Gold investing out of the shadows

US gold futures hit a record high of $1,000 an ounce and spot gold set a new peak, as investors snapped up the metal on a weakening dollar and rocketing oil prices.

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

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 more than $13 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.

Futures market

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.

Several other countries, including India, Dubai and Turkey, have also launched futures exchanges.

Exchange-traded funds

The wider media coverage of high gold prices has also attracted investments into exchange traded funds (ETFs), which allow people to buy the metal on a stock exchange without taking physical delivery of the metal.

Gold held in US-listed StreetTRACKS Gold Shares, the world's largest gold-backed ETF, rose to a record high of 654.93 tonnes on March 10. The ETF accounts for more than 80 per cent of the metal held by all such funds. Other gold ETFs include iShares COMEX Gold Trust and ETF Securities' ETFS Physical Gold.

Bars and coins

Retail investors can buy gold from metals traders selling bars and coins in specialist shops or on the Internet.

Hedging

Several years ago when gold prices were languishing around $300 an ounce, gold producers sold a part of their expected output with a promise to deliver the metal at a future date.

But when prices started rising, they suffered losses and there was a move to buy back their hedging positions to gain fully from higher market prices - a practice known as de-hedging. Significant producer de-hedging can boost market sentiment and support gold prices.

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.

US dollar

The currency market plays a major role in setting the direction of gold, with bullion prices moving in the opposite direction to the US dollar. A weak US currency makes dollar-priced gold cheaper for holders of other currencies and vice versa.

Central bank reserves

Central banks hold gold as part of their reserves. Buying or selling of the metal by the banks can influence prices. In March 2004, 15 European central banks renewed a 1999 pact to limit their gold sales over a five-year period to 2,500 tonnes, with annual sales limited to 500 tonnes, up from 2,000 tonnes in the first agreement.

Oil prices

Gold has recently had a strong correlation with crude oil prices, as the metal can be seen as a hedge against oil-led inflation.

Political tensions

The precious metal is widely considered a "safe-haven", bought in a flight to quality during uncertain times. Major geo-political events including bomb blasts, terror attacks and assassinations can induce sharp price rises. Financial market shocks, which cause other asset prices to decline sharply, can have a similar effect.

Supply/Demand

Supply and demand fundamentals generally do not play a big role in determining gold prices because of huge above-ground stocks, now estimated at around 158,000 tonnes - more than 60 times annual mine production.

Gold is not like other commodities. Peak buying seasons in major consuming countries exert some influence on the market, but others factors such as the dollar and oil prices carry more weight.