Precious metals such as gold and silver have long symbolised wealth across the world. While such commodities can be used for long-term investment, they also present some excellent trading opportunities.
Ancient Egyptians made jewellery from gold well before it eventually came to be used as a currency by the Romans.
The British pound has its origins in Anglo-Saxon England when it was equivalent to a pound of silver.
Along with making jewellery and other adornments and luxury goods, and being viewed as store of value, these days precious metals have very many industrial applications. Palladium and platinum are synonymous with the auto sector given their use in catalytic converters.
While precious metals such as gold continue to be used for long-term investment, they also present some excellent trading opportunities. For instance, contracts for difference (CFDs) allow investors to potentially profit from down moves as well as up moves in prices on any given trading day.
Other means to invest in precious metals include other derivatives such as ETFs, the shares of mining companies and bullion. However, the latter route would mean going to the trouble of storing physical coins or bars.
Precious metals trading
Precious metals are traded in exchanges across the world. In the US, gold, silver, platinum and palladium are traded on the New York Mercantile Exchange.
In Asia, precious metals trading takes place on a variety exchanges, especially in India, China and Japan.
While being synonymous with industrials metals trading, last year the London Metals Exchange (LME) also moved into precious metals trading, launching contracts in gold and silver.
In the UK, precious metals trading in gold and silver had traditionally taken place among members of the London Bullion Market Association (LBMA) on an over-the-counter basis, which means directly between two parties and not via a regulated exchange.
Meanwhile, trading in platinum and palladium takes place between members of the London Platinum and Palladium Market (LPPM) association.
However, as precious metals trading happens all over the world, it´s possible for investors to trade in commodities such as gold via online platforms 24 hours a day. These markets only really go to sleep at the weekends.
Gold has both demand and scarcity on its side; the value of gold has long been linked to its rarity, appearance, malleability, strength and resistance to corrosion.
These traits have helped make gold a natural store of value throughout history, given its use in jewellery and other adornments and as a means of payment.
According to the World Gold Council, if every single ounce of gold that was ever mined was in the same place, the resulting cube of pure gold would only measure around 21 metres on each side.
It reckons a total of around 187,200 tonnes of the yellow stuff have been mined since the dawn of time, with around 2,500 to 3000 tonnes continually mined each year.
To put this into perspective, about 475 million tonnes of iron ore are mined each year.
Demand for precious metals trading
Jewellery remains the biggest source of demand for gold, followed by investment.
At the same time, the rise of computer technology has also seen gold increasingly used by the electronics sector given its high degree of electrical conductivity and its excellent resistance to corrosion, as well as to many other chemical reactions.
The circuit boards of everyday items such as laptops, tablets and smartphones contain various precious metals. A standard laptop has been estimated to contain around £25 worth of gold.
Gold has also long been used in dentistry, though this pales in comparison to the current demand related to electronics.
In the 19th century, the so-called gold standard increasingly emerged, with most countries printing currencies that were supported by a fixed gold value.
Nations sought to hold sufficient quantities of gold to support the value of their currencies so that people could exchange a fixed amount of gold for a given paper currency if they so wished.
It wasn´t until 1976 that the International Monetary Fund (IMF) established a permanent system of floating exchange rates and the gold standard completely disappeared.
Despite having long since abandoned the gold standard, major central banks still retain significant reserves of gold given the metal´s tendency to hold its value during difficult times.
The UK chose to sell about half its gold reserves between July 1999 to March 2002, arguing that it made sense to diversify the Bank of England´s asset reserves in favour of foreign currencies such as the euro, thereby theoretically reducing the volatility of its overall reserves.
However, the then Chancellor, Gordon Brown, subsequently came under fierce criticism for the move as the sales were made at a time when gold prices were at a 20-year low – coining the phrase Brown’s Bottom.
The UK sold 395 tonnes of gold in 17 auctions for a total of $3.5bn. That would have been worth about $18bn at the start of 2018.
Gold is renowned for its ability to preserve wealth over the long term. This does not mean, however, that its price will always rise steadily.
Gold has been known to move up sharply, especially at times of increased volatility and uncertainty. Similarly, during times of relative stability, when risk assets have made strong progress, gold has been known to sell off.
In inflation-adjusted terms, the yellow metal has risen from around $350 per ounce in January 1918 to around $1300 per ounce by 2018, an inflation-adjusted return of just over 270% over 100 years.
