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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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Gold Approached $1,570 an Ounce!
Gold approached $1,570 an ounce, extending a rally to a record, on bets that the dollar will extend a slump, enhancing the allure of the metal as a store of value. Silver posted for the biggest monthly gain in 28 years.
“Silver’s run is related to the rise in gold,” said Michael Cuggino, who helps manage about $12 billion at Permanent Portfolio Funds in San Francisco. “There’s a lot of speculation in silver. Anytime you’ve had a run like silver, you’re going to get a correction.”
Gold has climbed 33 percent in the past year, and silver has more than doubled.
Hedging Silver
Silver – like gold – has enjoyed a high-octane surge. But what now? How do you keep chasing the profits that inflation is sure to bring without risking the loss of those profits should silver prices reverse? Well, options expert Larry D. Spears last week showed investors how to hedge against a possible decline in the price of gold – and this week he’s back to do the same ….