Major Players and Factors Affecting the World Gold Market


The gold market is very lively. Although the market may appear complicated to the uninitiated, it is actually driven by logic and factors that are very easy to understand. All it takes is for the budding investor to take the time to study the gold market, and this article is a great place to start.

To understand the market, we’ll dive into the factors that influence the movement of prices.

The Four Main Players in the Gold Market

The financial and commodities trading markets are akin to fields where athletes play. It’s like sports, in other words. And, like in sports, some players rise among the rest and are considered the cream of the crop.

It is actually these players that exert a significant influence on the movements of the global market. These players are also the ones that investors go to engage in the gold trade or the financial market in general.

London Bullion Market

The London Bullion Market took over the market functions of two separate organizations, namely, the London Gold Market and Silver Market. Traders who register and participate in the London Bullion Market belong to the London Bullion Market Association, or the LBMA.

According to its website, the London Bullion Market and the LBMA were first established in 1987. The Association and its activities are overseen by the Bank of England, which mandated its creation.

Gold and silver bullion trade in London began in 1697 when ships of the East India Trading Company transported gold from Brazil to London in copious amounts. The later discoveries of gold in other countries like the United States, as well as South Africa and Australia, brought significant quantities of gold to the London Vault.

There was so much gold produced in the following years that London had to set standards for bullion that circulates the market. In 1750, the Crown created a roster of accredited refineries, known as the London Good Delivery List. Only bullion minted by these refineries was recognized and can be traded in the London Market.

By 1850, the London Gold Market came under the control of five companies known as the London Gold Market Fixing Company. These companies were responsible for maintaining the Good Delivery List until the 1980s, when the London Bullion Market was established to take over the task.

American Gold Market

The American Gold Market is a very diverse platform. It is a free market participated in by the American people themselves through companies authorized by the U.S. government to distribute gold bullion.

The United States Mint has the sole authority to mint gold bullion as well as uncirculated and proof coins. These are then passed on to accredited distributors for selling to interested investors as well as collectors.

The history of gold bullion investment in the United States began in 1985 when President Ronald Reagan signed the Gold Bullion Coin Act. This authorized the U.S. Mint to create the first American Gold Eagle bullion coins. These coins remain popular to this day among both collectors and investors alike.

There are many ways that one can engage in the gold market in the United States, including buying physical gold bars or bullion from government-approved distributors, or other reputable precious metals dealers.

Another method is to invest in exchange-traded funds, which are mutual funds for gold. In this method, you can pool your money with other traders to purchase gold or shares in mining companies.

A third method includes the use of futures contracts. A gold futures contract is an agreement between two parties to exchange gold at a specific price and quantity at a predetermined date. When the contract is executed, the price remains the same regardless of the actual value in the market. Futures contract investments occur through the Intercontinental Exchange (ICE) based in New York, or the Commodity Exchange (COMEX). Many savers interested in precious metals choose so-called “paper gold” without realizing the additional risks associated.

Learn more about the differences between holding physical and paper gold.

Chinese Gold and Silver Exchange

Similar to the London Bullion Market, the Chinese Gold and Silver Exchange is managed by a group of gold trading firms that regulate all exchange transactions. These companies are referred to as the Chinese Gold and Silver Exchange Society, which today comprises 171 members, as stated on the CGSE’s website.

The CGSE is the sole Exchange in Hong Kong for trades in bullion. According to Wikipedia, the CGSE joined the three other major gold trading centers in 1979 when it started trading one million ounces of gold each day.

In 1994, the Exchange established the subsidiary Hong Kong Precious Metals Exchange Limited to streamline trading management amidst continuous high demand. While there are other investors, members of the society own unlisted shares in the subsidiary.

The CGSE is noted for its Chinese Renminbi Kilobar Gold contract, which it launched in 2011. Aside from Mainland China, the CGSE is the only trading center in the world to offer such a deal. According to the BBC, the contract is part of the Chinese government’s efforts to internationalize the yuan.

Swiss Gold Market 

The Swiss have always held a distinction in the world of finance and banking. Thus, it’s not a surprise that the Zurich trading center is counted amongst the four leading players of the gold trading scene.

The Swiss Gold Market arose due to events that led to the London Gold Pool collapse in 1968. The events began in 1958 when central banks worldwide converted their holdings of U.S. dollars into gold at $35 an ounce.

As a result, the U.S. released 2,022 metric tons of gold. By 1960, gold prices rose to $40 per ounce, forcing the U.S. Federal Reserve to ask the London Gold Pool to sell more gold to stabilize the price.

In response, the United States, the United Kingdom, Germany, France, Italy, Belgium, Netherlands, and Switzerland established the London Gold Pool in 1960 to keep the price of gold at $35 per ounce and fix prices of convertible currencies.

