Australian Gold Sector: Economic Factors and Market Analysis

This report provides an in-depth analysis of the Australian gold sector, focusing on the factors that influence gold prices, demand, and supply. It highlights the impact of the international monetary system, political events, and the value of the Australian dollar on gold prices. The report also examines the demand side, noting the significant role of jewelry consumption, household incomes, and investment demand. On the supply side, it discusses the influence of mine production, the financial system, and net producer hedging. The report concludes with recommendations for the Australian government and gold mining companies to enhance the sector through investments in infrastructure, human capital development, and productivity improvements, ultimately contributing to Australia's economic growth. The report is based on an article from ABC news and uses data from the Department of Foreign Affairs and Trade and the Department of Industry, Innovation and Science.

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Article Summary
The article titled “Gold fever strikes with companies scrambling to open mines as prices
stay high” from ABC news by Babs McHugh on 28th July 2017 highlights the current trend in
Australian gold industry. Nearly insatiable demand for gold from countries like India and China
as well as low Australian dollar has increased the price of this commodity. The current price of
gold is 1600 Australian Dollars per ounce, and both large scale and small scale gold miners are
comfortable with it (McHugh, 2017). The high price of gold has also been instrumental in the
economic growth of Australia due to export earnings and employment in the gold mines.
The key players in this industry primarily the gold mining companies are paying close
attention to the current trend in the gold market. There is a gold rush as gold miners attempt to
hunt for more gold to satisfy the rising demand. The study conducted by Gold Industry Group
show that at least half of exploration expenses in Australia in 2016 was directed into the hunt of
gold. Kalgoorlie-based Topdril is among those companies that are extending their gold hunt
(McHugh, 2017). However, the efforts of gold mine companies to supply gold in Australia have
been hampered by inadequate qualified workers especially the drillers.
Economic Analysis
Factors Affecting the Price of Gold in Australia
Risk of International Monetary System and Politics
The global monetary system and politics impact the price of gold. When the international
financial system becomes less stable or during times of global political tension, the price of gold
often increases (Maclean, 2013, p.58). During such moments, the central banks all over the

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world usually sell the assets and purchase gold since the prices of assets may decline during
periods of instability or crisis. In 2016, specific events took place that facilitated the increase in
the price of gold in Australia. These events include geopolitical turbulence in the wake of Brexit,
stagnation in global interest rates and the election of United States President Donald Trump
(Department of Industry, Innovation and Science, 2018).
The Value of the Australian Dollar
Changes in the value of Australian dollar tend to sway the price of gold. When other
factors are constant, the price of gold will rise when the Australian dollar depreciates. When the
value of Australian dollar falls, the Reserve Bank of Australia will diversify the risk by investing
in other assets like gold (Department of Foreign Affairs and Trade (DFAT), 2018). Therefore,
the price of gold will increase. In 2017, the value of Australian dollar fell and hence an increase
in the price of gold.
Demand and Supply of Gold
When others factors influencing the price of gold are constant, the gold prices will go up
when the demand for gold is higher compared to supply in the market. On the other hand, when
the supply is high, which is a rare case, then, the price of gold will decline. Factors influencing
the Demand for gold in Australia are as follows.
Changes in Taste for Jewelry
Jewelry sector is the highest consumer of gold both in Australia and globally. Studies
show that this sector consumes approximately 68% of the total gold supply (Department of
Foreign Affairs and Trade (DFAT), 2018). In the recent years, there has a favorable change in

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taste for jewelry in Australia and international market. In 2016, the highest consumption of
Australian gold was from India and China. Due to an increase in demand for jewelry, the demand
for gold increased and thus increases in the price.
Retrieved from Department of Foreign Affairs and Trade (DFAT), 2018
Changes to Household Incomes
The demand for commodities is affected by the income levels of the individuals. When
the income increases, the demand rises. When the income falls, the demand will also drop. In
most cases, when the salaries of people increase, they increase their intake of nonessential
products. In Australia, the mining sector played a crucial role in uplifting the incomes of

