GOLDEN ACADEMY
GOLDEN ACADEMY
Factors Affecting Gold Price
USD
USD exchange rate is one of the significant factors that affect gold price. Such influence is mainly shown in two aspects: 1) USD is the pricing currency in the international gold market being negatively correlated to gold price; if USD is depreciated in case of constant value of gold itself, gold price will then rise; 2) Gold is a substitute investment tool of USD assets and continuous increase of gold price in previously years was mainly resulted from dramatic depreciation of USD for three consecutive years.
According to historical statistical information of gold, USD is negatively correlated to gold. Information of recent 10 years suggests that the correlation between USD and gold is increasingly close to -1%. Therefore, change of USD exchange rate is a significant parameter in the analysis of gold price. However, under some special circumstances, especially circumstances when the gold price trend is particularly strong or weak, gold price may be free of influence of USD.
Political situation
Throughout history, gold has been the best means of hedging. As a common saying goes, when the battle begins, it is a matter of 1000-kilogram gold, perfectly explaining the high hedging value of gold. Any war or political turbulence would result in an increase of gold price and emergency events would normally lead to a dramatic increase of gold price in the short term. On January 21st, 1980, gold price reached a new high, USD 850/ounce, and one of the significant causes was turbulence in the world -- the U.S. was held hostage by Iran in November 1979 and the Soviet Union invaded Afghanistan in December of the same year, thus increasing gold price by USD 30 to 50 on the daily basis.
Inflation
As the only non-credit currency in the world, unlike other forms of currency such as paper money which only represents value but is of extremely low value itself, gold has of very high value. Under extreme circumstances, paper money may be as worthless as paper. Gold, however, will never lose its value as precious metal. Therefore, gold represents constant value, which is most obviously explained by its investment value during inflation —— paper money will be depreciated due to inflation and gold will not. To take Savile Row in London as an example, suits made there have been priced at 5-6 ounce of gold for centuries, certifying constant purchasing power of gold. Several centuries ago, people could buy a suit with dozens of pounds. Therefore, in ages of over liquidity of currency and inflations, gold will be particularly favored by investors due to its resistance to inflation. Gold price is more easily affected by the inflation rate of western countries, the U.S. particularly, while it is under no impact of in some less developed countries such as Chile and Uruguay.
Supply
Gold price fluctuates based on the supply-demand relation. If gold production is largely increased, gold price will go down. Meanwhile, application of new mining techniques, discovery of new gold ores and sales of gold by central banks will exert impacts on gold price. In major gold-consuming countries such as India, if the demand for gold exceeds its supply greatly during a rush for gold consuming because of long-term strike or other reasons, gold price will go up. In recent years, the investment demand for gold accounts for an increasing percentage in the market, imposing a more flexible and more sensitive impact on gold and changes in the market of financial derivatives thus become particularly important to gold price trends.
Demand
(1) Changes of actual demand for gold (jewelry, industry, etc.)
In general, total demand for gold depends on the speed of the world's economic development. In the field of microelectronics, for example, gold is increasingly used as protection. Meanwhile, in medicine and construction and decoration, even though the technical progress continuously presents gold substitutes, gold remains in increasing demand due to its special metal quality. In some regions, on the other hand, local factors exert a great impact on gold price. For instance, in India and Southeast Asian countries where gold jewelry is always on demand, under the impact of financial crisis, such countries have imported greatly decreased amount of gold since 1997. According to information of the World Gold Council, the demand for gold in Thailand, Indonesia, Malaysia and South Korea is decreased by 71%, 28%, 10% and 9% respectively. According to relevant statistical data, gold consumption per capita in China in the 21th century is 0.2 gram, which is much lower than that of some major gold-consuming countries in the world. The figure of India, for example, is 0.85 gram, which is more than 4 times that of China. On the other hand, China surpasses India greatly in economic development and average income. Therefore, China has great potential in gold consuming.
(2) Needs for value preservation
Gold reserve has always been adopted by central banks as a significant means to prevent domestic inflation and regulate the market, while ordinary investors invest in gold mainly for the purpose of value preservation under circumstances of inflation. In case of economic depression, gold is much more secure than monetary assets, resulting in an increased demand for gold and thus an increase in gold price. For example, during the third USD crisis after World War II, the U.S. was experiencing severe international payment deficit, resulting in increased USD held by many countries. Consequently, the market's confidence in the value of USD weakened, hence, investors rushed to purchase gold, which directly led to bankruptcy of the Bretton Woods System. In 1987, the U.S. was having huger deficit and the Middle East was in turbulence, all together resulting in a huge increase of gold price in the international market.
