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Overview of the International Gold Mining Industry

The volume and dynamics of international gold mining industry

Currently, gold is extracted in about 70 countries of the world; still the largest gold deposits are located in the Republic of South Africa, Australia, Canada, the USA and Russia.

The updated report of Thomson Reuters GFMS states that the world production of gold increased by 0.4% in 2016 – up to 3,222 tons. Rates of worldwide gold mining have been uneven by year. If we consider the period since 2000, the value peaked in 2016 – at 116.3% as compared to 2013, when the production bounced back. The lowest point was 2008 - it saw the production decrease by 7%, as compared to 2003.

Chart 2. Dynamics of international gold mining industry.

Overall gold supply grew by 2% in 2016, totaling to 4,511 tons. This was mostly due to increase in recycling - by 8%, up to 1,268 tons (28% of the total supply). The total worldwide hedge amount at the end of 2016 was 241 tons.

The worldwide demand for physical gold grew by 2% in 2016 to make 4,309 tons, which is a peak value since 2013, according to the World Gold Council. Production of jewelry has decreased by 21%, down to 1,891 tons, which is the lowest since 2009. Purchases of central state banks dropped from 436 to 257 tons (including 201 tons purchased by the Central Bank of the Russian Federation).

At the end of 2016, Thomson Reuters GFMS ranked Russia the third gold mining country in the world. Among other major gold mining countries, Australia and Canada boasted an impressive momentum, which partly made for the recession in Mexico and the Republic of South Africa.

The world average total cash cost (TCC) and all-in sustaining costs (AISC) of gold miners were reduced by 2%, down to USD 630 and USD 818 per troy ounce respectively. Experts state that the impairment of local currencies aided the costs, but the effect was not as prominent as back in 2015 (the year saw average costs of gold miners decreased by 5%).

Structure of gold mining

The supply of primary metal is formed by a group of gold mining countries with industrial production of precious metal - by extracting it from subsoil and processing of gold-bearing mineral raw materials or by associated gold extraction during smelting of other precious metals. The geographical structure of worldwide gold mining has altered considerably in the last three decades. The continuing shift of gold mining from developed western states towards countries with a developing economy, which benefit from cheap labor and low electricity cost, witnesses an increasingly competitive environment in the sphere of gold extraction and production.

For the last seven years, China has been the top gold mining country in the world; in 2016 it extracted more than 453 tons of gold. According to experts of BMI Research (Fitch Group Company), 2017 will see China extract more than 513 tons of gold. According to the United States Geological Survey (USGS), the total worldwide gold extraction in 2016 was 3,100 tons. Among the leading gold mining countries, the largest growth in production throughout 2010-2017 was in China – by 4.72% in average per annum. According to the experts, 2017 will bring increase in Russian gold production by 2-2.5%.

It is worth noting that 2015 was critical for the world gold mining. Despite the maintaining positive growth rate of production, it is safe to say that the continuing decrease in gold prices has finally begun to affect the production volumes, even if yet only due to decrease in capital costs and investments in development of new fields.

Chart 3. Major countries in mine production of gold worldwide from 2010 to 2016 (in metric tons).

Internation Gold Mining Trends

Based on a series of research by Dundee Corporation (Canada) using data of 153 fields owned by 23 public companies with different production rate ranging from less than 200,000 ounces to more than two million ounces and different types of fields - from open pits to heap leaching in underground mines and combinations thereof, a conclusion was made on some adverse trends as to the quality of ore.

From 2005 to 2015, the worldwide average content of gold in the extracted ore decreased by 31% - from 2 g/ton in 2005 to 1.3 g/ton in 2015

Chart 4. Dynamics of change of gold in the extracted ore.

In the last 9 years, the reserved price used by top-5 gold mining companies has increased from 365 to 1,200 dollars per ounce (+230%), while the market price of gold only increased by 184%. It also a recognized fact that the last 10 years saw the average content of gold in explored reserves of ore decrease by 35%.

Researches show that the currently ore extracted is richer in gold by 17%, than the one in explored reserves. We can provide four possible explanations:

  1. Strong growth of the gold price in 2010-2012 caused ranking fields with very poor ore quality as explored reserves, thus blurring the average quality standard.
  2. Increase in cost value results in reduction of gold extracted from open pits with traditionally poor ore, thus, increasing the average quality of the extracted ore.
  3. Attempts to maximize the net present value by increasing cost efficiency when processing richer ore.
  4. Emergence of a great number of new gold miners in recent years, who begin their activity in the most prospective development sites.

