Gold is a popular investment choice among precious metals. Investors often buy gold to spread their financial risk. They use various methods, including futures contracts and derivatives, to invest in gold. Like other markets, the gold market experiences speculation and price changes.
Gold Price
The price of gold is measured in US dollars per troy ounce and has fluctuated over time. Historical data shows significant price changes, such as peaks in 1980 and recent years, due to various global events and economic factors.
Gold has been used as money throughout history and served as a standard for currency in many countries until recent times. In the late 19th and early 20th centuries, many European countries used the gold standard. After World War II, the Bretton Woods system fixed the US dollar to gold at $35 per ounce. This system ended in 1971, and the Swiss franc was the last major currency to drop its gold backing in 2000.
Since 1919, the London gold fixing, a meeting of five gold-trading firms, has set a common benchmark for gold prices. Gold is also traded globally based on spot prices from various over-the-counter markets.
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Influencing Factors
Gold prices are mainly driven by supply and demand, including speculative demand. Unlike other commodities, gold’s price is more affected by saving and disposal than by consumption. Most gold ever mined still exists in forms like bullion and jewelry, making it nearly as liquid as bullion.
Gold prices are influenced by sentiment, macroeconomic variables, and market changes rather than just annual production. For example, in recent years, annual gold mine production has been around 2,500 tonnes, with most used for jewelry and industrial purposes.
Central Banks
Central banks and the International Monetary Fund (IMF) play a key role in the gold market. As of the end of 2004, central banks held 19% of all above-ground gold as reserves. The Washington Agreement on Gold, starting in 1999, limited gold sales by its members to 400 tonnes per year. This agreement was extended and modified over the years, with the latest extension ending in 2019.
Some central banks, such as Russia and China, have shown interest in increasing their gold reserves. China, in particular, has become the world’s top gold consumer since 2013.
Hedge Against Financial Stress
Gold is often used as a hedge against financial instability, inflation, and currency devaluation. Despite some debate about its effectiveness, gold is unique in that it carries no default risk. However, its reliability as a hedging instrument has been questioned.
Jewelry and Industrial Demand
Jewelry is the largest use of gold, accounting for over two-thirds of annual demand. India, China, and the USA are major consumers. Gold is also used in industrial and dental applications due to its conductive properties and resistance to corrosion.
Gold recycling has become a significant industry, with many businesses buying old or broken gold jewelry.
War, Invasion, and National Emergency
Historically, gold has been used as money during times of crisis. For example, during the Great Depression in the 1930s, the US government restricted gold ownership to prevent bank runs. The restriction was lifted in 1975.
Investment Vehicles
- Bars: Investing in gold bars is traditional and often involves purchasing bullion from banks or dealers. Bars come in various sizes and typically have lower price premiums than coins. Good Delivery bars, which are traded within the London Bullion Market Association (LBMA) system, have a verified chain of custody. However, larger bars can be at risk of forgery.
- Coins: Gold coins are a popular investment and come in various sizes, with the 1 troy ounce coin being the most common. Notable examples include the Krugerrand, Gold Maple Leaf, and American Gold Eagle. Coins are often sold by dealers and can be subject to counterfeiting.
- Gold Rounds: These are similar to coins but do not have currency value. They are often less expensive than gold coins but are not as collectible.
- Exchange-Traded Products (ETPs): Gold ETPs, such as ETFs and ETNs, offer a way to invest in gold without physical storage. They represent gold value but carry risks beyond the metal itself, including management fees and potential structural issues.
- Certificates: Gold certificates allow investors to avoid handling physical gold. They can be allocated or unallocated, with allocated certificates being more secure. Gold certificates have been used historically and are still issued by various banks and programs.
- Accounts: Gold accounts can be allocated (fully reserved) or unallocated (pooled). Allocated accounts offer better security, while unallocated accounts are more liquid but less secure.
- Derivatives: Gold derivatives, such as futures and options, are traded on exchanges and over-the-counter. They can increase potential returns but also involve higher risk.
- Mining Companies: Investing in gold mining companies is another option. While it can offer higher returns if gold prices rise, mining shares are subject to various risks, including operational issues and market volatility.
Conclusion
Gold remains a popular and versatile investment. It serves as a hedge against economic uncertainty and inflation, with various investment options available. Each investment method has its advantages and risks, making it important for investors to choose based on their financial goals and risk tolerance.