(3) Speculative needs
Speculators may, based on the international and domestic condition, make use of gold price fluctuations on the gold market and trading system of the gold futures market, and cause massive shorting selling or buying of gold, artificially making a gloss of gold demand. In the gold market, almost every great down is related to hedging fund companies borrowing short-term gold, dumping on the spot gold market, and causing a short position in the COMEX. In July 1999, when the gold price reached the new low in 20 years, information published by the U.S. Commodity Futures Trading Commission suggested that the speculative short position in the COMEX was nearly 9 million ounce (around 300 tons). After loss-stopping selling had been triggered and gold price went down, fund companies took the chance to recover profits. When gold price slightly rebounded, forward hedging selling caused further increase of gold price, offering fund companies a new opportunity to cause short position, thus resulting in continuous decrease of gold price at that time. According to Gao Jin from Chengdu Gaosaier, “Currently, trends of gold price in the gold market do not simply depend on the demand-supply relation, or simple regulation by central banks of different countries. It is affected by speculative factors to a certain extent.”
Location of International Gold Markets
London
London has a long history of gold trading dating from more than 300 years ago. London replaced Amsterdam as the world's center of gold trading in 1804. In 1919, the London gold market was officially established, fixing gold price twice a day in the morning and in the afternoon respectively. Gold fixing was carried out by five gold fixing banks of the London gold market in the Gold Room, an office at the headquarters of Rothschild located in central London. Representatives from such five gold fixing banks gathered in the Gold Room for the first time on September 12th, 1919, fixing daily gold price for the London gold market, which then became a tradition that continues till today. 5 gold fixing banks fix gold price twice a day, respectively at 10:30 am and 3:00 pm.
On October 12th, 2004, Credit Suisse First Boston withdrew from relevant business including precious metal market making, financial derivatives, liquidation and stock in London, New York, and Sydney. Therefore, there are currently 4 gold fixing banks in the London gold market including N M Rothschild & Sons Limited, Bank of Nova Scotia-ScotiaMocatta, Deutsche Bank and HSBC USA. The withdrawal of Credit Suisse provides gold producers with an opportunity to enter the London Pricing Committee. The 4 gold fixing banks determine the market price of gold of current day, which is always affecting the trading in New York and Hong Kong. A major supplier of market gold is South Africa. Before 1982, there was mainly spot gold trading in the London gold market and in April 1982, the London futures gold market was established. Currently, London remains as the biggest gold market in the world.
Zurich
The development of the Zurich gold market was greatly fostered after the World War II when the London gold market was shut down twice; gold price issued by the Zurich gold market now receives as much international attention as the one issued by the London gold market. Without a formal organization structure, the Zurich gold market has its business liquidated and settled by 3 banks in Switzerland which are Swiss Bank Corporation, Credit Suisse, and Union Bank of Switzerland. These 3 major banks not only conduct transactions on behalf of their clients, but gold trading is also the main business of these 3banks. Established based on an unofficial negotiation by above 3 major banks in Switzerland, the Zürich Gold Pool is not subject by the government but serves as the intermediary between dealers and clearing system in the market.
New York
New York and Chicago gold markets were developed in the mid 1970s, mostly due to depreciation of USD after 1977 when the American (mainly corporate organization) facilitated the rapid development of gold futures for the purpose of hedging and adding profit from investment.
At present, New York Commodity Exchange (COMEX) and Chicago Mercantile Exchange (CME) are not only the center of American gold futures trading, but the world's largest gold futures trading centers. Both exert a great impact on gold price of the spot gold market.
To take New York Commodity Exchange (COMEX) as an example, the exchange itself is not engaged in futures trading. Instead, it provides a place and facilities for dealers and develops some rules that ensure fair and reasonable transactions between the trading parties. There is very detailed and complicated description of weight, fineness, shape, upper and lower limitation of price, trading date, and trading time for spot and futures gold trading.
Meanwhile, the U.S. Department of the Treasury and International Monetary Fund (IMF) are auctioning gold in New York, making the New York gold market the largest and most active gold futures market in the world. The U.S. gold market mainly engaged in gold futures trading with the futures contract can reach up to 23 months, and the trading subject is 100-ounce of 99.5% fineness pure gold quoted in USD.
Hong Kong
The Hong Kong gold market has a history for over 90 years starting from the establishment of the Chinese Gold & Silver Exchange (CGSE). In 1974, the Hong Kong government released control and regulation on import and export of gold. Thereafter, Hong Kong gold market has developed rapidly. Since the Hong Kong gold market time difference perfectly fills the gap between the closing of the New York and Chicago markets and the opening of the London market, hence connecting Asia, Europe, and the United States to form a complete world gold market. Its excellent geographical location also attracts the attention of European gold merchants, leading to the 5 largest gold merchants in London and the 3 major Swiss banks set up their branches in Hong Kong. Bringing the settled gold trading activities in London to Hong Kong, and gradually formed an invisible local "London Gold Market", making Hong Kong one of the world's major gold markets.
Tokyo
Tokyo gold market was established in 1982 as the only gold futures market with the official approval of the Japanese government. Most of the member are Japanese companies. The gold market quoted in Japanese Yen, with the trading subject is 1 kilogram of 99.99% fineness pure gold and each contract is 1000 grams.
Singapore
Gold Exchange of Singapore (GES) was founded in November 1978, mainly conducting spot gold trading and five types of futures contracts with a term of 2 months, 4 months, 6 months, 8 months, and 10 months. The standard trading subject is 100-ounce of 99.99% fineness pure gold with trading halt and suspension.