It is common knowledge that the cost value of gold mining has increased dramatically over the past 10 years. Researches show increase in mean price by 49% in the last five years - from 621 USD/ounce to 928 USD/ounce in 2014. This could be due to influence of the following factors: processing, quality of ore, operating and capital expenditure, extraction fee and price.

Obviously, over the past 5 years, the quality of ore has been the second top influence on the cost value of production. It caused the cost value growth by 63 USD/ounce (about 20%). Production costs still remain the top issue - they made the cost value increase by 178 USD/ounce. To sum up the research - gold becomes increasingly hard expensive to locate and extract. High-quality major deposits (from 3 million ounces) have not been discovered in recent years. If the quality of ore continues to decrease, the costs will further increase, and it will boost the gold price. In other case, one day we will inevitably see the bottom price event, when the cost value of production exceeds the price of gold. Then laws of the market will come into play: unprofitability of gold mining will result in its deficit with the subsequent skyrocketing growth of its price.

Along with decrease in content of gold in ore, we can see an increase in operating costs of gold mining companies – the cost value of production per ounce of gold increased by 4.3 times from 2005 to 2016.

According to the market professionals, the increase in costs is caused by a general increase in capital intensity of gold mining as well as by decrease in concentration of gold in ore, also contributed by increase in fuel prices, labor costs and consumables.

Overview of the Gold Mining Industry in Russia

Overview of Gold Fields in the Russian Federation

Russia’s explored reserves of gold exceed 13.1 thousand tons, and it ranks second in the world, topped only by the Republic of South Africa. The localized resource potential (estimated resources) of primary gold fields is more than 40 thousand tons, including: Category Р1 – 5,237.1 tons of gold, Category Р2 – 10,385.3 tons, Category Р3 – 10,385.3 tons.

Gold mining is one of the most promising Russian industries as has a considerable growth potential. According to US Geological Survey’s assessment of worldwide reserves, 14% of world explored gold reserves are concentrated in Russia.

Moreover, the estimated gold resources exceed the explored reserves by more than three times. This fact, along with vast territories yet to be surveyed, witnesses high growth potential of the explored deposits and gold mining volume.

After the Russian financial crisis of 1998, and adoption of the Federal law "On Precious Metals and Gemstones," which repealed the obligation of gold mining enterprises to sell gold to Federal State Institution "Public Enterprise for Forming the State Fund of Precious Metals and Gemstones of the Russian Federation" (Gokhran) and entitled companies to sell the extracted gold at their own discretion, the gold mining volume in Russia has skyrocketed.

The quality characteristic of reserves of primary and placer gold deposits in Russia proximities to the international one. Russia has more than 5,500 explored gold deposits, including 221 primary ore deposits, more than 5,200 placer deposits and 128 complex fields (where gold is an associated component). About 90% of primary ore deposits are located in Eastern Siberia and in the Far East. Despite a significant amount of the expected resources, Russia has been increasingly lacking in explored and ready-for-development deposits, especially free-milling ores. About a quarter of ore gold is concentrated in major deposits of refractory gold-sulphide-quartz ores with low content of gold.

The gold content in explored deposits of the Russian Federation averages to 3.7 g/ton, in developed ones – 4.06 g/ton, in non-licensed ones – 2.38 g/ton.

Thus, based on the structure of the explored fields, we expect an increase in the share of gold mining from primary fields, which are more capital-intensive. Besides, high rates of gold mining cause gold reserve depletion.

Development of the vast sources of raw gold owned by Russia has been rather active, gold extraction has been steadily growing in this country since 1999. Fields with refractory ores have been included into development. The short-term increase of extraction is mostly based on development of gold-quartz and gold and sulphidic fields in carbon-containing sand-slate formations, such as Natalkinskoye, Nezhdaninskoye, the Sukhoy Log and a number of minor fields.

