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The Volatility of the Gold Market, Explained | WSJ - YouTube
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(intriguing orchestral music)
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- [Narrator] Over the past few months,
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the price of gold has been going haywire.
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You can see it on this chart.
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As the coronavirus pandemic
took hold in March,
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the price crashed, alongside stocks,
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and then quickly regained.
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Then, a frenzy of investment
drove up the price
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to all-time highs.
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On August 4th, it shot
past $2,000 a troy ounce
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for the first time ever,
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before another week of big swings.
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This volatility is
drawing both main street
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and Wall Street investors
seeking fast gains
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and leading some analysts to
call it a modern-day gold rush.
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But these big moves call into question
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gold's reputation as a safe-haven asset.
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- Prices can move at a moment's notice
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without fundamental reason more.
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More volatility means more
risk, and that means gold
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isn't the haven, necessarily,
that some people think it is.
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- [Narrator] To you understand
why the price of gold
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is so volatile, first
you need to understand
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how gold trading works.
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Like other precious metals,
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the price of gold is
tied to physical assets.
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- The physical gold
market involves mining,
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refining, travel and sale.
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- [Narrator] Gold mining
happens on every continent
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except Antarctica.
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And the top-producing countries
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are China, Russia, and Australia.
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This work adds up to about 2,500
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to 3000 metric tons of gold each year.
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This metal is then smelted and refined
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before being turned into bars, coins,
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and other products like jewelry.
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The gold is then shipped around the world,
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often stashed in the cargo
of commercial aircrafts.
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Much of it is sent to London.
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Mostly hidden beneath
the streets of the city,
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the Bank of England's vaults
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hold around 400,000 bars of
gold worth over $260 billion.
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- The physical trading of gold in London
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is done behind closed doors
and in secret by a few banks.
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So, these banks work
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with the London Bullion Market Association
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to set the physical price
of a troy ounce of gold,
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and that price determines how
much gold is worth everywhere.
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- [Narrator] The gold
stash in London is rivaled
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only by the Federal
Reserve Bank of New York,
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which holds the world's
largest hoard of physical gold.
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In other places around the world,
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gold is a common investment as well.
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- In a lot of cultures in Asia,
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people see gold as something
that's having prestige
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and intrinsic value
that can be passed down
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from generation to generation.
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That can be a big source
of physical demand
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for jewelry and bars and coins.
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- [Narrator] When individual
investors want to buy in,
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they generally have a few options.
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They can purchase physical
gold in person from dealers
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or on websites like APMEX.
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They can bid on thousands
of dollars worth of gold
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through eBay.
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And they can buy exchange-traded funds
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that hold physical metal.
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The biggest of these is SPDR gold shares,
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which is traded on the
New York Stock Exchange.
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But this is just the physical market.
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Gold is also traded on
a whole different market
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that is tied to commodity futures.
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This takes us back to New York,
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where gold futures trade
on the COMEX division
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of the New York Mercantile Exchange.
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Futures are contracts which
lock the price of a commodity
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that will change hands at
a specific future date.
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A standard futures contract
is tied to 100 ounces of gold
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worth over $200,000,
depending on the market.
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- The most actively traded
month for gold futures right now
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is December because that's
a month people expect
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the pandemics issues to
maybe be resolved by,
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and it's a month around
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the November's presidential election.
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A lot of people are very
nervous about the outcome
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of that election and
that it might be delayed,
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so they're using these
December gold futures
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to give themselves options
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and protect against market turmoil.
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- [Narrator] But gold has slipped lately
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after a long run-up,
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a reminder that momentum in
this market can change quickly.
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Still, this hasn't stopped gold bugs.
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And there are a few reasons why people
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continue to pile money
into the metal right now.
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For a lot of investors,
it started in March,
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when mines, refineries and airlines
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shut down across the world,
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upending the system usually used
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to move gold across the
Atlantic and stabilize prices.
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But when the pandemic hit,
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investors feared there wouldn't be a way
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to physically move gold
between the markets.
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This caused physical
gold purchases to soar,
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leading to a severe shortage
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that drove up the price of futures.
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But there are other reasons too.
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- There are a lot of people
who are very bullish on gold
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and think it's an alternative currency
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that provides a hedge against inflation
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and is very attractive when
interest rates are low.
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Many bulls are piling into the sector
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because they think the Federal Reserve
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and other central banks
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are eroding the value of paper money
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by pumping a ton of cash into
the global financial system
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to support the economy.
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- [Narrator] The increased activity
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is contributing to momentum trading,
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driving a frenzy for
gold, similar to stocks.
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But if inflation doesn't materialize,
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the momentum that gold
is seeing could unravel.
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- Analysts say the current
trading environment
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is extremely risky.
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People say all of the economic
and political instability
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could last for a lot longer than we think.
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At the same time, if the economic recovery
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goes better than expected,
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if there's a coronavirus vaccine
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more quickly than we think,
gold could have some issues.
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- [Narrator] This means
that gold could face
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more volatility moving forward.
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(light orchestral music)
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