What’s the Gold Market Like?

The gold market is unique in the world of finance because gold is unique. Much more than merely another investment, gold is an asset in its own right, a raw material, a natural resource and also a trusted store of value and medium of exchange.

Gold plays more roles in more lives than any other commodity, other than water and possibly oil.

Gold’s variety of roles and broad utility mean that the gold market itself is unlike any other market.

Gold reacts differently to the economic and geopolitical factors which impact the financial markets.

For example, hyperinflation, which has historically been terrible for stocks and bonds, prompts people to seek the safe haven of gold, and gold has historically increased in value during periods of high inflation.

The same can be said for other factors:

Geopolitical crisis, such as the threat of war or sudden terrorist attacks, usually result in an increase in the price of gold. In the wake of the September 11th attacks back in 2001, US stock markets were interrupted for a week, but gold rose in value and continued to trade internationally throughout the period.

Currency crises, such as those that occurred in Mexico in 1995, Asia in 1997 and Russia in 1998, disrupt local stock markets dramatically. But in each of those instances gold increased in value dramatically, relative to those local currencies.

Banking crises, such as the one that occurred in the US in November of 2008, also are usually very bad news for the stock markets. Meanwhile, gold holds its value as people seek safe havens.

In summary, the kinds of factors which tend to make the value of stocks, bonds and other assets suffer, tend to make the value of gold increase. There are, of course, exceptions, but over the long-term this axiom has held true. Gold zigs when paper zags.

There are some other interesting aspects of the gold market that also set it apart from other markets.

For instance, there are more ways to own gold than any other asset class. You can own physical gold in the form of bullion bars, wafers or coins, such as the American Eagle, Canadian Maple Leaf or South African Krugerrand. You can also physically own gold in the form of rare gold coins.

For those who do not require the added security of physical gold, there are still other indirect methods of owning gold.

Some individuals choose to participate in the gold market by owning shares of companies that mine and/or refine gold. Along the same lines, mutual funds which acquire the stocks of such companies are another alternative which provides added diversification.

Gold buyers should be aware, however, that this method does not duplicate the direct ownership of gold.

There are still other methods of gold ownership.

One of the latest is the “Exchange Traded Fund” or ETF. These types of funds invest in physical gold and then turn around and sell shares which represent an undivided ownership interest in the holdings of the fund. In this way, investors can participate in movements in the price of gold, again, without the physical security of gold ownership, however.

Another widely followed method of participating in the gold market are the futures markets in which individuals can take positions in the market using leverage to participate in increases and decreases in the price of gold.

There is one final thing that sets the gold market apart:

Gold is a market that never sleeps. Gold trades around the world 24 hours per day, 7 days per week, all year long. No matter what time it is, somewhere the gold market is open and gold is trading. So, gold may close at one price in New York at the end of the trading day and open at a dramatically different price the very next morning due to action on the bourses in places like London, Paris, Zurich, Dubai, Mumbai, Hong Kong, Tokyo and Sydney. No other asset or commodity is traded as widely and as actively as gold.

Copyright (c) 2010 Rod Hoss

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