Price of gold Essay Example | Topics and Well Written Essays - 750 words

Price of gold - Essay Example The world market has seen a sharp rise in need of keeping wealth in the form of gold. The increase in demand by business persons and central banks in different regions requires an increase in supply of gold. The demand has not been met with similar supply because of constant factors in the supply chain. The suppliers of gold are not increasing their mining capacities in purchasing additional machineries or identifying new mines. The rise in demand with no rise in supply eventually leads to sharp increase in the prices of gold (Wise 2012). The rises in prices can persist for two years before the supply matches up with the demand through an increase in supply. Different factors make the market supply of gold inelastic limiting on supply capacity of miners. Gold mining is an expensive undertaking that needs investors to put a lot of resource in building crushing and drilling machineries. The massive investment cannot be made in a short time to meet the enormous demand in the market lead ing to a constant supply being made no matter the increase in demand of product in the market. Increase in supply can be made through long-term investment that can extend to 10 years before production begins. The inability of suppliers to respond to forces of demand leaves the market volatility high. The huge numbers of speculators in the market contributes volatility in gold prices. ... The supplier will increase prices because they cannot meet the large demand in the market. The increase in supply price can get to 11% increase with regard to the increase in demand. Announcement of huge releases of gold to the market in large quantity on prediction prices will remain high leads to reduction in prices (Thomas, 2012). The large amount supply with no increase in demand means sharp decreases in prices sometimes totaling to 5% decrease from previous day’s prices. The world gold supply from recycling vendors has seen sharp decrease. People selling their gold ware during the global economic crisis caused the decrease. Statistic have shown recycling supply used to cater for 45% of the world market in 2008. In 2011 recycling source of gold contributed 2% of the world gold supply which was a small proportion compared to the previous 45% supply. The fall in the amount of recycled gold available in the market with demand increase has led to prices increases. This leaves the supply from the mines to cater for 98% of all the demands. Lack of ability by the miners to cater for the 98%has contributed to the volatility leading to a sharp increase in prices of gold (Jeff, 2012). The central banks from different countries were key suppliers of gold to the markets. The banks released large amounts of their gold to the market without making purchases to replenish the dwindling stocks. The exhaustion of gold in their bulk meant that the different countries bank start purchasing the gold in competition with the retail purchasers. The purchasing of gold by the central bank increases demand while their lack of ability to supply creates shortage (BBC, 2011). The two forces of demand and supply lead