The Volatility of the Gold Market, Explained | WSJ

00:05:40
https://www.youtube.com/watch?v=qOpzs7IP51U

Summary

TLDRThe video discusses the recent unpredictable fluctuations in the price of gold, exacerbated by the COVID-19 pandemic and heightened investment activities. Initially crashing and then recovering, gold prices reached new historical highs before becoming volatile again. This instability challenges gold's reputation as a reliable safe-haven asset. The process of gold trading, from mining through global distribution and market trading, is complex, with prices significantly influenced by both physical and futures markets, mainly operating in London and New York. Investors view gold as a safeguard against inflation, particularly under current low interest rates and economic uncertainty. The pandemic's impact on the mining and transport sectors initially created a shortage, further increasing prices. However, if forecasted inflation fails to occur, the current momentum could reverse, introducing further volatility to the market.

Takeaways

  • 📈 Gold prices hit new highs during the pandemic.
  • 🌍 Major gold producers are China, Russia, and Australia.
  • 🏦 London and New York are key gold trading centers.
  • 💰 Gold is seen as a hedge against inflation.
  • ⚠️ The gold market is experiencing high volatility.
  • 🔄 Both physical and futures markets impact gold's value.
  • 💎 Cultural significance boosts gold demand in Asia.
  • 🔐 Central banks' actions influence gold's market behavior.
  • ✈️ Gold's supply chain involves global logistics.
  • 📉 Gold's current momentum may not last.

Timeline

  • 00:00:00 - 00:05:40

    In the wake of the coronavirus pandemic, the price of gold has experienced significant fluctuations, with initial crashes followed by investment-driven surges to unprecedented highs, making gold's status as a safe-haven asset questionable. The volatility is attracting investors but also increasing risks. To comprehend this volatility, one must understand the gold trading process, which starts with global mining predominantly in China, Russia, and Australia. The mined gold is refined, marketed, and mostly stored in vaults like those in London and New York. In Asia, cultural perceptions of gold add to its physical demand. Investors can purchase gold physically or through financial instruments like exchange-traded funds and futures, the latter being speculative contracts tied to future prices. Particularly with the December 2020 futures, investors sought protection against pandemic-related uncertainties and political instability, opting for these investments as potential hedges against inflation amidst low interest rates. Nonetheless, the gold market remains susceptible to rapid shifts, heavily influenced by economic recovery forecasts and central bank policies.

Mind Map

Mind Map

Frequently Asked Question

  • Why has the price of gold been volatile recently?

    The price of gold has been volatile due to the pandemic, increased investment, and market speculation.

  • Where is gold primarily traded?

    Gold is primarily traded in London and the New York Mercantile Exchange.

  • What are gold futures?

    Gold futures are contracts that lock the price of gold for a specific future date.

  • Why do people invest in gold?

    People invest in gold as a hedge against inflation, for its perceived intrinsic value, and because it is seen as a safe-haven asset.

  • How has the pandemic affected the gold market?

    The pandemic caused disruptions in mining and transportation, leading to a shortage and increased prices.

  • What influences physical demand for gold?

    Cultural perceptions, investment opportunities, and jewelry demand influence physical demand for gold.

  • What is the role of central banks in the gold market?

    Central banks influence the gold market by manipulating interest rates and financial stability measures.

