Is the Gold Market a Commodity Market or a Currency Market?
FAQ – The Best Way to Own Gold
Many people don’t realize that gold trades on the Forex market, just like any other currency. Although most banks refer to gold as a commodity, they trade it at their currency desks, not on their commodity desks. Gold, as a globally recognized currency, has the code XAU, distinct from the gold miner’s equity index, which shares the same acronym. Most central banks include gold reserves as part of their foreign currency holdings. Thus, despite claims to the contrary, gold functions as money.
Gold in the Forex Market
The foreign exchange market (Forex or FX) facilitates global currency trades, operating 24 hours a day. The bulk of trading occurs in London and New York, with significant activity in Tokyo, Singapore, and Hong Kong.
Volume of Gold Trading
In September 2013, the Bank for International Settlements (BIS) published a study titled “Triennial Central Bank Survey 2013.” The report revealed that the average daily trading volume in the FX market was $5.3 trillion. This figure includes spot transactions, forwards, swaps, and options.
Comparing Gold Markets
Gold trades $249 billion daily in currency markets, ranking as the 5th most actively traded currency worldwide. By comparison:
- Physical gold trading: 16 tonnes or $650 million daily
- GLD (ETF): 50 tonnes or $2 billion daily
- Comex: 500 tonnes or $20 billion daily
- Forex market: Over 6,000 tonnes or $249 billion daily
These numbers make it clear that the price of gold is not primarily driven by the small physical market. Instead, it reflects a highly synthetic currency trade.
Who Has Been Backstopping The Gold Market?
Paper Gold vs. Physical Gold
Today, most gold investors own financial instruments that track the price of gold, often referred to as “paper gold”. These credit-gold investments are only as valuable as long as they trade at parity with physical gold. While credit-gold depends on the physical market, the reverse is not true.
European Central Banks’ Role
For years, European central banks served as the lender of last resort in the gold market’s fractional reserve practices. However, with the 1999 Central Bank Gold Agreement (CBGA), restrictions were placed on central bank sales and leases of gold, ensuring that gold remains an essential wealth reserve.
Is The Gold Price Manipulated?
The Debate on Manipulation
This topic divides both investors and economists. While some claim gold prices are manipulated, the real issue lies in the gold market’s structure. This structure allows participants to interfere with the price mechanism.
Gold as a Currency
Gold continues to function as an independent currency within the Over-the-Counter (OTC) market. Banks treat gold as they would any other currency, using it in cash, account balances, and various financial instruments. However, a large portion of gold trading involves derivatives created by banks to track the gold price.
How are Precious Metals Different from Financial Assets?
Lack of Counterparty Risk
Precious metals like gold and silver bullion can be preferable to financial assets due to the absence of counterparties. Securities, derivatives, and ETF products carry counterparty risks, which tangible assets like gold do not. By investing in physical gold, you eliminate counterparty risk.
Store of Value
Gold’s 5,000-year history as a store of value and its universal acceptance make it unique. Its liquidity and independence from financial systems make it a strong reserve asset for central banks and investors alike.
Why Not Invest In Gold Using Securities Or Derivatives?
Risks of Gold Derivatives
Gold derivatives like futures and options contracts are complex and carry hidden leverage. Investing in these financial instruments is a speculation on price movements, not an investment in gold itself. Risks include leverage, volatility, and counterparty defaults.
Real Gold vs. Paper Gold
Gold is not a paper credit or a contract for future settlement. It is a tangible asset. Paper credits and financial contracts, including ETFs, are ultimately short positions on physical gold.
Why Should I Use Strategic Gold Instead of Buying Gold ETFs?
ETFs: Limited Ownership
Precious metals ETFs only track gold’s price and do not grant ownership of physical bullion. They expose investors to counterparty risk without the benefits of physical gold ownership or delivery options.
Why Choose Physical Gold?
In contrast, Strategic Gold’s Clear Title Accounts provide physical ownership of gold, free from financial counterparties. Your investment remains fully liquid and insulated from the risks involved with ETFs.
Why Use Strategic Gold Instead of Spread Betting?
Leverage Risks
Spread betting on gold prices with leverage can quickly work against investors, especially in volatile markets. In spread betting, you only hold an electronic bet on the price of gold, not the asset itself.
Physical Gold vs. Financial Bets
Owning physical gold through Strategic Gold removes the financial risks associated with spread betting, allowing investors to diversify away from counterparty risk.
Why Not Invest In Gold Mining Shares Instead Of Physical Gold?
Risks of Gold Mining Shares
Gold mining shares expose investors to risks like exploration, extraction, jurisdictional, and management risks. The price of energy and currency fluctuations can also affect mining profitability, making these shares more speculative than physical gold.
Security in Physical Gold
If you seek security and diversification, investing in physical gold provides more stability and fewer risks than gold mining shares.
Why Is Opening a Clear Title Account Better Than Buying Gold Coins?
Coins vs. Bullion Bars
Gold coins may be suitable for small, immediate needs, but bullion bars offer a more efficient investment for larger sums. Coins are more expensive to produce, and their higher cost per ounce is typically not recovered when resold.
Efficiency and Liquidity
Investing in gold through Strategic Gold’s Clear Title Program allows you to buy and sell at the spot market price. This makes your investment highly liquid, with fast settlement periods.
Why Should I Buy Gold Through Strategic Instead of Going to a Dealer?
Convenience and Security
Strategic Gold offers a convenient, cost-efficient way to purchase, store, and sell gold bullion. Dealers often don’t provide storage, leaving you responsible for securing your gold, which is usually uninsurable.
Guaranteed Liquidity
Strategic Gold guarantees the Chain of Integrity for your bullion. This ensures full liquidity and eliminates the need for re-assaying when selling your gold.