Gold held as part of assets is easy to be sold when the economy is booming and interest rates are high. This is because it is at a disadvantage compared with other financial products such as deposits and stocks. Central banks and mining companies are unique sellers of gold. Once they sell in large quantities, the price of gold will fall.

Main Investors of Gold

The main sellers of gold are investors, central banks, and mining companies.

If you hold gold on hand and the price is higher than when you bought it, what would you do? Is it to sell for profit, or do you think that it may continue to rise, and then buy more? When the price of gold fluctuates, people will buy and sell with their own small calculations. Representative gold sellers/sellers include investors who hold gold, central banks of various countries, and mining companies that mine gold.

1. When the Economy is going great

When the economy is booming and interest rates are high, gold is sold off.

The situation of economic prosperity and higher interest rates is recognized by investors who hold gold as a better time to sell. In principle, gold has no interest (the following chapter will discuss the interest rate of gold), so when the interest rate is higher, it is more advantageous to save money. Only when the price of gold rises can gold make a profit. However, when the economy is booming, corporate performance rises and stock prices rise, and it may be more profitable to invest in stocks.

At the same time, when the economy is good, funds are needed to invest in new equipment, and sometimes gold is sold in exchange for funds. Gold sometimes requires a handling fee when it is kept, and the cost is higher than other financial products, which is a defect from the perspective of financial products.

In other words, when the economy is booming and interest rates rise, deposits and stocks are good, money will flow to such financial products, and gold will be sold.

2. When Central Banks mention Golds

The central bank used to be the seller’s representative.

In addition to investment purposes, central banks also hold gold as part of foreign exchange reserves. In the 1980s and 1990s, the U.S. economy was booming and interest rates were quite high. The central bank dumped the gold it held every year. Although the annual statistics will confirm the demand and supply of gold, the seller is specifically set up as a central bank. Now, in order to cope with the global financial unease, the central bank has turned into a buyer of gold.

3. When Mining Companies come in

To avoid risks, mining companies conduct gold futures trading.

Many people think that futures trading is a desperate move, right? Let me briefly explain what futures trading is. Futures trading means that both parties decide the price in advance at the current point in time and agree to trade until a certain date in the future. The structure is complicated and the risk is high, so it is not suitable for all people. However, in the gold industry, futures trading is an indispensable method.

For gold mining companies, it takes about 6 months on average from discovering gold mines to mining and smelting and then recovering the payment (for selling gold). I think it is profitable to start mining, but if the price of gold falls when the project is completed and sold, profits will inevitably decrease. In order to maintain stable operations, when mining companies discover gold mines, they first borrow gold equivalent to the expected mining volume and sell it at the current gold price. The selling price is determined in advance through futures trading. After that, the borrowed gold is repaid through mining.

Mining companies are producers of gold and should be important sellers (supply side) of gold, but in addition to physical gold, they have also been engaged in futures trading for a long time. The reason why mining companies do this is to avoid potential risks when gold prices fall. When the price of gold rises, it will be difficult for mining companies to trade in gold futures. On the contrary, they will repurchase previously sold futures.

4. When Emerging countries explode to buy gold

Since 2010, central banks in emerging countries have turned into buyers of gold. Among the notable ones are Russia, Brazil, Mexico, Thailand, Kazakhstan, South Korea, and other countries. The total amount of gold purchased by the central bank in 2012 was 535 tons. This is the highest level since 1964. The biggest reason for the explosive buying of gold in emerging countries is to adjust the foreign exchange reserves that are too prone to the US dollar. After the Lehman turmoil, countries have truly felt that their national assets are too dependent on the US dollar, and only gold can meet the conditions for effective risk diversification.

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