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. The lion’s share of physical gold trading takes place on the over-the-counter (OTC) market, based primarily in London, New York, and Zurich. The size of an average OTC gold trade can range in size from 5,000 to 10,000 ounces. Investors and speculators can also trade in OTC derivatives similar to the ones discussed below.
Because physical assets are bought and sold in such trades, the live OTC gold market price is an important benchmark for investors. The “London fix” – the most widely used gold spot price indicator – is calculated twice daily (the AM fix and the PM fix).
And Into the Futures
When institutional investors talk about the gold market they are usually referring to the gold futures market. Futures trading 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 what gold prices will be like in the future. The principal indicator is the spot price, and in the futures market that price represents the price for 1000 ounces of COMEX-approved gold bullion bars 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. It should be noted, however, that futures contracts rarely come to fruition and are more often extended to future dates rather than fulfilled.
Exit Gold, Enter Paper
The Derivatives gold market refers to instruments that settle farther into the future than the original spot settlement date. These types of gold investments were introduced as a way to hedge against adverse volatility in the gold spot price. Two basic types of derivatives exist, although each of these types can be further broken down into numerous complicated variations.
Futures contracts are written agreements to buy or sell a certain amount of gold at a certain price on a fixed future date. Futures traders buy, sell and adjust futures contracts constantly; physical gold is rarely delivered between the two parties.
Options are a specific type of futures contract. Options give the holder the right – but not the obligation – to buy (a call option) or sell (a put option) a specific quantity of gold at an agreed-upon price on or before a date agreed upon by both parties. Options are standardized by individual gold exchanges.
Out of the Exchange and Into the Stock Market
In 2003 the exchange-traded fund (ETF) was introduced. ETFs are supposed to be 100% backed by actual gold, but many investors and analysts believe that since the shareholder never takes possession of the metal there could be room for fraud and/or negligence on behalf of the share issuers. Although ETFs may seem to be an easy way to invest in gold, they actually introduce another layer of risk (due to the doubts surrounding the volume of metal backing each share) while having none of the safety benefits of physical gold ownership.
Untangling the Rat’s Nest
Trading directly in the gold market can be quite complex. Fortunately, there exists a far superior option – invest in physical gold through the Certified Gold Exchange. Our industry-exclusive PriceMatchPlus® guarantee assures you our best prices for certified gold and silver, and it always includes free home or office delivery. Call (800) 300-0715 for the best volume discounts available.
Learn more about gold. Next: How to Buy Gold