The demand for gold reached US $102 billion in 2008, up 29% from the previous year, supported by increasing investor demand in light of the current economic climate. Increasing investor demand resulted in the demand for gold bullion bars and coins rising by 87%. This huge increase was partially offset by a drop in demand for gold jewelry as gold prices increased. Jewelry purchases remained low in Western countries where jewerly has a high design markup and low caratage. But in countries where investment-grade jewelry with high caratage and low design markup is the norm, large buying increases occurred during dips in the gold price.
The supply of gold continued its decreasing trend in 2008, due to mine closures and lack of exploration in previous years when the gold price was lower. This is a cyclical process, with exploration and new mines being developed when the gold price is high enough to fund these activities. But the results of these activities are delayed by a few years, as it takes time to progress such projects. In addition to that cyclical decline, credit problems may lead to troubles for mining and exploration companies, resulting in a slowing of operations.
Central banks are also holding onto their gold reserves and not selling at high levels.
The results of this continued limited supply coupled with increasing investor demand means that the price of gold is likely to remain high as long as the current economic conditions prevail.