Finally, development of gold, copper and porphyritic fields, which has not been typical in Russia, such as Peschanka in Chukotka Autonomous Territory, can also boost production of gold in this country. It is these kinds of field, i.e. fields with associated gold – such as Grasberg (Indonesia), Pebble (USA), Uyu-Topgoi (Mongolia) - are considered internationally to be the major suppliers of precious metal today.

Structure of a Source of Raw Materials of Gold in the Russian Federation.

The structure of the Russian sources of gold raw materials is significantly different from the international one. It features fields prevailing in carbon-containing sandstone and slate breeds, the number of which has increased significantly in the latest years (the Natalkinskoye, Nezhdaninskoye, Mayskoye, Chertovo Koryto); it also includes one of the world's largest fields - Sukhoy Log.

Another fair share of reserves is gold-silver, copper and pyritic, copper and nickel fields, as well as placer deposits. Still, hardly any gold-copper-porphyritic type field has been developed in Russia to date. Russia has been steadily increasing extraction of precious metal since 2008. The major boost of the country’s position in the gold mining industry was development of major fields in terrigeneous carbon-containing formations. Russia ranks as a top-3 gold extracting country in the world, along with China and Australia.

According to the Federal Agency for Subsoil Management of the Russian Federation (Rosnedra), the gold mineral resources in general, satisfy the current demand of the state. Thus, gold reserves of Category A+B+С1 make 8 thousand tons, while Category С2 estimates total to 5.1 thousand tons. The share of licensed fields of Category A+B+ С1 makes 66%, and 54.5% for Category С2.

Use of mineral gold resources in Russia has been as follows (information dated 2010-2015):

Name of an indicator 2010 2011 2012 2013 2014 2015
Quantity of existing operational licenses 1,308 1,232 1,215 1,175 1,252 1,224
General production of gold, tons 256.5 262.2 284.7 324.4 311.8 293.4
Gold mining from subsoils and concentrates, tons 189.1 200.1 213.3 214.7 249.1 238.3
Production of gold from secondary raw materials, tons 12.6 7.9 8.5 17.8 38.9 38.5
Purchases in state reserves, tons 135 118 80 78 173 208.4
Export, tons 18.8 44 58 80 76 34

Table 7. Use of mineral gold resources in Russia (2010-2015).

In 2016 Russia increased its gold production up to 293.4 tons (including associated, secondary metal and the exported concentrate). 254.9 tons of this total amount is contributed by gold production from mineral raw materials, including gold mining from subsoil – 238.3 tons; extraction of associated gold when developing complex fields has grown by 2% up to 16.6 tons.

Gold mining ratio of placer fields to ore ones is 30% to 70%. Gold is extracted in 24 Russian regions, yet about 99% of the Russian gold is extracted in 17 regions located in the Ural, Siberian and Far East federal districts. Leaders The top gold extracting territories of the Russian Federation are Krasnoyarsk Territory, Chukotka Autonomous Territory and the Amur Region.

The Volume and Dynamics of Gold Mining in the Russian Federation.

Due to the high price of gold and large corporate investments, gold mining in the Russian Federation was growing by 5-7% per year in 2011-2014 and was slowed down to 2% in 2015. There is a consolidation process: 6 major companies extract 50% of the Russian gold, TOP-30 companies provide 80% of the general extraction amount. 400 other companies total to 20% of the total gold extraction in the country. There are no non-licensed gold fields left in the country, so the companies the companies expand their activities abroad.

Chart 5. Dynamics of gold mining from primary fields and placer fields.

The state creates incentives for exploration works by private companies having introduced the declarative order of obtaining licenses for expected resources of Category Р3. The ratio of state expenses to the expenses of private companies for geological exploration in the gold mining industry is 1:7.

The state has been gradually removing the numerous barriers of the industry regulatory framework; still we are yet to see any radical changes in the mining legislation, which could increase the investment appeal of the Russian subsoil.

As for funding the gold mining industry, commercial banks finance 100% of the placer and ore gold mining in the country, while the state, represented by Gokhran, allocates limited financing to individual companies.

The sanctions imposed on Russia have limited access of Russian banks and companies to the capital markets. There have been no initial public offerings of Russian gold mining companies at foreign and Russian stock exchanges.

