Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21
The History of Bitcoin Hard Forks - 10th Apr 21
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21
Investing in Google Deep Mind AI 2021 (Alphabet) - 6th Apr 21
Which ETFs Will Benefit As A Stronger US Dollar Reacts To Global Market Concerns - 6th Apr 21
Staying Out of the Red: Financial Tips for Kent Homeowners - 6th Apr 21
Stock Market Pushing Higher - 6th Apr 21
Inflation Fears Rise on Biden’s $3.9 TRILLION in Deficit Spending - 6th Apr 21
Editing and Rendering Videos Whilst Background Crypto Mining Bitcoins with NiceHash, Davinci Resolve - 5th Apr 21
Why the Financial Gurus Are WRONG About Gold - 5th Apr 21
Will Biden’s Infrastructure Plan Rebuild Gold? - 5th Apr 21
Stocks All Time Highs and Gold Double Bottom - 5th Apr 21
All Tech Stocks Revolve Around This Disruptor - 5th Apr 21
Silver $100 Price Ahead - 4th Apr 21
Is Astra Zeneca Vaccine Safe? Risk of Blood Clots and What Side Effects During 8 Days After Jab - 4th Apr 21
Are Premium Bonds A Good Investment in 2021 vs Savings, AI Stocks and Housing Alternatives - 4th Apr 21
Penny Stocks Hit $2 Trillion - The Real Story Behind This "Road to Riches" Scheme - 4th Apr 21
Should Stock Markets Fear Inflation or Deflation? - 4th Apr 21
Dow Stock Market Trend Forecast 2021 - 3rd Apr 21
Gold Price Just Can’t Seem to Breakout - 3rd Apr 21
Stocks, Gold and the Troubling Yields - 3rd Apr 21
What can you buy with cryptocurrencies?- 3rd Apr 21
What a Long and Not so Strange Trip it’s Been for the Gold Mining Stocks - 2nd Apr 21
WD My Book DUO 28tb Unboxing - What Drives Inside the Enclosure, Reds or Blues Review - 2nd Apr 21
Markets, Mayhem and Elliott Waves - 2nd Apr 21
Gold And US Dollar Hegemony - 2nd Apr 21
What Biden’s Big Infrastructure Push Means for Silver Price - 2nd Apr 21
Stock Market Support Near $14,358 On Transportation Index Suggests Rally Will Continue - 2nd Apr 21
Crypto Mine Bitcoin With Your Gaming PC - How Much Profit after 3 Weeks with NiceHash, RTX 3080 GPU - 2nd Apr 21
UK Lockdowns Ending As Europe Continues to Die, Sweet Child O' Mine 2021 Post Pandemic Hope - 2nd Apr 21
A Climbing USDX Means Gold Investors Should Care - 1st Apr 21
How To Spot Market Boom and Bust Cycles - 1st Apr 21
What Could Slay the Stock & Gold Bulls - 1st Apr 21
Precious Metals Mining Stocks Setting Up For A Breakout Rally – Wait For Confirmation - 1st Apr 21
Fed: “We’re Not Going to Take This Punchbowl Away” - 1st Apr 21
Mining Bitcoin On My Desktop PC For 3 Weeks - How Much Crypto Profit Using RTX 3080 on NiceHash - 31st Mar 21
INFLATION - Wage Slaves vs Gold Owners - 31st Mar 21
Why It‘s Reasonable to Be Bullish Stocks and Gold - 31st Mar 21
How To Be Eligible For An E-Transfer Payday Loan? - 31st Mar 21
eXcentral Review – Trade CFDs with a Customer-Centric Broker - 31st Mar 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Are U.S. Investors Driving the Gold Price?

Commodities / Gold and Silver 2010 Oct 10, 2010 - 02:44 PM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleThe U.S. is a world of well educated, highly sophisticated investors who use an extraordinary well developed set of markets through which to invest into every item that has a market and usually at prices that attract the world of buyers to the oil market, currencies equities bonds and the rest.


In the U.S. gold markets investors can buy the shares of gold mining companies, get options to buy these shares, buy the Indices that track these shares, buy gold coins, gold bullion, buy the shares of gold Exchange Traded Funds, buy gold futures through COMEX and more still. Indeed the variety of different types of investment channels and their markets leads you to believe that the U.S. must be the heart of the world of gold. In terms of volumes of money that surely must be the case. This would be true if they all affected the gold price directly. Do they?

Where are the main Gold Markets and which ones affect the Gold Price?

Cutting to the chase, the only markets that do affect the gold price are those where gold bullion is bought and sold. These are physical gold markets. They can be as far apart as Shanghai, Mumbai, Dubai, London, Zurich, New York, etc. Jewelry markets use physical gold and these are world wide. Industrial markets are smaller and spread across the globe.

