Gold is a dense, bright yellow metallic element with a high luster. Gold is an inactive substance and is unaffected by air, heat, moisture, and most solvents. Gold has been coveted for centuries for its unique blend of rarity, beauty, and near indestructibility. The Egyptians mined gold before 2,000 BC. The first known, pure gold coin was made on the orders of King Croesus of Lydia in the sixth century BC.

Gold is found in nature in quartz veins and secondary alluvial deposits as a free metal. Gold is produced from mines on every continent with the exception of Antarctica, where mining is forbidden. Because it is virtually indestructible, much of the gold that has ever been mined still exists above ground in one form or another. The largest producer of gold in the U.S. by far is the state of Nevada, with Alaska and California running a distant second and third.

Gold is a vital industrial commodity. Pure gold is one of the most malleable and ductile of all the metals. It is a good conductor of heat and electricity. The prime industrial use of gold is in electronics. Another important sector is dental gold where it has been used for almost 3,000 years. Other applications for gold include decorative gold leaf, reflective glass, and jewelry.

In 1792, the United States first assigned a formal monetary role for gold when Congress put the nation’s currency on a bimetallic standard, backing it with gold and silver. Under the gold standard, the U.S. government was willing to exchange its paper currency for a set amount of gold, meaning the paper currency was backed by a physical asset with real value. However, President Nixon in 1971 severed the convertibility between the U.S. dollar and gold, which led to the breakdown of the Bretton Woods international payments system. Since then, the prices of gold and of paper currencies have floated freely. U.S. and other central banks now hold physical gold reserves primarily as a store of wealth.

Gold futures and options are traded at the New York Mercantile Exchange (NYMEX). Gold futures are traded on the Bolsa de Mercadorias and Futuros (BM&F) and on the Tokyo Commodity Exchange (TOCOM), the NYSE-LIFFE exchange, the Central Japan Commodity Exchange (CJCE), the Hong Kong Futures Exchange (HKFE) and the Korea Futures Exchange (KOFEX). The NYMEX gold futures contract calls for the delivery of 100 troy ounces of gold (0.995 fineness), and the contract trades in terms of dollars and cents per troy ounce.

Prices – NYMEX gold futures prices on a nearest-futures basis weakened in early 2010 as inflation in the U.S. slipped to a four decade low. Gold prices fell to a 1-1/4 year low of $1,045 in February 2010. Gold prices then began a rally that lasted through most of 2001, posting an all-time high of $1,431 an ounce in December and finishing 2010 up +30% at $1,421. As dollar weakness intensified after June 2010 and the European sovereign-debt crisis expanded from Greece to Ireland, demand for gold surged. Gold prices continued their rally in early 2011 and in March 2011 posted another all-time high of $1445. The markets remain concerned that the Federal Reserve, the Bank of England and Bank of Japan will be slow to end their quantitative easing and run the risk of causing a surge in inflation within the next year or two.

Supply – World mine production of gold rose +2.0% yr/yr to 2.500 million kilograms in 2010, and was still below the record high of 2.570 million kilograms seen in 1999 and 2000 (1 kilogram = 32.1507 troy ounces). The world’s largest producers of gold in 2010 were China with 13.8% of world production, followed by Australia (10.2%), the U.S (9.2%), South Africa (7.6%), and Russia (7.6%).

Gold mine production has been moving lower in most major gold-producing countries such as South Africa, Australia, and the U.S. For example, South Africa’s production of 190,000 kilograms in 2010 was down -4.0% yr/yr and that was about one-third the production levels of more than 600,000 kilograms seen in the 1980s and early 1990s. On the other hand, China’s gold production in 2009 rose +7.8% to a record 345,000 kilograms. U.S. gold mine production in 2010 rose +3.1% yr/yr to 230,000 kilograms, just above last year’s production level which was the lowest production since 1988. U.S. refinery production of gold from domestic and foreign ore sources in 2010 rose +5.9% yr/yr to 180,000 kilograms. U.S. refinery production of gold from secondary scrap sources in 2010 rose +8.5% yr/yr to 205,000 kilograms.

Demand – U.S. consumption of gold in 2010 remained unchanged at 150,000 kilograms. The most recent data available from the early 1990s showed that 71% of that gold demand came from jewelry and the arts, 22% from industrial uses, and 7% from dental uses.

Trade – U.S. exports of gold (excluding coinage) in 2010 fell -0.3% yr/yr to 380,000 kilograms, down from the 16-year high of 568,000 kilograms seen in 2008. U.S. imports of gold for consumption in 2010 rose +68.8% yr/yr to 540,000 kilograms, a new record high.

Excerpted from the CRB Commodity Yearbook. For more information on CRB products click here