How is the price of gold created?

The international gold market operates 24 hours a day and, through electronic trading systems, allows buyers and sellers to trade and set the price of gold based principally on the available supply and demand for the yellow metal.

Between 20 and 25 million ounces are traded each day, mostly through the major trading centres of New York, London and Hong Kong. In addition, the London Bullion Market Association (LBMA), which operates the largest over-the-counter (OTC) gold market provides a benchmark price for gold set at 10.30am GMT (7.30pm AEST) and 3pm GMT (12 midnight AEST) each business day. These fixed morning and afternoon prices are used to settle most of the daily trades between members of the LBMA.

What drives it?

The value and price of physical gold is derived by a number of key drivers, which are generally different to the pricing determinants of investments such as equities and real estate. These key price drivers include geo-political tensions, inflation, currency regradings, supply and demand considerations and expectations about all of these with each driver, likely to continue to influence the price of gold for the foreseeable future.

Gold has always been a safe haven for investors. As an investment it has always been regarded as an alternative to “paper money”. In the mid-1990s there was a debate over whether gold has lost its safe-haven status but over a long period of time, let's say 2000 years, gold remains a safe haven. Put it this way: in biblical times an ounce of gold had the purchasing power of 350 loaves of bread; today, that purchasing power remains virtually the same. It is this point of difference that makes physical gold – and gold backed securities – an effective portfolio stabiliser and preserver of wealth.

Greg Burgess is a director of the ASX-listed Gold Bullion Securities Limited (ASX Code: GOLD). The group listed in 2003 and its only asset is gold. Each share is stapled to one-tenth of an ounce of gold held in vault in London.