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GOLD
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Gold has been widely used throughout the world as a vehicle for monetary exchange, either by issuance and recognition of gold coins or bars or other bare metal quantities, or through gold convertible paper instruments by establishing gold standard in which the total value of issued money is represented in a store of gold reserves.
However, production has not grown in relation to the world's economies. Today, gold mining output is declining.
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With the sharp growth of economies in the 20th century and increasing gold exchange, the world's gold reserves and their trading market has become a small fraction of all markets and fixed exchange rates of currencies to gold were no longer sustained.
At the beginning of World War I, the warring nations moved to a fractional gold standard, inflating their currencies to finance the war effort. After World War II, gold was replaced by a system of convertible currency following the Bretton Woods System.
Price
Gold is measured by troy ounce and by grams. The price of Gold is determined through trading in the gold and derivatives markets, but a procedure of known as the Gold Fixing in London, originating in September 1919, provides a daily benchmark price to the industry.
The afternoon fixing was introduced in 1968 to provide a price when US markets are open. Since April 2001, the gold price has more than tripled in value against the US dollars, prompting that this long secular bearish market has ended and a bull market has returned.
Gold Trading
Internationally, gold is traded primarily via over-the-counter (OTC) transactions on the New York Mercantile Exchange (NYMEX), Loco London (LME) and Tokyo Commodity Exchange (TOCOM).
London is by far the largest centre for OTC transactions followed by New York, Zurich and Tokyo Exchange. Gold is also traded in forms of securities, such as exchange-traded funds (ETFs) on the London, New York, Johannesburg and Australian Stock Exchange.
Unlike many commodity markets, the forward market for gold is driven by spot prices and interest rates differentials, similar to foreign exchange markets, rather than underlying supply and demand dynamics.
This is because gold, like currencies, is borrowed and lent by central banks and in the interbank market. Because interest rates for gold tend to be lower than US domestic interest rates, it encourages gold borrowings so that central banks can earn interest on their large gold holdings, except in special circumstances the gold market tend to be in contango , i.e. the forward price of the gold is higher than the spot price.
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