How investors buy gold and what drives the market

Gold prices rose to a fresh all-time high on Thursday, bolstered by safe-haven inflows following U.S. President Donald Trump’s announcement of new auto tariffs.

Bullion prices touched a record high of $3,057.78 per ounce to mark a gain of over 15% this year.

SPOT MARKET

Large buyers and institutional investors usually buy gold from big banks. Prices in the spot market are determined by real-time supply and demand dynamics.

London is the most influential hub for the spot gold market, largely because of the London Bullion Market Association. The association sets standards for gold trading and provides a framework for the over-the-counter market, facilitating trades among banks, dealers, and institutions.

China, India, the Middle East and the United States are other major gold trading centres.

FUTURES MARKET

Investors can also get exposure to gold via futures exchanges, where people buy or sell a particular commodity at a fixed price on a particular date in future.

COMEX (Commodity Exchange Inc), part of the New York Mercantile Exchange, is the largest gold futures market in terms of trading volumes.

The Shanghai Futures Exchange, China’s leading commodities exchange, also offers gold futures contracts. The Tokyo Commodity exchange, popularly known as TOCOM, is another big player in the Asian gold market.

EXCHANGE TRADED PRODUCTS

Exchange-traded products or exchange-traded funds issue securities backed by physical metal and allow people to gain exposure to gold prices without taking delivery of the metal itself.

Exchange-traded funds have become a major category of investment demand for the precious metal.

Physically backed gold exchange-traded funds registered a modest net inflow of $3.4 billion in 2024, their first in four years, even though their holdings fell by 6.8 metric tons, the World Gold Council said.

BARS AND COINS

Retail consumers can buy gold from metals traders selling bars and coins in a shop or online. Gold bars and coins are both effective means of investing in physical gold.

DRIVERS:

INVESTOR INTEREST AND MARKET SENTIMENT

Rising interest from investment funds in recent years has been a major factor behind bullion’s price moves.

Sentiment driven by market trends, news, and global events can fuel speculative buying or selling of gold.

FOREIGN EXCHANGE RATES

Gold is a popular hedge against currency market volatility. It has traditionally moved in the opposite direction to the U.S. dollar, since weakness in the U.S. currency makes dollar-priced gold cheaper for holders of other currencies and vice-versa.

MONETARY POLICY AND POLITICAL TENSIONS

The precious metal is widely considered a “safe haven” during times of uncertainty.

Trump’s threats of trade tariffs, and his imposition of additional duties on Chinese goods, have fuelled fears of a global trade war, rattling currency markets and sparking fears of a spike in U.S. inflation.

The global trade war that has roiled financial markets and raised recession fears is escalating, with Trump announcing his plan to implement 25% tariffs on imported cars and light trucks effective next week.

The policy decisions of global central banks also influence gold’s trajectory. Lower interest rates reduce the opportunity cost of holding gold since it pays no interest.

CENTRAL BANK GOLD RESERVES

Central banks hold gold in their reserves. Central bank demand has been robust in recent years because of macroeconomic and political uncertainty.

More central banks plan to add to their gold reserves within a year, despite high prices for the metal, the World Gold Council said in its annual survey in June.

Global gold demand, including over-the-counter trading, rose by 1% to a record high in 2024, the World Gold Council said, adding that central banks sped up buying in the fourth quarter.

Source: reuters