FXCM Insights

XAU – Gold

Gold is the most popular investment of all precious metals, with many investors buying it to diversify risk. The price of gold fluctuates in the commodity markets, and speculation on gold occurs in futures contracts and derivatives. Throughout history, gold has been used as money in countries around the world. The price of gold is commonly benchmarked by the London bullion market. Likewise, gold is traded daily from over-the-counter spot prices, with a currency code of XAU. Though a gold standard was previously common practice in fixing the value of many countries’ currencies, no country currently uses the gold standard. Gold is, however, used as a major financial asset for countries around the world.


Price of Gold

In the late 1800s, gold standards were in effect in multiple countries around the world. However, with the enactment of the Bretton Woods system in 1944, the price of gold was pegged to the US dollar at US$35 per troy ounce. The purity of gold is measured in carats; pure gold is 24 carats, with the number dropping as purity drops. Similar to other investments, gold price fluctuates and can be followed in trends. For example, US$64 in gold in 1973 was worth $900 in 2009, an increase in value of more than 1,000%.1)http://gold.goldprice.org/2009/09/investing-in-gold.html Retrieved 29 December 2014 The value of gold can be affected by the value of global currencies and commodities, such as oil, and global economic situations, such as war. Currently, the spot gold price is around US$1,200 per ounce,2)http://goldprice.org/ Retrieved 29 December 2014 which is based on the futures contracts on global exchanges.

Gold Coins and Bars Versus Gold EFTs

Owning gold directly means that the gold physically belongs to the investor. EFTs (exchange traded funds) are fundamentally digital gold, which involves speculation on the movements of the gold price.

Gold coins are highly refined and produced in large quantities around the world, with weight and purity guarantees by the issuing government. “Unlike commemorative or numismatic coins valued by limited mintage, rarity, condition and age, bullion coins are purchased by investors seeking a simple and tangible means to own and invest…” 3)http://www.usmint.gov/mint_programs/american_eagles/action=american_eagle_bullion Retrieved 29 December 2014 Gold coins have legal tender status in their country of origin.
Gold bars are created by commercial manufacturers and have no legal tender status. The quality and authenticity of a gold bar is backed by the reputation of the refiner. Gold bars are produced in a wide variety of sizes, from one gram up to 400 troy ounces. The bars are typically marked with the refiner’s name, the weight, the purity and the bar’s serial number.4)http://goldprice.org/2007/08/gold-bullion-investments-which-to-buy.html Retrieved 29 December 2014

With gold EFTs, an investor buys a share of gold holdings from an institution, similar to buying stocks on an exchange. The investor has no physical gold; rather, it is the performance of the price of gold where the investment is made. Because gold EFTs are considered investment materials, they often are subject to capital gains tax, while gold coins and bars may not.

Gold Reserves

As the most globally traded commodity, gold is held in reserve around the world. The largest reserves of gold 5)http://www.resourceinvestor.com/2014/10/07/top-20-largest-gold-reserves-by-country-2014-editi?t=precious-metals Retrieved 29 December 2014 are:

Country Metric Tons
United States 8,133.5
Germany 3,384.2
International Monetary Fund 2,814.0
Italy 2,451.8
France 3,435.4
Russia 1,094.7
China 1,054.1.7
Switzerland 1,040.0
Japan 765.2
Netherlands 612.5

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