Why gold supply dynamics differ from other commodities’ dynamics

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China is the largest gold producer in the world, accounting for 14% of total production. East Asia as a whole produces 21% of the total newly mined gold. Latin America produces around 18% of the total.

At the end of 2013, there were 177,200 tons of gold inventories above ground.

Gold supply

Mine production

Global mine production increased by 15% from 2,498 tons in 2007 to 2,861 tons in 2012. New supply is coming up because of a sharp increase in gold prices, which more than doubled between 2007 and 2012. China is the largest producer of mined gold, extracting 413 tons in 2012. China’s production is around 14.5% of the world total.

Recycling gold

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“Recycling” refers to gold sourced from previously fabricated products that are subsequently refined back into bars. The U.S. and Italy are the two top sources of recycled gold, followed by China and India. The supply response from recycling is more significant than mine production, where development lead times and other barriers limit rapid responses.

Unique supply dynamics

Supply dynamics for gold are, however, quite different from supply dynamics for other commodities. Gold isn’t “consumable” in the traditional sense of the word. It’s stored away somewhere for safe keeping.

So the supply at any given time can come from sources other than mine supply and gold held for recycling. For example, supply could include central banks, individual investors, or ETF outflows.

How does this difference affect gold stocks?

As we discussed above, mine supply is significant, but other sources can also significantly influence gold prices by selling gold in the market. These other sources in turn affect stock prices for stocks like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), and Agnico Eagle Mines (AEM). They also affect gold-backed ETFs like the SPDR Gold Trust (GLD) and stock-based ETFs like the Gold Miners Index (GDX) significantly.

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