What is the gold inventory?
Well, Gold inventory usually means goods available for sale or raw materials used to produce these goods. In other words, it is the goods and materials that companies hold for the ultimate goal of resale. Hence, we could say that all gold held by jewelers, dentists and technology companies is gold inventory. The same applies to gold coins or gold bars held by bullion dealers.
However, we know that most of the gold is used not in jewelry or industry, but as a store of wealth, or monetary asset. It means that practically all gold is available for sale, at least for a certain sale. Our point is that gold is the ultimate money or the source of liquidity. Therefore, it behaves like currency, so the concept of inventory does not strictly apply to gold. Or, we can say that all gold acts as an inventory – this is the idea of currency or the store of wealth, after all.
But the term “gold inventory” is also used in different senses. First, people say about gold above-ground holdings. Indeed, contrary to other metals, nearly all gold in the world that has ever been mined is still in existence. As of 2014, a total of 183,600 tons of gold was in existence above ground. This is why gold has a comparatively high stock-to-flow ratio. Because of this huge inventory, the mining production is only a tiny fraction of the total gold stock and, thus, does not drive the gold price.
Second, the central banks or the treasuries hold gold reserves to prove their creditworthiness and to have some backup in times of crisis. The same applies to other entities: generally, it is recommended to hold a certain percentage of its portfolio in precious metals as a portfolio diversifier and insurance against tail risks.
Third, the gold exchanges, such as Comex, hold some gold in warehouses as inventory needed to secure the settlement of the gold futures, as some of them may call for physical delivery (the bullion held in these warehouses is divided into two categories: eligible and registered gold). All of the analyzed meanings of “gold inventory” are presented in the table below.
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Bullion is the general name for pure gold or silver (at least 99.5%) which have been transformed into bars or minted into coins for investment purposes.
The Commodity Exchange Inc. (Comex) is an American commodity exchange where buyers and sellers electronically meet to invest in precious metals.
Comex has several warehouses for metals (as investors may take delivery), which contain lots of gold. The bullion held in these warehouses is divided into two categories: eligible and registered gold.
In a futures contract two parties agree to exchange an asset (gold, currencies, stock indexes, hog bellies) for a price agreed upon today (the strike price) but with delivery to take place at a specified future date. The party agreeing to buy the underlying asset, is said to be “long” and hopes the price will go up, and the party agreeing to sell the asset is said to be “short” believing that the price will decline. Gold futures term usually refers to a futures contract that is based in the price of gold.
Gold as an Element
Chemically, gold is an element with the symbol Au and atomic number 79. It belongs to noble metals and is a unique element. First of all, it is extremely rare. In the Earth’s crust, gold occurs 19 times less frequently than silver and 15 thousand times less frequently than copper. It is the only metal being yellow with a high luster, to which it owes its Latin name ‘aurum’, meaning “shining dawn.”
Gold as an Investment
Gold had served as money for thousands of years until 1971 when the gold standard was abandoned for a fiat currency system. Since that time, gold has been used as an investment. Gold is often classified as a commodity; however, it behaves more like a currency. The yellow metal is very weakly correlated with other commodities and is less used in the industry. Unlike national currencies, the yellow metal is not tied to any particular country. Gold is a global monetary asset and its price reflects the global sentiment, however, it is mostly influenced by the U.S. macroeconomic conditions.
The price of gold, as each price, is determined by the market forces of demand and supply. The demand is the amount of a good demanded for purchase at a given price. Therefore, the demand for gold is the amount of a gold demanded for purchase at a given price. Gold demand is often analyzed on an annual basis and divided into jewelry demand, technology demand, central banks’ demand or investment demand.
Gold reserve is the amount of bullion that is held by the central bank or the treasury of the country. It contributes to the nation’s creditworthiness in the issuance of currency and bonds. Gold reserve that is held by the government should be distinguished from private hoard of goal held by individuals or non-financial institutions.
The price of gold, as each price, is determined by the market forces of demand and supply. The supply is the amount of a good offered for sale at each price. Therefore, the gold supply is the amount of gold offered for sale at a given price. The gold supply in that sense should not be confused with the annual supply of gold widely analyzed by many analysts (we will explain this later). The annual supply of gold comes from recycling, net hedging and mining production.
A portfolio diversifier is a portfolio addition which reduces the overall risk in a portfolio. This is an important feature, since diversification allows investor to obtain a desired return without taking as much risk as with an individual security.
Comex has several warehouses for metals (as investors may take delivery), which contain lots of gold. The bullion held in these warehouses is divided into two categories: eligible gold and registered gold.
Tail risk it is the risk of an asset or portfolio of assets moving more than three standard deviations from its current price. Technically, tail risks arise when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution (see the chart below). To simplify, tail risks are very unlikely events which entail very serious consequences.
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