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Thu 1 Jul 2010 03:26 PM

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Gold investing: How it works

Gold investing: How it works
Gold surged to a record high near $1,265 an ounce in June, as concerns over the stability of the global financial system and volatility in other assets classes boosted investment interest in the precious metal.

Following are key facts about the market and different ways to invest in the precious metal.

(Text: Reuters/ Images: Getty Images)
Gold investing: How it works
HOW DO I INVEST?

SPOT MARKET

Large buyers and institutional investors generally buy the metal from big banks.

London is the hub of the global spot gold market, with nearly $30 billion in trades passing through London's clearing system each day. To avoid cost and security risks, bullion is not usually physically moved and deals are cleared through paper transfers.

Other significant markets for physical gold are India, China, the Middle East, Singapore, Turkey, Italy and the United States. (Getty Images)
Gold investing: How it works
FUTURES MARKETS

Investors can also enter the market via futures exchanges, where people trade in contracts to buy or sell a particular commodity at a fixed price on a certain future date.

The COMEX division of the New York Mercantile Exchange is the world's largest gold futures market in terms of trading volume. The Tokyo Commodity exchange, popularly known as TOCOM, is the most important futures market in Asia.

China launched its first gold futures contract on January 9, 2008. Several other countries, including India, Dubai and Turkey, have also launched futures exchanges.

(Getty Images)
Gold investing: How it works
BARS AND COINS

Retail investors can buy gold from metals traders selling bars and coins in specialist shops or on the Internet. They pay a small premium for investment products, of between 5-20 percent above spot price depending on the size of the product and the weight of demand.

(Getty Images)
Gold investing: How it works
EXCHANGE-TRADED FUNDS

The wider media coverage of high gold prices has also attracted investments into exchange-traded funds (ETFs), which issue securities backed by physical metal and allow people to gain exposure to the underlying gold prices without taking delivery of the metal itself.

Gold held in New York's SPDR Gold Trust, the world's largest gold-backed ETF, rose to a record high of 1,320.436 tonnes in June. The ETF's holdings are equivalent to more than half global annual mine supply, and are worth some $52.6 billion at today's prices.

Other gold ETFs include iShares COMEX Gold Trust, ETF Securities' Gold Bullion Securities and ETFS Physical Gold, and Zurich Cantonal Bank's Physical Gold.

(Getty Images)
Gold investing: How it works
KEY PRICE DRIVERS:

INVESTORS

Rising interest in commodities, including gold, from investment funds in recent years has been a major factor behind bullion's rally to historic highs. Gold's strong performance in recent years has attracted more players and increased inflows of money into the overall market. (Getty Images)
Gold investing: How it works
US DOLLAR

Despite the recent drop in the usual strong correlation between gold and the euro-dollar exchange rate, the currency market still plays a major long-term role in setting the direction of gold.

Gold is a usually popular hedge against currency weakness. A weak U.S. currency also makes dollar-priced gold cheaper for holders of other currencies and vice versa.

This link sometimes breaks down in times of widespread financial market stress, however, as both gold and the dollar benefit from risk aversion. Their ratio turned positive in late 2008 and early 2009 after the Lehman Brothers crisis. (Getty Images)
Gold investing: How it works
OIL PRICES

Gold has historically had a correlation with crude oil prices, as the metal can be used as a hedge against oil-led inflation. Strength in crude prices can also boost interest in commodities as an asset class. (Getty Images)
Gold investing: How it works
FISCAL AND POLITICAL TENSIONS

The precious metal is widely considered a