In essence, the Pool guaranteed that the dollar was backed by American and European gold reserves. For the United States, it was to protect the U.S. dollar from devaluation and to keep its gold reserves from being depleted.

Although successful for the first half of the 1960s, the explosion of the Vietnam War in 1965 forced the Pool to sell more of its gold to prevent the rising prices in the market. Central banks were once again unloading their dollar reserves, putting pressure on the currency.

France withdrew from the Pool and took its gold reserves back to Paris in June 1967, and exchanged U.S. dollar reserves for gold. The United States Congress decided to cut the dollar off from gold on March 18, 1968.

As a result, the effectiveness of the London Gold Pool ended, creating instability in the markets. To keep the Swiss market stable, Numismatic News recounted that three of the largest Swiss banks established the Zurich Gold Pool to create its own gold trading center independent of London.

The Zurich Gold Pool is notable for its exclusive use of over-the-counter transactions. Even in the digital age, there are no central exchanges or electronic platforms involved.

Emerging Gold Markets 

Those four markets mentioned above may be the biggest, but they’re not the only players. There are many up-and-coming markets that you might want to check out. Let’s take a look at some of them.

Japan Gold Market

The Japanese Gold Market is relatively young. Japan’s gold trade began in 1973, as the post-war government had banned the import and export of gold to and from the land of the Rising Sun. That year, however, the government revoked the existing ban on imports as it tried to spur the trading of gold between private entities.

Five years later, the government lifted its export ban, finally allowing traders from abroad to start gold trading with Japanese traders. Almost immediately, English and Swiss traders began exporting kilobars of gold with 0.999 purity to Japan. These were traded on a consignment basis and were shipped to Japan from Hong Kong.

According to the London Bullion Market Association, it would be another four years, in 1982, before Japanese commercial banks were finally authorized to solicit trading of investment bars and coins to the markets. The Tokyo Gold Exchange also made its first gold contract in 1982. This was a futures contract involving gold bars weighing 1 kilogram.

By 1983, three Japanese zaibatsu members, or conglomerates, partnered with the Hong Kong branch of NM. Rothschild. This partnership launched an over-the-counter exchange called ‘Loco Tokyo’ that dealt exclusively in 50-kilobar lots.

A year later, Japan’s first-ever commodities exchange market, the Tokyo Commodity Exchange or TOCOM, launched. TOCOM merged the Tokyo Gold Exchange with the Tokyo Textile Exchange and the Tokyo Rubber Exchange.

These days, gold trading in Japan is accomplished mainly by TOCOM, the Central Japan Commodity Exchange or C-COM, and over-the-counter markets.

India Gold Market

Gold is said to be a significant part of India’s culture, which makes India’s gold market one of the best for trade.

For starters, India is said to have one of the largest reserves of physical gold. These reserves are reportedly higher than that of the U.S. and China, for instance. A 2012 report by the Financial Express claims that India possesses around 20,000 tons of gold.

That’s simply a lot of gold! Indians consume gold primarily through jewelry, which makes up 80% of the precious metal’s consumption in the South Asian subcontinent. Indian families buy gold jewelry to give them as gifts or dowries for weddings. Barring dire financial times, Indians tend to keep the gold that they buy or are given.

The Indian market is also one of the liveliest in the world. According to Bullion Star, there are two exchanges in India that actively trade future contracts for precious metals like gold. These are namely:

  • Multi Commodity Exchange of India Limited (MCX)

Based in Mumbai, the MCX claims to hold 85% of the market share in commodity derivatives. Aside from gold, it also offers contracts in silver, base metals, energy resources, and agricultural commodities. The Exchange has over 1,700 members with national reach.

  • National Commodity & Derivatives Exchange Limited (NCDEX)

Also headquartered in Mumbai, the NCDEX trades more in agricultural futures contracts. Its contracts include agricultural commodities sold only in India, like pulses, spices, and guar. As for gold, it offers three gold contracts: Gold Hedge (1 kilo and 100 grams), gold (1 kilo and 100 grams), and GoldNow.

Culturally, however, the most essential bullion hubs are the networks of over-the-counter transaction centers that allow the public to invest directly into physical gold, whether in bullion or jewelry form.

Dubai Gold Market

The Emirate of Dubai has emerged to become a crucial gold trading hub serving the Middle East and nearby nations.

Dubai’s gold trade has been consistently growing since 2003. According to the Dubai Multi Commodities Center or DMCC, the years between 2003 and 2011 saw a steady growth of 28% compounded annual growth rate.

2018 is an important year in Dubai’s gold trade history. To make the market more competitive globally, the Emirate’s government decided to remove value-added tax for every gold bullion transaction. This lowered transaction costs and spurred an increase in trading activity.

That year, the website Emirates 247 reported, the Dubai Ministry of Economy pegged gold and diamond trade at 18% of the country’s commerce. The Minister said that the market is valued at AED1.628 trillion. These statistics earned Dubai the distinction of being a top hub for gold and diamond exports in 2018.

