FACTBOX-How to invest into gold and key price drivers

LONDON, July 1 (BestGrowthStock) – Gold surged to a record high near
$1,265 an ounce in June, as concerns over the stability of the
global financial system and volatility in other assets classes
boosted investment interest in the precious metal.

Following are key facts about the market and different ways
to invest in the precious metal.



Large buyers and institutional investors generally buy the
metal from big banks.

London is the hub of the global spot gold market, with
nearly $30 billion in trades passing through London’s clearing
system each day. To avoid cost and security risks, bullion is
not usually physically moved and deals are cleared through paper

Other significant markets for physical gold are India,
China, the Middle East, Singapore, Turkey, Italy and the United


Investors can also enter the market via futures exchanges,
where people trade in contracts to buy or sell a particular
commodity at a fixed price on a certain future date.

The COMEX division of the New York Mercantile Exchange is
the world’s largest gold futures market in terms of trading
volume. The Tokyo Commodity exchange, popularly known as TOCOM,
is the most important futures market in Asia.

China launched its first gold futures contract on January 9,
2008. Several other countries, including India, Dubai and
Turkey, have also launched futures exchanges.


The wider media coverage of high gold prices has also
attracted investments into exchange-traded funds (ETFs), which
issue securities backed by physical metal and allow people to
gain exposure to the underlying gold prices without taking
delivery of the metal itself.

Gold held in New York’s SPDR Gold Trust (GLD: )
(XAUEXT-NYS-TT: ), the world’s largest gold-backed ETF, rose to a
record high of 1,320.436 tonnes in June. The ETF’s holdings are
equivalent to more than half global annual mine supply, and are
worth some $52.6 billion at today’s prices.

Other gold ETFs include iShares COMEX Gold Trust (IAU: ), ETF
Securities’ Gold Bullion Securities (GBSx.L: ) and ETFS Physical
Gold (PHAU.L: ), and Zurich Cantonal Bank’s Physical Gold
(ZGLD.S: ).


Retail investors can buy gold from metals traders selling
bars and coins in specialist shops or on the Internet. They pay
a small premium for investment products, of between 5-20 percent
above spot price depending on the size of the product and the
weight of demand.



Rising interest in commodities, including gold, from
investment funds in recent years has been a major factor behind
bullion’s rally to historic highs. Gold’s strong performance in
recent years has attracted more players and increased inflows of
money into the overall market.


Despite the recent drop in the usual strong correlation
between gold and the euro-dollar exchange rate, the currency
market still plays a major long-term role in setting the
direction of gold.

Gold is a usually popular hedge against currency weakness. A
weak U.S. currency also makes dollar-priced gold cheaper for
holders of other currencies and vice versa.

This link sometimes breaks down in times of widespread
financial market stress, however, as both gold and the dollar
benefit from risk aversion. Their ratio turned positive in late
2008 and early 2009 after the Lehman Brothers crisis.


Gold has historically had a correlation with crude oil
prices, as the metal can be used as a hedge against oil-led
inflation. Strength in crude prices can also boost interest in
commodities as an asset class.


The precious metal is widely considered a “safe haven,”
bought in a flight to quality during uncertain times.

Financial market shocks, as seen in the aftermath of the
collapse of Lehman Brothers and more recently in the case of
burgeoning euro zone debt problems, tend to boost inflows to

Major geopolitical events including bomb blasts, terror
attacks and assassinations can also induce price rises.


Central banks hold gold as part of their reserves. Buying or
selling of the metal by the banks can influence prices.

On Aug. 7, 2009, a group of 19 European central banks agreed
to renew a pact to limit gold sales, originally signed in 1999
and renewed for a further five years in 2004.

Annual sales under the pact are limited to 400 tonnes, down
from 500 tonnes in the second agreement, which expired in late
September. Sales under the new pact have been low, however.


At the beginning of the 21st century, when gold prices were
languishing around $300 an ounce, gold producers sold a part of
their expected output with a promise to deliver the metal at a
future date.

But when prices started rising, they suffered losses and
there was a move to buy back their hedging positions to fully
gain from higher market prices, a practice known as de-hedging.

Significant producer de-hedging can boost market sentiment
and support gold prices. However, the rate of de-hedging has
slowed markedly in recent years as the outstanding global hedge
book shrank.


Supply and demand fundamentals generally do not play as big
a role in determining gold prices as those of other commodities
because of huge above-ground stocks, now estimated at around
160,000 tonnes — more than 60 times annual mine production.

Gold is not “consumed” like copper or oil.

Peak buying seasons in major consuming countries such as
India and China exert some influence on the market, but others
factors such as the dollar and financial risk carry more weight.

(For factbox on oil markets and its investors, please click
on [ID:nLDE65Q0M5])

(Compiled by Atul Prakash and Jan Harvey; editing by
Veronica Brown and Chris Johnson)

FACTBOX-How to invest into gold and key price drivers