The last 20 years have seen a steady increase in gold mining from primary fields as compared to extraction from placer fields. This is mostly due to introduction of new companies and modernization of the existing ones, with an important contribution of expanding of the heap leaching technology, as well as increased efforts of the industry companies (such as Polyus Gold Int., Polymetal Int.) to process refractory ores.

As compared to 2015, gold mining from primary fields increased by 1.5% in 2016 (up to 169.1 tons), while extraction from placer deposits decreased by 0.9% (down to 69.2 tons). 2009 marked the lowest level of extraction from placer fields, followed by a minor, yet steady growth of volumes in placer gold mining, which stabilized at 69-70 tons per year.

The Russian gold mining industry boasts the highest share of gold mining from placer fields in the world. This testifies to a significant potential of prospecting new primary fields, as placer fields are likely to be rich in primary gold and historically have been the developing priority. A number of major Russian gold mining companies - Polyus Gold Int., Petropavlovsk Plc, GC Yuzhuralzoloto OJSC, Vysochayshy OJSC and others have their segment of gold mining from placer fields.

Major Gold Mining Companies in Russia.

The top ten major gold producers in Russia are still the driving force of the industry development, totaling to 69% of the market. Despite the unstable situation in the Russian economy and decrease in the average dollar price of gold by 9.66%, Russian gold mining companies showed good financial results in 2016 - most of them closed the year in the black. Still, some players have been increasing their production, while others have been reducing it. GC Yuzhuralzoloto OJSC is the top growing company with growth of 78,1%.

While the general costs in rubles were unchanged in 2015, the gold price in ruble equivalent grew dramatically causing an increase in profitability of gold mining projects. As compared to gold mining companies of Canada, the USA and the Republic of South Africa, such as Barrick Gold, Newmont Mining or AngloGold, the Russian companies have a competitive edge — their overall costs in 2015 were, on average, 200 US dollars lower per ounce.

In 2016, the total number of gold mining enterprises in the country increased by 5% (from 452 to 475), which shows the investment appeal of the industry and aspiration of new players to get their share of the additional profit created by devaluation of ruble and a relatively high dollar price per gold ounce.

Company name Location of fields Gold mining, tons
2016 2015 2014 2013 2012
1. Polyus Gold Int. Krasnoyarsk Krai
Irkutsk region
Magadan region
61.2 54.8 52.7 51.3 48.8
2. OAO "Polymetal" Khabarovsk Krai
Chukotka Autonomous Okrug
Magadan region
Sverdlovsk region
24.8 24.7 26.3 21.7 15.2
3. Kinross Gold Corporation Chukotka Autonomous Okrug
21.3 23.6 21.5 16.9 14.5
4. OAO "GC Yuzhuralzoloto" Republic of Khakassia
Trans-Baikal Territory
Krasnoyarsk Krai
Chelyabinsk region
15.0 13.7 8.5 7.5 6.5
5. Petropavlovsk Plc Amur region 12.9 15.0 19.2 23.1 22.1
6. Nordgold company Amur region
Republic of Buryatia
Trans-Baikal territory
Republic of Yakutia
8.3 10.6 10.6 9.9 10.2
7. HGM Krasnoyarsk Krai
Khabarovsk Krai
6.9 6.6 6.7 6.5 6.1
8. OAO "Vysochayshy" Irkutsk region
Republic of Yakutia
5.1 5.6 5.5 5.5 5.2
9. Amber group Republic of Yakutia 4.9 4.8 4.6 3.5 2.1
10. OAO "Suzumanzoloto" Magadan region 4.5 3.5 3.9 3.9 3.7

Table 8. The major gold mining companies of Russia in 2016.

Gold mining in the Trans-Baikal Territory.

In 2016, the Trans-Baikal Territory once again showed gold mining extraction exceeding 12 tons. The increase is mostly contributed by enterprises engaged in placer gold mining. The list of major companies has remained unchanged. In 2014, the Trans-Baikal companies extracted 12.3 tons of gold. It included 6.4 tons extracted in placer fields and 5.9 tons (+12%) of gold - in ore fields. In 2013, the Trans-Baikal Territory supplied 11.7 tons of precious metal, including: 6.4 tons of placer gold and 5.3 tons of ore gold.

