Modelling the gold market, explaining the past and assessing the physical and economical sustainability of future scenarios

By using an integrated dynamic model we are able to reconstruct the supply and gold price of the past (1920-2010) and this is used to predict the future supply of gold to the market and to make a forecast of the goldprice 2010-2100. The model was validated against field data for the period 1920-2010 and it performs well. The model GOLD is implemented in the STELLA® software and the model described in the article. The simulation results show that the market is fundamentally driven by supply and demand, but that derivates trade and speculations have affected the market significantly to create large short term variations in price. The investigations show that during 1930 to 1971, the price was set by the governments of the US and UK, that after 1971 it was a functioning market and that during 1990-2000, the gold price was artificially depressed by foreward and derivates trade. On the theme of long term supply the model predicts a shift from high-grade ores to low-grade deposits as the main virgin supply source in the next 50 years, but that recycling will become the most important source of gold to the market. The authors predict a significant tightening of the gold market, with rising prices and a decreased derivates trade as compared to trade in the physical commodity. It has been claimed that foreward and derivates trade would stabilize the markets and the price. However, the model shows clearly that this is not the case, but that foreward and derivates trade create less stability and increase price fluctuations, but that they cannot prevent the long term trend from basic fundamental factors to set the long term levels.