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Calm down everybody. Those scary days, less than two months ago, when the gold price briefly dipped below $1,200.00 per ounce, are over. The laws of supply and demand have taken over and prices have rebounded nicely. A look at the London PM Fix gold prices, from the beginning of the year, through August 22, 2013, will show the fall and rise of the precious metal.

  • On January 2, 2013, the spot price per ounce of gold was $1,693.75
  • On June 28, 2013, the spot price per ounce of gold hit a low of $1,192.00
  • On August 22, 2013, the spot price per ounce of gold closed at $1,375.50

Supply and demand

You may be worried about inflation. You may think that the stock market is going to crash. The world is in economic and political turmoil. You can rattle off a list of reasons for why you expect gold prices to go up, but, in the end, prices are a reflection of supply and demand.

When gold prices decline, two things happen. Supply dries up and demand increases. That is the classic economic formula for higher prices. Supply gets tighter because newly mined gold becomes less profitable to extract. Demand increases because customers find the lower price to be an attractive buying opportunity.

Demand for gold is coming from around the world

In a press release dated August 15, 2013, the World Gold Council Gold Demand Trends report 1 for the second quarter (April-June) of 2013 was released. Among the more interesting findings was that the rebalancing of the gold market, that started in the first quarter of 2013, continued through the end of the second quarter.

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In the United States, hedge funds, speculators and small investors were net sellers of more than 400 tons of gold that was held in gold-backed ETF funds. However, while those paper transactions were taking place, bar and coin investment in gold surpassed the 500 ton mark. Much of that amount came from demand in China and India. China’s demand for physical gold coins and gold bars was up over 150% from the same period in 2012. India’s bar and coin investment demand increased by 116 percent over the second quarter levels in 2012.

Central banks continue to buy more gold

While the U.S. might have been putting downward pressure on the world gold market by selling off gold in large quantities during the second quarter, central banks were buying gold. Central banks around the world continued to accumulate the precious metal while the price was relatively low. Quarter 2 of 2013 marked the tenth consecutive quarter that the world’s central banks purchased more gold than they sold.

Global demand for gold jewelry

Worldwide, the gold jewelry demand increased from 421 tons in the second quarter of 2012 to 576 tons in the second quarter of 2013, representing a 37 percent year-over-year gain. China and India led the surge, with increases in gold jewelry purchases of 54 and 51 percent, respectively.

What this report really shows is that gold is still in strong demand. There is a definite shift of demand from the west to the east, with the people in China and India wanting more gold and the people in the United States, at least temporarily, looking to reduce their gold holdings. With a finite amount of gold available, demand is most likely going to drive gold prices much higher in the coming months and years ahead.

Additional Sources

1 – http://www.gold.org/media/press_releases/archive/2013/08/gdt_q2_2013_pr/