HOW IS GOLD PART OF OUR ECONOMY?


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Gold can be bought and sold in almost every market and currency imaginable, whether in a Cairo souk or a sophisticated commodity exchange in Chicago.

Although some gold trading is based on commercial transactions, such as and Amsterdam jeweller buying gold for inventory, most gold investors range from powerful central banks that use gold to shore up their currencies to individual who hope gold will be the one thing to hold its value in inflationary times.

Gold’s role in the world economy has been changing. Before banks and security houses became part of the electronically connected “global village” gold served as an uniquely liquid investment that could be exchanged anywhere in the world at any given time. People in war-torn countries still use gold as a refuge. Many of the refugees fleeing the war in Kosovo, for example, used small amounts of gold or gold jewellery to buy their way of safety.

In developed economies, gold is perceived mostly as a “hedge”-it provides a stable refuge for investors if world markets should crash or in inflation should rear up its ugly head.

When inflation is brought under control, however gold loses its luster: unlike most other investments, there is no interest paid on gold. The only possible hope for profit is for gold to rise in value on the world markets, giving the investors a capital gain. Central banks have been the world’s biggest gold holders, but as inflation worries receded during the late 1990s, they began selling off some of their large holdings in order to put the money to better use.

They are several ways of investing gold, including buying shares in gold mining companies or gold mutual funds. Most gold investments are “spot” purchases for immediate delivery. Gold is usually held in custodian bank that charges a fee for storage- a form of “negative interest rate”

Gold trading takes place in banks and trading houses all over the world as well on the Web. One favourite method of buying gold is to purchase a future. Purchases that are not for immediate delivery are called future contracts, with flexible dates to fit the needs of specific buyers and seller, are called forward contracts. Gold futures prices, like a child riding piggy-back, tend to move in the same direction as gold spot prices. Also, they often rise and fell in tandem with the prices of other precious metals, such as silver and platinum.

 


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