In Dubai, gold trading is accomplished through the Dubai Gold and Commodities Exchange, which maintains its own Dubai Good Delivery list of accredited refineries. Similar to the Good Delivery List of the London Bullion Market Association, the DGCX only accepts bullion and bars produced by members of the DGD list for trading to the market.

Thailand Gold Market

Consistent with its role as one of the rapidly growing countries in the Association of Southeast Asian Nations, Thailand also joins China and India as one of Asia’s rising stars in the gold trade.

Thailand’s Deputy Commerce Minister Weerasak Wangsuphakijkosol told the Nation Thailand that the Kingdom’s gold shipments from January to May of 2020 had risen 386.1%, totaling US$7.595 billion. This, Minister Weerasak said, is a direct result of the global recession.

According to Minister Weerasak, people were cashing in on gold to hedge themselves from financial uncertainty and minimize their losses due to the COVID-19 pandemic. This demand, the World Gold Council said, puts Thailand right behind India and China as one of the biggest Asian consumers of gold.

Trading of gold contracts in Thailand is facilitated by the Thailand Futures Exchange (TFEX), a subsidiary of the Stock Exchange of Thailand (SET). First established in 2004, the TFEX has two gold futures contracts on offer – the THB50 and the THB10 gold futures contracts. These were launched in February 2009 and August 2010, respectively.

Aside from these statistics, one facet of gold trading in Thailand that should attract investors is the availability of gold bar shapes that you cannot find in any other country, including the bar and doughnut-shaped bars. Aside from their actual value in ounces, they could be worth more for their numismatic value.

Central Banks With Large Holdings of Gold

One of the main driving factors of global market prices is the amount of gold each central bank holds in its reserves. As pointed out by Bloomberg, central banks worldwide have been steadily growing their reserves in gold since the abandonment of the gold standard in 1971.

The United States Treasury and Federal Reserve

When the United States moved to tie the price of gold to the U.S. dollar through the Bretton Woods system, it essentially became the most powerful entity to dictate the market movement through its policies towards both the production and the trading of gold.

In addition to cementing the dollar’s role as the de facto global currency, the Library of Economics and Liberty said, the Bretton Woods system also attempted to fix the price of gold at $35 per ounce. The United States tried to avoid devaluation of the dollar since other currencies hoarded holdings of U.S. dollars and Treasury securities.

Central banks began redeeming dollar holdings with gold at the fixed value in response to several actions by the U.S. This eventually led to a rapid depletion of the United States’ gold holdings, prompting President Richard Nixon to intervene with a set of policies known as the “Nixon Shock.”

Today, Bullion Star points out, the United States gold reserves are held jointly by the U.S. Treasury through the United States Mint and the New York Federal Reserve. However, the Federal Reserve explicitly states that it is only holding gold certificates and not physical gold bullion, and they cannot convert these certificates into actual gold.

Just how much gold does the United States have in its reserves? According to a U.S. Treasury Report, the country currently holds a total of 261,498,926.241 troy ounces of gold as of September 30, 2020, with a total value of around $11 billion.

Bank of Russia

Bloomberg’s report put Russia on the top spot of buyers of gold reserves since 1971. As of July 2020, the website U.S. Funds reports that the Russian Federation has 2,299 tons of gold reserves.

To understand Russia’s impact on gold prices, it is important to highlight its relationship with the United States. Considered as military rivals since the Cold War, this relationship has changed little even with the dissolution of the USSR and the so-called “Fall of Communism.”

Although the dissolution of the Soviet Union had enabled almost two decades of cooperation between the two great powers, the United States State Department claimed that Russia departed from bipartisan cooperation to pursue its supposedly unilateral interests.

As such, Russia took steps to move away from its economic relationship with the United States. In 2017, it began selling off its holdings of U.S. Treasuries in order to stockpile physical gold.

People’s Bank of China

Much like its neighbors Thailand and India, China has a cultural connection to gold, or the color yellow. In Chinese culture, yellow and gold are used interchangeably and are considered symbols of good fortune.

Of course, today’s China is a lot more pragmatic in its approach, especially when it comes to issues that affect its economy. Currently, China’s economic relationship with the United States is temperamental at best. Although the United States dominates the global economy through the U.S. dollar and other factors, the Chinese government is inclined to minimize its exposure to the dollar as much as possible.

Just like Russia, China has steadily built its gold reserves. China currently holds an estimated 1,948.3 tons of gold as of June 2020. This puts China at sixth place in the list of countries with the world’s largest gold reserves.

German Federal Bank

With 3,364 tons of gold in its vaults as of August 2020, U.S. Funds lists the Germans just right behind the United States at second place in terms of the sizes of gold reserves.