Shanghai
Shanghai Gold Exchange (SGE) was officially founded on October 30th, 2002. Approved by the State Council of the People's Republic of China and established by the People's Bank of China, the Shanghai Gold Exchange performs functions in accordance with the Gold Exchange Management Measures. It organizes gold transactions in accordance with the principles of openness, fairness, justice and honesty.
Investment Value of Gold
Investment Value of Gold
Always been an investment instrument, gold is a kind of independent resources of high value, limited to no state or trade market and connected to no enterprise or government. Therefore, investing in gold normally could protect investors from possible turmoil in the economic environment. Moreover, gold investing is the investment item with the least tax liabilities all over the world. Gold investing includes investments in gold bars, gold coins and even gold jewelry. There are many kinds of gold accounts in the investment market.
Gold Bar Investment
When investing in gold bar (bullion), it is suggested that investors purchase gold bar (bullion) made by a gold refining company that is commonly accepted in the world or withhold considerable local fame. In the long run, investor can save many fees and procedures when selling the gold bar in the future. If the gold is not produced by a well-known company, the gold buyer will charge a fee for analyzing the gold. Numerous famous international gold merchants would sell gold bars in a sealed packaging with a reliable seal certificate, so it will be much more convenient to sell gold bars in a sealed packaging.
In general, a gold bar is casted with serial number, purity mark, also name and logo of the refinery company. As gold bricks (nearly 400 ounces) are only available for trading between governments, banks and large gold merchants, private individuals, medium and small-sized enterprises normally choose gold bars that are smaller in size for trading, which require an extra cost to remelted and casting of the huge gold bricks. The smaller the gold bar the higher its casting expenses will be, hence the higher price.
The advantages of investing in gold bars include: strong circulation, can be cashed immediately, can be transferred all around the world, and can also be quoted from all over the world. In the long run, gold bars have a value-preserving function and have a certain effect on resisting inflation.
The disadvantage is that it takes up part of the cash and has certain risks in ensuring the safety of physical gold.
Things to notice when buying gold bars: it is best to buy gold bars from well-known companies, keep the relevant documents properly, and ensure that the appearance of the gold bars, including packaging materials and the gold bars themselves, are not damaged, so that they can be sold conveniently in the future.
Gold Coin Investment
There are 2 types of Gold Coin Investment, which are pure gold coin and commemorative gold coin. The value of pure gold coin is consistent with the gold content therefor the price fluctuates according to international gold prices. Pure gold coins are mainly collected by coin collectors.
The pure gold coins of some countries are marked with face value, Canada, for example, once issued gold coins with a face value of CAD 50, but pure gold coins of some other countries do not have a face value. Since the price of pure gold coin is basically the same as gold, when they are sold the premium rate is not high (i.e. the difference between the value of the gold contained and the price at which the gold coin is sold), and the value-added function of investment is not great, but it has the functions of aesthetic, appreciation, strong circulation and value preservation, so it is still appealing to some collectors.
Meanwhile, due to larger premium range, commemorative gold coins have a greater possibility of added value and are much more valuable than pure gold coins in terms of collection investment value. The price of commemorative gold coins mainly determined by three factors: 1) The smaller the quantity of the gold coin, the higher the price; 2) the older the gold coin, the higher the value; 3) the better appearance of the gold coin is kept, the higher the value. Commemorative gold coins are usually currency coins with a face value, stronger circulation than pure gold coins, and do not need to be converted and cashed out according to the gold content.
Due to the relatively small quantity of commemorative gold coins issued, they have higher appreciation and historical significance, thus they have greatly surpassed general circulation functions. Investors are mostly purchase it for the value-added investment as in collection and appreciation, and the investment significance is relatively large. For example, a commemorative gold coin with a face value of USD 50 may contain gold with a market price of USD 40 at the time, but the price after issuance can be much higher than the face value of USD 50. Although investing in commemorative gold coins has great value-added potential, it is difficult to invest in such gold coins. First of all, you must have certain professional knowledge with an understanding of appearance appreciation, issuing quantity, memorial significance and market trend of commemorative gold coins, also choosing the good institution for trading.
Paper Gold
Paper gold trading is a service provided by the bank without the involvement of actual gold. Investors invest in gold via a precious metal account in the form of bookkeeping, without purchasing and settlement of physical products, thus getting the lower trading cost. It should be noted that, though it is equivalent to holding gold, the 'gold' in this account could not be used to redeem physical gold products and there is no interest for such 'deposit'. 'Paper gold' is a kind of one-way transaction based on 100% funds and is a rather stable instrument concerning direct investment in gold.
Gold Stock
The so-called gold stock is referring to the listed or unlisted stock of gold issued by gold mining companies to the public, it can also be called Gold Mining Company Stocks.
Since transaction of gold stocks is not only investing in gold mining companies, but also investing in gold indirectly, this type of investment is much more complicated than simple pure gold trading or stock trading. Investors not only should pay attention to the operating conditions of gold mining companies, but also analyze the price trend of the gold market.