Various market factors and consumer habits determine the demand for gold, including market conditions, sociocultural factors, and broader macroeconomic drivers. In practical terms, while gold jewellery accounts for only half of the global demand gold remains a valuable resource across multiple sectors of the industry due to its non-corrosive properties. Gold is also used in manufacturing, 80% of which is used by the automotive industry. The natural resource also has uses across consumer electronics, defence and aerospace industries and as a catalyst in many industrial processes.
As market volatilities continue, gold is often seen as a valuable investment asset to hedge against unpredictable market conditions. In fact, it’s interesting to note that during the 2008 financial crisis, the demand for gold went up as central banks around the world increased their gold reserves as a means of asset management.
The back and forth in markets for gold demand and supply is one of the factors that determine the price of gold. Other factors, including inflation, interest rates, and market volatility, can also influence the gold price. This is because the supply of gold, especially through mining and production, is a complicated and time-consuming process. In fact, gold mine exploration can take anywhere between one to ten years and requires the allocation of resources like expert labour and capital. Moreover, once a mine is discovered, it can take up to five years before it becomes productive. A lot of that time goes into planning, construction, local infrastructure development, and logistics. And even after heavy investments of time, energy, resources, and capital, only about 0.1% of all explored sites become productive gold mines. On average, a gold mine can remain in production for 10 to 30 years. Ore extracted from the mine is transformed into a semi-pure alloy bar called doré that contains 60%-90% of gold. Given the complexity of gold mining, it’s not surprising to note that most of the gold in circulation in the market is recycled gold sourced mainly from jewellery products.
Good Delivery and Responsible Supply of Gold
Gold mining can greatly impact the environment. As environmental concerns grow globally, responsible gold refineries are cognizant of the part they are playing. They are undertaking efforts to alleviate any environmental and social risk factors so that they are playing a more positive role at every touch point along the supply chain.
To raise confidence in the industry, the World Gold Council (WGC) introduced a structure for Responsible Gold Mining Principles (RGMPs) in 2019. The framework defines the parameters of responsible gold mining. It addresses different environmental, social and governance (ESG) aspects of gold mining, including climate change, corruption and community engagement. Similarly, to ensure ethical practices in the buying and selling of gold, the London Bullion Market Association (LBMA) has launched Responsible Gold Guidance (RGG) under its Responsible Sourcing Programme. To get accredited by the LBMA, gold refineries are required to follow the rules and regulations set under the program.
To be an accredited member of the World Gold Council, all mining companies have to abide by the RGMP guidelines, where compliance with RGMP requirements must be verified by a third party. Businesses operating without verification or outside of RGMP frameworks find it almost impossible to carry on working in global markets. The process of verification and authentication can also be very detailed and thorough, covering all benchmarks of qualitative and quantitative tests.
In addition to these safeguards, the LBMA also has a Responsible Sourcing Programme, which follows the five-step framework set out in the OECD Due Diligence Guidance. The program requires refineries to prevent human rights abuses, money laundering, terrorist financing, and environmental abuses. LBMA has also set Good Delivery standards aimed at standardizing the specifications for gold bars and settlement of loco London contracts. These specifications include fine-ounce weight, purity, and physical appearance. By accrediting refineries under the Good Delivery standards, LBMA eliminates any doubts for clients about the integrity and origin of their gold.
As a registered company in Dubai, United Arab Emirates, HMB Gold Trading LLC is committed at every touch point to detailed due diligence to ensure clients of the responsible supply of gold.
Hedging for gold
Hedging is a risk management strategy for price volatility of a specific instrument or asset. It simply allows for offsetting losses in investments by taking the opposite position to the one that an investor currently holds. For example, if an investor buys (physically owns) one ounce of gold and immediately over a trading platform opens an opposite position, i.e., goes short, (sells one ounce of gold). In such an event, if the gold price goes up, the investor will make a gain over the owned stock and an equivalent loss on the short position opened over the trading platform. Hence, the net effect will be zero. This is what is meant by hedging. Hedging for gold manages to eliminate potential financial losses by considering the opposite position to the one held by investors/traders.
Because government vaults and central banks hold paper currencies and gold in reserve, the precious commodity can offer many benefits for investors. It’s a well-recognised fact that during uncertain economic times, such as recession, more people tend to gravitate towards gold because of its enduring value. Described as a ‘safe haven’ for traders and investors during turbulent times, when the return on bonds, equities and real estate fall, the interest in gold positions can increase, driving up its price.
Hedging for gold, therefore, can limit financial losses and lock in profit to protect customer capital against value erosion and price loss. It can help companies survive market volatility and financial crises. It protects investors against inflation, interest rate fluctuations, currency exchange rates, etc. Another upside to hedging is that it mitigates demand-supply risk.
We use cookies to enhance your experience. By continuing to visit this site you agree to our use of cookies.
View More
