Year Price Supply

(tonnes per
year)
2000 3800 675.8
2001 3800 682
2002 4200 577.2
2003 5100 565.6
2004 5800 598.9
2005 5800 649.6
2006 7600 381.5
2007 8800 390

Elasticity of supply for the year 2003

= (565.6-577.2)/577.2
5100-4200/4200
= 0.0201
0.214
= 0.094
Price elasticity of supply of gold in the above period
is less than 1, i.e. Ed < 1

That means % change in quantity supplied is less

than % change in price

DETERMINENTS OF ELASTICITY OF SUPPLY

OF GOLD
1. Availability of raw materials: availability may cap the amount of gold
that can be produced in a country regardless of price.

2. Volatile Gold Prices: Price of gold is volatile, sometimes shooting upwards one moment
and dramatically decreasing the next. This happens because of shifts in demand and
highly inelastic supply. Gold production is expensive and time consuming to process.

3. TIME

THREE PERIODS: Market period--> short run --> long run

• Price Elasticity of Supply: the Market Period: The period that occurs when the time
immediately after a change in market price is too short for producers to respond with a
change in quantity supplied.
 Suppliers cannot be picky with the price they sell their goods for
 Some goods do not even have a market period (time is too short for any response)
 It has a Vertical Supply Curve (meaning it is inelastic)

• Price Elasticity of Supply: the Short Run (fixed-plant period): supply is more elastic,
but not terribly so, as the time period is short
 The period of time is not enough to change the output significantly; producers have less
time to react to the change
 ex. if gasoline prices rise, in the short run, producers are stuck with their current less fuel
efficient machines and still need to produce the same output. When given time to adjust,
producers can introduce fuel efficient machines, and production cost will drop and yield
more quantity supplied. Thus PES becomes more elastic
 plants intensify production and output by working longer hours, having workers work
overtime, and using all available resources to the max
 It has a steeper slope than that of the supply curve in the long run

• Price Elasticity of Supply: the Long Run (variable-plant period): supply becomes
more elastic over a longer period of time.
 Why? because over time, new technology will adapt to the change in price to create
more efficiency, and more time is allowed to allocate resources to a different field or
allocate more resources to the same field
 TIME is the major determinant of the price elasticity of supply!!! Noticeably More
Horizontal Slope
 ex. in the long-run, firms have time to change their size and adjust their production plants
to suit whatever new product they want to produce.

IN REALITY ELASTICITY OF SUPPLY OF GOLD DETERMINENTS

Gold, unlike many other commodities is not consumed, and therefore the traditional
models and theories of supply and demand simply do not apply! There are, of course,
several other reasons such as the finite amount available and the cost of entry to the
market, but the key point is that deficits or excesses do not, and cannot affect the market
price, for the simple reason that nothing has actually been consumed. In a sense all that is
happening in the market is that the commodity is moved from one person’s stockpile ( the
mining company ) to another person’s stockpile, the investor. Nothing has been gained or
lost in terms of the commodity itself, and unlike James Bond’s adversary, Goldfinger, it
would be impossible for one private investor to control the world’s stockpile. Of all the
gold extracted from the relatively small number of mines, only a tiny fraction is ever
“consumed” in the true sense, with the overwhelming production added to the ever
growing stockpiles of governments, corporations and private investors, along small
amounts of recycled scrap. For gold there is always a large stockpile and it never gets any
smaller, it is simply the owners of the stockpile who change! So in looking at the market
as a whole we need to consider the total supply and total demand compared one with
another, and not simply the incremental increase or decrease on an annual basis.

Lets consider a simple example based on current estimates from the World Gold Council.
Based on their figures the total weight of gold on the market is currently estimated at
around 160,000 tonnes with global production at just over 2,500 tonnes a year. Suppose
all mining stopped for a year with no new supplies entering the market, then this would
represent only 2,500/160,000 or 1.5% of the total market – an almost insignificant
amount, and remember this is based on a total closure of all the gold mines around the
world. If we perhaps consider a more realistic example where total production falls from
2,500 tonnes to 2,000 tonnes, then as a percentage this represents less than 0.3% of the
total market. Perhaps now you can start to see why the supply demand figures for gold,
and their relationship to the market price are virtually meaningless.

Now in addition to the above, there is another reason that the supply and demand analysis
often suggested as the reason for the rise or fall of gold prices, is complete nonsense, and
it is this – the figures used are based on guesswork and half truth, not fact. The reason is
very simple – much of the gold moves around the world in secret, particularly with the
banks reporting or publishing only sketchy details, and most not at all. It is generally
agreed that demand runs at around 3800 tonnes per year creating a so called “deficit” of
around 1200 tonnes per year or 0.75% of the total stockpile! Hardly enough to move the
market! There is no need at all for supply on an annual basis (excluding private sales) to
come into balance with demand on an annual basis. It is not even true that these must
balance over any number of years. The reason for this is that a sale out of someone’s
stockpile of gold does not reduce the total amount of stockpiled gold – all it does is to
shift the gold from the seller’s private stockpile to the buyer’s private stockpile. A market
could remain in a “deficit” of this sort forever without the price ever going up (or going
down) as buyers and seller shifted the contents of their stockpiles among themselves.