Gold Description

Gold, with its high value, has been utilized since prehistory age. In a simple way, the evolution of gold’s purpose based on the change of its function are as described : complement of religious culture, symbol of power, mining commodity, assets, jewelry, exchange tool (as money), foreign exchange reserve and electronics industry. Now, gold is not only recognized as a mining commodity but also as a means of monetary and investment instrument.

Gold as a Mining Commodity

As usually in other metal substances, Gold is generated by mining activity. The largest gold mining facilities is in South Africa, but it does not mean that South Africa has the biggest gold reserve. As a quantity, gold is unfinished to consume, so that it shall allow other countries which have no gold mining activities have a great gold reserve, this case is related to gold function as a reserve of foreign exchange and monetary instrument as well as investment.

In Indonesia, gold mining activities begin from the colonial age (Europe imperialism), in fact, in history a number of the Indonesian kingdoms have carried out gold mining activities as it was implemented in Sumatra or Borneo.

As a mining commodity, gold price not only influences but also is influenced by prices of other different mining commodities besides the fundamental factors related to either supply and demand or other non fundamental factors. Although gold price is more dominant as a price reference for other mining commodities particularly silver which is produced as by-product in gold mining, gold price also occasionally follow other mining commodity prices, such as crude oil and nickel. Price correlation among the commodities, either it has direct relation (substitution or complementary) or does not have any relation at all, in price analysis, it is usually called as market sentiment.

Gold as a Product

As a product, we recognize gold in the form of jewelry. Though, at present gold product is not only as jewelry but also as electronic and dental tools. It is estimated that Gold demand for jewelry and industry reached 80% from all of the total gold demand globally.

Gold price as a product especially jewelry is influenced by the supply and demand of the jewelry. Gold demand as a jewelry product will be influenced by ceremonial activity in many celebrations.

Gold as Monetary Instrument

Gold as a monetary instrument which makes gold price correlate with financial market, began with the use of gold as money (exchange instrument), standard of gold and the use of Gold as foreign exchange reserve of a country, other than a quality of gold value that has no inflation effect (Zero inflation effect).

Gold has already served as an exchange instrument before Christ, but evolution has demanded for a more flexible exchange instrument in portability and divisibility, this case encourages the creation of paper money. Initially, the printed paper money should be guaranteed with gold which is referred to as Gold standard; the gold standard system began in 1944 and ended in 1971. Since then paper money is no longer guaranteed by Gold but by availability of foreign exchange reserve (Gold and foreign currency) possessed by the state central bank respectively and supply-demand stipulated fundamental economy condition of the country. Gold is greatly appropriate to be one of the foreign exchange reserve other than the foreign currency, this case is caused by price that tend to increase continually and can be used as an international payment tool which can be received by all nations, besides the fact that gold price also refer to international trade price.

The use of gold as every country central bank’s foreign exchange reserve makes central bank as one of the demand variables of global gold market in that period, but now the condition begin to change on the contrary. Area currency unification likes Euro zone, makes the central bank united and it means that several central banks that are united have no more interest to hold back foreign exchange reserve in gold and slowly release gold reserve to market. In that case, this makes a central bank as one of the supply variables at global Gold market.

Gold correlation to the monetary sector and financial market is also based by a gold price character which has no inflation effect (zero inflation effect), where if a price increase occurred, then the gold price also tends to increase. On the basis mentioned, at the time when economy condition deteriorates or in an uncertain condition of economics prospect, all parties will tend to hold gold as an asset compared to another asset.

Besides all of the above, financial market correlation, especially currency with the gold price is in relation with price conversion. Although Gold is traded in all countries with the respective country currency, but the market is still referring to the international gold price which denomination in US Dollar per troy ounce. Appreciation and depreciation of country currency which are influenced by fundamental condition and economy prospect of the concerned state will influence the conversion of the gold price into the local gold price.

Gold as Hedging and Investment Instruments

Gold functions as a hedging and investment instruments are integrated with one another. It is caused by society habit of keeping wealth in the form of gold in long term, which can be appreciated as an investment decision with income (return) in an increase of price. In addition, the gold owner has also done a hedging action for his/her wealth asset from the wealth value depreciation by inflation effect.

GAMBAR 5

Gold as an investment instrument is very appropriate to be used for a diversification action, either to asset or an investment portfolio. In relation to gold price as an investment instrument and to the correlation with finance and monetary market, gold price tend to fluctuate and gold price will be more fluctuating along with more susceptible economy condition.

Forward Market Product with Underlying Gold

Gold as an investment instrument, besides having various advantages as mentioned above, it has also various disadvantages among other: difficult to keep, less transparent of gold physical market and it has security risks. Obstacle and shortcoming of gold as an investment instrument and wealth asset can be overcome with the presence of several products of Forward Market which product is based on Gold (underlying):

1. Futures Gold Contract

2. Rolling Gold Contract

In futures gold contract transaction, investor gets an ease; no need of place and gold repository cost, and so do the high price fluctuation risk that can be an opportunity in searching for a profit within a brief time. At the same time price will be more transparent because the transaction will be done between many buyer and many seller (multilateral) in an organized market such as an exchange. Investor also does not need cash fund of 100% subjecting to transaction value. He only needs to prepare fund to pay for the Initial Margin (approximately 5% of the transaction value) and margin variation (profit and loss calculation from the transaction). Time contract also can be used as hedging facility by the gold physical market subject both for consumer (industry) and also for producers (mining and gold processing).

Different from futures gold contract, rolling gold contract has no time limit of maturity and physical delivery so that it is easier for the investor. It can be used for investment and hedging need for a short and long period. However, in rolling gold contract, there is an interest calculation (the buyer will accept the interest and the seller will have to pay the interest ).