These days like all investments in commodities the value of gold is ultimately driven by supply and demand. Unlike most other commodities the hoarding and disposal plays a much larger role in affecting the price because most of the gold ever mined still exists and is potentially able to come on to the market for the accurate price. Given the huge amount of stored gold compared to the annual production, the price of gold is generally affected by changes in sentiment, rather than changes in annual production. According to the World Gold Council annual mine production of gold over the last few years has been close to 2,500 tones. About 2,000 tones goes into jewelry or industrial/dental production, and around 500 tones goes to retail investors and exchange traded gold funds.
Central banks and the International Monetary Fund play a vital role in the gold price. At the end of 2004 central banks and official organizations held 19 percent of all above-ground gold as official gold reserves. The Washington Agreement on Gold (WAG), which dates from September 1999, restricts gold sales by its members to less than 400 tones a year. European central banks such as the Bank of England and Swiss National Bank have been key sellers of gold over this period. Even though central banks do not normally announce gold purchases in advance some such as Russia have expressed interest in growing their gold reserves again as of late 2005. following are the major factors, that are influencing the Gold price.
If the return on bonds, equities and real estate is not sufficiently compensating for risk and inflation then the demand for gold and other alternative investments such as commodities will increase.
In times of national crisis, people fear that their assets may be detained and that the currency may become valueless. They see gold as a solid asset which will always buy food or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.
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