Why Gold is More Than A Safe Haven Asset

At a Glance

  • Despite its strong ties to geopolitical events, gold is still driven by supply and demand
  • Five countries, led by China, are responsible for most of the world’s supply

Gold, known as the safe haven asset, historically becomes more valuable during times of geopolitical turmoil. Approximately 20% of the above ground stock of gold reserves is held by central banks and international monetary organizations. In addition, gold and the U.S. Dollar typically have an inverse relationship since international gold is dollar-denominated. Weakness in the dollar pushes up gold prices and vice versa, though that has not been the case in 2019 as we have seen the prices of gold and the U.S. dollar increase in tandem.

China Leads World Production

Gold mining happens on every continent except for Antarctica and is extracted from mines of widely varying types and scale. China was the world’s largest gold producer in 2018 and accounted for approximately 12% of total global production, followed by Australia, Russia, the United States and Canada.  The world’s gold production affects the price of gold, and like most commodities, the price of gold depends on supply, demand and short-term trading by speculators.

For top gold-producing countries, mining brings employment, foreign direct investment, foreign exchange and tax revenues.  Mine production was roughly 3,500 tonnes in 2018, up from 2,400 in 2010.  However, despite the increase over this period, gold mining production has not changed significantly since 2016. One reason is that the “easy gold” has already been mined and miners now must dig deeper to access quality gold reserves. This has led to additional problems as miners are exposed to new hazards, and the environmental impact is heightened. In short, it costs more to get less gold. These factors add to the costs of gold mine production, sometimes resulting in higher gold prices.

Gold Supply Limits

Supply and demand of gold is in relative balance presently but because no absolute estimate of how much gold is left to be mined in the world exists, it’s impossible to know exactly how long current reserves will last. Gold is scarce and a majority of exploration activity by gold mining companies does not find commercially viable quantities of gold. Once a suitable ore body is identified it generally takes at least ten years to develop a large-scale gold mine.

Some analysts believe that at present extraction rates, South Africa, which is one of the largest gold producers in the world, could run out of accessible gold within 40 years. Other estimates suggest that gold mining could reach the point of being economically unsustainable by 2050 worldwide though new discoveries will likely push that date back somewhat.

New technologies may also make it possible to extract some known reserves that aren’t currently economical to access, but it is unlikely that large-scale gold mining will continue past 2075 without either huge mining technology advances or the discovery of currently unknown massive gold deposits.

Scott Bauer graduated with honors from the University of Illinois Business School, Urbana Champaign, in 1988 with a B.S. in Finance. Bauer began floor trading in 1991 and formed BOTTA Capital Management in 1995. Scott traded equity options, S&P options at CME and was employed by Goldman, Sachs & Co. as Vice-President, Equities Division. He is currently CEO of Prosper Trading Academy and appears regularly on CNBC, Bloomberg Financial and Fox Business as a guest commentator.

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