For hundreds of years, investing in gold has been the preferred market choice in times of uncertainty, a substitute way of keeping money. A testament to that is that in the 1990s gold traded at $250 a troy ounce and today the price is about five times as much. Gold is also one of the most widely traded commodities by online traders, including via spread bets and CFDs.
When trying to assess what the gold price might do next the key thing is, like for all commodities, to look at supply and demand. For most metals this would mean looking at how much of the metal is mined each year compared to how much is bought, in the case of gold in form of jewellery and gold bars. But this equation is complicated for the yellow metal by the fact that it is increasingly becoming a favourite form of investment for pension funds and speculators and as central banks look to hold some portion of their reserves in the form of gold.
In terms of mining, the biggest producer is South Africa, with mines that can go five kilometres into the ground and take almost a full day to travel through. China, Australia, the US, Peru and Russia are also big gold producers. The level of how much gold is mined globally tends to go slightly higher every year but in the short term production can get disrupted by strikes, accidents or problems with electricity supplies.
On the demand side nowhere is gold as beloved as in India, Pakistan and the Middle East where festivals and big family occasions are marked with lavish gifts of gold jewellery. China is nudging up in importance as a key gold buyer, here the consumers prefer gold bars to jewellery, similarly as in the US and in German-speaking parts of Europe.
When it comes to central bank holdings, there has been a complete U-turn in the way central banks view gold. The trend in the 1990s was to sell gold reserves – the Bank of England infamously sold some of its gold holdings when prices were at their lowest – but this has changed completely since the credit crunch and now central banks, particularly those in emerging economies, are buying into gold to have at least some portion of their reserves stable unlike the part that is in currencies such as the dollar, yen or the euro and can wildly swing in value.
Speculative investment is becoming an increasingly large part of gold buying and has the capacity to override the effect on the gold price from simple supply and demand for the physical metal. Over the last few years pension funds have increased the amounts of gold they hold in their portfolios as a way of dampening the effect of drops in share and bond prices, and this trend is only likely to continue. Gold Exchange Traded Funds or ETFs have become a massive source of demand for the metal, almost rivaling demand for gold bars. These are readily available via online trading accounts.
Gold futures are traded on Nymex in New York while London is the main trading arena for over-the-counter trading. Here the daily price for gold is fixed twice a day in the London am and pm gold fixing by a group of banks that are market makers in the precious metal.
A good source of information about gold flows are the World Gold Council, an association of gold producers, and GFMS, a leading London consultancy providing annual statistics for the gold market.