Explanation of the background of the rise in gold prices.
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Gold has always played an important role in the international monetary system throughout history. At various times in history, many countries have minted gold coins, and the world's first gold coins were made around 560 BC. The discovery of gold mines in California in the 19th century triggered the largest wave of immigration in American history, known as the Gold Rush.
This document explains the status of gold in the economy and why gold continues to be a popular investment choice.
Table of Contents
- History of Gold Development
- Analysis of Gold Demand and Supply
Why do people invest in gold?
How is the price of gold determined?
What are the investment options related to gold?
Summary
Over a long period in history, gold was widely used as a currency in many countries. Gold could be exchanged as currency at a fixed exchange rate. This was well known as the "gold standard" system, first adopted by the United Kingdom and later spread worldwide.
However, the importance of the gold standard system declined due to World War I. The Great Depression prompted significant hoarding of gold. Furthermore, in 1944, a new international monetary system called the Bretton Woods system introduced fixed exchange rates against the U.S. dollar at $35 per ounce of gold, while allowing other currencies to fluctuate.
In 1971, President Nixon lowered the value of the dollar against gold to curb inflation, leading to an increase in gold savings. Eventually, the Bretton Woods system ended when Nixon announced the suspension of the dollar's convertibility into gold.
Gold lost its status as an official currency in the international monetary system. However, gold maintains its position as a safe haven due to its scarcity and remains an attractive investment option.
Let's take a look at the basic framework of gold's supply and demand.
- Production (mining and refining): According to the World Gold Council (WGC), all the gold mined so far is said to fit into a cube of 22 cubic meters. Over 90% of the world's gold has been mined since the California Gold Rush of 1848. In 2022, China, Australia, and Russia were the largest gold producing countries.
- Consumption (demand, purchase): Since 2010, India and China have been the largest consumers of gold, maintaining this position in 2022. Other major consumers of gold include the United States, Saudi Arabia, Germany, and Turkey.
- National gold holdings: In this case, gold is compared by weight. The United States holds the world's largest gold reserves, with over 8000 tons. This accounts for 4% of the 187,200 tons of gold mined to date.
Gold is a limited resource, and everyone understands that it cannot be mined in large quantities in a short period. With limited gold supply, it means that the price of gold is highly sensitive to changes in demand.
According to data from the World Gold Council (WGC), in 2022, annual gold demand is expected to reach a 11-year high due to large purchases by central banks, strong buying demand from individual investors, and a slowdown in ETF outflows. International total gold demand is expected to reach a significant 3,303 tons, making it the strongest year of gold demand in over a decade.
Despite headwinds such as a stronger US dollar and global rate hikes, gold prices are still expected to rise in 2022. The LBMA's average annual gold price is expected to reach $1,800 per ounce, setting a new record high.
Many investors view gold not only as a beautiful asset but also as a safe investment against inflation and risk, especially during economically uncertain times. Here are the main advantages of investing in gold:
1. Function as a commodity ETF: Gold, due to its non-tarnishing and malleable characteristics, as well as its rarity, is seen as a symbol of wealth and is popular. According to the World Gold Council, 49% of the gold mined today is used in jewelry.
2. Can be preserved as an asset: Due to inflation, currency may lose value over time. However, gold retains its value. By investing in gold, investors can protect their assets from the impact of inflation.
3. Safe haven: Currency can become extremely volatile when there is economic or geopolitical instability. In contrast, the value of gold remains relatively stable. Therefore, especially during economic crises, gold serves as a safe asset akin to a secure haven.
4. Portfolio Diversification: Gold has a low correlation with traditional financial assets such as stocks and bonds, which is believed to reduce overall risk when included in a portfolio. This means that gold can maintain its investment value even when other market prices fall due to inflation or economic instability.
Investors need to recognize the potential risks associated with investing in gold. Like other assets, the price of gold is subject to fluctuations due to economic data, geopolitical events, and changes in investor sentiment. Furthermore, unlike many stocks and bonds, investing in physical gold does not generate income or dividends, so please be aware of this.
