Impact of the global gold spot market

Following the abandonment of the gold standard in 1971, the precious metal adopted a role in the market hedging currency investment and as a safe haven asset. What are its main advantages? Is there any factor which could endager its position in the market?

Read on to learn more about this precious metal.

With its role in the market, gold is being somewhat exposed to a speculative bubble though reliable when it comes to its investment in any form - from physical gold bars to ETFs, specialized investment funds,etc.

Gold – although it is not a golden rule – has an inverse relationship with US dollar, yet other currencies mainly the Indian rupee, the Chinese yuan and the Russian rouble – whose cultures are closely linked to this precious mineral - have boosted its role as a hedge against global risks.

Withal, gold is subject to some factors, particularly trading systems which can drive spot gold prices. Experts and dealers of the gold market have been noticing a decline in activity and gold transactions over the counter since 2007, mainly explained by the regulations and credit constraints established after the 2008-2009 financial crisis that led many banks away from the commodity sector.

The volume of troy ounces transferred among London banks fell to a one-year low in February, 2015, with no better data from March which showed also a figure below 20 million. This downtrend in interbank trade making, together with the shrinking liquidity that it brought about, has resulted in this fall in volumes in the global spot gold market.

According to Ross Norman, CEO of Sharps Pixley, these factors have compounded an increase in cost of large transactions. That means clients with smaller volumes have better opportunities in the gold market, but also that those who have invested heavily in gold could take advantage of the lack of liquidity to cause spikes or flash crashes.

Nevertheless, according to the World Gold Council, the fact that gold is influenced by other factors than those that tend to influence the stock markets adds strength to the idea of gold as an indispensable part of investment portfolios, together with the fact that banks which exit commodities, choose gold bullions to trade.

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