That’s not surprising – as the German population has been described as being very enthusiastic when it comes to investing their money into gold. Their appetite for investing in gold is markedly different from that of their Asian counterparts, who tend to invest heavily in gold in jewelry form.

Instead, the World Gold Council said that Germans invest more in gold bars and coins. 91% of the gold purchases made by the German people are in those forms.

Germany is also notable for seeing a significant rise in domestic demand for gold in just 20 years. As of 2017, the World Gold Council lists Germany as fourth for gold consumption and demand, rising ten places.

Germany is currently one of the most economically powerful countries in the European Union. Wikipedia describes the country as the fourth largest economy in the EU by nominal GDP, which means any economic event in the country can affect the EUR/USD exchange rate as well as global gold prices.

Banca d’Italia

Right after Germany, we see Italy in third place in terms of gold reserves owned or stored by its central bank, the Banca d’Italia.

One notable fact about the Banca d’Italia is that it has never increased or decreased its gold holdings for the past 20 years. Since the year 2000,  Italy’s holdings have remained at a steady 2,451.8 tons.

The ownership of the gold by the Banca d’Italia has been a point of debate among lawmakers in the Italian Parliament.

According to Bullion Star, this is because the bank is not owned by the state independently but by a group of shareholders that include the government itself and commercial. This complicated relationship is stipulated in the country’s constitution and its membership in the European Central Bank.

Other Factors That Affect Gold Prices

While central banks can hold sway over the price of gold and other precious metals, they are not the only factors that can affect the cost of gold in the market. Investopedia identifies four different factors: gold production, the value of the U.S. dollar and wealth protection efforts by investors, investment demand, jewelry, and industrial demand.

Production

Because gold is a commodity, it is also affected by the fundamental laws that govern supply, demand, and ultimately, price.

Gold is mined, which means that the metal must be dug from beneath the earth. This means costs in terms of labor and in separating the actual metal from the alloy or ore that is scraped off from underground rocks. These costs can factor into the actual gold price, together with supply.

One look at the U.S. Geological Survey’s data shows that there has been a steady increase in global gold production in a 10-year period. In 2010, the world gold production produced a cumulative total of 2,500 tons. By 2019, the global production increased to 3,300 tons.

Despite these promising values, a closer look at the data during the past four years shows that the United States, in particular, has been producing an average of 221.8 tons of gold from mines. This means consistent yearly productions within the range of 200 to 240 tons.

This means that gold prices could rise soon, though not at as drastic a pace as what is happening this year in response to the pandemic. This is due to mines having to spend more to keep up their yearly production quotas.

Value of U.S. Dollar and Wealth Protection

Because of the United States’ policies in the early 20th century, the dollar and the price of gold remain inseparable from one another. Although gold no longer backs the dollar, other countries use gold and other precious metals as a hedge towards value fluctuations of U.S. currency.

Most investors are also turning to gold as a hedge against inflation. Inflation causes prices to rise, thus lowering the purchasing power of paper currency.

Investment Demand

In 2019, investment demand accounted for 29% of gold’s global consumption.

Certain countries are actively encouraging their citizens and other parties to invest in gold bullion. These nations include the United States with the American Eagle, Canada, with its Gold Maple Leaf, China, with the Chinese Panda, and South Africa with its Kruggerand bullion coins.

Aside from bullion, ETFs are also popular among gold enthusiasts. ETFs allow investors to earn from the price movement of the precious metal without having to concern themselves with the delivery and storage of physical gold. That makes them attractive to a number of investors. For some investors, however, ETFs can be less advantageous than physical bullion. ETFs come with high trading fees and commission charges that can negatively impact the performance of your investment. Additionally, owning actual physical precious metals is a more secure claim of ownership than an ETF.

Jewelry and Industrial Demand

According to data from the World Gold Council, the global demand for gold dropped a minuscule 1% year-on-year in the months preceding the pandemic. This included a 14% year-on-year drop in demand on the 4th quarter alone.

Relatively high gold prices cause this drop in demand, but this did not deter people from purchasing gold in jewelry form. Jewelry demand took up nearly 50% of the market for gold, the Council said. Industrial applications also took up 7.5% of the market for gold in 2019.

Conclusion

Gold has served a prominent role as a form of currency before fiat currencies like the U.S. dollar were introduced to society. Before and after World War II, gold served as a guarantee to the dollar and other currencies.

The events that led to the abandonment of the gold standard did not diminish the value of gold, either. In fact, central banks are still investing heavily in gold stockpiles to protect their currencies against fluctuations of the U.S. dollar that can occur during severe financial crises.

The state of the world economy makes it imperative that you protect your savings from debilitating losses. Due to investment demand, gold’s price continues to rise amidst the adverse economic conditions experienced globally. Gold investment can provide a hedge to keep your nest egg from losing significant value.