Gold Market :: Gold Markets

How the "Books" Underpin World Prices

"Books" - Arabic for markets - are the traditional gold markets of North America and the Middle East. Today they are linked electronically with New York and London, forming an important part of the worldwide precious metals market.

The souks make up a thrid tier to world gold market demand, after large international investors and the small European or Japanese grass roots investors or hoarders.

The mood of the souks is a key indicator of gold price trands. The rise of fundamentalist Islam, for example, with its disapproval of material worth, reduced some of the traditional Middle Eastern demand for gold, but by 1989 Iran was again purchasing gold for the fabrication of jewellery.

Gold also plays a special role in India where demand for jewellery and marriage gifts is insatiable. The easing of restrictions on international trade in gold and the holding of bullion diminished the role of the Indian gold smugglers.

The growth area of the Far East has been the production of chuk kam, pure gold, jewellery for the Chinese market, in Hong Kong and in mainland China.

"Unofficial" markets, the souks, smugglers and small-scale hoarders around the world, add a measure of stability to worldwide demand for gold. Unlike major US or European players who may shift assets out of gold overnight, these markets are driven by centuries-old traditional habits that are not likely to change in a hurry.

Conclusion

Gold's performance in the 1990's raised questions about its usefulness as a hedge against anything short of complete chaos. But there was always a possibility of unexpected events sparking off a rush back into gold. It took only a small shift in confidence in paper secuities to dramatically boost the price of gold.

The role of fiat money in the economy paralleled with the lack of a gold standard made it inevitable that sophisticated investors would conclude that gold should be held until government gold holdings increased to cover the disparity of fiat against specie.

How Investor Sentiment is the Key to Gold Price Moves

The "bread and butter" demand for gold comes from the jewellery business, dentistry and the electronics industry. This consumes the vast bulk of all new gold production.

However, investor sentiment provides the "swing" factor that actually determines major price moves.

Interesting Legend

Rothchild's in London used to remove the wooden floor of their bullion room and burn it every 20 years to melt out specks of gold which had rubbed off bullion bars. With improved handling processes, this is no longer necessary, but the legend emphasises the high value of gold compared to its weight.

Conclusion

Other than in South East Asia, gold is a commodity rather than money or a money surrogate. Investor demand is the strongest single influence on gold's price. This price may change explosively when major geopolitical or economic factors upset world stability.

How Metal Market's Move :: What Determines the Price of Gold

Gold, like any other commodity, is moved by the laws of supply and demand. Demand may be broken down into:

  • Industial demand, mainly jewellery which absorbs over 80% of gold fabrication, and the electronics industry.
  • Dentistry
  • Investor demand, particularly in the nervous markets of the near and Far East, and the more sophisticated Western investor with an eye on the bullion holdings of governments..
  • The minting of official coins.
  • Medals, fake coinage and medallions.
  • And to a much lesser extent, purchases by central banks. Not all central banks are buyers though - some have been net sellers.

In the 1990's there was little investor demand in the West. 1991 showed the lowest addition to investor stocks for a decade. Selling in Europe and North America largely cancelled out any investment in the rest of the world. But continued moderate sales from the Communist countries, some success in Brasil in controlling inflation and an increase in sales of scrap gold from India and the Far East combined to keep prices on the low side.

Whilst interest rates were still perceived on the high side, had added to the factors depressing the price of gold. However, apparent stability in gold prices is easily disturbed.

Fears of hyper-inflation or widespread political instability upset the market.The current rises in the price of gold is the result of another factor - the divestment of gold out of government coffers and 'fiscal easing' (the printing of money without any backing) has meant that fiat money has less and less worth.

As fiat money value decreases you need more and more to purchase specie money (gold or silver) and hence the price (in fiat money terms) of gold, increases. With gold backing the US dollar to the value of 4 cents (now less) per dollar the lickelihood is that gold and silver will continue to increase in price for the foreseeable future.

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Comments 5 comments

shazwellyn profile image

shazwellyn 6 years ago from Great Britain

If there was a collapse, would small bars be better to barter with than large? If so where would you get best value?


humagaia profile image

humagaia 6 years ago from United Kingdom Author

Shaz it's all according to what you want to buy. If it is something relatively small then the smaller the bar the better (think about what change you will get - gold or paper money). The smaller bar, when buying, will have a larger percentage mark-up over spot price (but if gold is still rising in price this will soon be offset.

As far as best value it is all according to what you buy and where you buy it -in gold terms you can purchase it in jewellery form (at boot sales, auctions etc etc - each gram has a value) in pure gold form you can buy 1 gram bars up to 1 kilo bars - in Germany you can buy small bars from gold vending machines - otherwise there are internet sellers (but use you usual discretion with these). If you have a refinery account you could buy gold dust and have it refined (but even greater care needs to be taken with this avenue).

All in all my suggestion would be to keep any gold and silver that you have and not sell it. Even though the price is currently high the economic indicators point to it increasing (but check gold futures regularly).

Any piece of gold or silver has an intrinsic value so in times of hyperinflation one piece of gold will pay for an equivalent amount of goods whatever the paper money cost. If a television costs the equivalent of 10g of pure gold now (say £300), it is likely to cost 10g of pure gold when the cost in paper money rises to say £3,000 or £30,000 (as in hyperinflationary times).

Hope this helps


shazwellyn profile image

shazwellyn 6 years ago from Great Britain

Thanks Huma - I have been thinking about this. It seems that people are stashing gold because of an uncertain future. Would you agree with me?


humagaia profile image

humagaia 6 years ago from United Kingdom Author

Yes. And as above, keep what you have and add to it at the right price. Silver of any form may prove to be better than gold. It comes in more tradable form for small purchases.


HealthyHanna profile image

HealthyHanna 6 years ago from Utah

I keep getting this advice from financial advisors. I haven't understood it. You have explained it very nicely.

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