How to invest in gold
19.06.2010 03:19
How to invest in gold
If you are one of the intrepid ones and believe in commodities guru Jim Rodgers predictions on gold price rise, then here is how to get hold of some yellow metal for yourself.
Gold surged to a record high above $1,250 an ounce on Tuesday as concern about the scope of the euro zone debt crisis and its impact on economic recovery pushed investors towards the perceived safety of bullion.
Following are key facts about the market and different ways to invest in the precious metal.
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 some $18 billion in trades passing through London'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.
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 January 9, 2008. Several other countries, including India, Dubai and Turkey, have also launched futures exchanges.
EXCHANGE-TRADED FUNDS
The wider media coverage of high gold prices has also attracted investments into exchange-traded funds (ETFs), which issue securities backed by physical metal.
These 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 1,289.839 tonnes earlier this month. The ETF's holdings are equivalent to more than half the global annual mine supply, and are worth some $51.8 billion at today's prices.
Other gold ETFs include iShares COMEX Gold Trust, ETF Securities' Gold Bullion Securities, 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 small premium for investment products, of between 5-20 percent above spot price depending on the size of the product and the level 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.
U.S. DOLLAR
Despite the recent 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 the direction of gold.
Gold is a usually popular hedge against currency weakness. A weak U.S. currency also makes dollar-priced gold cheaper for holders of other currencies and vice versa.
This link sometimes breaks down in times of widespread financial market stress, however, as both gold and the dollar benefit from risk aversion. Their ratio turned positive in late 2008 and 2009 after the Lehman Brothers crisis.
OIL PRICES
Gold has historically had a strong correlation with crude oil prices, as the metal can be used as a hedge against oil-led inflation. Strength in crude prices also boosts interest in commodities as an asset class.
FISCAL AND POLITICAL TENSIONS
The precious metal is widely considered a safe haven, bought in a flight to quality during uncertain times.
Financial market shocks, as seen in the aftermath of the collapse of Lehman Brothers in 2009 and more recently in the case of burgeoning euro zone debt problems, tend to boost inflows to gold.
Major geopolitical events including bomb blasts, terror attacks and assassinations can also induce price rises.
CENTRAL BANK GOLD RESERVES
Central banks hold gold as part of their reserves. Buying or selling of the metal by the banks can influence prices.
On Aug. 7, 2009, a group of 19 European central banks agreed to renew a pact to limit gold sales, originally signed in 1999 and renewed for a further five years in 2004.
Annual sales under the pact are limited to 400 tonnes, down from 500 tonnes in the second agreement, which expired in late September. Sales under the new pact have been low, however.
HEDGING
At the beginning of the 21st century, when gold prices were languishing around $300 an ounce, gold producers sold a part of their expected output with a promise to deliver the metal at a future date.
But when prices started rising, they suffered losses and there was a move to buy back their hedging positions to fully gain from higher market prices, a practice known as de-hedging.
Significant producer de-hedging can boost market sentiment and support gold prices. However, the rate of de-hedging has slowed markedly in recent years as the outstanding global hedge book shrank.
SUPPLY/DEMAND
Supply and demand fundamentals generally do not play a big role in determining gold prices because of huge above-ground stocks, now estimated at around 160,000 tonnes, more than 60 times annual mine production.
Gold is not consumed like other commodities.
Peak buying seasons in major consuming countries such as India and China exert some influence on the market, but other factors such as the dollar and oil prices carry more weight.
