The global gold market reflects our complex world, with demand from China and India increasing rapidly and technology creating new investment opportunities, even while traditional investment venues and methods remain dominant.
The major trend in the market is the rise of demand in China and India, while governments in Asia have been investing heavily in the entire gold value chain. At the same time, communications technology is changing gold trading and who can take part in the market.
But London remains the heartbeat of the market, and even the most complex derivates are still backed by the existence of physical gold stored in vaults.
Chinese and Indian investors now make up more than half of global gold demand, and China is both the world’s largest producer and consumer of gold.
As a result, Shanghai Gold Exchange is strengthening its position as a global superpower in gold trading. Hong Kong, while not as significant as Shanghai, also plays an important role in the global market.
As well as trading in gold, Asian countries are investing in all stages of the value chain, from gold mining through to refining and fabrication.
Asia also has several important gold trading centres outside of China, including Dubai, Tokyo, Singapore and Mumbai. They offer a range of trading facilities and function as either local or regional trading hubs.
Even with the rise of Shanghai and the Asian markets, London and New York remain the powerhouses of the global gold market.
London alone accounts for more than half of the world’s trades and holds this position for a couple of important reasons. Firstly, it dominates the over-the-counter (OTC) sector, which is the direct trading of gold between two parties. OTC is more flexible and less regulated than other forms of trade and has historically been the most common way of buying and selling. London also has a large amount of gold physically stored in highly reputable vaults around the city, and it is a major centre for financial services.
After London, the biggest player is New York’s Commodities Exchange (COMEX), which focuses on derivatives rather than physical gold. These more complex contracts are still tightly linked to physical gold.
Shanghai is the third of the big gold trading centres, thanks to the importance of both the Shanghai Gold Exchange and Shanghai Futures Market.
Traditional forms of gold trading, like OTC, still dominate, but new technology is bringing new participants to the market and creating new products.
Powerful computer systems are the key to the rise in algorithmic and high frequency trading, which rely on software to track trends and identify opportunities more quickly than even experienced human traders.
Another development is Internet Investment Gold, which allows investors to buy physical gold online. The gold is stored in vaults and the investor can take possession if they want.
Blockchain technology is a hugely promising development for the gold market, because it offers a more robust and efficient way of settling trades. It may one day help to track gold from the mine right through to the consumer.
This could make the whole market more transparent, reducing smuggling and the exploitation of gold from conflict zones.
Anyone who wants to get involved in trading gold has a number of options for how to take part in the global market, from buying refined gold to more complex financial instruments or even investing in gold mining.
The most obvious way is to buy physical gold, either as coins or bars, and store it in a secure vault. Moving away from owning gold itself, investors can explore a range of options, including gold derivatives and gold-backed exchange traded funds and exchange traded commodities.
Investing in gold mining is also an important part of the market, although returns for investors do not always reflect changes in the price of gold. This is because mining involves uncertainties related to finding and extracting such a rare metal, which is often found in remote or conflict-afflicted parts of the world.
Overall, the global gold market is complex and evolving. Traditional trading centres and practices still dominate, but the combination of new technology and changing patterns of demand means smart investors can find unexpected value and opportunities.
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