Central banks hold physical gold alongside individual investors, all over the world. All these markets follow the same route to physical gold as each other. All of them go to a local wholesaler, where small amounts are involved. These wholesalers may be banks or maybe just wholesalers or large jewelers that supply smaller ones, having the advantage of bulk buying. These larger buyers go, in turn, to their main local importers. Local importers go to gold dealers or if large enough direct to the bullion banks. The largest buyers go direct to the London Bullion banks.

Refiners may receive their gold from scrap sales of from the gold mines direct, refining it to the highest Standards of the LBMA [The London Bullion Market Association]. It is then eligible for sale though the London Fixing.

All the above markets directly affect the gold price.

It may come as a surprise to you that the U.S. is not the place where the heart of the gold market lies. This happens in its traditional center in London.

The Gold Fixing

The two Gold Fixings are the most important [www.goldfixing.com] events in the daily world of gold. At the Fix, five Bullion banks buy and sell gold at two points in the day, at 10.30am and at 3.30 pm. At these "Fixing" sessions, the five banks representatives face each other in small neat room. There, they are linked to their own banks by phone. In turn, these banks are linked into their customers by phone and often their customers are linked by phone to their own customers. Offers and bids are put forward at different prices, then adjusted and readjusted by all involved until a consensus is reached on price and volumes. This price is then "Fixed" and all transactions involved are established at that price. This takes care of over 80% of gold deals in physical bullion, often as much as 90%.

It is from here that coins are made and find separate markets.

Gold Exchange Traded Funds.

A major link between the physical gold world and the paper gold world is via the recently developed gold Exchange Traded Funds. Initiated by the World Gold Council but largely handled by HSBC, [one of the five London gold bullion members of the Gold Fixing] shares are bought in these funds. These funds take the proceeds and invest in actual gold bullion, usually bought through the Fix in London. Of course when one buys "loco London" delivery can be made in another part of the world. Unlike buying shares in gold mining companies, buying these shares precipitates the buying of gold. So effective is this translation of paper gold into physical gold that over 1,400 tonnes of gold has been bought through these funds. This places their holdings larger than China's or Switzerland.

The largest of these gold Exchange Traded Funds is in the U.S. called the SPDR Gold Trust. This holds nearly 1,300 tonnes of gold. Investors in these shares come mainly from the U.S. The force that these investors gave to the gold price was substantial and their buying at that time was the main gold price driver as the holdings rose. But this amount has hardly grown this year as asset managers [according to HSBC gold dealers] are fearful of the confiscation of gold by the U.S. government. It appears that these buyers now hold their gold outside the U.S. in the hope that this will avoid any confiscation [more on this in future issues of the Gold Forecaster]. So any force that the investors from the U.S. have on the gold price does not appear to be present now nor has it been for the last few months. In the present run up to $1,360 these investors have been overall sellers of gold. This has taken away the driving force of U.S. investors in the gold market.

Paper Gold Markets which do not affect the gold price

COMEX

We confirmed with officials on COMEX [the Commodity Exchange in New York] where it appears huge volumes of gold changes hands that between 1% and 5% of all transactions there involve physical gold. To emphasize the point, this means that between 95% and 99% of all Futures, and Options trading on COMEX do not involve gold itself. This is a financial market. Its key function is to allow those in the gold market to cover their exposure to physical positions in gold with a financial 'insurance' against price fluctuations.

There are very large positions in futures and options [the net speculative long position on COMEX is over 1,000 tonnes] but these are unwound before a delivery has to take place. For those positions where the buyer wants to take delivery, he has to notify the seller well in advance. So of this 1,000 tonne position only between 10 and 50 tonnes will involve the delivery of physical gold. This is a tiny amount relative to the London Bullion Market.

Gold Mining Company Shares

These are simply equities the same as any other traded worldwide in equity markets. They carry the same corporate risks as any company shares. Where they are different is that their income over the quarter, half or full year is linked to the average gold price over that time. Hopefully shareholders will benefit from both capital appreciation and a dividend flow as the gold price rises. The income from the sale of gold by these miners will rise with the average gold price and from the point that costs are covered company profits will rise at a higher rate than the gold price rises.

Additionally it is hoped that even when the gold price were to remain static, increasing proven gold reserves adds to the amount of gold the company can produce for the benefit of the shareholders. This, again, can make the right gold shares outperform the gold price. One has to have done ones' homework carefully on each gold mining company before you can be sure that this will happen in any particular share.

What is irrefutable is that when you buy the shares of these gold mining companies, your investment will not affect the gold price whatsoever. The huge volumes of investors money does no more than ensure that gold will be mined. With the supply of gold now relatively price inelastic, we see such investments as unlikely to affect the gold price directly any time in the future.

Who then is driving the gold price?

With U.S. investors in the SPDR Gold Trust currently holding the gold they have and not investing at the moment, the force that U.S. investors have had on the gold price through the physical buying of gold is absent from the gold market.

If U.S. investors are buyers at the moment, they have taken their money overseas to buy gold and hold it there.

We can conclude that U.S. investors are not the driving force behind the gold price breaking new records. But the gold price has been hitting new record highs in the last

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules