Supply and Demand

Gold is an extremely rare metal, but this is not surprising. It is raised by the humanity to a new level opening a new era, i.e. the era of metal. In Bulgaria, in the Varna necropolis, there have been gold objects found, dating from 4600 BC. This golden treasure is still considered as being the oldest one in the world. Therefore, it follows that mankind, which is familiar with gold, was already found at least 6,500 BC.

Gold has an important role in the world’s history and culture for millenniums. Many ancient peoples such as Egyptians, and Greeks deified it as the sun. Ancient people compared it with a golden glitter of the sun and believed that the skin of their gods had been gold.

From the ancient times to the present day, gold has been the most reliable means to preserve wealth. For thousands of years, there were new people and governments; and then it went into oblivion. It was the currency that appeared and disappeared, eaten up by inflation and wars. However, gold has continued to be a stable and universal standard of value for 5000 years, preserving the purchasing power to this day.

The possession of a large amount of gold in the ancient world was very prestigious and dangerous. Suffice it to recall the history of the Egyptian gold, a lot of which is not happy about being next to the state. First all it went to the Assyrians, then passed to the Persians, then the Greeks; and, in the end, it went to the Roman Empire. Gold (in the ancient civilizations) was not only a special measure of solvency. Holding gold was not enough, it needed to occupy a certain position in the society.

No other metal than gold caused so many bloody wars and crimes. Because of it, there were millions of people killed around the world. On the other hand, gold significantly motivated the human progress and played a major role in the world development. Historically, gold was a monetary metal, which developed on the basis of a gold monetary system, without which modern capitalism would be unthinkable. For millenniums, there was a huge number of cultural values that affected the performance skills, some of which did not actually have any values. Thanks to the medieval alchemists, who were unsuccessfully trying to get the gold from base metals, with the Philosopher’s Stone – managed to get a lot of new elements. A gold rush, occasionally here and there, led to the rapid development of new lands.

In the modern world, gold continues to occupy an important place in the economy and international relations being a symbol of wealth and power. The history of Gold continues and can be more exciting than before.

Exactly the uniqueness of this metal is interesting for me. We will speak about the supply and demand of this rare metal in the modern world.

Gold is regarded as the most reliable investment tool, giving the instability in the world economy. The study has identified the possible causes of the excess gold supply over demand and the continued record growth in metal prices, as well as determined the problems of the world gold production.

Starting the instability of the world economy, which was in the deepest recession since the 1930s, investors are looking for the protection for their savings in traditional stores of values, such as government bonds and gold. In this connection, the problem of demand and supply in the global gold market is relevant, including the country’s gold and a holder of significant gold reserves.

Gold is mined from ore, in which there is a main useful component contained, as well as ores, in which the main mineral resources are the other non-ferrous metals, including silver, copper or lead. In the second case, it is a by-gold mining, in which the gold is mainly being as the extracted minerals. It means that it is present in the ores of nonferrous metals in low concentrations. The incidental production entails the complication enrichment and reprocessing concentrate. However, it is economically justified, even at relatively low concentrations of gold.

A demand customer on certain products is influenced by the needs, that is, a person wants to ensure for him/ or herself a better life. Very individual needs, they own every man and fold under the influence of a number of factors determining the conditions of existence:

• From himself (i.e. the need or lack of need for warm clothing control climate of the country, the degree of a tempered man, the tastes).
• His family and his inner circle (i.e. the need to educate children and the strength of the manifestations depend on the development of the society and from the place which is given to an individual in the society).
• The social, ethnic, and religious communities to which the person belongs (i.e. the need for a national defense depends on the international position of the state  the person is from).

Demand is the quantity of goods or services to be purchased at a certain price for a certain period. It is useless to try to determine the demand without the price as it varies depending on exactly what it is.

The law of supply is that all other things are being equal; the demand for products in terms of quantity varies in the inverse proportion to the price. This happens for two reasons: firstly, if the price the consumer wants to buy more goods (income effect); and, secondly, the goods at lower prices have become cheaper relatively to other goods. It becomes relatively more profitable (the substitution effect).

The law of demand does not apply in three cases:

1) the excessive demand caused by an expected increase in prices;

2) for some rare and expensive commodities (gold, jewelry, and antiques), which means an investment of money;

3) when a person changes the demand for better and more expensive goods (i.e. switching the demand for butter and margarine: the prices for margarine does not increase the demand for it.)

Depict the relationship between price and quantity demanded graphically. If the abscissa indicates the quantity Q, bought in the market, and the ordinate, i.e. the price movement of P, then the following results will be.

The Curve D in the economic literature as the demand curve. Projecting its price, there can determine how to change the quantity demanded of a price change. If the price of the P1 quantity demanded is Q1, then the lower price to P2 the quantity demanded will increase to Q2, etc.

The influence on the demand change and non-price factors is the following ones:

a) the changes in the monetary income of the population. The income growth increases the demand for different types of products for all possible prices for them. Gold is the quite exclusive and luxury goods. The demand for it depends on the income level of the population.

b) the changes in the population structure. An aging population, an increase in the number of pensioners, increases the demand for drugs and medical care. However, in this case, it is not very important. The target audience for buying gold is young and mature, but still much dependence can be traced through the income level of the population.

c) the changes in the prices of other goods, especially in substitute products (substitutes). Thus, the increase in prices for silver and precious metals can dramatically affect the buying gold because of higher prices for it. If, however, the price of gold remains utopian unchanged, the demand for it will increase.

d) the economic policy of the government. Cash benefits paid by the state to the poor, increase the demand for goods consumed by this population. However, the money paid by the state is intended to help with the purchase of essential goods. For gold, it is not irrelevant.

e) the changes in consumer preferences under the influence of advertising, and fashion. The trend to buy gold can be traced through the human desire to live in luxury and comfort. Its advertising and fashion increase the demand for it.

If the demand for gold has changed under the influence of non-price factors, at the same price, it is a new demand. It will have a different graphical representation.

In the economic theory, to distinguish between individual demands of individual customers as the demand for a certain product and market demand, i.e. the total demand of all customers for each commodity price. If we denote by each individual’s demand for the i-th item j-th customer, the market demand can be expressed as:

Qi = qij, where Qi – the market demand is;

n – the number of buyers in the market is.

It is important to emphasize that the individual demand curves, having, as the market demand curve, a negative slope, i.e. reflecting the already described inverse relationship between the demand and the price that is not smooth, but has a more step-like form.

To encourage people to, let’s say, buy two ounces of gold one, not a small price reduction compared to the normal level. Small changes will likely not make one particular buyer to double purchases. However, at some point (i.e. at the discount of 25%), it will respond to increase the amount of products purchased. In the graph, there is a jump in demand, i.e. a “step”. Since the “threshold” for consumers is different, then summed, the individual demand curves step would smooth each other and eventually create a smooth curve of the market demand.

If now there can be considered the market situation of sellers or the supply side, then there can be observed an opposite picture. All sellers will seek to market the highest price; and the higher the price is, the more they will try to sell more goods, that is, to increase the supply.

The proposal is the amount of products or services that producers are willing to sell at the certain price for a certain period. The relationship between the price and supply is not reversed, and the line. The law of supply states that the proposal, all other things being equal, changes in a direct depending on the price changes.

In other words, each vendor supply volume will vary depending on the price the higher the price is; the other things are being equal, and the higher amount of supply of this product is. Graphically, this relationship is shown in the Figure 2 (an abscissa serves to indicate the quantity of goods Q, delivered to the market of gold; the ordinate represents the price movement P). The S curve is called the supply curve.