Ingots from precious metals Ligature mass (ingot weight), grams
2013 2014 2015 2016
Ore gold, tons 5.3 5.9 4.9 4.861
Placer gold, tons 6.4 6.4 6.4 7.208
Total, tons 11.7 12.3 11.3 12.069

Table 9. Dynamics of gold mining in the Trans-Baikal Territory (2013-2016).

In total, 42 gold mining were engaged in gold mining, including 33 - from placer fields and 9 - from ore fields.

The major companies of the Trans-Baikal Territory extracted the following amounts from primary fields:

  • Rudnik Aprelkovo CJSC (part of the Nordgold Group) extracted 2,408 kg of gold in 2014 as compared to 2,271 kg in the previous year.
  • Novoshirokinsky Rudnik OJSC (part of the Highland Gold Mining Group) extracts gold in a zinc-lead concentrate; its results for 2014 showed 2,006 tons of gold (+16,8%).
  • Mangazeya Mining LLC extracted 566 kg as compared to 577 kg in 2013.
  • GRK Zapadnaya CJSC (23,08% owned by VTB Capital) established a gold-extracting plant (ZIF) in the Aleksandrovsk field in late September, 2013 with the capacity up to 2 tons of gold per year. In 2014, it extracted 350 kg; while in 2013 the company produced 236 kg of gold.
  • Darasunsky Rudnik LLC (part of GC Yuzhuralzoloto Group OJSC) showed production of 317 kg (as compared to 238 kg in 2013).

Price environment

Gold prices or, more specifically, their behavior is a major economic indicator. Usually, the gold price and stock exchange indexes are in opposition, i.e. when the economic situation is stable, the financials grow - investors place their cash in increasingly risky assets and, vice versa, when the economic situation is unstable - investors prefer to make investments in gold, which is safe from complete depreciation.

International Gold Prices.

As we know, the price for troy ounce of gold introduced by Sir Isaac Newton in 1717 as 4.24 pounds sterling held as long as 200 years, and more. The first price leap happened after 1932 due to the outbreak of World War II. It was followed by another stability period – up to 1971, the year when the gold standard was cancelled. Later, the gold price behavior began to resemble that of other non-ferrous metals: rapid growth has been followed by a long recession, and these fluctuations have been cyclic. Abandoning gold backing of national currencies caused an increase in money stock in most countries i.e. inflation.

By early 80’s, it was clear that such policy only deteriorates the economic environment and causes more problems. In the situation of stagflation (a combination of production decrease and the inflation), which affected most developed countries, the gold price skyrocketed. The troy ounce grew up to USD 850, as compared to 43 before the crisis! It would make USD 2,000 in today's prices. Faced with the need for urgent actions, the authorities started their fight against inflation by reducing the issue of paper money. This and other actions contributed to recession of prices in the gold market. The curve of the gold price went down. The price minimum was recorded in 1999, followed by the banks’ agreement on restriction of gold sales from reserves. The prices were stabilized for several years– hence the recurrence mentioned above.

Since 2002, the gold prices went up again due to another issue of paper money, mostly in the USA. The gold price performance over the last 10 years has been impressive – in 2001 an ounce cost USD 272, while in 2011 it was as high as USD 1,600. This might not be the record yet - gold can still go up in price. The events were triggered by 9/11 followed by a reduction in mortgage loan cost in the USA. The purchase boom for mortgage real estate property ended in collapse and crisis of the US economy and the world economy in general.

After 2008, the situation somewhat stabilized, and the gold prices decreased a little. But the crisis response actions, destabilization of the European Union and the Middle East events have triggered another spike. We can see a positive gold price performance in the previous and this year.

Chart 6. A price performance on gold from 2000 to 2016 (the world price of gold in USD/ounce at the end of every year).

The gold prices in the international market were growing constantly from 2000 to 2016, having reached the maximum value for the considered period – 1,656 USD/troy ounce, in 2013, there was a drop in prices, down to 1,212 USD/troy ounce. The considered period showed average growth in the international gold prices by 10.5%. The biggest spike happened in 2007 – 31.2%, in 2013, the drop in prices was 26.8%. Throughout the considered period – the last 16 years – the price of a troy ounce of gold in the international market has grown by 4.2 times.

