The price of gold soared to a record high $1,000.45 per ounce on Thursday, as the precious metal benefited from the weak dollar and its safe haven status amid fears of rising inflation. How to invest in gold and key price drivers.
Investors are funneling their cash into commodities like gold as they seek refuge from volatile world stock markets, the plunging value of the dollar and growing fears about a US-led economic slowdown, traders said. After reaching the milestone, gold stood at $997.54 per ounce on the London Bullion Market, which compared with $975.50 late on Wednesday. “Ongoing inflationary pressure from rising oil prices and continued concerns about the US economy and credit liquidity have led sentiment to turn more positive,” said James Moore, analyst at TheBullionDesk.com. He added: “Trading conditions remained choppy in the precious metal.”
US gold futures hit a record high, as investors snapped up the metal on a weakening dollar and rocketing oil prices. Following are key facts about the market and different ways to invest in the precious metal.
HOW DO I INVEST?
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 $13 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.
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. Several other countries, including India, Dubai and Turkey, have also launched futures exchanges.
The wider media coverage of high gold prices has also attracted investments into exchange traded funds (ETFs), which allow people to buy the metal on a stock exchange without taking physical delivery of the metal. Gold held in US-listed StreetTRACKS Gold Shares, the world’s largest gold-backed ETF, rose to a record high of 654.93 tons on March 10. The ETF accounts for more than 80% of the metal held by all such funds. Other gold ETFs include iShares COMEX Gold Trust and ETF Securities’ ETFS Physical Gold.
BARS AND COINS
Retail investors can buy gold from metals traders selling bars and coins in specialist shops or on the Internet.
KEY PRICE DRIVERS:
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.
The currency market plays a major role in setting the direction of gold, with bullion prices moving in the opposite direction to the US dollar. A weak US currency makes dollar-priced gold cheaper for holders of other currencies and vice versa.
Gold has recently had a strong correlation with crude oil prices, as the metal can be seen as a hedge against oil-led inflation.
The precious metal is widely considered a “safe-haven”, bought in a flight to quality during uncertain times. Major geo-political events including bomb blasts, terror attacks and assassinations can induce sharp price rises. Financial market shocks, which cause other asset prices to drop sharply, can have a similar effect.
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. In March 2004, 15 European central banks renewed a 1999 pact to limit their gold sales over a five-year period to 2,500 tons, with annual sales limited to 500 tons, up from 2,000 tons in the first agreement.
Several years ago 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 gain fully from higher market prices -- a practice known as de-hedging. Significant producer de-hedging can boost market sentiment and support gold prices.
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 158,000 tons -- more than 60 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 others factors, such as the dollar and oil prices carry more weight. (Reuters)