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residents (Department of Industry, Innovation and Science, 2018). As a result, the individuals
have increased the purchase of electronics and jewelry making the price of gold to rise.
Investment Demand
The purchase of gold as an investment has been on the increase in the recent years. Gold
is perceived as relatively safe investment for storage of wealth (Department of Industry,
Innovation and Science, 2018). The Brexit, stagnation in global interest rates and the United
States presidential elections in 2016 made investors both in Australia and worldwide market to
turn to gold as a more reliable asset. As a result, the price of gold shot up to due high demand
than supply.
Figure 1: Increase in Demand for Gold
Price
Gold
Change in taste for jewelry, increase in household incomes and investor activity have
made the demand for gold to rise. On graph one above, this scenario is illustrated by the shift in
the demand curve from D to D0. Therefore, the demand for gold increases from Qe to Q0 and the
price increases from Pe to P0.
S
P0
Pe
D0
D
Qe Q0

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The Supply of Gold
The supply of gold in Australia is affected by mine production, financial system, and net
producer hedging (Department of Industry, Innovation and Science, 2018). Increase in gold mine
activity is likely to increase the supply of gold in the market. In Australia, the exploration of gold
is being impeded by inadequate qualified workers particularly the drillers. When the reserve
bank of Australia sells gold, the supply of this product is also likely to increase. Furthermore, the
supply of gold is affected by net producer hedging. Under this scheme, the gold mines usually
enact future contracts to manage risks from gold fluctuation prices.
Recommendations
Apart from direct contribution to the economy through export earnings, gold avails
numerous flow-on benefits. For example, many of gold miners in Australia are located in rural
areas and get employment from gold mining (Department of Industry, Innovation and Science,
2018). Hence, the government of Australia has a significant role in ensuring that its boosts the
exploration of gold in the country. The leadership should concentrate on establishing a business
setting that supports investments and promotes productivity. This can be accomplished through
infrastructure improvement, reduction of red tapes to cut costs and project delays as well as other
incentives that encourage the exploration of gold.
Moreover, the companies in Australian gold mining industry have a responsibility to play
in guaranteeing the flourishing of this industry. Inadequate qualified workforce such as drillers is
one of the problems facing the gold sector (McHugh, 2017). Therefore, the mining companies
should invest in human capital development to enhance the skills and knowledge of workers in
this industry.

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Conclusion
Gold is one of the essential minerals that contribute significantly to the economic growth
of Australia. In the recent years, the price of this resource has increased due to strong demand
and low Australian dollar. The interaction between supply and demand also influences the prices
of gold. In Australia, the demand for gold is determined by changes in taste for jewelry, income
levels, and investor activity. On the contrary, supply is influenced by mines production, financial
system, and net producer hedging. Finally, this sector can be enhanced through the development
of human capital and creation a business setting that supports investments and boosts
productivity.

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Bibliography
Department of Foreign Affairs and Trade (DFAT), 2018. Australia’s gold Industry: tade,
production and outlook. [Online] Available at:
https://dfat.gov.au/about-us/publications/Documents/australias-gold-industry-trade-production-
and-outlook.pdf [Accessed 22nd April 2018].
Department of Industry, Innovation and Science, 2018. AUSTRALIA’S MAJOR EXPORT
COMMODITIES. [Online] Available at:
https://industry.gov.au/resource/Mining/AustralianMineralCommodities/Documents/Australias-
major-export-commodities-gold-fact-sheet.pdf [Accessed 22nd April 2018].
Department of Industry, Innovation and Science, 2018. Enhancing Australia's Resource Sector.
[Online] Available at: https://industry.gov.au/resource/Enhancing/Pages/default.aspx [Accessed
21st April 2018].
Department of Industry, Innovation and Science, 2018. Gold. [Online] Available at:
https://industry.gov.au/Office-of-the-Chief-Economist/Publications/
ResourcesandEnergyQuarterlyJune2017/documents/Resources-and-Energy-Quarterly-June-
2017-Gold.pdf [Accessed 22nd April 2018].
Department of Industry, Innovation and Science, 2018. Gold and Copper. [Online] Available at:
https://www.industry.gov.au/resource/Mining/AustralianMineralCommodities/Pages/
GoldandCopper.aspx [Accessed 22nd April 2018].
Maclean, I., 2013. Why Australia prospered the shifting sources of economic growth. Princeton:
New Jersey Princeton University Press.

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McHugh, B., 2017. Gold fever strikes with companies scrambling to open mines as prices stay
high. [Online] Available at: http://www.abc.net.au/news/rural/2017-07-28/in-the-grip-of-gold-
fever-as-mines-open-across-nation/8745306 [Accessed 22nd April 2018].
Scutt, D., 2016. Gold demand surged in early 2016. [Online] Available at:
https://www.businessinsider.com.au/gold-demand-just-hit-an-all-time-high-2016-5 [Accessed
22nd April 2018].