Gold
Content
Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. This article focuses on the history and current debates regarding global commodity markets. It covers physical product (food, metals, electricity) markets but not the ways that services, including those of governments, nor investment, nor debt, can be seen as a commodity. Articles on reinsurance markets, stock markets, bond markets and currency markets cover those concerns separately and in more depth. One focus of this article is the relationship between simple commodity money and the more complex instruments offered in the commodity markets.
History
The modern commodity markets have their roots in the trading of agricultural products. While wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th century in the United States, other basic foodstuffs such as soybeans were only added quite recently in most markets.[citation needed] For a commodity market to be established, there must be very broad consensus on the variations in the product that make it acceptable for one purpose or another. The economic impact of the development of commodity markets is hard to overestimate. Through the 19th century "the exchanges became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to expanded interstate and international trade."[citation needed]
Early history of commodity markets
Historically, dating from ancient Sumerian use of sheep or goats, other peoples using pigs, rare seashells, or other items as commodity money, people have sought ways to standardize and trade contracts in the delivery of such items, to render trade itself more smooth and predictable.[citation needed] Commodity money and commodity markets in a crude early form are believed to have originated in Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. Sealed in clay vessels with a certain number of such tokens, with that number written on the outside, they represented a promise to deliver that number. This made them a form of commodity money - more than an I.O.U. but less than a guarantee by a nation-state or bank. However, they were also known to contain promises of time and date of delivery this made them like a modern futures contract. Regardless of the details, it was only possible to verify the number of tokens inside by shaking the vessel or by breaking it, at which point the number or terms written on the outside became subject to doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets. This represented the first system of commodity accounting.[citation needed] Classical civilizations built complex global markets trading gold or silver for spices, cloth, wood and weapons, most of which had standards of quality and timeliness. Considering the
many hazards of climate, piracy, theft and abuse of military fiat by rulers of kingdoms along the trade routes, it was a major focus of these civilizations to keep markets open and trading in these scarce commodities. Reputation and clearing became central concerns, and the states which could handle them most effectively became very powerful empires, trusted by many peoples to manage and mediate trade and commerce.[citation needed ]
Size of the market
The trading of commodities consists of direct physical trading and derivatives trading. Exchange traded commodities have seen an upturn in the volume of trading since the start of the decade. This was largely a result of the growing attraction of commodities as an asset class and a proliferation of investment options which has made it easier to access this market. The global volume of commodities contracts traded on exchanges increased by a fifth in 2010, and a half since 2008, to around 2.5 billion million contracts. During the three years up to the end of 2010, global physical exports of commodities fell by 2%, while the outstanding value of OTC commodities derivatives declined by two-thirds as investors reduced risk following a five-fold increase in value outstanding in the previous three years. Trading on exchanges in China and India has gained in importance in recent years due to their emergence as significant commodities consumers and producers. China accounted for more than 60% of exchange-traded commodities in 2009, up on its 40% share in the previous year. Commodity assets under management more than doubled between 2008 and 2010 to nearly $380bn. Inflows into the sector totalled over $60bn in 2010, the second highest year on record, down from the record $72bn allocated to commodities funds in the previous year. The bulk of funds went into precious metals and energy products. The growth in prices of many commodities in 2010 contributed to the increase in the value of commodities funds under management.[1]
Commodities trading
Spot trading
Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Spot trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in markets such as wholesale markets. Commodity markets, on the other hand, require the existence of agreed standards so that trades can be made without visual inspection.
Forward contracts
A forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today. The fixed price today is known as the forward price.
Futures contracts
A futures contract has the same general features as a forward contract but is transacted through a futures exchange. Commodity and futures contracts are based on what¶s termed forward contracts. Early on these forward contracts ² agreements to buy now, pay and deliver later ² were used as a way of getting products from producer to the consumer. These typically were only for food and agricultural products. Forward contracts have evolved and have been standardized into what we know today as futures contracts. Although more complex today, early forward contracts for example, were used for rice in seventeenth century Japan. Modern forward, or futures agreements, began in Chicago in the 1840s, with the appearance of the railroads. Chicago, being centrally located, emerged as the hub between Midwestern farmers and producers and the east coast consumer population centers. In essence, a futures contract is a standardized forward contract in which the buyer and the seller accept the terms in regards to product, grade, quantity and location and are only free to negotiate the price.[2]
Hedging
Hedging, a common (and sometimes mandatory[citation needed ]) practice of farming cooperatives, insures against a poor harvest by purchasing futures contracts in the same commodity. If the cooperative has significantly less of its product to sell due to weather or insects, it makes up for that loss with a profit on the markets, since the overall supply of the crop is short everywhere that suffered the same conditions. Whole developing nations may be especially vulnerable, and even their currency tends to be tied to the price of those particular commodity items until it manages to be a fully developed nation. For example, one could see the nominally fiat money of Cuba as being tied to sugar prices[citation needed], since a lack of hard currency paying for sugar means less foreign goods per peso in Cuba itself. In effect, Cuba needs a hedge against a drop in sugar prices, if it wishes to maintain a stable quality of life for its citizens.[citation needed ]
Delivery and condition guarantees
In addition, delivery day, method of settlement and delivery point must all be specified. Typically, trading must end two (or more) business days prior to the delivery day, so that the routing of the shipment can be finalized via ship or rail, and payment can be settled when the contract arrives at any delivery point.
Standardization
U.S. soybean futures, for example, are of standard grade if they are "GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and Michigan origin produced in the U.S.A. (Non-screened, stored in silo)," and of deliverable grade if they are "GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Iowa, Illinois and Wisconsin origin produced in the U.S.A. (Non-screened, stored in silo)." Note the distinction between states, and the need to clearly mention their status as GMO (Genetically Modified Organism) which makes them unacceptable to most organic food buyers.
Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley, pork bellies, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock, meats, poultry, eggs, or any other commodity which is so traded.
Regulation of commodity markets
Cotton, kilowatt-hours of electricity, board feet of wood, long distance minutes, royalty payments due on artists' works, and other products and services have been traded on markets of varying scale, with varying degrees of success.[citation needed ] Generally, commodities' spot and forward prices are solely dependent on the financial return of the instrument, and do not factor into the price any societal costs, e.g. smog, pollution, water contamination, etc. Nonetheless, new markets and instruments have been created in order to address the external costs of using these commodities such as man-made global warming, deforestation, and general pollution. For instance, many utilities now trade regularly on the emissions markets, buying and selling renewable emissions crs and emissions allowances in order to offset the output of their generation facilities. While many have criticized this as a band-aid solution, others point out that the utility industry is the first to publicly address its external costs. Many industries, including the tech industry and auto industry, have done nothing of the sort. In the United States, the principal regulator of commodity and futures markets is the Commodity Futures Trading Commission but it is the National Futures Association that enforces rules and regulations put forth by the CFTC.
Oil
Building on the infrastructure and cr and settlement networks established for food and precious metals, many such markets have proliferated drastically in the late 20th century. Oil was the first form of energy so widely traded, and the fluctuations in the oil markets are of particular political interest. Some commodity market speculation is directly related to the stability of certain states, e.g. during the Persian Gulf War, speculation on the survival of the regime of Saddam Hussein in Iraq. Similar political stability concerns have from time to time driven the price of oil. The oil market is an exception. Most markets are not so tied to the politics of volatile regions - even natural gas tends to be more stable, as it is not traded across oceans by tanker as extensively.
Commodity markets and protectionism
Developing countries (democratic or not) have been moved to harden their currencies, accept IMF rules, join the WTO, and submit to a broad regime of reforms that amount to a hedge against being isolated. China's entry into the WTO signalled the end of truly isolated nations entirely managing their own currency and affairs. The need for stable currency and predictable clearing and rules-based handling of trade disputes, has led to a global trade hegemony - many nations hedging on a global scale against each other's anticipated protectionism, were they to fail to join the WTO.
There are signs, however, that this regime is far from perfect. U.S. trade sanctions against Canadian softwood lumber (within NAFTA) and foreign steel (except for NAFTA partners Canada and Mexico) in 2002 signalled a shift in policy towards a tougher regime perhaps more driven by political concerns - jobs, industrial policy, even sustainable forestry and logging practices.
Commodities exchanges
Main article: Commodities exchange
Largest commodities exchanges
Exchange Country Volume per month $M CME Group USA 19[3] Tokyo Commodity Exchange Japan NYSE Euronext EU Dalian Commodity Exchange China Multi Commodity Exchange India Intercontinental Exchange USA, Canada, China, UK -
GOLD
Gold exchange-traded products are exchange-traded funds (ETFs), closed-end funds (CEFs) and exchange-traded notes (ETNs) that aim to track the price of gold. Gold exchange-traded products are traded on the major stock exchanges including Zurich, Mumbai, London, Paris and New York. As of 25 June 2010, physically backed funds held 2,062.6 tonnes of gold in total for private and institutional investors.[1] Each gold ETF, ETN, and CEF has a different structure outlined in its prospectus. Some such instruments do not necessarily hold physical gold. For example, gold ETNs generally track the price of gold using derivatives.
History
The first gold exchange-traded product was Central Fund of Canada, a closed-end fund founded in 1961. It later amended its articles of incorporation in 1983 to provide investors with an exchange-tradable product for ownership of gold and silver bullion. It has been listed on the Toronto Stock Exchange since 1966 and the AMEX since 1986.[2]
The idea of a gold exchange-traded fund was first conceptualized by Benchmark Asset Management Company Private Ltd in India when they filed a proposal with the SEBI in May 2002. However it did not receive regulatory approval at first and was only launched later in March 2007.[3] The first gold ETF actually launched was Gold Bullion Securities, which listed 28 March 2003 on the Australian Stock Exchange. Graham Tuckwell, the founder and major shareholder of ETF Securities, was behind the launch of this fund.[4]
Fees
Typically a commission of 0.4% is charged for trading in gold ETFs and an annual storage fee is charged. U.S. based transactions are a notable exception, where most brokers charge only a small fraction of this commission rate. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each share, so the amount of gold in each share will gradually decline over time. In some countries, gold ETFs represent a way to avoid the sales tax or the VAT which would apply to physical gold coins and bars. In the United States, sales of a gold ETF are treated as sales of the underlying commodity and thus are taxed at the 28% capital gains rate for collectibles, rather than the rates applied to equity securities.[5]
Physically backed funds
Central Fund of Canada and Central Gold Trust
The Central Fund of Canada (TSX: CEF.A, TSX: CEF.U, NYSE: CEF) and the Central Gold Trust (TSX: GTU.UN, TSX: GTU.U, NYSE: GTU) are closed-end funds headquartered in Calgary, Alberta, Canada, mandated to keep the bulk of their net assets in precious metals, with a small percentage of cash. The Central Fund of Canada holds primarily a mix of gold and silver, while the Central Gold Trust holds primarily gold. The custodian of the precious metals assets of both funds is the main Calgary branch of CIBC. Both funds are considered especially safe because of their published codes of governance and ethics, the Central Fund's history of operation since 1961, and the funds' simple prospectuses which equate shares of the closed-end funds with real units of ownership in the trusts. As of October 2009, the Central Fund of Canada held 42.6 tonnes of gold and 2129.7 tonnes of silver in storage, and the Central Gold Trust held 13.6 tons of gold in storage.
