South Africa was for many years clearly the world’s dominant gold-producing country. In the early 1970s it was producing 1,000 tonnes per year, over 70% of global output.

And whilst a number of relatively new and productive sources have been developed quite recently, the overall level of global mine production is now relatively flat, averaging approximately 2,550 tonnes per year over the last 5 years.

The comparatively long lead times in gold production, with new mines often taking up to 10 years to come on stream, mean mining output is relatively inelastic and therefore unable to react quickly to market fluctuations. The incentives promised by a sustained price rally, as experienced by gold over the last half decade, are not easily or rapidly translated into increased production.

In the 1990s, some gold producers hedged much of their output by selling gold forward . But the rally in the gold price of the past five years – coupled with buoyant price expectations – means this practice has diminished. Producers are now buying back those hedges. Producer “de-hedging” amounted to 131 tonnes of gold in 2005.

Central banks and supranational organisations, such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS), currently hold just over one fifth of global above-ground stocks of gold as reserve assets. These official holdings amount to approximately 31,000 tonnes, dispersed across 110 organisations, 70% of which hold less than 100 tonnes of gold. On average, governments hold around 10% of their official reserves as gold, although the proportion varies widely from one country to another. Although a number of central banks have increased their gold reserves over the past decade, the sector as a whole has been a net seller (since 1989), contributing an average of 562 tonnes to annual supply flows in 2001-2005. However, since September 1999, the bulk of these sales have been regulated by the Central Bank Gold Agreement (CBGA), which stabilised sales from 15 of the world’s biggest holders of gold at a rate the signatories felt the market could absorb without undue disruption. The second year of the renewed Central Bank Gold Agreement (CGBA2) ended on September 26th 2006, with signatories having sold only 395 tonnes of their 500 tonnes annual maximum.

The value of gold means that it is economically viable to recover it from most of its uses where it is capable of being melted down, re-refined and reused. Recycled gold, or scrap, therefore plays an important part in the dynamics of the gold market. Although gold mine production is relatively inelastic, scrap ensures there is easily traded supply when needed, thereby helping to stabilise the gold price. Between 2001 and 2005, recycled gold has contributed an average of 23% to annual supply flows. Most recycled gold is derived from jewellery. Smaller amounts come from salvaged electronics components. The supply of scrap depends largely on economic circumstances and the price behaviour of gold. It is common practice in the Middle East and Asia for customers to trade in one piece of jewellery in exchange for another, and the piece traded in may be melted down rather than simply being resold. But gold can also be sold for cash if, for example, the owner has urgent need of money or wants to cash in a profit following a rise in the gold price. Scrap supply typically rises in times of economic distress or following a price rise.