Gold: Physical Demand, Investment or Protection?

When you think of Gold the first thought that comes to mind is Jewelry, then as an investment and as a means of safeguarding against economic or geo-political uncertainty.

How do you distinguish what takes precedence and how much weight to give each? This is one of the most commonly asked questions by Gold traders and people looking to get into trading Gold. The key is to understand the make-up of the Gold industry and what are the main components and how much weight each sector has.

Therefore, when looking at Gold as a physical asset used predominantly for Jewelry, you need to know that from all the Gold traded in the World, around fifty percent goes to Jewelry usage. As a result the weight we should give to this sector is substantial, and in turn any fluctuations in this sectors demand will have a significant impact on Gold prices.

So, after establishing that Gold Jewelry accounts for fifty percent, you then need to know who the main purchasers are, as it is their demand that will have the main impact on prices. Thus, in the jewelry sector China and India account for over fifty percent of all jewelry purchases a year, and subsequently are the main countries that determine price direction of Gold, based on their domestic demand.

As a result we have established that jewelry demand is a main component of the Gold market, and as traders we need to know that any potential pick-up or slowdown in demand from the main importing countries may have an impact on prices. However, one thing we need to be aware of is that the impact on prices from any change in demand will have a more medium to long-term impact on Gold prices.

The next major component in the Gold market is Investment. This has traditionally been a way in which society had used as a means in investing their money for a return in the future, and one that would be stable and immune from outside factors. This characteristic of Gold has made its appeal universal and has been around for many generations.

This universal appeal has made the investment part of Gold a major factor and one that can influence prices, even though it is not as big a component as Jewelry. The main factor of investing in Gold is that with the vast scope and reach to traders and investors around the World the impact can sometimes be more severe than the physical sector, and in turn can result in major price action in Gold. This was seen in 2011, when prices went up above $1900.

The main caveat in Gold investment is that the appeal is really there when other forms of investment are not appealing. Subsequently in times of economic uncertainty, such as the Sub-Prime Crisis and ensuing Global Recession the appeal for Gold was strong, as there was an uncertainty as to what would happen to the Worlds economies.

However, when we see a clearer economic landscape and there is confidence among investors they are more likely to invest in higher risk assets, such as Stocks and it is this factor that is the main factor in the amount of investment in Gold as an investment tool. As traders being aware of this characteristic and the current climate economically this will give you the gauge to be able to assess whether it is a period of time when Gold investment has an appeal or otherwise, and by going through this process you can understand what direction the Gold market should be in and by how much.

After establishing that physical demand and Investment are major components in the Gold market, the other major factor is the Safe-Haven appeal. This part of Gold is one of the most influential price and direction indicators for Gold, due to its universal appeal and necessity.

This means that when we have a situation, which warrants a form of protection, from a war, natural disaster, major economic event and other globally impacting events.  In these circumstances Gold is seen as the first port of call and the main market all investors, ranging from individuals, institutions and countries invest in to.
This universal appeal makes the impact on Gold more concentrated and has the impact of overriding the other main components in the Gold market, ranging from physical demand to investment.

Therefore, when we see major global events such as the tensions in Ukraine, and the Middle Eastern tension in 2014 we see the impact on Gold prices and directions to be very large.

However, the main caveat in this type of Gold trading is that the event must have a global implication and impact, and generally is not confined to one country, but if that country were a major economic and geo-political power than that would still warrant Safe-Haven investment.

In conclusion, we have seen that there are many parts to Gold investment, and by knowing what each one is, what weight it holds, and when it applies will give you the required knowledge and confidence to be able to trade the Gold market with a sufficient degree of understanding. This will then give you the best chance in making profits from the Gold market whatever situation presents itself!