The Gold Market

The Gold Market

The gold market is somewhat unique when compared to other markets and it is for the most part traded OTC (also known as “over-the-counter”) with the bulk of trading activity occurring in the London bullion market (followed by markets in New York, Zurich and Tokyo) between various members associated with the London Bullion Market Association (LBMA). In fact in 2012, it is estimated that an average daily trading volume of just over 20 million ounces of gold worth between 33-36 billion dollars are traded on the London markets but some believe the actual figures could be as much as four times higher than these estimates.


For more information about the scope of the gold market and about gold in general, check out the homepage of the World Gold Council.


How is gold traded?

Trading in this market is facilitated by the various members that are part of the London Bullion Market Association ( also known as the LBMA), which would include large international banks along with gold bullion dealers and gold refiners, and is loosely overseen by the Bank of England. And although gold is traded throughout the day, there is a benchmark price called the London gold fixing, that is determined two times a day via telephone meeting that is organized by representatives from five specific gold bullion-trading firms of the London bullion market. They have for the most part set the benchmark prices for gold since 1919.


In addition, the rise of exchange based trading has seen the growth of gold futures contracts increasingly being traded in both New York’s Mercantile and Tokyo’s Commodity Exchange while gold is also traded in the form of securities or exchange traded funds in the stock exchanges based in London, New York, Australia and Johannesburg.


For more information about how gold is traded and about gold in general, check out the homepage of the World Gold Council.


What are the dynamics of gold trading?

Gold investors need to understand that the dynamics of the gold market are unique compared to the dynamics of many other markets. For starters, the price of gold is driven by the laws of supply and demand and by speculation but unlike other types of commodities, hoarding or saving along with disposal will play a more important role than consumption when setting prices. This is due to the fact that most of the gold ever mined is still accessible and could come back on to the market for the right price.


Moreover, the price of gold can also be influenced by low or negative interest rates or by war, economic or political crisis as investors will tend to seek a store of value for their money. In addition, the activity of central banks and the IMF can also play an important role impacting the price of gold.


However and unlike many other commodity markets though, the forward market for gold behaves in a manner similar to the foreign exchange markets due to the fact that gold is borrowed and lent by central banks and in the interbank market. In other words, it is driven by spot prices and interest rate differentials rather than underlying supply and demand dynamics.


For more information about the scope of the gold market and about gold in general, check out the homepages of the World Gold Council and the London Bullion Market Association (LBMA).


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