The change in price for gold from 2001 to 2008
Year 2001 2002 2003 2004 2005 2006 2007 2008
Dynamics +1,8% +24,7% +19,5% +5,3% +18,5% +22,9% +31,2% +5,3%
The change in price for gold from 2009 to 2016
Year 2009 2010 2011 2012 2013 2014 2015 2016
Dynamics +24% +28,8% +11,5% +5,7% -26,8% -2,1% -10,5% +8,4%

Table 8. Dynamics the change in price for gold from 2001 to 2016 (as a percentage).

Gold quotations are very sensitive to major political and economic events in the world. When the world economy seesaws, and mass media predict another wave of crisis, the gold price spikes at once. The gold price also depends a lot on the US dollar exchange rate – as it is the principal world currency. Annual seasonal fluctuations of gold price are also worth noting. Such major holidays, as Christmas in Europe and the US, the Indian Fall Feast, the Chinese New Year all positively influence the gold price.

Following the rapid growth of the gold price from 2001 to 2011, its price began to drop. If we look at the historical price chart of gold, we can see that its cost has sunk considerably. Despite this negative trend in gold quotations, many investors still buy the yellow metal, as this reduction in gold price results in an attractive price for them. Further decrease in the price is likely to cause a sharp decrease in the international volume of gold mining, which, in turn, will result in boosting the gold price.

The Gold Prices in the Russian Market.

The analysis of price performance in the Russian market is usually based on the official gold price of the Central Bank of the Russian Federation. Due to introduction of Regulation No. 1283-U of the Bank of Russia d.d. May 28, 2003 "On the Procedure for Establishing Official Prices by the Bank of Russia of Affined Precious Metals", the Bank of Russia has introduced the following procedure establishment of official prices of affined precious metals (gold, silver, platinum and palladium) since July 7, 2003. The official prices of precious metals are established by the Central Bank of the Russian Federation on each working day. The prices are calculated based on fixing on gold, silver, platinum and palladium in the London market of spot metal and converted into rubles at an official US dollar exchange rate to the Russian ruble effective as on the day following the day of establishment of the official prices. The official prices are for the financial accounting purpose in credit institutions. Before July 7, 2008, the Central Bank of Russia used the quoted gold prices and the official prices were defined using discounts.

From 2000 for 2016, the official gold price of the Central Bank of Russia grew from 237.49 rub/g to 2260.43 rub/g (by 2022.94 rub), i.e. more than by 9.5 times. During the same period, the international prices for gold grew by 4.2 times.

It is worth noting that dynamics in the domestic market differs from the international price performance. Thus, the gold prices at the London exchange in 2014 and 2015 were decreasing (by 14% in total for the two years), while the official prices of the Central Bank of Russia in the same period grew by 97.9%.

Experts attribute the gold price explosion in Russia in early 2014 to the following events:

  • Increase in purchased amount of gold by the Central Bank of Russia. In 2014, 5.5 million troy ounces (about 171 ton) was purchased, and 6.7 million troy ounces (208 tons) in 2015. A report by the Thomson Reuters GFMS Gold Survey agency states that the Central Bank of Russia purchased 6.4 million ounces (201 ton) in 2016, while all other Central Banks of the world combined purchased only 257 tons. But the researchers note that if the sanctions imposed on Russia are lifted, it may change its gold strategy.
  • Deterioration of the political environment and financial uncertainty of investors due to the sanctions imposed on Russia.

Chart 7. Dynamics of the book prices of the Central Bank of Russia from 2000 to 2016 (in rubles for gram at the end of every year).

Experts note considerable purchases of gold by the Central Bank of Russia: as compared to 2005; the gold reserves has been increased by three times. Such behavior is exceptional in the international gold market and, according to The Economist, gold purchase by Russia, regardless of the price fluctuations, is not caused by the objective investment appeal of the asset, but distrust of the Russian government towards the US dollar.

According to the World Gold Council, Russia with the stocks is in the sixth place (51,9 million ounces or 1,614 thousand tons) and lags behind China very little. The undisputed leader of this rating - the USA which has in stocks more than 8 thousand tons.

Factors Influencing the Gold Price.

