What Is the Gold Market?

Mary McMahon

The gold market is a financial market revolving around the trade of gold. Like other commodity markets, it waxes and wanes in response to a variety of conditions. Historically, gold and silver have been favored by many investors because of their potentially high value. Participants in the gold market include individual investors, institutions, and government agencies, in some cases.

Stack of gold bars.
Stack of gold bars.

In this market, gold prices are quoted by the ounce, although few investors buy gold ounce by ounce. More typically, they invest in bullion or gold bars which come at higher weights, as these are more convenient for large scale trading. Standardized weights vary, but the gold must be extremely pure in all cases. One particularly common size is the so-called “Good Delivery” gold bar, which contains 438.9 ounces (12.4 kilograms or 400 troy ounces) of gold.

Investment in gold can create some logistics problems. Gold is heavy, and in the volumes traded by investors, it would be cumbersome to transfer between physical locations. Consequently, some of the trading on the gold market takes place in the form of gold certificates. Traders buy, sell, and exchange certificates indicating ownership of a set amount of gold. The gold remains stored in a secure location and the institution that houses it updates the records to reflect the change of ownership.

Some investors active in the gold market do stockpile supplies of gold, a practice seen at some central banks wishing to control a supply of precious metals directly, not just in the form of certificates. These institutions have secure facilities to store and handle gold. They can also work with assayers and other personal to test their investments and confirm the purity. In the event of a dispute over impure gold, investors may need to trace the ownership through several previous handlers to determine if a switch was made or when impurities were introduced.

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Individual investors typically cannot participate in a meaningful way on the gold market because they lack the funds to buy large supplies of gold. Institutional and government investors purchase gold in huge volumes. Their trading activities can have a direct impact on the market and may drive prices up or down. They also have the ability to hold stocks in reserve in the event of price drops, while individuals may be forced to sell their gold to recoup losses or limit losses if they do not have reserves to rely upon and need liquidity quickly.

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