Gold is one of the most ancient assets known to mankind. The precious metal has long been considered the best tool for saving your own savings, demonstrating well-being, and ensuring future costs.
In the modern world, gold also remains a sought-after and very specific commodity. Precious metal is used in industrial production, but the demand of producers has little effect on the pricing process. Metal has a high value, and the demand for it tends to increase.
For many centuries, gold served the function of money , it determined its unique status among other precious metals. Until 1971, gold had the status of a world reserve currency. In the face of falling confidence in national money or in times of economic crisis, investors use gold as an alternative to save savings .
In the twentieth century, most countries abandoned the gold standard – the security of emission of money by gold reserves, but the yellow metal still occupies an important place and has an impact on the economies of states.
Gold is an economically independent asset, therefore it is attractive for central banks as a tool for risk diversification.
Since 2000, new gold investment products have appeared on the market, which have made the asset available to small investors, and this has caused an incredible increase in demand. At the same time, the policies of central banks, which traditionally use gold to support reserves, were changing.
Key market players
The specifics of trading this asset determines the main groups of key players:
– Central Bank, government agencies, the IMF;
– large institutional investors represented by funds, hedge funds, large private investors;
– gold producers – companies that are prospecting, mining and smelting gold.
World gold trading sites
The largest international gold trading centers are located in London, Paris, Zurich, Frankfurt, New York, Tokyo, Hong Kong, Dubai .
Physical gold is traded in wholesale over-the-counter markets . The largest of these is the London Bullion Market (LBM) .
The value of gold on the spot markets is determined by the prices of the London fixing .
Twice a day – at 10-30 and at 15-00 – gold quotes at LBM are published .
Futures, options and other types of contracts for gold are traded on the London Metal Exchange (LME), the New York Commodity Exchange (COMEX), the Chicago Commodity Exchange (CME) and other exchanges.
There are marked interrelations between the price of gold and the general state of the world economy, the economy of individual regions, geopolitical events and other factors. Central banks are actively buying gold when confidence in the national currency, the dollar or other assets begins to fall. Any instability leads to an increase in the price of gold. During a calm and stable situation in the markets, on the contrary, they sell surplus stocks of precious metals, and the price of gold begins to decline.
Correlation with currency rates
Traditionally, gold was a safe haven . Financial and banking crises, falling stock prices, inflationary processes stimulate investment in precious metals.
There is a relationship between the prices of gold and quotes of major currencies. The depreciation of money leads to the fact that people seek to protect their savings. Stimulating the economy by additional issue of money makes market participants increase investments in gold. The announcement by the US Federal Reserve to continue the policy of “quantitative easing” in September 2013 in one day shifted the price for one troy ounce by $ 60 up. The first dependence is obvious – the price of gold rises with crisis manifestations in the economy .
Graph of the dollar and gold index
If you follow the changes in the gold and dollar index, you can see that as the American currency decreased, gold prices rose.
Correlation with oil prices
There is a direct correlation between gold prices and oil prices . With a decrease in oil prices, gold prices also go down and, conversely, with an increase in oil prices, gold is used to accumulate petrodollars, its quotes are also rising.
Graph of prices of Brent crude oil and gold in 2018
This correlation in different periods manifests itself with different intensity.
The impact of economic and political news on gold quotes
Gold reacts strongly to any resonant events. This is what many traders use in their strategies.
06/23/2016, UK referendum on leaving the EU (Brexit)
11/09/2016, US presidential election
Any negative forecasts or news can be a driver of growth in prices for precious metals. At the same time quotes can rapidly grow, spurred by panic. Good news does not affect the market.
The situation on the gold market in October 2018
Mid-October brought some panic to stock markets.
US stock indices slipped by more than 5%. The price of gold immediately took off, breaking the two-month highs.
Graph of S & P index and gold – a drop in the index and a simultaneous increase in the price of gold (October 2018)
October 15, data appeared on a record, for the last 6 years, the deficit of the US state budget. Fears of a further increase in the budget deficit may stimulate further purchases of precious metals.
The pressure on the stock market increased the yield of bonds and the aggressive policy of the Fed at interest rates. The gold market immediately responded with an increase in trading volumes and an increase in quotations.
According to the IMF, the banks of Kazakhstan , Mongolia and Polandincreased their gold reserves in September.
China has increased the volume of gold imports in the current year amid a weakening of the yuan. Trade wars with the USA bring anxiety to investors. As of August, China’s purchase of the precious metal exceeded last year’s level by almost 7%.
The weekly drop in stock markets made investors look for an alternative. The growth of purchases of gold pushed up the quotes, the price reached a maximum of $ 1,232.83.
In the US, the reporting period begins. Strong quarterly reports can support the stock market, in which case interest in buying gold will be reduced.