Commodity Trading: Gold
Futures
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From
the first discoveries, Gold has captured the imaginations of craftsman and
artisans. Not only is Gold
pleasing to the eye, but its resistance to corrosion and malleability have
made it an ideal metal for craftsmen to mold into pieces of adornment, as
well as a symbol of wealth and power.
As the ancient philosopher Pinder wrote nearly 3,000 years ago,
"Gold is the child of Zeus, neither moth nor rust can devoureth
it". It is the
malleability, luster and resistance to corrosion that has made Gold the
metal of choice for jewelry.
Jewelry
fabrication is the crucial cornerstone of demand for this yellow metal.
Since 1991, over 2,000 tonnes of Gold has been used annually in the
production of jewelry. Gold
for use in the jewelry industry accounts for roughly 54% of the total
demand - an estimated 54.2 million ounces.
Gold for use in jewelry is mixed with other alloys, because of the
softness of Gold. The
pureness of Gold is measured in terms of carats, with 24 carats being
99.99 percent pure. The most popular carat rankings of Gold are 18 and 14 carat
pure, representing 75% and 58.3% pure, respectively.
The most popular carat for jewelry in Europe is 18 and 14, as it is
in the United States. In the
Middle East, India, and South East Asia, where jewelry is used as much as
an investment as it is for decoration, 22 carat is more popular. In these countries, 22 carat items usually sell at a marginal
markup to the metal value (usually 10 to 20%).
These items can be traded in or sold back to distributors at any
time. England has, in recent
years, begun manufacturing 9 carat jewelry items, while Portugal has a
unique designation of 19.2 carats.
Given that Gold demand is so closely tied to the jewelry industry,
the fortunes of both industries tend to rise and fall in tandem.
Like
all of the other metals, which have underlying futures contracts, Gold is
becoming more and more of an industrial metal.
Due to Gold's virtues of malleability, ductility, reflectivity,
resistibility to corrosion and unparalleled ability as a thermal and
electric conductor, Gold is used in a wide variety of industrial
applications. The largest
industrial user is the electronics industry.
In the Electronics Age, Gold is used in everything from
microprocessors, pocket calculators, washing machines, televisions,
missiles and spacecraft. In
electronics, Gold is used to plate contacts.
Contacts are electroplated with a very thin layer of gold, using
potassium cyanide, referred to in the industry as plating salts.
The production of plating salts accounts for roughly 70% of the
demand for Gold in the electronics industry, or roughly 13.8 million
ounces annually. Gold's other
major role in the electronics industry is in semi-conductors.
A fine Gold wire or strip is used to connect parts such as
transistors and integrated circuits, and in printed circuit boards to link
components. This bonding wire
is one of the most specialized uses of Gold, requiring it to be 99.999%
pure with a wire diameter of one one-hundredth of a millimeter.
Japan and the United States are the largest industrial users of
Gold, accounting for 45% and 30% of its industrial use, respectively.
Gold
as an investment or "hoarding" vehicle is the third largest
component of demand. The
attraction of Gold coins as an investment soared with the introduction of
the South African Krugerrand, in the mid 1970's.
The success of the Krugerrand spawned most major nations to produce
their own bullion coins: Australia's Nugget & Kangaroo's, Austria's Philharmonkier,
Britain's Britannia, Canada's Maple Leaf and the United States Eagle, to
name a few. The concept of a
bullion coin made by a government and sold at a low premium (usually five
to seven percent) to the base bullion amount (as opposed to the old
numismatic coins which had more value as a collector’s item than their
metal value), has endeared Gold as an investment vehicle for small
investors. This enables them
to buy very near the spot price of Gold.
Small bars of Gold are the preferable investment vehicles of the
Middle East. Together, the
small bar and coin demand accounts between 100 and 200 tonnes of Gold on
an annual basis. The hoarding
demand is directly related to the level of inflation as well as political
uncertainty in the Middle East and throughout India and South East Asia.
Gold
is also used widely by the dental industry, even though the use of Gold
has been declining by this sector due to the introduction of new
techniques using ceramics. Gold
has been used in dentistry for centuries, due to its malleability and
resistance to corrosion. Besides
new ceramic-based techniques decreasing the demand for Gold in the dental
industry, the use of Gold in dentistry has come under increasing scrutiny
by the Social Security Board of the United States, further reducing Gold's
attractiveness in this market.
With
production decreasing, new uses for Gold being found, as well as Gold's
solid use in jewelry, the long down trend in price may be near an end.
The growing importance in the industrial sector will most likely
make Gold an industrial metal over the coarse of the next decade.
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