According to the latest estimates, there are 244,000 metric tonnes of gold in the world. Over 75 per cent of this figure (187,000 metric tonnes) is made up of gold we have already mined. The remaining 57,000 tonnes are known to exist, but are currently locked beneath the Earth’s surface, waiting to be dug up.
Such a lack of a resource like gold makes it intrinsically more valuable than most precious metals. Supply is typically sourced from a limited number of countries: China, Australia and South Africa. Gold rushes have come and gone, and most of the gold we will ever find on Earth has already been dug up.
The price of gold has been sinking in recent months, but gold is highly sensitive to supply constraints. The pandemic has done much to affect this supply, and it is possible that prices could resume a long-term upward trajectory, unless we somehow stumble upon vast new supplies of gold.
As finite as they come
Gold is incredibly rare, and when you explore its atomic composition, you begin to understand why. Each atom of gold consists of 79 protons and 118 neutrons. These numbers mean gold atoms are deemed to be incredibly dense, and one of the only ways gold could have possibly been created from scratch was at incredibly high temperatures, in extreme conditions such as those found in supernovae.
These stellar explosions of dying stars are believed to have been the forging moments of this precious metal, which helped disseminate it all across the universe. Some of this was deposited on Earth, and there is a likelihood that gold exists beyond our home planet, but until interplanetary travel becomes a reality, all of this gold remains beyond our reach.
True, pure gold is known to be dazzling and somewhat soft. Miners tend to find supplies of gold in the form of veins or nuggets. Countless generations of prospectors have mined mounds of earth to find even the smallest piece of gold. It is an element that has impressed countless civilisations, including the Ancient Egyptians, who adorned the tombs of pharaohs with gilded items.
Gold is so treasured due to the fact that it is chemically inert. Iron and copper corrode easily. The former crumbles into reddish iron oxide dust over time, while copper transforms from bright and shiny into green and seemingly valueless. Gold, on the other hand, is unable to react with oxygen, helping effectively keep it trapped in amber. The gold you see today is almost every bit as well-preserved as it ever was over the last few millennia.
So, what do we know about gold? It is incredibly rare, it hardly oxidises, allowing it to preserve an unbeatable shine. Previous generations have seen these qualities, meaning gold has gone down in history as a noble element which was always highly valued.
Falling production augurs well for gold
Adjusted for inflation, a troy ounce of gold has managed to trade within something of a consistent value range from a few hundred pounds to over £1,000 since records began in the Middle Ages. Empires have risen and fallen in the ensuing centuries, but gold has remained. It is only in the last century or so that prices have well and truly taken off.
At the start of the 20th century, gold was worth little over £4 per troy ounce, but by 1999, the price had soared to over £300 and settled at a level closer to £200. Now, by 2021, gold is worth almost £1,300 per troy ounce. In the last six years, prices have already doubled, and one of the reasons that experts cite as a possible cause is the tightness of supply.
For decades, according to CPM’s Gold Yearbook 2020 report, gold mining production had been rising since at least the 1980s. However, production peaked in 2016 and we have seen several consecutive years of lower mining volumes. South African production is a particular pinch point, as supply has ebbed considerably for well over 40 years now. Total gold production volumes peaked at almost 100 million Troy ounces – over 3,110 tonnes – in 2016, and are already falling down towards 90 million Troy ounces – 2,800 tonnes.
Rising mining activity by the likes of the US, China and Australia helped plug the gap for the last few decades, but now even the combined forces of all the world’s gold miners can’t keep supply from tightening. Such an occurrence has led some to wonder, have we entered the era of peak gold?
Just as the finite supply of oil yielded fears of an impending energy crisis as oil production appeared close to peaking in the 2000s, the gold markets could be preparing for a similar crunch point in terms of supply. As a basic economic principle, when the supply of an item is abundant, prices sink to match a fair price for the item. However, if the supply is constrained and there is less of it to go around, demand can increase, and people are willing to pay a higher price to get a piece of it.
This logic extends to the gold markets. If most of the gold that will ever be mined on Earth is already sitting in our homes, museums or on the verge of being found, that gives gold miners little to look forward to, in terms of sizable future hauls. Not so good for miners, but it could mean anyone with a bit of gold could reap the reward, should the markets reprice based on pure fundamentals alone.
As mentioned, gold prices are currently close to £1,300 per troy ounce, as of April 2021. Despite being below their peak of closer to £1,500, prices could regain these highs once more, especially if the geopolitical situation becomes tense and supply is constrained. The UK is in a uniquely disadvantaged position, when you consider the UK Government sold off at least half of its gold reserves over a series of auctions during a low point in the gold markets back in 1999.
If you’re based in the UK and looking to protect your wealth against the risks of high inflation or economic instability, it may be sensible to invest in gold shortly. As supply tightens due to falling mining volumes, prices could become more volatile, lending to the argument that prices could settle at a permanently higher level in the longer term.
Be a step ahead of the game, get in touch with UK Bullion today, and let us help you find a store of wealth that has been the firm favourite for generations of people. It all starts by calling us on 0800 090 3256 today.