Claymore Gold Bullion ETF
In May 2009 Canadian-based Claymore Investments launched Claymore Gold Bullion ETF (TSX: CGL). As of November 2010 the fund held 10.4 tonnes in gold assets. [6]
Exchange Traded Gold
Several associated gold ETF's are grouped under the name Exchange Traded Gold.[7] The Exchange Traded Gold funds are sponsored by the World Gold Council, and as of June 2009
held 1,315.95 tonnes of gold in storage.[7] Exchange Traded Gold securities are listed on multiple exchanges worldwide by various ETF providers, including:
SPDR Gold Shares
SPDR Gold Shares marketed by State Street Global Markets LLC, an affiliate of State Street Global Advisors, accounts for over 80 percent of the gold within the Exchange Traded Gold group. As of 2009, SPDR Gold Shares is the largest and most liquid gold ETF on the market, and the second-largest exchange-traded fund (ETF) in the world.[8] Stock market listings:
y
United States (NYSE: GLD), Japan (TYO: 1326), Hong Kong (HKEX: 2840) and Singapore (SGX:GLD 10US$)
The SPDR Gold Trust ETF (GLD) holds a proportion of its gold in allocated form in London at HSBC, where it is audited twice a year by the company Inspectorate. GLD has been criticized by Catherine Austin Fitts and Carolyn Betts for its extremely complex structure and prospectus, possible conflict of interest in its relationships with HSBC and JPMorgan Chase which are believed to have large short positions in gold, and overall lack of transparency.[9] GLD has been compared with mortgage-backed securities and collateralized debt obligations.[9] These problems with SPDR Gold Trust are not necessarily unique to the fund, however as the dominant gold ETF the fund has received the most extensive analysis.
[] Gold Bullion Securities, ETFS Physical Gold and ETFS Physical Swiss Gold
ETF Securities "Gold Bullion Securities" (previously marketed by Lyxor Asset Management) listings:
y
Australia (ASX: GOL), Belgium, France (Euronext: GBS), Germany (FWB: GG9B), Italy, Netherlands and United Kingdom (LSE: GBS and LSE: GBSS)
Similar to Gold Bullion Securities, ETF Securities¶ ETFS Physical Gold (LSE: PHAU) and ETFS Physical Swiss Gold (LSE: SGBS) are also backed by allocated gold bullion. They later launched ETFS Physical Swiss Gold Shares (NYSE: SGOL) and ETFS Physical Asian Gold Shares (NYSE: AGOL) on the New York Stock Exchange for US investors seeking geographical and custodian diversification. ETF Securities¶ physical gold ETCs ² ETFS Physical Gold (PHAU), ETFS Physical Swiss Gold (SGBS) and Gold Bullion Securities (GBS) ² are all backed by ³allocated´ gold bars ± uniquely identifiable bars which carry no bank cr risk. The precious metal bars are held in trust in London by the Custodian HSBC Bank USA N.A., the world¶s leading Custodian for ETCs. The metal held with the Custodian must conform to the rules for Good Delivery of the London Bullion Mar ket Association (LBMA). Securities are only issued once metal is confirmed as being deposited into the Company¶s bullion account with the Custodian. Consistent with allocated gold, no precious metal is borrowed, loaned out nor does it earn any income.[citation needed ]
Dubai Gold Securities and NewGold
y y
Dubai Gold Securities (Sharia compliant) (NASDAQ Dubai:GOLD) ABSA "NewGold" debentures (JSE: NewGold)
Goldist ETF
Goldist ETF (ticker symbol: GLDTR) was launched by Finansbank in September 2006 on the Istanbul Stock Exchange.[10]
iShares Gold Trust
The iShares Gold Trust was launched by iShares on 21 January 2005 and is listed on the New York Stock Exchange (NYSE: IAU) and Toronto Stock Exchange (TSX: IGT). As of July 29, 2010, the fund claimed to hold 90.88 tonnes of gold in storage. According the prospectus, trading in the fund may be suspended if COMEX gold trading is restricted or gold delivery is not possible. Some writers have expressed doubts that iShares has sufficient gold inventory to back its existing warehouse receipts.[11] One of the main differences between iShares and SPDR Gold Trusts is that iShares creates roughly 100 shares from every ounce of gold, versus the 10 shares per ounce created by SPDR. This makes iShares more accessible for day traders or small investors to play the gold market.[12]
Julius Baer Physical Gold Fund
In October 2008 Swiss & Global Asset Management (formerly Julius Baer Asset Management) launched JB Physical Gold Fund (SIX: JBGOCA, JBGOEA, JBGOUA, JBGOGA) which invests in physical 12.5 kg gold bars (around 400 ounces). The ETF has four unit classes traded in different currencies: CHF, EUR, USD and GBP.[13]
Precious Metals Bullion Trust
On August 14, 2009 Brompton Funds Management Limited launched Precious Metals Bullion Trust (TSX: PBU.UN). The Fund invests in physical gold, silver and platinum bullion bars which are stored on a fully allocated, insured and physically segregated basis in Canada, in the treasury vaults of the Bank of Nova Scotia, a Canadian Schedule 1 bank. PBU.UN publishes its ³Good Delivery´ standard bar holdings on a monthly basis on its website[14] and units can be redeemed quarterly at Net Asset Value for cash with no limitations. As the physical bullion held by the Fund is entirely unencumbered, unitholders may also choose to redeem quarterly for whole bars of physical gold, silver and platinum bullion (subject to minimum redemption amounts).
