Gold as an Investment
Gold had served as money for thousands of years until 1971 when the gold standard was abandoned for a fiat currency system. Since that time, gold has been used as an investment. Gold is often classified as a commodity; however, it behaves more like a currency. The yellow metal is very weakly correlated with other commodities and is less used in the industry. Unlike national currencies, the yellow metal is not tied to any particular country. Gold is a global monetary asset and its price reflects the global sentiment, however, it is mostly influenced by the U.S. macroeconomic conditions.
Gold Investment Market
The gold market is a global market, with London and New York being the two biggest market places for gold in the world. The gold market is quite large, larger than many other markets. It is estimated that the size of the investable gold market is $2.4 trillion. The average daily trading volume in gold in the over-the-counter market alone is estimated at $67 billion, indicating that the gold market is very liquid.
The price of gold is determined by supply and demand. However, annual gold demand and supply are only a tiny fraction of the gold volume that is traded in a year. Unlike most other commodities, saving and disposal plays a larger role in affecting its price than its consumption and annual mining production. Although most of the volume is in the over-the-counter market, price discovery happens mainly in the futures markets, such as Comex. Additionally, the London Bullion Market Association determines the fix twice a day. The so-called London fix is set daily at 10:30 GMT and 15:00 GMT, serving as a benchmark for pricing gold.
Gold Investment Reasons and Drivers
The most important reason for investing in gold is diversifying risk. Gold is an excellent portfolio diversifier, since it has very low correlation with other assets. This is why the yellow metal is one of the most effective hedges or safe havens. Gold can be seen as an insurance against tail risks, financial black swans, high and accelerating inflation or systemic crises.
There are many factors influencing the investment demand for gold, however, the most important are the U.S. dollar strength, the level of real interest rates and the intensity of risk aversion.
Gold Investment Vehicles
There are many. The most traditional way of investing in gold is by buying bullion bars or coins. However, investors can also purchase gold exchange-traded products or gold certificates, to avoid the risks and costs associated with the transfer and storage of physical bullion. Investors can also invest in gold via derivatives, such as forwards, futures and options. The indirect way to have exposure to the price of gold is buying the shares of gold mining companies.
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