For a better understanding of the gold market performance, its ups and downs, we should analyze all factors influencing the gold price in any way. The following things are worth mentioning: reserves, production and processing, use of in the jewelry industry and for investment purposes. Development of the gold market is governed by its own special laws, differening from laws of other markets. Legislation of the countries, parties to the market, govern the internal relations between companies and enterprises. The history of gold markets shows what drastic changes were triggered by a state, when it tried to limit this market completely, as in the USA, or liberalize it, as witnessed by many countries in Asia and Africa.

The last 15 years have seen an active development of the gold market: the increasing number of participants, banks and agents have become interested in it and use it for capital gain. A large number of minor investors are trying to enter this market by trading virtual gold through a broker, opening metal accounts and making transactions through banks, i.e. purchase of spot gold, coins or bars. All these methods of capital increase and preservation are rather relevant and effective in the modern crisis environment.

The factors influencing in the international gold price can be conventionally defined as exchange (market) and off-exchange ones.

Exchange factors
  • Gold and currency transactions of the market maker states in the gold market
  • Gold and foreign exchange reserves of the countries actively engaged in the world economy is a major contributor to the gold price fluctuations. The states in the modern gold market are the main and key players (market makers) in the gold market. Any structural revision of gold and foreign exchange reserves of any major economic power may impact the gold price significantly; based on information on such reserves, investors and speculators conclude how strong the national currency of such states is, what amount of gold a national bank sold or purchased in the previous period. Any information obtained from press releases, interviews or other official sources may affect the quotations significantly. Today, the gold held in the international reserves is about 32.6 thousand tons, which is 10 times as much as the average annual production. The gold reserves of the TOP-10 countries of the world totals to 22,862.2 tons; the share of other countries is 9,750.1 tons of gold.

    Chart 8. The gold reserves of the TOP-10 countries of the world (in tons)

    The worldwide gold amount also includes the gold which held by the International Monetary Fund – 2,814 tons, the European Central Bank – 504.8 tons, Bank for International Settlements - 104 tons, the Central Bank of the States of the Western Africa – 36.5 tons.

  • Speculation of market-users of the gold market
  • Along with the active trade of market maker states in the gold market, it is also influenced by speculators, banks, investors and other minor players in the market, who buy gold assets for investment, savings or by order of their clients. According to the London Bullion Market Association (LBMA), the London Gold Market alone has a daily turnover of about 30 million troy ounces, which makes about 930 tons of gold or more than 37.3 billion USD.

  • Change in value of shares of gold mining enterprises
  • The change in value of shares of gold mining enterprises, mostly the major ones, such as Barrick Gold, Gold Fields, GoldCorp, Newcrest Mining, Newmont Mining and others, directly influences the change in earnings of such companies, which, in turn, affects costs and gold mining volumes, and, finally, it leads to changes in price for gold. Operation of a gold mining company is also influenced by natural calamities and political crises. In case of such events, supply of gold is usually reduced: this causes a deficit and, subsequently, the growth of gold price. The price of gold is, in its turn, perhaps, the greatest external factor to influence the cost of gold mining companies. A significant increase in the share price of such companies is common during periods of the price peaking. And, vice versa, along with growth of the share value in gold mining companies, investors' interest in buying precious metal also increases. And since the price of the produced goods is a major external factor of business value, gold mining companies will maintain this momentum to increase their capitalization.

  • Expectations of investors
  • This factor is a uniting one. In fact, other players depend on it, one way or the other, i.e. it is all about playing on the rumors and expectations based on the aforementioned factors. For instance, if investors believe that some released statistics on the market in China indicate a slowdown in growth - they may start buying gold more actively or, otherwise, sell it due to an issued decision of the central bank to sell their stocks. Experts have long been aware of how the price of gold is determined based on behaviour of investors. When buying gold in both direct and gold-bearing products, they create a huge demand for precious metal. As we all know from our school days, the higher demand is for a certain object, the more expensive it is. The reasons behind buying up are very diverse; they can include financial instability or the improvement of the quality of living within a certain territory. When citizens earn a lot, they start buying more jewelry, thus, in turn, increasing the demand.

  • The value of the US dollar
  • Since an ounce of gold is quoted in US dollars, the value of this currency is directly related to gold quotations. It is statistically proved that the more a US dollar costs, the lower the price per an ounce of gold is.