Sprott Physical Gold Trust
Sprott Asset Management launched the Sprott Physical Gold Trust as a closed-end fund on February 26, 2010. It is traded on the NYSE Arca (NYSE: PHYS) and the Toronto Stock Exchange (TSX: PHY.U). The fund holds physical gold, stored at the Royal Canadian Mint. PHYS publishes its inventory of Good Delivery gold bars on the web, and (uniquely among gold ETFs) allows shares to be redeemed for whole bars. As LBMA bars weigh between 350 and 430 troy ounces, physical redemption is limited to such increments. Regardless, the
provision for physical redemption lends credibility to the fund's claim of holding unencumbered physical gold, especially as of 2010 when funds such as SPDR Gold Shares with elaborately structured holdings are under scrutiny. As of June 2010, the Sprott Physical Gold Trust held 582,417 ounces of gold, plus about $9 million of other assets.[15]
ZKB Gold ETF
The ZKB Gold ETF (SIX: ZGLD, ZGLDEU, ZGLDUS, ZGLDGB) was launched on 15 March 2006 by Zürcher Kantonalbank. The fund invests exclusively in physical 12.5 kg gold bars (around 400 ounces). The ETF has four unit classes traded in different currencies: CHF, EUR, USD and GBP.[16]
Certificate and bond products
db Physical Gold ETC
db Physical Gold ETC (SIX: XGLD, LSE: XGLD, FWB: XAD5) was launched by Deutsche Bank in July 2010. [17]
Nomura Gold-Price-Linked ETF
On 10 August 2007, Nomura Asset Management launched the Gold-Price-Linked ETF (code "1328") on the Osaka Securities Exchange, Japan. Shares are sold in 1 gram gold units, with a minimum purchase of ten units. The fund is not backed by physical gold but by bonds traded in London which are linked to the price of gold.
RBS Physical Gold ETC
Royal Bank of Scotland N.V. launched RBS Physical Gold ETC (FWB: XOB1) in April 2010. [18]
Xetra-Gold
Xetra-Gold (FWB: 4GLD) was launched by Deutsche Börse Commodities in December 2007. [19]
Source Physical Gold ETC
Source Physical Gold ETC (LSE: SGLD), provided by Source UK Services, aims to track the performance of The London Gold Market PM Fix. Gold P-ETC is an exchange-traded certificate rather than an exchange-traded fund. Each Gold P-ETC is a certificate which is secured by gold bullion held in J.P. Morgan Chase Bank's London vaults.[20]
Hybrid products
Hybrid products hold mostly physical gold, but also hold other financial instruments such as gold futures, bonds or money market funds.
Benchmark Gold BeES
On 19 March 2007 Benchmark Asset Management Company Private Ltd, a Mumbai-based mutual fund house, launched Gold BeES (NSE: GOLDBEES) on the National Stock Exchange of India. The name is short for "Gold Benchmark Exchange-traded Scheme." Shares are sold in approximately 1 gram gold units. The scheme's assets are 90-100% physical gold, and up to 10% money market instruments, securitised debts (up to 5%), and bonds.[21]
UTI Gold Exchange Traded Fund
On 17 April 2007 UTI Mutual Fund listed Gold Exchange Traded Fund (NSE: GOLDSHARE) on the National Stock Exchange of India. The fund states that its objective is "to provide investment returns that, before expenses, closely correspond to the performance and yield of the gold prices or gold related instruments."[22] Every unit of UTI Gold Exchange Traded Fund approximately represents one gram of pure gold. Units allotted under the scheme will be cred to investors¶ demat accounts.
Index-tracking products
ETFS Gold
In September 2006 ETF Securities launched ETFS Gold (LSE: BULL) which tracks the DJAIG Gold Sub-Index.
PowerShares DB Gold ETF and ETNs (PowerShares/Deutsche Bank)
Tracks the performance of certain index moves inside the Deutsche Bank Liquid Commodity Index - Optimum Yield Gold [1]. ETNs are exchange-traded notes, which differ from exchange-traded funds (ETFs).
y y y y
DB Gold (NYSE: DGL) (gold ETF) DB Gold Double Long (NYSE: DGP) (long leveraged gold ETN) DB Gold Short (NYSE: DGZ) (short gold ETN) DB Gold Double Short (NYSE: DZZ) (short leveraged gold ETN)
Gold held in ETF Securities Ltd.¶s European exchange-traded products rose to a record $10 billion, accounting for half of the provider¶s total global assets under management. Its ETFS Physical Gold product held $5.2 billion of metal as of June 11, and ETFS Gold Bullion Securities contained $4.8 billion, London-based ETF Securities said today in a report. Total assets under management climbed to an all-time high $20 billion as of June 17 including commodity, currency and equity products, up 70 percent from last July, it said.
Gold ETP holdings advanced to an all-time high this year and coin sales from mints accelerated on buying by investors seeking to protect their wealth from Europe¶s sovereigndebt crisis and on concern the global economic recovery may falter. Bullion climbed to a record $1,265.30 an ounce on June 21 and is up 15 percent this year. ³European investors¶ demand for hard assets, particularly precious metals, continues to grow as they look to reduce their exposure to counterparty and currency-depreciation risks,´ Hector McNeil, a managing partner at ETF Securities, said in the report. ³Demand for the ETFS Physical Gold product has been particularly strong since the euro crisis began.´ Its two bullion products are the biggest gold-backed securities in Europe, ETF Securities said. The company also provides precious-metals products in the U.S., Australia and Asia. Global holdings of the metal in ETPs increased four metric tons to 2,062.6 tons on June 25, according to Bloomberg data tracking 10 providers. Holdings in the U.S.-based SPDR Gold Trust, the world¶s biggest exchange-traded fund backed by bullion, were 1,316.18 tons on June 25, valuing its assets at $52.28 billion. Gold for immediate delivery traded at $1,259.15 an ounce at 11:17 a.m. in London and is up 15 percent this year. Prices are heading for a 10th straight annual increase, the longest run since at least 1920.
