Exploring the intricacies of how the gold market works would take several volumes. This “primer” article covers the basic ins and outs of the market and the primary indicators of activity – essential information for making informed investments. For a complete look at all of the possible gold investments click here.
The gold market has two distinct segments. Almost all trading of physical gold takes place on the over-the-counter (OTC) market, centered primarily in London, New York, and Zurich. OTC trades are direct, unstructured transactions between principals – mining companies, central banks, and industrial consumers. The standard size of OTC gold trades ranges from 5,000 to 10,000 ounces. Investors and speculators can also trade in OTC derivatives similar to those discussed below.
Because physical assets are bought and sold, the current OTC gold market price is an important benchmark. The London fix – the most widely used indicator – is calculated twice daily (the AM fix and the PM fix).
And Into the Futures
What most people think of as the gold market is actually the gold futures market, the trade that takes place on exchanges such as the Commodity Exchange (COMEX) division of the New York Mercantile Exchange (NYMEX), the Chicago Board of Trade (CBOT), and the Tokyo Commodity Exchange (TOCOM). Investors in futures exchanges do exactly what you might guess – speculate on the future of gold market prices. The principal indicator is the spot price – the quote price for gold to be delivered and paid for on a settlement date two days into the future. The spot price is heavily influenced by the London fix.
Exit Gold, Enter Paper
Derivatives, instruments that settle further into the future than the spot settlement date, were introduced into the gold market to hedge against adverse movement in the spot price. There are two basic types of derivatives, although each has numerous complicated variations.
Futures are contracts to buy or sell a specified quantity of gold at a set price on a fixed future date. Delivery dates and unit quantities are standardized by individual exchanges. Futures trading is buying and selling futures contracts; physical gold is rarely delivered.
Options are a variation on futures that give the holder the right – but not an obligation – to buy (call option) or sell (put option) a specified quantity of gold at a set price on or before a specified date. Options are also standardized by individual exchanges.
Out of the Exchange and Into the Stock Market
In 2003 the exchange-traded fund (ETF) introduced a new form of gold trade into the stock market. These instruments are supposed to be fully backed by gold, although the share holder never takes possession of the gold itself. Similar instruments, backed by futures, are also available. Although ETFs may appear to simplify one’s entry into the gold market, they introduce another layer of risk while having none of the benefits of owning physical gold.
Untangling the Rat’s Nest
Trading directly in the gold market is indeed complex. Fortunately, there exists a far superior option – invest in physical gold through Certified Gold Exchange. Our PriceMatchPlus® guarantee assures you the best prices for both Gold Bullion for short-term investments and Certified Gold Coins for your long-term investment strategy. Call 1-800-300-0715 for the best volume discounts available.
Learn more about gold. Next: How to Buy Gold