Demand Analysis of Gold

Unique in the world of economics is the supply and demand relationship of gold.  Although gold is a commodity, for economic and investment purposes gold behaves much more like a currency.  It is the most popular precious metal for investment purposes, a highly sought after material for jewelry, used for a wide array of industrial applications, and was a form of currency in the past.

 The vast majority of the world gold supply has already been mined, and new mine production does not meet annual demand.  New gold mines take approximately ten years to become operational.  Thus, the miners cannot generate the supply to compensate for short term demand fluctuation.  These factors, and the lack of substitutes, tend to give gold an inelastic demand when compared with other commodities.

Demand for gold originates primarily from three different sources. Firstly, the jewelry industry accounts for the largest percentage of newly mined gold.  Approximately two thirds of this demand comes from the Eastern Hemisphere.  This demand disparity between the east and west mostly arises from cultural tastes in India.  India, whose inhabitants accounted for 29% of gold demand in 2011, uses gold for cultural and religious reasons more than other nations.  Thus, this regional demand is less affected by global economic circumstances.  Outside of India, demand for gold jewelry is more affected by economic circumstances.  The financial crisis in 2007-2009, for example, saw a dramatic decline in gold jewelry demand in the United States.  

A portion of the gold demand also arises from industrial interests.  Gold is used in a wide array of electronic, dental, and medical applications due to its ability to avoid corrosion, and its superior conductivity compared with other metals.  In the medical industry gold is demanded for its unique ability to resist bacterial colonization.  In future years, industrial gold demand is projected to increase, as new applications in advanced technologies...