History
The modern commodity markets have their roots in the trading of agricultural products. While wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th century in the United States, other basic foodstuffs such as soybeans were only added quite recently in most markets.[citation needed] For a commodity market to be established, there must be very broad consensus on the variations in the product that make it acceptable for one purpose or another. The economic impact of the development of commodity markets is hard to overestimate. Through the 19th century "the exchanges became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to expanded interstate and international trade."[citation needed]
Early history of commodity markets
Historically, dating from ancient Sumerian use of sheep or goats, other peoples using pigs, rare seashells, or other items as commodity money, people have sought ways to standardize and trade contracts in the delivery of such items, to render trade itself more smooth and predictable.[citation needed] Commodity money and commodity markets in a crude early form are believed to have originated in Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. Sealed in clay vessels with a certain number of such tokens, with that number written on the outside, they represented a promise to deliver that number. This made them a form of commodity money - more than an I.O.U. but less than a guarantee by a nation-state or bank. However, they were also known to contain promises of time and date of delivery this made them like a modern futures contract. Regardless of the details, it was only possible to verify the number of tokens inside by shaking the vessel or by breaking it, at which point the number or terms written on the outside became subject to doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets. This represented the first system of commodity accounting.[citation needed] Classical civilizations built complex global markets trading gold or silver for spices, cloth, wood and weapons, most of which had standards of quality and timeliness. Considering the
many hazards of climate, piracy, theft and abuse of military fiat by rulers of kingdoms along the trade routes, it was a major focus of these civilizations to keep markets open and trading in these scarce commodities. Reputation and clearing became central concerns, and the states which could handle them most effectively became very powerful empires, trusted by many peoples to manage and mediate trade and commerce.[citation needed ]
Size of the market
The trading of commodities consists of direct physical trading and derivatives trading. Exchange traded commodities have seen an upturn in the volume of trading since the start of the decade. This was largely a result of the growing attraction of commodities as an asset class and a proliferation of investment options which has made it easier to access this market. The global volume of commodities contracts traded on exchanges increased by a fifth in 2010, and a half since 2008, to around 2.5 billion million contracts. During the three years up to the end of 2010, global physical exports of commodities fell by 2%, while the outstanding value of OTC commodities derivatives declined by two-thirds as investors reduced risk following a five-fold increase in value outstanding in the previous three years. Trading on exchanges in China and India has gained in importance in recent years due to their emergence as significant commodities consumers and producers. China accounted for more than 60% of exchange-traded commodities in 2009, up on its 40% share in the previous year. Commodity assets under management more than doubled between 2008 and 2010 to nearly $380bn. Inflows into the sector totalled over $60bn in 2010, the second highest year on record, down from the record $72bn allocated to commodities funds in the previous year. The bulk of funds went into precious metals and energy products. The growth in prices of many commodities in 2010 contributed to the increase in the value of commodities funds under management.[1]
Commodities trading
Spot trading
Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Spot trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in markets such as wholesale markets. Commodity markets, on the other hand, require the existence of agreed standards so that trades can be made without visual inspection.
Forward contracts
A forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today. The fixed price today is known as the forward price.
Futures contracts
A futures contract has the same general features as a forward contract but is transacted through a futures exchange. Commodity and futures contracts are based on what¶s termed forward contracts. Early on these forward contracts ² agreements to buy now, pay and deliver later ² were used as a way of getting products from producer to the consumer. These typically were only for food and agricultural products. Forward contracts have evolved and have been standardized into what we know today as futures contracts. Although more complex today, early forward contracts for example, were used for rice in seventeenth century Japan. Modern forward, or futures agreements, began in Chicago in the 1840s, with the appearance of the railroads. Chicago, being centrally located, emerged as the hub between Midwestern farmers and producers and the east coast consumer population centers. In essence, a futures contract is a standardized forward contract in which the buyer and the seller accept the terms in regards to product, grade, quantity and location and are only free to negotiate the price.[2]
Hedging
Hedging, a common (and sometimes mandatory[citation needed ]) practice of farming cooperatives, insures against a poor harvest by purchasing futures contracts in the same commodity. If the cooperative has significantly less of its product to sell due to weather or insects, it makes up for that loss with a profit on the markets, since the overall supply of the crop is short everywhere that suffered the same conditions. Whole developing nations may be especially vulnerable, and even their currency tends to be tied to the price of those particular commodity items until it manages to be a fully developed nation. For example, one could see the nominally fiat money of Cuba as being tied to sugar prices[citation needed], since a lack of hard currency paying for sugar means less foreign goods per peso in Cuba itself. In effect, Cuba needs a hedge against a drop in sugar prices, if it wishes to maintain a stable quality of life for its citizens.[citation needed ]
Delivery and condition guarantees
In addition, delivery day, method of settlement and delivery point must all be specified. Typically, trading must end two (or more) business days prior to the delivery day, so that the routing of the shipment can be finalized via ship or rail, and payment can be settled when the contract arrives at any delivery point.
Standardization
U.S. soybean futures, for example, are of standard grade if they are "GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and Michigan origin produced in the U.S.A. (Non-screened, stored in silo)," and of deliverable grade if they are "GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Iowa, Illinois and Wisconsin origin produced in the U.S.A. (Non-screened, stored in silo)." Note the distinction between states, and the need to clearly mention their status as GMO (Genetically Modified Organism) which makes them unacceptable to most organic food buyers.
Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley, pork bellies, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock, meats, poultry, eggs, or any other commodity which is so traded.
