Introduction to Commodity Markets: Gold

CMC Markets

What is the gold market?

Gold is one of the world’s oldest and most precious metals. It’s what we award athletes who finish first, it’s designed into the jewellery we give loved ones, and some cultures have even gone so far as to build entire temples out of it.

But aesthetics aside, gold is – and has been for a long time – crucial to the world’s economy.

Gold was first used as currency since the Byzantine Empire (395–1453AD), most notably the pure gold coin the Byzantine solidus.

More recently, gold was used as the world reserve currency up until 1971, when the US abandoned the gold standard. Before then, the value of a country’s currency was directly linked to the value of gold.

Rather, paper money had to be backed up by an equal amount of gold in a country’s reserve, which in most cases was gold bullion.

How is gold different from currencies?

So is gold a commodity? A currency? Or a combination of the two?

The free market system we currently trade in (post-gold standard) allows gold to act very similarly to a currency.

Gold is not often used for direct payments; however, it is highly liquid and can be converted to cash in most currencies very simply.

That said, gold is, first and foremost, a commodity often grouped with other precious metals, such as silver, platinum and palladium. These can be traded as part of our Precious Metals Index.

Gold is a global commodity and can be traded in many currencies. However, the typical market quote is to price gold in "US dollars per troy ounce".

This relationship to the US dollar is one of many important factors that influence the price of gold, which we’ll now take a look at.

What factors impact the price of gold?

Unlike oil or coffee, for example, gold isn't consumed (although sometimes chefs get bored with edible ingredients and add them in). Also, as it is virtually indestructible, most of the gold that hase ever been mined is still around to this day. As such, the price of gold is moved more by a combination of supply and demand, and investor behavious.

Nowadays, when other investments seem too risky, gold is often seen as a "safe haven".

It generally performs well during global crises such as wars, terrorist attackes, and pandemics, to name but a few, as it is seen as an attractive hedge.

For example, if the US central bank, the Federal Reserve, decided to cut interest rates, this would usually weaken the US dollar and lift the price of gold.

It's therefore important when trading gold to keep an eye out for any major economic announcements that could impact inflation - and in turn gold - such as unemployment figures, interest rates, price changes in energy or food, and even natural disasters.

Why do people trade gold?

  • Hedge against inflation: Inflation occurs when the value of a currency, say the US dollar, decrease over time whilst the price rises. Some traders will store some of their wealth in gold to counteract this trend as gold, unlike currency, is a finite resource.
  • Safe haven: Gold has a reputation as a safe investment, therefore it tends to do well when other asset classes, such as stocks are doing poorly.
  • Currency proxy: Gold Prices are often used to measure the relative value of a local currency and can be traded as a substitute for currencies in some situations.

Way to trade gold?

  • Spot Gold: Gold is an over-the-counter asset, with 70% of global gold trading being physical, via the London Bullion Market Association. Whilst hefting gold bars between vaults may not sound particularly practical, most of these members are international banks, bullion refiners and dealers. 
  • Gold futures and options: another way to trade gold is via futures and options contracts.  The biggest exchange for gold futures (code: GC) is the COMEX section of Chicago Mercantile Exchange (CME), which offers electronic trading virtually 24 hours a day. The contract size is 100 troy ounces (3.11kg). As gold is used around the world, it is traded on almost all stock exchanges around the world.
  • Investing: investing in shares or exchange traded funds (ETFs) is an easy way to get exposure to gold. For leveraged exposure to the gold price, you can purchase shares in gold companies and miners listed on any securities exchange. Alternatively, you can buy gold ETFs which track the value of the underlying commodity.
  • Trading via CFDs: Another option is to trade Gold CFDs (contracts for difference). To put it simply, this allows traders to buy or sell positions in a financial instrument, exposing them to movements in the gold price without physically purchasing the commodity.

Gold market overview

Over many centuries, the gold trade has seen it all. Empires have risen and fallen, economies have prospered and crashed and though demand has waxed and waned, there has always been a market for gold. This is why many see it as a safe haven investment. Still, like every other investment, its prices will fluctuate over time – which creates opportunities and risks for traders.

However, gold is just one of a number of options open to commodities traders, with many preferring to focus on oil, grains or coffee. To find out more visit CMC’s Commodities Market.

Investing in CMC Markets derivative products carries significant risks and is not suitable for all investors. You could lose more than your deposits. You do not own, or have any interest in, the underlying assets. We recommend that you seek independent advice and ensure you fully understand the risks involved before trading. Spreads may widen dependent on liquidity and market volatility. The information on this website is prepared without considering your objectives, financial situation or needs. Consequently, you should consider the information in light of your objectives, financial situation and needs. CMC Markets NZ Limited Company Registration Number 1705324 (the product issuer) provides the financial products and/or services. It's important for you to consider the relevant Product Disclosure Statement ('PDS') and any other relevant CMC Markets Documents before you decide whether or not to acquire any of the financial products. Our Financial Services Guide contains details of our fees and charges. All of these documents are available at cmcmarkets.co.nz or you can call us on 0800 26 26 27.
 
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