    This is due to the behaviour of investors - when the US dollar is expensive, everyone is trying to use the currency to make their transactions, and when the dollar is less stable and cheaper, so investors prefer gold and more profitable assets. An increase in the trade balance deficit and the US national debt, the economic growth of the BRIC countries will devalue the dollar and strengthen other world currencies.

    Another factor associated with the US dollar that influences the value of gold should also be noted, the so-called "Index of fear". It measures the relative importance of gold in the US monetary system and is calculated by multiplying the US gold reserve (that is, the weight of gold held by the US Treasury) by the price of gold - in order to obtain its full market value, and then dividing the result by the total money supply currently in circulation. When the "Index of fear" falls (that is, when the number of dollars in circulation grows faster than the market value of gold making the reserve of the federal treasury, or when the number of dollars decreases more slowly than the value of gold reserves), this means that people prefer to hold an excessive amount dollars, because they are optimistic about the prospects for the dollar and the US economy. If the "Index of fear" grows (it happens when cash flows into gold, thus raising its exchange rate and increasing the market value of the US gold reserves), it usually happens because people are uncertain of the dollar or the stability of the American banking system and are looking for alternative ways to store valuables. Since early 2006, the US Federal Reserve has stopped publishing data on the M3 unit, thus, confirming that this figure is too large, for mentioning in statistical publications. Since then, the calculation of the "Index of fear" has become a rather challenging task.

    Off-exchange factors
  • Volumes of gold mining
  • Insufficient supply from gold mining companies, sellers of gold, leads to an increase in its market value due to the unsatisfied demand.
  • Cost value of gold mining
  • It is perfectly clear that the amount of produced gold inversely affects its value, the price of gold continued to grow in the beginning of 2010, as there is no more easily extracted gold in the world. So, in order to increase the level of production of this demanded precious metal, more resources should be invested into mining methods. It has become increasingly more difficult to extract gold, which means that the extraction costs have increased, which, in turn, triggered the growth of prices per ounce of gold.

  • Volumes of gold consumption
  • The main gold consuming countries are clearly divided into two groups. On the one hand there is a group of technologically advanced countries. They are using gold rather widely in various fields of technology and industries, as well as to manufacture jewelry. The top countries using gold for technical purposes are Japan, the United States and Germany. In this case, gold acts as a marker of high technologies in the electronic and electrical, space, instrument-making industries, etc.

    The other group of states are the countries in which the bulk of gold (or even all of it) is consumed only by the jewelry industry. Among them are China, India, Italy, the Arab Emirates, Indonesia, Malaysia, Kuwait, Egypt and Portugal.

    Yet, the volumes of gold consumption are also directly related to the prospects of the world economy and its stability. This means that, in the current international economic and political environment, gold is used primarily as a financial instrument and a safety net against other exchange risks - in particular, deterioration of the dollar and instability of other world currencies. In this sense, oil, of which the price is currently a key factor in determining the value of gold, has not been used as widely by the market as an exclusively exchange commodity. During crises, prices for precious metals rise, as the demand for reliable investment tools is increasing to replace any dropping shares and bonds that are under a default, so crises usually raise the rate of gold.

  • The interest of the jewelry industry
  • The main consumer of gold is the jewelry industry, the demand in which is mostly determined by the price of gold: the lower the price, the higher the demand. But this pattern operates only during periods of international economic growth, while, during periods of decline, the demand in the jewelry industry decreases, even if the prices are relatively low. Over the past 15 years, worldwide gold consumption by the jewelry industry has doubled to take more than 3 thousand tons per year. Up to 75% of all gold sold is indented for jewelry.

  • Political crises, natural calamities, wars in production countries
  • This can primarily affect the operation of mining companies. In case of any natural disaster or a crisis, certain difficulties may arise in the extraction of minerals, leading to a significant reduction in the amount of gold supplied to the international market, and therefore the price for it will increase significantly.

  • Seasonality
  • Another feature of the modern development of the world gold market is the seasonal nature in the movement of metal prices. It manifests itself in the fact that such prices annually peak in the middle of winter, whereas in the middle of summer prices drop. February is marked by the Chinese New Year, which has been becoming one of the leading consumers of gold in the world.

    Thus, the price of gold is affected by the combination of the above factors. Still, it should be noted that the gold market is one of the most closed ones, so manipulations of exchange players affecting the price remain unknown to the general public.