Regulation of commodity markets
Cotton, kilowatt-hours of electricity, board feet of wood, long distance minutes, royalty payments due on artists' works, and other products and services have been traded on markets of varying scale, with varying degrees of success.[citation needed ] Generally, commodities' spot and forward prices are solely dependent on the financial return of the instrument, and do not factor into the price any societal costs, e.g. smog, pollution, water contamination, etc. Nonetheless, new markets and instruments have been created in order to address the external costs of using these commodities such as man-made global warming, deforestation, and general pollution. For instance, many utilities now trade regularly on the emissions markets, buying and selling renewable emissions crs and emissions allowances in order to offset the output of their generation facilities. While many have criticized this as a band-aid solution, others point out that the utility industry is the first to publicly address its external costs. Many industries, including the tech industry and auto industry, have done nothing of the sort. In the United States, the principal regulator of commodity and futures markets is the Commodity Futures Trading Commission but it is the National Futures Association that enforces rules and regulations put forth by the CFTC.
Oil
Building on the infrastructure and cr and settlement networks established for food and precious metals, many such markets have proliferated drastically in the late 20th century. Oil was the first form of energy so widely traded, and the fluctuations in the oil markets are of particular political interest. Some commodity market speculation is directly related to the stability of certain states, e.g. during the Persian Gulf War, speculation on the survival of the regime of Saddam Hussein in Iraq. Similar political stability concerns have from time to time driven the price of oil. The oil market is an exception. Most markets are not so tied to the politics of volatile regions - even natural gas tends to be more stable, as it is not traded across oceans by tanker as extensively.
Commodity markets and protectionism
Developing countries (democratic or not) have been moved to harden their currencies, accept IMF rules, join the WTO, and submit to a broad regime of reforms that amount to a hedge against being isolated. China's entry into the WTO signalled the end of truly isolated nations entirely managing their own currency and affairs. The need for stable currency and predictable clearing and rules-based handling of trade disputes, has led to a global trade hegemony - many nations hedging on a global scale against each other's anticipated protectionism, were they to fail to join the WTO.
There are signs, however, that this regime is far from perfect. U.S. trade sanctions against Canadian softwood lumber (within NAFTA) and foreign steel (except for NAFTA partners Canada and Mexico) in 2002 signalled a shift in policy towards a tougher regime perhaps more driven by political concerns - jobs, industrial policy, even sustainable forestry and logging practices.
Commodities exchanges
Main article: Commodities exchange
Largest commodities exchanges
Exchange Country Volume per month $M CME Group USA 19[3] Tokyo Commodity Exchange Japan NYSE Euronext EU Dalian Commodity Exchange China Multi Commodity Exchange India Intercontinental Exchange USA, Canada, China, UK -
GOLD
Gold exchange-traded products are exchange-traded funds (ETFs), closed-end funds (CEFs) and exchange-traded notes (ETNs) that aim to track the price of gold. Gold exchange-traded products are traded on the major stock exchanges including Zurich, Mumbai, London, Paris and New York. As of 25 June 2010, physically backed funds held 2,062.6 tonnes of gold in total for private and institutional investors.[1] Each gold ETF, ETN, and CEF has a different structure outlined in its prospectus. Some such instruments do not necessarily hold physical gold. For example, gold ETNs generally track the price of gold using derivatives.
History
The first gold exchange-traded product was Central Fund of Canada, a closed-end fund founded in 1961. It later amended its articles of incorporation in 1983 to provide investors with an exchange-tradable product for ownership of gold and silver bullion. It has been listed on the Toronto Stock Exchange since 1966 and the AMEX since 1986.[2]
The idea of a gold exchange-traded fund was first conceptualized by Benchmark Asset Management Company Private Ltd in India when they filed a proposal with the SEBI in May 2002. However it did not receive regulatory approval at first and was only launched later in March 2007.[3] The first gold ETF actually launched was Gold Bullion Securities, which listed 28 March 2003 on the Australian Stock Exchange. Graham Tuckwell, the founder and major shareholder of ETF Securities, was behind the launch of this fund.[4]
Fees
Typically a commission of 0.4% is charged for trading in gold ETFs and an annual storage fee is charged. U.S. based transactions are a notable exception, where most brokers charge only a small fraction of this commission rate. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each share, so the amount of gold in each share will gradually decline over time. In some countries, gold ETFs represent a way to avoid the sales tax or the VAT which would apply to physical gold coins and bars. In the United States, sales of a gold ETF are treated as sales of the underlying commodity and thus are taxed at the 28% capital gains rate for collectibles, rather than the rates applied to equity securities.[5]
Physically backed funds
Central Fund of Canada and Central Gold Trust
The Central Fund of Canada (TSX: CEF.A, TSX: CEF.U, NYSE: CEF) and the Central Gold Trust (TSX: GTU.UN, TSX: GTU.U, NYSE: GTU) are closed-end funds headquartered in Calgary, Alberta, Canada, mandated to keep the bulk of their net assets in precious metals, with a small percentage of cash. The Central Fund of Canada holds primarily a mix of gold and silver, while the Central Gold Trust holds primarily gold. The custodian of the precious metals assets of both funds is the main Calgary branch of CIBC. Both funds are considered especially safe because of their published codes of governance and ethics, the Central Fund's history of operation since 1961, and the funds' simple prospectuses which equate shares of the closed-end funds with real units of ownership in the trusts. As of October 2009, the Central Fund of Canada held 42.6 tonnes of gold and 2129.7 tonnes of silver in storage, and the Central Gold Trust held 13.6 tons of gold in storage.
