In 1995 the Istanbul Gold Exchange (IAB) was founded. Its initals stem from the Turkish name of the exchange: Istanbul Altin Borsasi. This ended the gold bullion import monopoly of the Turkish Bank. In 2009 it began diamond and other precious stone trading. The IAB is a spot, lending, futures and options market. IAB’s motto is “no one puts it all together except us”. In 2008 the exchange became a member of the London Bullion Market.
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The Shanghai Gold Exchange (SGE) specializes in gold, silver, platinum and other precious metals. As part of the deregulation of the Chinese gold market and the end of the 50-year old state monopoly on gold, the SGE was founded in 2002. Its members consist of commercial banks, gold miners, consumer units, refineries and mints.
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The Hong Kong-based Chinese Gold and Silver Exchange Society (CGSE) is a spot market for gold and silver. Trading began in 1910 as the Chinese Gold and Silver Society. The organization was registered under its current name with the British government in 1918. It has operated on every trading day except during the war time 1941 – 1945. On 23 January 1980 and February 1983 strong gold fluctuations let to trade suspensions at all major gold exchanges. CGSE was the only market that continued trading as usual.
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The Tokyo Commodities Exchange (TOCOM) is an exchange for future and option contracts. Traded futures include metals (gold, silver, platinum, aluminium, palladium), oil and rubber. Gold is the only option traded at TOCOM.
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Commodity Exchange Inc. (COMEX) is based in New York. The company is a division of the CME Group form Chicago which is the world largest commodity futures exchange.
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The London Bullion Market is the world largest wholesale over the counter (OTC) market for gold. Trading occurs among the members of the London Bullion Association (LMBA) and is overseen by the Bank of England. Other important OTC gold markets are based in Zurich, New York (COMEX) and Tokio (TOCOM).
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Portfolio diversification refers to reducing investment risk by purchasing a variety of assets. A random selection of assets already reduces risk, compared to a one-asset investment. However, diversification is more efficient, if the portfolio assets are not correlated, i.e. they do not move into the same direction. Investors seek a portfolio that has a minimum of risk and a maximum of return.
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Gold is often regarded as a perfect inflation hedge. Let’s discuss this issue by answering the following three questions: First, what is inflation. Second, what are the reasons for inflation? Third, is gold an effective hedge against inflation?
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Searching for a correlation between gold and the US dollar seems to be awkward at first, as gold is traded in this currency. Would it not be impossible to determine a relationship?
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Is there a relationship between gold and the stock price? One might expect an inverse correlation: When stock goes up, investors make more money at the stock market and thus sell their gold. This drives then the gold price down. However, data tell us otherwise.
Now let’s look at three graphs. All three show the Gold Price (London Gold Fixing PM) and the Standard and Poor’s 500 Index.
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Conventional wisdom suggests that there is a strong correlation between gold and inflation. When inflation goes up, gold follows suit. Likewise, a drop in inflation would lead to a fall in the gold price. This is because in times of high inflation, gold becomes a better option for investors. But this reasoning is wrong.
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Is there a correlation between oil and gold? The first idea suggests a direct causal gold oil relationship, the second argument proposes an impact of oil on shares of gold companies, and lastly a theory argues that the gold and oil prices are driven by a common factor.
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A gold scam is either 1. downright fraud, 2. misrepresentation or 3. market manipulation. To be knowledgeable about gold scams is necessary to anticipate and avoid them.
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The political risk of gold investing means that the government can change laws and regulations that may harm your investment in gold. These government interventions can happen in the country of the investor or in another country. Both would have an impact on the gold price, as supply and demand, or the invisible hand of the market will be disturbed.
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Exchange risks refer to the exchanges where gold and futures are traded, and not to currency risks. The two major gold futures exchanges are the New York Mercantile Exchange (NYMEX) and the Tokyo Commodity Exchange (TOCOM). Trading at these and all other exchanges is subject to their rules and regulations. The exchanges can on purpose or accidentally foster market outcomes by changing their trading rules.
What events could happen at an exchange?
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The price of gold, as of every traded asset, is subject to the ups and downs of the market. The rate of this precious metal can fluctuate fundamentally. The volatility of gold must be a concern to all short- and long-term investors.
Its perceived value is shaped by demand and supply. The factors are gold production by gold mines, central banks, investors and the industry (jewelry, electronic etc.).
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The first downside of gold investment is the physical risk. Buying gold bars and coins exposes the investor to the risk of loss and theft.
Costs are involved to mitigate this risk. The transport of gold needs to be insured, gold has to be kept in a personal safe at home, or, better, in the bank’s safety deposit box. Here, renting fees incur.
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In 2010 investment demand for gold totalled 1,333 tonnes. This is 995 tonnes for bars and coins and 338 tonnes were purchased by exchange traded funds and similar products (Gold Bullion Securities, SPDR Gold Shares, Central Fund of Canada etc.). Compared to 2009, gold demand was down by 2 per cent in terms of quantity, but rose 23 per cent in value terms. In 2006 – 2007 private investors held accumulated for the first time more gold than all central banks together.
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Central banks, international entities (e.g. International Monetary Fund) and governments are the single largest holder of gold in the world. These institutions controlled end of 2009 16.2 per cent (26,780 tons) of the worldwide available gold. All ever produced gold is estimated to be 165,000 tons (5.321 billon ounces). This corresponds to a market value of 7,950 billion US dollar, based on a gold value of 1427 dollar per ounce.
These are the central banks and institutions with the top 20 gold reserves:
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In 2010, gold processed to jewelry accounted for 54 per cent of all gold purchases, making jewelry the biggest contributor to gold demand. That is a rise of 17 per cent from 2009 to 2010. The increase is even more remarkable, as the gold price increased in the same period by 26 per cent. The biggest buyer of gold for jewelry is India, with 745 tonnes, followed by China (400 tonnes) and the United States (128 tonnes).
Gold has been used for jewelry for 6,000 years. The reasons are its rarity, ease of mechanical processing, resistance to corrosion and its exceptional color.
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