What is the best product to use to trade Gold Futures? For me it’s Gold Futures. In this video I chatted with Director of Metals Products at CME Group, Tommy hart about the Benefits of Trading Gold Futures.
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Understanding the forces and drivers of supply and demand in the physical market is essential for understanding the derivatives markets.
For all four of the main precious metals, gold, silver, platinum and palladium, new supply comes to the market from mining production and recycling of scrap and obsolete material.
Mining product accounts for between 70-85% of the total new supply, depending on the metal, with recycled material accounting for the remainder. The proportion fluctuates with time, reflecting the changing cost of production, reclamation values and the economic outlook, amongst other factors.
For gold, supply from these two sources amounts to around 120 million troy ounces per year, equivalent to around 3,700 metric tons. This production has a value in the order of $150 billion, which represents the highest value of production in the precious metals space.
Gold mine production comes from countries throughout the world. Chinese mine production has risen considerably in recent years, and now China is the world’s largest producer, accounting for around 16% of global output. In contrast, South Africa, which used to be largest producer has seen declining output in recent years, and now accounts for around 5% of production. Australia, Russia, the U.S., Canada, Mexico, Peru and Ghana also produce significant quantities.
Investment demand is a significant element in the market for precious metals and has an important role to play in establishing market prices for metals. However, investment transactions usually represent the transfer of ownership of stored material. This brings valuable liquidity to the market, but will have little impact on the overall supply and demand. Taken as a whole, investment behavior can be seen as either a net buyer of metal, and therefore a source of demand, or a net seller of metal, and therefore a source of supply. The overall impact of investment will reflect investor sentiment of how ownership of metal will compare to other investment opportunities over their investment horizon.
Gold is the most widely held investment commodity. As well as private investments in gold, central banks hold a significant amount of their reserves in gold. The IMF and the World Gold Council estimate that the world’s central banks hold around 33,000 metric tons of gold, worth over $1 trillion. Changes in this amount will affect the net supply or demand in the market.
Also, on the demand side, all four metals have a wide range of industrial uses, reflecting their physical properties.
Gold is used in electronics and in medical and dental applications, amongst other industrial uses.
In conclusion, thousands of tons of precious metal are produced each year from mining operations, adding to the stock of metal available. These metals are used in industry and in jewelry, from where they can be recycled back into the market. Precious metal is also held in store as an investment and as part of countries’ official reserves. The combination of all these factors creates an active global market for precious metal.
Information in this post came from CME Group.
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