Claymore Gold Bullion ETF
In May 2009 Canadian-based Claymore Investments launched Claymore Gold Bullion ETF (TSX: CGL). As of November 2010 the fund held 10.4 tonnes in gold assets. [6]
Exchange Traded Gold
Several associated gold ETF's are grouped under the name Exchange Traded Gold.[7] The Exchange Traded Gold funds are sponsored by the World Gold Council, and as of June 2009
held 1,315.95 tonnes of gold in storage.[7] Exchange Traded Gold securities are listed on multiple exchanges worldwide by various ETF providers, including:
SPDR Gold Shares
SPDR Gold Shares marketed by State Street Global Markets LLC, an affiliate of State Street Global Advisors, accounts for over 80 percent of the gold within the Exchange Traded Gold group. As of 2009, SPDR Gold Shares is the largest and most liquid gold ETF on the market, and the second-largest exchange-traded fund (ETF) in the world.[8] Stock market listings:
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United States (NYSE: GLD), Japan (TYO: 1326), Hong Kong (HKEX: 2840) and Singapore (SGX:GLD 10US$)
The SPDR Gold Trust ETF (GLD) holds a proportion of its gold in allocated form in London at HSBC, where it is audited twice a year by the company Inspectorate. GLD has been criticized by Catherine Austin Fitts and Carolyn Betts for its extremely complex structure and prospectus, possible conflict of interest in its relationships with HSBC and JPMorgan Chase which are believed to have large short positions in gold, and overall lack of transparency.[9] GLD has been compared with mortgage-backed securities and collateralized debt obligations.[9] These problems with SPDR Gold Trust are not necessarily unique to the fund, however as the dominant gold ETF the fund has received the most extensive analysis.
[] Gold Bullion Securities, ETFS Physical Gold and ETFS Physical Swiss Gold
ETF Securities "Gold Bullion Securities" (previously marketed by Lyxor Asset Management) listings:
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Australia (ASX: GOL), Belgium, France (Euronext: GBS), Germany (FWB: GG9B), Italy, Netherlands and United Kingdom (LSE: GBS and LSE: GBSS)
Similar to Gold Bullion Securities, ETF Securities¶ ETFS Physical Gold (LSE: PHAU) and ETFS Physical Swiss Gold (LSE: SGBS) are also backed by allocated gold bullion. They later launched ETFS Physical Swiss Gold Shares (NYSE: SGOL) and ETFS Physical Asian Gold Shares (NYSE: AGOL) on the New York Stock Exchange for US investors seeking geographical and custodian diversification. ETF Securities¶ physical gold ETCs ² ETFS Physical Gold (PHAU), ETFS Physical Swiss Gold (SGBS) and Gold Bullion Securities (GBS) ² are all backed by ³allocated´ gold bars ± uniquely identifiable bars which carry no bank cr risk. The precious metal bars are held in trust in London by the Custodian HSBC Bank USA N.A., the world¶s leading Custodian for ETCs. The metal held with the Custodian must conform to the rules for Good Delivery of the London Bullion Mar ket Association (LBMA). Securities are only issued once metal is confirmed as being deposited into the Company¶s bullion account with the Custodian. Consistent with allocated gold, no precious metal is borrowed, loaned out nor does it earn any income.[citation needed ]
Dubai Gold Securities and NewGold
y y
Dubai Gold Securities (Sharia compliant) (NASDAQ Dubai:GOLD) ABSA "NewGold" debentures (JSE: NewGold)
Goldist ETF
Goldist ETF (ticker symbol: GLDTR) was launched by Finansbank in September 2006 on the Istanbul Stock Exchange.[10]
iShares Gold Trust
The iShares Gold Trust was launched by iShares on 21 January 2005 and is listed on the New York Stock Exchange (NYSE: IAU) and Toronto Stock Exchange (TSX: IGT). As of July 29, 2010, the fund claimed to hold 90.88 tonnes of gold in storage. According the prospectus, trading in the fund may be suspended if COMEX gold trading is restricted or gold delivery is not possible. Some writers have expressed doubts that iShares has sufficient gold inventory to back its existing warehouse receipts.[11] One of the main differences between iShares and SPDR Gold Trusts is that iShares creates roughly 100 shares from every ounce of gold, versus the 10 shares per ounce created by SPDR. This makes iShares more accessible for day traders or small investors to play the gold market.[12]
Julius Baer Physical Gold Fund
In October 2008 Swiss & Global Asset Management (formerly Julius Baer Asset Management) launched JB Physical Gold Fund (SIX: JBGOCA, JBGOEA, JBGOUA, JBGOGA) which invests in physical 12.5 kg gold bars (around 400 ounces). The ETF has four unit classes traded in different currencies: CHF, EUR, USD and GBP.[13]
Precious Metals Bullion Trust
On August 14, 2009 Brompton Funds Management Limited launched Precious Metals Bullion Trust (TSX: PBU.UN). The Fund invests in physical gold, silver and platinum bullion bars which are stored on a fully allocated, insured and physically segregated basis in Canada, in the treasury vaults of the Bank of Nova Scotia, a Canadian Schedule 1 bank. PBU.UN publishes its ³Good Delivery´ standard bar holdings on a monthly basis on its website[14] and units can be redeemed quarterly at Net Asset Value for cash with no limitations. As the physical bullion held by the Fund is entirely unencumbered, unitholders may also choose to redeem quarterly for whole bars of physical gold, silver and platinum bullion (subject to minimum redemption amounts).
