. The shift from jewellery to investment is a clear sign of bulls’ market dominance.  Jewellery is too expensive and its consumption is falling. On the contrary, the faster ETFs’ reserves grow, the higher their quotes are and the bigger their buying army is. They sometimes say, gold flows from east to west in an uptrend. True, in 2019 the relative share of China and India in the jewellery’s gold consumption structure was 67%, while the main ETFs are located in the USA, including the biggest fund SPDR Gold Shares, and Europe.

The main producers of gold are China (404.1 t), Australia (314.9 t), Russia (297.3 t), USA (221.7 t) and other countries. Supply’s influence on the price is limited. The year 2013 is a bright example. Many said then XAU/USD quotes couldn’t drop below $1,300-1,350 per ounce as it was gold producing companies’ break-even.  They said production would be cut to provoke a deficit and a price growth. But in fact, existing hedging technologies allowed companies to fix the price and continue producing the same volumes of gold. So, gold fell even below the expected levels and buyers were punished for their extreme self-confidence.

At the same time, supply shouldn’t be fully ignored. In 2020, investors felt a critical shortage of the physical asset when trading forwards amidst the pandemic and shutdowns. As a result, gold premiums grew in the USA and Europe and [XAU/USD][2] quotes rose as well.

Dynamics of gold quotes in spot and forward market

![LiteForex: Gold, investors’ choice][5]

Source: Bloomberg.

So, investment demand is an important factor in gold pricing. Its volume is mostly affected by central banks’ monetary policies. Massive monetary expansion contributes to weakening major currencies, dropping bond yield and raising [XAU/USD][2] quotes.

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Price chart of XAUUSD in real time mode

![Gold market][8]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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