The Supply of Gold

The supply of gold comes essentially from two distinct sources, namely new mine production and previously mined metal now sitting aboveground as stocks in various forms. New mine production provides the greatest amount of gold to the market each year, typically accounting for around two-thirds of total supply. In recent decades, annual production has exploded, up from less than 1,000 tonnes in 1980 to a peak of 2,645 tonnes in 2001, although more recently, output has fallen somewhat.

The bulk of supply from aboveground stocks comes from the recycling of the metal contained in manufactured (or fabricated) products, the vast majority of which comes from jewelry. It is therefore not surprising that the supply from recycling, typically referred to as old scrap, has generally kept to a rising trend, reflecting the addition each year to the pool of available metal from that year’s jewelry production.

Other areas of supply from aboveground stocks include sales by central banks, hedging by mining companies (a form of advanced selling), and disinvestment from private holdings (which is reviewed in an upcoming section under demand as investment). Net sales by central banks have been a constant feature of the gold market since 1989, and over the past decade, these provided an average of about 500 tonnes of gold to the market each year. Central banks do purchase gold, but buying globally on a net basis has not been seen since 1988. Hedging by mining companies is, in essence, equivalent to gold producers selling their future production at current prices. Such transactions normally involve gold being borrowed and sold in today’s market with producers later delivering their production against these commitments. Hedging was a major source of supply in the late 1980s and the 1990s, but more recently, positive sentiment toward prices has resulted in producers

cutting their hedge book commitments. This in essence adds to demand and this position of “dehedging” on a net basis has been in practice since 2000.