Gold

Gold is a dense, bright yellow metallic element with a high luster. Gold is an inactive substance and is unaffected by air, heat, moisture, and most solvents. Gold has been coveted for centuries for its unique blend of rarity, beauty, and near indestructibility. It is known that the Egyptians mined gold before 2,000 BC. The first pure gold coin was made on the orders of King Croesus of Lydia in the sixth century BC.

In 1792, the United States first assigned a formal monetary role for gold when Congress put the nation’s currency on a bimetallic standard, backing it with gold and silver. Under the gold standard, the US governance was willing to exchange its paper currency for a set amount of gold, thus ensuring that the paper currency was backed by a physical asset with real value. However, President Nixon in 1971 severed the convertibility between the US dollar and gold, which led to the breakdown of the Bretton Woods international payments system. That meant that the prices of gold and of paper currencies floated freely according to supply and demand factors in their own markets. The US and other central banks now only hold physical gold reserves as a psychological backing for their paper currencies. World central banks hold a little over 1 billion troy ounces of gold, which equates to roughly billion worth of gold (assuming a gold price of per ounce). The US holds the most gold with roughly 262 million troy ounces, followed by Germany (112 million), and France (97 million). Although the US holds roughly billion worth of gold, that is a mere fraction of the total US debt or the amount of outstanding US currency, illustrating that gold now plays an insignificant role in backing the dollar or paper currencies.

Gold is found in nature in quartz veins and secondary alluvial deposits as a free metal. Gold is produced from mines on every continent with the exception of Antarctica, where mining is forbidden. Because it is virtually indestructible, all the gold that has ever been mined still exists above ground in some form or another. South Africa remains the world’s largest producing nation. The largest producer of gold in the US by far is the state of Nevada, with Alaska and California running a distant second and third.

Gold is a vital industrial commodity. Pure gold is one of the most malleable and ductile of all the metals. It is a good conductor of heat and electricity. Gold melts at 1,064 degrees Celsius and boils at about 2,808 degrees Celsius. The prime industrial use of gold is in electronics. Another important sector is dental gold where it has been used for almost 3,000 years. Other applications for gold include decorative gold leaf, reflective glass, and jewelry.

Gold futures and options are traded on the COMEX division of the New York Mercantile Exchange. Gold futures are traded on the Bolsa de Mercadorias and Futuros (BM&F) and on the Tokyo Commodity Exchange (TOCOM), the Chicago Board of Trade (CBOT) and he Korea Futures Exchange (KOFEX). The COMEX gold futures contract calls for the delivery of 100 troy ounces of gold (0.995 fineness), and the contract trades in terms of dollars and cents per troy ounce.

Prices – Comex gold futures prices rallied early in 2003 on geopolitical concerns caused by the war with Iraq, but then fell back through early April. Gold prices in August then began a steady rally that took the contract to an 8-year high of in the last week of December. That was only mildly below the 14-year high of posted in February 1990. The record high for cash gold prices was .75 posted in September 1980. Bullish factors for gold in the latter half of 2003 centered on the weak dollar and improved industrial demand with the rebounding global economy. The weak dollar was a key reason for gold’s strength, since the dollar depreciated not only against other world paper currencies but also against a store of wealth such as gold.

Supply – World mine production of gold fell -1.9% in 2002 to 2.550 million kilograms (1 kilogram = 32.1507 troy ounces) from 2.600 million in 2001. The world’s largest producers of gold are South Africa (with 16% of world production), followed by the US (12%), Australia (11%), China (7.5%), Russia (6.2%), and Canada (5.8%). US gold mine production in 2002 fell to 298,000 kilograms from 335,000 kilograms in 2001. US refinery production in 2002 was 196,000 kilograms for domestic and foreign ores and 78,100 kilograms from secondary (old scrap).

Demand – US consumption of gold in 2002 fell to 163,000 kilograms from 179,000 kilograms in 2001.

Trade – US exports of gold in 2002 (including coinage) fell sharply to 257,000 kilograms from 489,000 kilograms in 2001. US imports of gold for consumption in 2002 rose to 217,000 kilograms from 194,000 kilograms in 2001.