This may not appear such a spectacular return compared with something like Bitcoin, which has risen by over 1,200% over the year.
While there is arguably less risk and volatility involved with investing in gold compared with Bitcoin, there have also been some big peaks and troughs in gold prices over the years, and some excellent opportunities for investors to make profits from the moves.
Wall Street crash
In the aftermath of the Wall Street crash of 1929 and the onset of the Great Depression, gold rose from around $300 per ounce to peak at around $650 per ounce in inflation-adjusted terms in 1934.
During the Great Depression, many Americans began converting their paper dollars into gold and generally hoarding the yellow metal.
However, in 1934, the US Congress passed the Gold Reserve Act, which put an end to this practice as it outlawed the private ownership of gold in the US and forced people to sell their gold back to the Federal Reserve (Fed).
In inflation-adjusted terms, the price of gold subsequently fell from $650 per ounce in March 1934 to just under $240 by March 1971.
Under the 1944 Bretton Woods agreement, the US dollar became the official global reserve currency, pegged to the price of gold at a nominal price of $35 per ounce. The agreement enabled other global central banks to exchange their dollars for gold with the Fed at that price.
The deregulation of gold began in 1971 when US President Nixon halted the conversion of dollars for gold at $35 per ounce. In 1975, Americans were allowed to hold unlimited amounts of gold once again.
Gold shot up over the following years, rising from around $235 at the beginning of 1971 to around $757 per ounce by December 1978 (both in inflation-adjusted terms).
The Oil Shock that resulted from the 1979 Iranian revolution and the outbreak of the Soviet-Afghan war saw gold prices surge further as uncertainty prompted investors to seek out safe havens.
A fall in oil output and the rising price of oil also meant that global inflation picked up, so investors were looking for traditional stores of value rather than leaving the value of their money to erode in paper currencies. US inflation was at around 14%.
By January 1980, gold prices had reached an inflation-adjusted high of around $2,150.
With risk appetite returning and the bear conditions across equity markets abating, gold fell back to around $800 by June 1982.
Gold subsequently reached an inflation-adjusted low of $363 in April 2001 as stock markets surged to record highs during the dotcom bubble.
The end of the dotcom bubble, the 9-11 atrocity and the onset of recession sent gold up once again, beginning a 9-year bull market for the yellow metal.
As in the Great Depression some eighty years earlier, the extreme uncertainty of the recent financial crisis saw gold soar, with the yellow metal rising from $832 in October 2008 to reach a high of $1987 in August 2011, just shy of the inflation-adjusted peak reached in 1980.
The familiar story repeats itself; as volatility has decreased and risk appetite has returned to global markets, gold has tended to sell off.
US dollar strength in 2014 and 2015 was also a factor behind gold´s decline to $1,115 an ounce in December 2015.
Recent weakness in the dollar has helped gold recover to trade around the $1,300 per ounce mark.
On a day-to-day basis, gold tends to move inversely to the dollar, the currency that it is priced in. However, geopolitical worries, such as those related to last year´s North Korea missile and nuclear tests are likely to support gold over the next few years.
This point was affirmed in a recent research note from analysts at Citibank.
“Even as the rates and forex channel dominate the outlook for gold pricing, the yellow metal is increasingly being used by investors as a policy and tail-risk hedge," said the Citi analysts.
Sliver prices tend to be much more volatile than gold. For one, sliver´s use in industrial applications is much greater than that of gold; industry accounts for around 50% of the demand for sliver as opposed to just 10% for gold.
While less scarce than gold, the price of silver is also much lower, at $17.25 per ounce.
But the relative scarcity of gold versus silver does not appear to justify this massive price gap.
Gold is some 75 times more expensive than sliver, though there is estimated to be just around 19 times more silver than gold in the earth´s crust. The annual ratio of sliver to gold mined is typically about nine times.
This could indicate that either gold is overvalued or sliver is undervalued, or a combination of both.
Jewellery and silverware account for around 25% of demand for silver compared with the 50% of all demand that jewellery represents for gold, the yellow metal´s principal usage.
Unlike gold, however, pure silver is relatively soft so the jewellery industry tends to create silver alloys, using metals such as copper.
So-called sterling silver, the jewellery standard across the world, has 7.5% copper content.