About Gold

Gold is the first metal found and used in the history of human beings. Because it is scarce, special and precious, gold has been regarded as the "king of metal" since ancient times. Now, it is also a symbol of wealth and nobleness. Today, gold still plays a very important role not just because it is a kind of jewelry, but it is also treated as a kind of currency and serves the purpose of financial reserves in the world.

1. Demand of gold and three main usages

• Used as international reserves; determined by the attributes of the currencies and commodities. Due to the excellent properties of gold and the history of gold serving as the function of the currency, such as the yardstick of value, liquidity, storage means, means of payment and the world currency. Since 70's, after the decoupling of gold and U.S. dollar, the importance of gold has weakened. However, it still maintains a certain monetary functions; many major Western countries are currently using gold for international reserves.

• Used as decorative jewelry; it has always been a symbol of wealth and social status.

• Used in the industrial and scientific research. As gold has several important properties like anti-corrosion, good conductivity, and thermal conductivity, it is widely used as the catalyst for many alloys. In addition, gold can be easily processed into thin gold foil, plated to other metals, ceramics and glass surfaces, and fabricated into superconductors. Due to all these great properties, gold is widely used in high-tech industries, such as electronic technology, communications technology, aerospace technology, chemical technology, medical technology, and etc.

2. The supply and demand

• The major sources of gold supply are: gold that newly mined, gold that sold by the former Soviet Union, gold that are recycled, and gold that sold by other official institutions and the IMF

• There are three characteristics of gold supply. The first one is the regular supply from the world's major producing countries; such supply is stable and recurrent. The second one is inductive supply. This happens when increase in gold price induces more gold mining activities and potentially profit-taking activities by speculative investors. The third one is a regulated supply which is not a regular source of supply

• Sometimes, when the oil producing countries see fall of oil prices may result in fall in revenue, they may start selling gold

• While the global demand of gold mainly comes from the official reserves, industrial and jewelry sectors, and investors.

1. The official gold reserves mainly serve the purpose of international payment and clearing. In order to maintain a certain proportion of gold reserves, the central banks and international financial institutions will participate in the world gold market trading activities.

2. The increase or decrease in demand for industrial usage has great influence to the gold price.

3. The demand for investment or hedging also has a great impact to the fluctuations of gold price. For example, depreciation of US dollar and rise in oil prices increase the gold demand. On the other hand, gold prices usually fall when the stock market is bullish because investors would pull money out of gold market in order to invest in stock market.

3. The gold market

Hong Kong, London and New York are the world's top three markets for gold trading; others less influential markets are Zurich, Frankfurt, Australia, Japan and Singapore.

Majority of the gold trading activities in Hong Kong are conducted in The Hong Kong Gold and Silver Exchange and London market. They are all spot markets. Physical gold trading is conducted in Hong Kong Gold and Silver Exchange but the volume is small.

Gold trading service is 24 hours a day, covered by different major markets in different parts of the world.

4. Factors affecting the gold price

a) Political reasons
Gold serves the function of hedging risks, especially when there are political tensions and wars; great demand of gold by investors causes gold prices to go up. For example, during the collapse of the Soviet Union on the August 19 of 1991, gold soared by US$10 within one hour. But, when the political issues were settled, gold immediately reinstated. Another example is during the Gulf War in 1992, gold prices went as high as US$400 per ounce, but as soon as the war was over the gold price was no longer bullish. However, regional tensions rarely have little impact to the price.

b) Economic factors
Overheated economy raises inflation concerns, the need to hedge such risk creates a lot of buyers for gold. Meanwhile, inflation is highly affected by the changes in oil prices. Therefore, the rise in oil prices will also boost the price of gold. When the economy improves, interest rate hikes usually create strong demand of US dollars which in turn put gold under selling pressure.

c) Movements by central banks
Central banks are the major holders of gold; hence they have a direct impact on the gold price. If the central banks are to hold or buy more gold, the gold price will go up. In contrast, if the central bank is to sell more gold, the gold price will fall.

d) Consumption
This factor depends on the economy. When the economy is good, people's incomes rise and consumer sentiment strengthens. The demand of gold and silver ornaments increases accordingly, resulting in rise in gold prices. On the contrary, if the economy slumps, consumers' desire to purchase declines, leading to decline in the gold demand and fall in prices.

e) IT industry
Gold is widely used in high-tech industries, creating a demand of about 60 tons which is approximately 17 percent of the total consumption every year. So, the more industrial development, the greater demand for gold, leading to increase in gold price. On the other hand, better mining technology that can cut down the cost of gold mining costs may cause gold prices to fall.