Long-Term Drivers for the Valuation of Gold Bullion

Oct 17, 2020

Gold is one of the most sought precious metals in the world of investment. It has a long history, and its price has never touched zero in the last 3000 years of history.  Just like other precious metals, gold prices also fluctuate. If you are keen to know the long-term drivers for gold bullion valuation, click here.

Economic Expansion and Prosperity

The gold bullion prices are heavily dependent on that country’s economic growth and region’s wealth. The reason prosperity creates a demand for gold like gold bullion and gold-backed securities. Only people who have an income above a certain level invest in gold. They can buy gold as a pure investment vehicle or buy golden jewelry.

Gold is known as luxury goods. It is mostly bought by people experiencing an economic boom due to the country's rapid economic expansion.

Industrial Applications

Half of the gold sold worldwide is in ornaments. A larger percentage of this precious metal is used in various industrial applications. A leading study conducted in Europe reveals around 440 tons of gold was used in various automobile components. 

Gold is used in the medical and chemical industries. In chemical industries, gold is primarily used as a catalyst. This precious metal has several uses in the medical field.  It is used in virus detection kits, including COVID-19 detection tests. Gold is also used in the treatment of joint diseases.

Gold is used in several smartphone components and smart wearables due to its high ductility and conductivity. As the global demand for smartphones and smart wearables increases, there will be greater demand for gold in the mobile communication industry.  Click here to know about diverse industrial applications of gold.

Central Banks Gold Reserves

As per the World Gold Council, banks worldwide have increased their gold holdings over the years to support its price.  Here are some exciting figures about gold reserves held by central banks across the world

• Central banks hold around 34,789 tons of this precious metal in their secure vaults.
• Eurozone central banks hold around 10,776 tons of gold.

According to financial experts, 59% of gold accounts for total currency reserves of central banks. If the central banks make any changes to their gold holding strategy, the market would be flooded, pushing the prices of precious metal downwards.

Discovery of New Deposits

Global demand does not determine the price of gold alone. Gold is a rare commodity with limited reserves. Despite advanced exploration technologies, no new gold reserves have been found since 2012.  If the high demand for gold stays for a more extended period, all production opportunities existing today would be exhausted in the next 12 years.

For the last ten years, the annual gold production is around 4000 tons. Currently, the price of mined gold is the US$ 1,150 per troy ounce of gold.  When new gold mines are found, it can take around 15 years to build production facilities.

If you consider the price per troy ounce of gold from new gold mines, it would be around the US$ 1500. Hence, gold manufacturers are less interested in finding and exploring new gold reserves.

To sum up, these are some of the long-term drivers for the valuation of gold bullion.