Demand and Supply of Gold - Essay Example

The world market has seen a sharp rise in the need of keeping wealth in the form of gold. The increase in demand by business persons and central banks in different regions requires an increase in the supply of gold. The demand has not been met with a similar supply because of constant factors in the supply chain. The suppliers of gold are not increasing their mining capacities by purchasing additional machinery or identifying new mines. The rise in demand with no rise in supply eventually leads to a sharp increase in the prices of gold (Wise 2012). The rises in prices can persist for two years before the supply matches up with the demand through an increase in supply.

Different factors make the market supply of gold inelastic limiting on supply capacity of miners. Gold mining is an expensive undertaking that needs investors to put a lot of resources into building crushing and drilling machinery. A massive investment cannot be made in a short time to meet the enormous demand in the market leading to a constant supply being made no matter the increase in demand for products in the market. An increase in supply can be made through a long-term investment that can extend to 10 years before production begins. The inability of suppliers to respond to forces of demand leaves the market volatility high.

The huge number of speculators in the market contributes to volatility in gold prices. The speculators buy gold in an enormous amount predicting that the market prices will rise in the future. The rush created by speculators on purchasing gold leads to an increase in demand with no similar increase in supply. The speculator creates an artificial scarcity of gold in the market leading to an increase in price because of the high elasticity of the supply price. The supplier will increase prices because they cannot meet the large demand in the market. The increase in supply price can get in an 11% increase about the increase in demand. The announcement of huge releases of gold to the market in large quantities on prediction prices will remain high leading to a reduction in prices (Thomas, 2012). A large amount of supply with no increase in demand means sharp decreases in prices sometimes totaling to 5% decrease from the previous day’s prices.

The world gold supply from recycling vendors has seen a sharp decrease. People selling their gold ware during the global economic crisis caused the decrease. Statistics have shown recycling supply used to cater for 45% of the world market in 2008. In 2011 recycling sources of gold contributed 2% of the world's gold supply which was a small proportion compared to the previous 45% supply. The fall in the amount of recycled gold available in the market with demand increase has led to price increases. This leaves the supply from the mines to cater to 98% of all the demands. The lack of ability by the miners to cater to the 98%has contributed to the volatility leading to a sharp increase in the prices of gold (Jeff, 2012).

The central banks from different countries were key suppliers of gold to the markets. The banks released large amounts of their gold to the market without making purchases to replenish the dwindling stocks. The exhaustion of gold in their bulk meant that the different countries' banks start purchasing the gold in competition with the retail purchasers. The purchasing of gold by the central bank increases demand while their lack of ability to supply creates a shortage (BBC, 2011). The two forces of demand and supply lead to a sharp increase in the prices of gold.

In conclusion, the world gold trade shows signs of remaining volatile in the present and future. The volatility will be increased by the rising demand for gold coupled with the exhaustion of the available mines. Increasing the supply of investors in the mining industry requires increasing investment in the exploration of new mining sites to cater to future demands. The new mining sites once they start the production will replace the lost supply from the exhausted mines. Increased investments by miners will ensure less volatility being felt in the world gold market in the future. Central banks need to make a backup of currency supplies with gold to reduce the rate of loss of value in currencies. Stable currencies will reduce the need for people and businesses to save their wealth in the form of gold reducing the pressure on demand for the commodity (History, 2012). Read More