There are direct and indirect ways to invest in gold.
1. Physical Gold
One of the simplest ways to invest in gold is through purchasing physical assets such as jewelry or gold bars. Over the past decade, small gold bars and coins have accounted for two-thirds of the annual gold investment demand and a quarter of global gold demand. However, physical gold may lack liquidity, and investors need to ensure secure storage methods.
Gold futures
Gold futures are a well-known financial product. They involve investing in the conditions of a right to buy or sell gold at a specific price and date in the future. These futures contracts are traded on regulated exchanges. Market prices can fluctuate based on supply and demand factors. Due to the participation of many institutional investors, the gold futures market usually has high liquidity and efficiency. Investors have the flexibility to buy or sell gold futures or take long or short positions, providing many companies often utilize gold futures for risk management purposes.
Note: moomoo Securities does not handle gold futures trading. Futures trading carries high risks and may not be suitable for all investors. Losses may exceed the initial investment amount.
1. Gold ETF
There are investors who prefer to hold shares of companies specialized in gold mining and refining. These gold mining stocks can also be purchased through exchange-traded funds (ETFs) or mutual funds. According to statistics, ETFs and other exchange-traded investment tools represent about one-third of the demand for gold investment. The price of gold ETFs usually follows the spot gold price and can be traded on exchanges like shares. As the minimum investment amount is the price of one share of an ETF, this investment method may be more convenient for small investors than directly owning physical gold. Furthermore, the average expense ratio of these funds is typically about 0.61%, which is generally much lower than most public funds and other investment fees and costs.
The term 'gold price' can be confusing for many investors. Is it the spot price or the futures price? While there are many different gold prices in the market, which is the most important?
Gold prices can be classified into three main types:
1. Spot Price: The price to buy or sell physical gold bars is typically based on the spot price of gold. This price is determined by the market price at the time of purchase and fluctuates based on changes in supply and demand.
Fixed price: The fixed price is an average gold price calculated through multiple adjustments and tests of spot prices. This helps offset minute price fluctuations. Institutions such as LBMA and COMEX set fixed prices, which are set twice a day.
Futures contract price: This is the price agreed upon by investors and suppliers to buy or sell gold on a specific day. Since the gold derivatives market is separate from the actual gold commodity market, futures prices do not strictly follow commodity price movements. In summary, banks and monitoring committees set average spot prices and fixed prices based on the supply and demand situation in the gold futures derivative market. Gold is traded 24 hours a day, 365 days a year worldwide, with prices set in US dollars. The over-the-counter (OTC) market has the highest trading volume, with about 90% of the world's gold transactions taking place in OTC markets such as London, New York COMEX, and Shanghai Gold Exchange. Therefore, the OTC market plays a crucial role in determining gold prices.
Investors pay attention to three indicators of gold prices:
Spot price: The spot price of gold is the most commonly used benchmark to measure the current exchange rate of gold. It fluctuates every few seconds during market trading hours and is calculated per troy ounce. Most gold bullion dealers determine the precise quote prices of specific coins or bars based on the spot price of gold.
LBMA Gold Price: The London Bullion Market Association (LBMA) is an internationally recognized gold and silver market, accounting for approximately 70% of the world's nominal trading volume. The LBMA gold price is set in US dollars and serves as a reference price in the gold market. It is operated and managed by ICE Benchmark Administration (IBA) with pricing opportunities twice a day.
COMEX: From the perspective of futures contracts, the world's largest real-time derivatives market is the Chicago Mercantile Exchange (CME), commonly known as COMEX, and the New York Mercantile Exchange.
Factors affecting gold prices
Factors affecting gold prices are closely related to the reasons for investing in gold explained so far. These six major factors play a crucial role:
How can I further my learning?
Check the macro analysis in the "Advanced" section and learn more about the gold market. Verify the latest data and market trends to make investment decisions based on more information!
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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