Sprott Physical Gold Trust
Sprott Asset Management launched the Sprott Physical Gold Trust as a closed-end fund on February 26, 2010. It is traded on the NYSE Arca (NYSE: PHYS) and the Toronto Stock Exchange (TSX: PHY.U). The fund holds physical gold, stored at the Royal Canadian Mint. PHYS publishes its inventory of Good Delivery gold bars on the web, and (uniquely among gold ETFs) allows shares to be redeemed for whole bars. As LBMA bars weigh between 350 and 430 troy ounces, physical redemption is limited to such increments. Regardless, the
provision for physical redemption lends credibility to the fund's claim of holding unencumbered physical gold, especially as of 2010 when funds such as SPDR Gold Shares with elaborately structured holdings are under scrutiny. As of June 2010, the Sprott Physical Gold Trust held 582,417 ounces of gold, plus about $9 million of other assets.[15]
ZKB Gold ETF
The ZKB Gold ETF (SIX: ZGLD, ZGLDEU, ZGLDUS, ZGLDGB) was launched on 15 March 2006 by Zürcher Kantonalbank. The fund invests exclusively in physical 12.5 kg gold bars (around 400 ounces). The ETF has four unit classes traded in different currencies: CHF, EUR, USD and GBP.[16]
Certificate and bond products
db Physical Gold ETC
db Physical Gold ETC (SIX: XGLD, LSE: XGLD, FWB: XAD5) was launched by Deutsche Bank in July 2010. [17]
Nomura Gold-Price-Linked ETF
On 10 August 2007, Nomura Asset Management launched the Gold-Price-Linked ETF (code "1328") on the Osaka Securities Exchange, Japan. Shares are sold in 1 gram gold units, with a minimum purchase of ten units. The fund is not backed by physical gold but by bonds traded in London which are linked to the price of gold.
RBS Physical Gold ETC
Royal Bank of Scotland N.V. launched RBS Physical Gold ETC (FWB: XOB1) in April 2010. [18]
Xetra-Gold
Xetra-Gold (FWB: 4GLD) was launched by Deutsche Börse Commodities in December 2007. [19]
Source Physical Gold ETC
Source Physical Gold ETC (LSE: SGLD), provided by Source UK Services, aims to track the performance of The London Gold Market PM Fix. Gold P-ETC is an exchange-traded certificate rather than an exchange-traded fund. Each Gold P-ETC is a certificate which is secured by gold bullion held in J.P. Morgan Chase Bank's London vaults.[20]
Hybrid products
Hybrid products hold mostly physical gold, but also hold other financial instruments such as gold futures, bonds or money market funds.
Benchmark Gold BeES
On 19 March 2007 Benchmark Asset Management Company Private Ltd, a Mumbai-based mutual fund house, launched Gold BeES (NSE: GOLDBEES) on the National Stock Exchange of India. The name is short for "Gold Benchmark Exchange-traded Scheme." Shares are sold in approximately 1 gram gold units. The scheme's assets are 90-100% physical gold, and up to 10% money market instruments, securitised debts (up to 5%), and bonds.[21]
UTI Gold Exchange Traded Fund
On 17 April 2007 UTI Mutual Fund listed Gold Exchange Traded Fund (NSE: GOLDSHARE) on the National Stock Exchange of India. The fund states that its objective is "to provide investment returns that, before expenses, closely correspond to the performance and yield of the gold prices or gold related instruments."[22] Every unit of UTI Gold Exchange Traded Fund approximately represents one gram of pure gold. Units allotted under the scheme will be cred to investors¶ demat accounts.
Index-tracking products
ETFS Gold
In September 2006 ETF Securities launched ETFS Gold (LSE: BULL) which tracks the DJAIG Gold Sub-Index.
PowerShares DB Gold ETF and ETNs (PowerShares/Deutsche Bank)
Tracks the performance of certain index moves inside the Deutsche Bank Liquid Commodity Index - Optimum Yield Gold [1]. ETNs are exchange-traded notes, which differ from exchange-traded funds (ETFs).
y y y y
DB Gold (NYSE: DGL) (gold ETF) DB Gold Double Long (NYSE: DGP) (long leveraged gold ETN) DB Gold Short (NYSE: DGZ) (short gold ETN) DB Gold Double Short (NYSE: DZZ) (short leveraged gold ETN)
Gold held in ETF Securities Ltd.¶s European exchange-traded products rose to a record $10 billion, accounting for half of the provider¶s total global assets under management. Its ETFS Physical Gold product held $5.2 billion of metal as of June 11, and ETFS Gold Bullion Securities contained $4.8 billion, London-based ETF Securities said today in a report. Total assets under management climbed to an all-time high $20 billion as of June 17 including commodity, currency and equity products, up 70 percent from last July, it said.
Gold ETP holdings advanced to an all-time high this year and coin sales from mints accelerated on buying by investors seeking to protect their wealth from Europe¶s sovereigndebt crisis and on concern the global economic recovery may falter. Bullion climbed to a record $1,265.30 an ounce on June 21 and is up 15 percent this year. ³European investors¶ demand for hard assets, particularly precious metals, continues to grow as they look to reduce their exposure to counterparty and currency-depreciation risks,´ Hector McNeil, a managing partner at ETF Securities, said in the report. ³Demand for the ETFS Physical Gold product has been particularly strong since the euro crisis began.´ Its two bullion products are the biggest gold-backed securities in Europe, ETF Securities said. The company also provides precious-metals products in the U.S., Australia and Asia. Global holdings of the metal in ETPs increased four metric tons to 2,062.6 tons on June 25, according to Bloomberg data tracking 10 providers. Holdings in the U.S.-based SPDR Gold Trust, the world¶s biggest exchange-traded fund backed by bullion, were 1,316.18 tons on June 25, valuing its assets at $52.28 billion. Gold for immediate delivery traded at $1,259.15 an ounce at 11:17 a.m. in London and is up 15 percent this year. Prices are heading for a 10th straight annual increase, the longest run since at least 1920.
