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How to Invest in Gold
How to invest in gold and key price drivers
Article updated on May 20, 2020
How to invest in gold and key price drivers
LONDON (Reuters) – Gold surged to a record above $1,500 an ounce on Wednesday as dollar weakness and a rise in oil prices added to fear-driven buying on the back of uncertainty over eurozone stability and U.S. growth.
The following are key facts about the market and different ways on how to invest in Gold.
HOW DO I INVEST?
SPOT MARKET
Large buyers and institutional investors generally buy the metal from big banks.
London is the hub of the global spot gold market, with more than $26 billion in trades passing through the city’s clearing system each day. To avoid cost and security risks, bullion is not usually physically moved and deals are cleared through paper transfers.
Other significant markets for physical gold are India, China, the Middle East, Singapore, Turkey, Italy, and the United States.
Find Out Why Countries & Governments Are Buying Gold
Russia continued to official gold reserves to fulfill the goal of boosting the Russian Federation’s national security. Given this statement, there should be no doubt that Russia views gold as an important monetary and strategic geopolitical asset.
FUTURES MARKETS
Investors can also enter the market via futures exchanges, where people trade in contracts to buy or sell a particular commodity at a fixed price on a certain future date.
The COMEX division of the New York Mercantile Exchange is the world’s largest gold futures market in terms of trading volume. The Tokyo Commodity exchange, popularly known as TOCOM, is the most important futures market in Asia.
China launched its first gold futures contract on Jan. 9, 2008. Several other countries, including India, Dubai, and Turkey, have also launched futures exchanges.
EXCHANGE-TRADED FUNDS
Media coverage of high gold prices has also attracted investments into exchange-traded funds (ETFs), which issue securities backed by physical metal and allow people to gain exposure to the underlying gold prices without taking delivery of the metal itself.
Gold held in New York’s SPDR Gold Trust, the world’s largest gold-backed ETF, rose to a record high of 1,320.436 tonnes in June 2010. The ETF’s holdings are equivalent to nearly half of the global annual mine supply and are worth some $59 billion at today’s prices.
Other gold ETFs include iShares COMEX Gold Trust, ETF Securities’ Gold Bullion Securities and ETFS Physical Gold, and Zurich Cantonal Bank’s Physical Gold.
BARS AND COINS
Retail investors can buy gold from metals traders selling bars and coins in specialist shops or on the Internet. They pay a premium for investment products of 5-20 percent above spot prices, depending on the size of the product and the weight of demand.
KEY PRICE DRIVERS:
INVESTORS
Rising interest in commodities, including gold, from investment funds in recent years has been a major factor behind bullion’s rally to historic highs. Gold’s strong performance in recent years has attracted more players and increased inflows of money into the overall market.
FOREIGN EXCHANGE RATES
Gold is a popular hedge against currency market volatility.
It has traditionally moved in the opposite direction to the U.S. dollar as weakness in the U.S.
The unit makes dollar-priced gold cheaper for holders of other currencies and vice versa.
This link sometimes breaks down in times of widespread market stress, however, as both gold and the dollar benefit from risk aversion.
Their ratio turned positive in late 2008 and early 2009 after the crisis following the Lehman Brothers’ failure.
Despite another drop in the usual strong correlation between gold and the euro-dollar exchange rate, the currency market still plays a major long-term role in setting gold’s direction
Analysts say gold’s strong performance last year was largely driven by concerns over the stability of all currencies, though primarily the dollar, as major economies have moved to dampen strength in their currencies to safeguard exports.
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Top Stocks of 2012 Aflac (AFL)
Aflac (NYSE: AFL) is best known in the U.S. for its ‘duck ads,’ but actually earns over 75% of its money from Japan. “In Japan, once people get AFL insurance they don’t drop it (which is very important in the life and health insurance industry) with a persistency rate of 95%.
AFL currently yields 2.4%, which is nice. It has however, increased that dividend in each of the last 27 years, and over the last 15 years it has done so at a compound annual rate of 20.7%.
10 Stocks off to a Good Year
Neither the multifaceted disaster in Japan nor the domino-like progression of political unrest in the Middle East and North Africa has prevented the Standard & Poor’s 500 Index ($INX) from climbing 13.4% in the first quarter of 2011. And some stocks performed as if we were living in the best of times.
Among the index’s top 10 performers was CB Richard Ellis Group (CBG), a commercial real estate company that offers services to tenants, owners, lenders and investors.
The Los Angeles company’s stock climbed 30.4% in the first quarter, helped by better-than-expected fourth-quarter financial results and an improving outlook for commercial properties.
CB Richard Ellis recently raised $800 million through term loans to purchase the real estate investment unit of ING (ING).
Some analysts think the share price has limited upside potential after soaring 68.5% in the past 12 months. Yet the commercial real estate market, considered by some “the next shoe to drop,” is turning around faster than many observers expected.
Home Prices Near a Double Dip!
With the latest data pointing to a double-dip in home prices, it has become increasingly clear that the wobbly economic recovery won’t be getting any help from the housing sector.
Existing home sales in February sank 9.6% from the previous month, while prices fell 5.2% to a median of $156,000, the lowest since April 2002. Existing homes comprise 90% of the housing market.
Meanwhile, new homes sales in February plummeted to an annual rate of 250,000, far below the norm of 700,000 and a level half that of 1963, when the United States had 120 million fewer residents than its current population of 310 million. The median sales price plunged 8.9% year-over-year.
But the worst news came with last Tuesday’s release of Standard and Poor’s Case-Shiller Home Price Index. The index average of 20 major housing markets in the United States fell 3.1% in January, putting it within 1.1% of its April 2009 low. A drop below that level would establish a new post-peak low – the dreaded “double-dip.”