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  • 00:00:00
    (intriguing orchestral music)
  • 00:00:01
    - [Narrator] Over the past few months,
  • 00:00:02
    the price of gold has been going haywire.
  • 00:00:05
    You can see it on this chart.
  • 00:00:07
    As the coronavirus pandemic took hold in March,
  • 00:00:10
    the price crashed, alongside stocks,
  • 00:00:12
    and then quickly regained.
  • 00:00:15
    Then, a frenzy of investment drove up the price
  • 00:00:18
    to all-time highs.
  • 00:00:19
    On August 4th, it shot past $2,000 a troy ounce
  • 00:00:23
    for the first time ever,
  • 00:00:25
    before another week of big swings.
  • 00:00:27
    This volatility is drawing both main street
  • 00:00:30
    and Wall Street investors seeking fast gains
  • 00:00:33
    and leading some analysts to call it a modern-day gold rush.
  • 00:00:37
    But these big moves call into question
  • 00:00:39
    gold's reputation as a safe-haven asset.
  • 00:00:42
    - Prices can move at a moment's notice
  • 00:00:44
    without fundamental reason more.
  • 00:00:46
    More volatility means more risk, and that means gold
  • 00:00:49
    isn't the haven, necessarily, that some people think it is.
  • 00:00:53
    - [Narrator] To you understand why the price of gold
  • 00:00:55
    is so volatile, first you need to understand
  • 00:00:57
    how gold trading works.
  • 00:01:03
    Like other precious metals,
  • 00:01:04
    the price of gold is tied to physical assets.
  • 00:01:08
    - The physical gold market involves mining,
  • 00:01:10
    refining, travel and sale.
  • 00:01:13
    - [Narrator] Gold mining happens on every continent
  • 00:01:15
    except Antarctica.
  • 00:01:17
    And the top-producing countries
  • 00:01:18
    are China, Russia, and Australia.
  • 00:01:22
    This work adds up to about 2,500
  • 00:01:24
    to 3000 metric tons of gold each year.
  • 00:01:28
    This metal is then smelted and refined
  • 00:01:30
    before being turned into bars, coins,
  • 00:01:32
    and other products like jewelry.
  • 00:01:34
    The gold is then shipped around the world,
  • 00:01:37
    often stashed in the cargo of commercial aircrafts.
  • 00:01:40
    Much of it is sent to London.
  • 00:01:42
    Mostly hidden beneath the streets of the city,
  • 00:01:45
    the Bank of England's vaults
  • 00:01:46
    hold around 400,000 bars of gold worth over $260 billion.
  • 00:01:53
    - The physical trading of gold in London
  • 00:01:55
    is done behind closed doors and in secret by a few banks.
  • 00:01:59
    So, these banks work
  • 00:02:00
    with the London Bullion Market Association
  • 00:02:03
    to set the physical price of a troy ounce of gold,
  • 00:02:06
    and that price determines how much gold is worth everywhere.
  • 00:02:09
    - [Narrator] The gold stash in London is rivaled
  • 00:02:11
    only by the Federal Reserve Bank of New York,
  • 00:02:14
    which holds the world's largest hoard of physical gold.
  • 00:02:17
    In other places around the world,
  • 00:02:19
    gold is a common investment as well.
  • 00:02:21
    - In a lot of cultures in Asia,
  • 00:02:23
    people see gold as something that's having prestige
  • 00:02:26
    and intrinsic value that can be passed down
  • 00:02:28
    from generation to generation.
  • 00:02:30
    That can be a big source of physical demand
  • 00:02:33
    for jewelry and bars and coins.
  • 00:02:35
    - [Narrator] When individual investors want to buy in,
  • 00:02:38
    they generally have a few options.
  • 00:02:40
    They can purchase physical gold in person from dealers
  • 00:02:43
    or on websites like APMEX.
  • 00:02:45
    They can bid on thousands of dollars worth of gold
  • 00:02:48
    through eBay.
  • 00:02:49
    And they can buy exchange-traded funds
  • 00:02:52
    that hold physical metal.
  • 00:02:54
    The biggest of these is SPDR gold shares,
  • 00:02:57
    which is traded on the New York Stock Exchange.
  • 00:03:00
    But this is just the physical market.
  • 00:03:02
    Gold is also traded on a whole different market
  • 00:03:05
    that is tied to commodity futures.
  • 00:03:07
    This takes us back to New York,
  • 00:03:09
    where gold futures trade on the COMEX division
  • 00:03:12
    of the New York Mercantile Exchange.
  • 00:03:14
    Futures are contracts which lock the price of a commodity
  • 00:03:17
    that will change hands at a specific future date.
  • 00:03:21
    A standard futures contract is tied to 100 ounces of gold
  • 00:03:25
    worth over $200,000, depending on the market.
  • 00:03:28
    - The most actively traded month for gold futures right now
  • 00:03:31
    is December because that's a month people expect
  • 00:03:34
    the pandemics issues to maybe be resolved by,
  • 00:03:37
    and it's a month around
  • 00:03:39
    the November's presidential election.
  • 00:03:41
    A lot of people are very nervous about the outcome
  • 00:03:43
    of that election and that it might be delayed,
  • 00:03:45
    so they're using these December gold futures
  • 00:03:48
    to give themselves options
  • 00:03:49
    and protect against market turmoil.
  • 00:03:51
    - [Narrator] But gold has slipped lately
  • 00:03:53
    after a long run-up,
  • 00:03:54
    a reminder that momentum in this market can change quickly.
  • 00:03:58
    Still, this hasn't stopped gold bugs.
  • 00:04:01
    And there are a few reasons why people
  • 00:04:02
    continue to pile money into the metal right now.
  • 00:04:05
    For a lot of investors, it started in March,
  • 00:04:08
    when mines, refineries and airlines
  • 00:04:10
    shut down across the world,
  • 00:04:12
    upending the system usually used
  • 00:04:14
    to move gold across the Atlantic and stabilize prices.
  • 00:04:18
    But when the pandemic hit,
  • 00:04:20
    investors feared there wouldn't be a way
  • 00:04:22
    to physically move gold between the markets.
  • 00:04:24
    This caused physical gold purchases to soar,
  • 00:04:27
    leading to a severe shortage
  • 00:04:29
    that drove up the price of futures.
  • 00:04:32
    But there are other reasons too.
  • 00:04:34
    - There are a lot of people who are very bullish on gold
  • 00:04:36
    and think it's an alternative currency
  • 00:04:39
    that provides a hedge against inflation
  • 00:04:41
    and is very attractive when interest rates are low.
  • 00:04:44
    Many bulls are piling into the sector
  • 00:04:46
    because they think the Federal Reserve
  • 00:04:48
    and other central banks
  • 00:04:49
    are eroding the value of paper money
  • 00:04:51
    by pumping a ton of cash into the global financial system
  • 00:04:54
    to support the economy.
  • 00:04:55
    - [Narrator] The increased activity
  • 00:04:57
    is contributing to momentum trading,
  • 00:04:59
    driving a frenzy for gold, similar to stocks.
  • 00:05:02
    But if inflation doesn't materialize,
  • 00:05:04
    the momentum that gold is seeing could unravel.
  • 00:05:07
    - Analysts say the current trading environment
  • 00:05:09
    is extremely risky.
  • 00:05:10
    People say all of the economic and political instability
  • 00:05:14
    could last for a lot longer than we think.
  • 00:05:16
    At the same time, if the economic recovery
  • 00:05:18
    goes better than expected,
  • 00:05:20
    if there's a coronavirus vaccine
  • 00:05:22
    more quickly than we think, gold could have some issues.
  • 00:05:25
    - [Narrator] This means that gold could face
  • 00:05:27
    more volatility moving forward.
  • 00:05:29
    (light orchestral music)
Tags
  • Gold
  • Volatility
  • Pandemic
  • Investment
  • Safe-haven
  • Futures
  • Market
  • Inflation
  • Central banks