Understanding the Gold Market
What is the Gold Market?
The Gold Market refers to the buying and selling Gold worldwide. It is a big concept but is actually fairly simple. The Gold spot price is the same across the entire market, even when it is expressed in different currencies. Gold has been used as a trading commodity for millennia and even today its intrinsic value makes it ideal for moving wealth internationally and investing long term. Savvy investors watch the Gold market to time their acquisitions to their best advantage.
Gold and Currency
Gold has been used as a tradable commodity literally since its discovery and until recently Gold was used as a relative standard for diverse currencies. Many European countries implemented Gold standards in the 19th century, but World War II and its resultant financial crises caused the suspension of Gold trading in England, which did not resume until 1954. After World War II, the United States set the dollar-to-Gold rate of $35 per troy ounce. This system functioned well until the 1971 Nixon shock, when inflation and economic upheaval necessitated the transition to a fiat currency system. Some currencies relied on the Gold standard longer than the United States; the last currency to be divorced from Gold was the Swiss franc in 2000.
What Determines the Gold Price?
Since 1919, the most common benchmark for the price of Gold has been the London Gold Fix, which takes place twice each business day of the London bullion market. Via teleconference, a price is set for settling contracts between members of the London bullion market, but this Gold fixing provides a recognized rate used in pricing the majority of Gold products worldwide. The Gold fix is conducted in the United States dollar, the pound sterling, and the euro daily at 10:30 a.m. and 3 p.m., London time. Currently, Barclays, the Bank of China, Bank of Communications, Goldman Sachs, HSBC Bank USA, JPMorgan Chase, Morgan Stanley, Société Générale, Standard Chartered, ScotiaMocatta, the Toronto-Dominion Bank and UBS all participate in the daily fixing. The number these firms set strongly influences the Gold spot price of the day.
What Influences the Market?
As with all commodities, the greatest influencing factor on the Gold market is supply and demand. Gold is particularly interesting, though, because the Gold market depends less on newly mined Gold than other Precious Metals markets. The Gold “above ground” is still fairly liquid. While about 2/3 of yearly Gold produced goes into jewelry, jewelry in many countries represents liquid wealth. This is something we explore at AMPEX, encouraging our clients to see a fine Gold money clip, for example, as a different form of Gold investment. Gold used for personal adornment often makes its way back into circulation after a few years or a few generations. A small amount of Gold each year goes into medical and industrial applications and the rest goes into investments and exchange-traded Gold funds. A bit of cursory research on the supply side versus the demand side of the Gold market will show you the ever-wavering balance that makes Gold a good long-term investment with real potential for growth over time.
The Gold market can seem like a complicated system but it relies on simple concepts. Luckily, a smart investor can easily keep abreast of the important news and understanding the spot price of Gold allows one to make wise investment decisions.