Gold is one of the most popular and desirable commodities on the market. Since its discovery, it has been regarded as one of the most valuable precious metals, due to its attractive appearance, scarcity and immutable nature. Currently, South Africa is the world’s gold mining capital and leading producer of gold, accounting for 16% of production. For traders, gold as a commodity provides financial stability and security, and is often invested in in times of financial unrest, such as a war, a rise in inflation, a recession or currency devaluation.
The relationship between currency and gold, and their dependence on each other, stretches back hundreds of years. Almost any transaction of notes, made anywhere in the world, involves some sort of gold investment, whether in gold futures, stocks or another aspect of the gold market.
Gold commodities are unique, as almost all of the gold ever mined and discovered remains in existence in one form or another (though some is in a form that makes it difficult to recover). Therefore, the world’s gold stocks can never significantly decline, which has a huge affect on the price. However, the amount of gold is finite, and the mining of gold as an industry is in decline as a result.
Gold trading today remains a huge business for major companies, commodity brokers and private traders in centres of trade across the world. Two of the major gold commodity trading centres are based in London and New York. The London Bullion Market, which trades gold and silver, trades ‘over the counter’ – or between two people or markets – and is run by the London Bullion Market Association. It is one of the oldest in the world, and is overseen by the Financial Services Authority, which regulates this aspect of the UK’s country’s finances. It compromises of major international banks, bullion dealers and refiners, and most of the world’s ‘over the counter’ transactions are based here. Other transactions take place at the Multi Commodity Exchange (MCX), the New York Mercantile Exchange (NYME), BM&F Bovespa (BOVESPA), the Singapore Commodity Exchange (SICOM) and the Tokyo Commodity Exchange (TOCOM).
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Trading in the futures market is common among gold traders. This is where traders agree a contract to buy gold, which is then delivered at an agreed point in the future. Unlike most commodities, it is usually based on a ‘spot price’, which is the price quoted for the immediate delivery of a product. The price can also be driven by interest rates. This is different to most commodities as it is not based on supply and demand, as gold is rarely destroyed and has a finite supply.
Gold prices are set, or ‘fixed’, twice a day on every business day in the USA and the UK by five members of the London Gold Market, at 10.30 am and 3 pm. The five members are currently Scotia-Mocatta, Barclays Capital, Deutsche Bank, HSBC and Société Générale. This affects the price of gold internationally. The gold price is fixed in Pounds Sterling (£), US Dollars ($) and the Euro (€), all major international currencies. However, the US Dollar is usually the currency that is used for quoting prices, based on one troy ounce. It is also usually the 3 pm price fixing that is used when quoting a contract price.