Gold or Equity: Which generates more global trade?

January 13, 2009

Commodity Online
LONDON: There is still no conclusive evidence to establish that global gold trading beats equity trading volumes. However it is a fact that gold trading through OTCs, through Futures and options in exchanges and Exchange Traded Funds have zoomed by 50-80 percent in recent years.

According to a report by International Financial Services Ltd (IFSL) London, although the value of above ground gold and silver is relatively small compared to the global equity and bond market, turnover is high. The gold and silver markets have a much higher turnover as a proportion of market value than the global equity market.

The turnover in gold trading was $20,247 bn with a market capitalization of $4,560 bn as against a equity trading volumes of $97,200 bn with market capitalization of $31,250 bn which is based on World Gold Council, LBMA, TOCOM and other sources.

“It should be noted however that estimates of the volume of gold and silver trading are conservative as they do not include all exchange-traded volumes or OTC trading that is cleared outside of London,” IFSL said in its report.

Even as analysts have repeatedly pointed out that gold had once again established its value as a `safe haven investment’ in 2008 even before the economic crisis fully unfolded, there isn’t sufficient data to account for the fact that gold volumes may be higher than global equity trading volumes.

Futures and options trading of gold and silver has gained in importance in recent years. According to IFSL estimates, turnover of such transactions increased more than 80% in 2008 to reach a record $5.1 trillion. This was up ten-fold on the value traded six years earlier. The value of silver traded on exchanges totalled $1.2 trillion in 2008, up 60% on the previous year

The main commodity exchanges for gold and silver are Comex in New York, Tocom in Tokyo and more recently MCX in India. Gold can also be traded on other commodity exchanges including the Chicago Board of Trade, Istanbul Gold Exchange, Chinese Gold and Silver Exchange Society, the Shanghai Gold Exchange and Dubai Commodity Exchange.

Only a small percentage of the futures market turnover ever comes to physical delivery of the gold or silver represented by the contracts traded.

Gold and silver backed securities
Precious metals trading in the form of securities on exchanges is based on fixed delivery dates and transaction sizes. These forms of securitised investments include for example Exchange Traded Funds or Exchange Traded Commodities (ETFs or ETCs) and Exchange Traded Notes. ETFs, which represent equity market securities that follow physical commodity returns, account for around 70% of such trading. ETFs for both silver and gold trading have increased strongly in recent years.

These securities have had a major impact on the market, representing 59% of identifiable gold investment and 20% of total demand in the first three quarters of 2008. Gold ETFs holdings increased to 27moz at end-2007 from less than 2 moz three years earlier. This makes ETFs the sixth largest gold “holding”, behind central banks of UK, Germany, France and Italy, and the IMF. The introduction of the Barclays Global Investors iShares Silver Trust ETF in 2006 was partly the reason for the 36% increase in silver prices in that year.

ETFs for all types of commodities have gained in importance in recent years and increased more than five-fold in assets outstanding in the two years up to June 2008 to nearly $60bn. Gold related investments account for the bulk of such trading and accounted for more than a half of the total. Other precious metals account for a further 10% with most of the remainder accounted for by other commodity investments such as agriculture and energy.

IFSL estimates that the market value of above-ground gold stocks totalled over $4.5 trillion at the end of 2008 with turnover of $20.2 trillion during the year. The value of turnover increased 50% in 2008 (20% in moz), and more than tripled (up 52% in moz) on three years earlier. Around threequarters of gold trading was conducted on OTC markets, and the remainder on exchanges.

The value of above-ground stocks and estimated turnover of the silver market totalled $10.8bn and $2.6 trillion respectively. The value of near-market silver or silver that is easily available from above ground stocks (in bullion form or scrap) is however much higher. The value of turnover increased 30% in 2008 (14% in moz), and nearly tripled (up 26% in moz) on three years earlier. Around 60% of silver trading was conducted on OTC markets, and the remainder on exchanges.

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