A Simple guide for new Investors to the surge in Gold prices | KOL Forex Analysis•Bola Akinya

Gold prices hit a record at the end of last week, creating a new milestone in a surge that began in late 2018 and has gathered momentum during the coronavirus pandemic.

Gold soared roughly 30% in 2020 to stop just short of closing at $2,000 a troy ounce—which is an all-time high in New York trading as it surpassed the Nasdaq Composite Index of highflying technology stocks.

What is the gold market？

There are two gold markets, remarkably similar because investment banks and other big players are active in both.

The first is the physical market, which brings together miners, refiners, jewellers, central banks, electronics manufacturers, banks and investors.

London is the focal point, dating back to the first gold rush from Brazil in 1697. Shanghai, Zurich, Dubai and Hong Kong are also hubs.

Gold How do the physical and futures markets interact？

In good times, gold costs roughly the same amount in London‘s physical market and on New York’s Comex.

If prices move out of kilter, banks bring them back in line by buying bullion on the cheap in one city, flying it across the Atlantic (normally in the cargo hold of a passenger plane) and selling at a profit where prices are higher.

They must factor in the small sum it costs to recast the gold, since Comex requires smaller bars, weighing either 100 troy ounces or a kilo.

The Corona virus pandemic scrambled this self-correcting mechanism in March this year. The world is still reeling from the effects.

Flights not operating due to the pandemic led to fears of a shortage in New York, sending futures well above spot prices in London.

The concerns proved unfounded, but the violent price moves led to losses at banks including HSBC Holdings PLC.

That has prompted banks to trade less actively on the Comex, which could make futures more volatile going forward.

How do Investors buy and sell gold？

Professional fund managers bet on gold prices with futures.

To avoid taking hold of a large amount of bullion, investors normally sell futures before they expire and buy later-dated contracts, a process known as rolling.

This comes at a cost because longer-dated futures cost more than spot gold.

The difference normally goes to the pockets of the investors enemy — investment bankers—who gets to buy at the low prices and sell at high prices.

Regular investors, comprising of Parents, Everyday people buy physical bars and coins, which they can either keep at home or in vaults.

Demand for bars and coins has shot up during the pandemic, though clients are also selling to profit on rising prices.

When things go bonkers and out of hand, with a lot of uncertainty in the markets, the two precious metal all investors rush to are gold and silver. A lot of investors consider it a safe haven investment.

Investors who want exposure to gold prices without the hassle of storing bullion or trading futures found an alternate solution in 2003: exchange-traded funds (ETFs).

These funds, with a huge surge in popularity, buy gold and issue shares that trade on the stock exchange.

Why are gold prices still soaring？

The dizzying drop in returns on the US treasury is the main reason behind this.

Gold doesnt pay any income, unlike bonds or bank deposits.

As a result, owning gold means missing out on yields from other assets when interest rates are high.

When real yields are negative, golds lack of yield becomes a strength.

Investors are also buying gold because they think it will hold its value if stocks take another tumble due to fears of a second wave in the COVID 19 Pandemic.

It doesn‘t have anyone else’s political or financial risk associated with it.

Another push for gold right now is the decline in the US Dollar.

Buyers outside the U.S. are willing to pay a higher dollar price when the greenback loses strength, making gold cheaper in terms of their home currencies. This relationship does not always hold: Gold and the dollar shot up together as a unit in March this year when the pandemic caused the great turmoil in the markets.

Another frequently asked question at the moment is will the Gold prices keep on rising？

It took three years after the start of the previous financial crisis for gold prices to peak, and it kept on going up until it was very clear that the U.S. economy would recover slowly and surely and that there would not be inflation.

Based on this, it is ok to believe we are the very beginning of momentum for gold prices going up.

The return of jewellery demand in China and India could also boost prices.

Is Gold a commodity or a currency？

Both. Gold is a commodity in that it derives its value, in part, from its use in products like jewellery.

Banks that are active in the physical market trade gold on their commodities books, and the futures market in the U.S. is regulated by the Commodity Futures Trading Commission.

Gold is treated like any other commodity on banks balance sheets under the Basel III regulatory guidelines, designed to avoid a repeat of the 2008-9 financial crisis.

Gold is also a currency. For millennia, the metal has functioned as a store of value, unit of account and medium of exchange.

The Egyptians were casting gold bars as money as early as 4000 B.C., each bar stamped with the name of the Pharaoh Menes

Bullion played a foundational role in the monetary system from 1717, when Isaac Newton, master of Englands Mint, established a price ratio between gold and silver, to 1971, when President Nixon ended the convertibility of dollars into the precious metal.

Gold is more a currency than a commodity based on this. Everything else, to one degree or another, gets used up and does not come back into the market.

Gold just stays there. There is safety in Gold

Authors Biography

Bola Akinya is a Forex trader and consultant with more than 20 years of immense experience in Forex Indices, Commodities and Currencies.

Prior to becoming a professional Trader, she held positions as a Head of Sales/Business Developer with Credit Registry and Operations Manager with Peak Merchant Bank both in Nigeria before moving to UK where she worked with great companies like AIG and The Wealth Training Company as Course Instructor and Speaker for over 15 years on the FX and Stock Markets before she started her own company – The Learn and Earn Forex Training Company over 5 years ago.

Over the years, she learned 121 from Top traders all over the UK which enabled her to develop her own unique strategies and trading systems that has made her a successful trader and Trainer.

She is married with 2 boys and 2 cats.

With the combined use of Fundamental and Technical analysis, she trades on the short term – medium term, as well as Economic News releases, combining both to give the consistency that is required for successful trades.

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