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Measuring global gold market liquidity

Topics [ gold investing ]

Liquidity measures the dollar value of turnover in a given asset class. It is an important consideration for investors seeking exposure to precious metals – and indeed any asset class.

All other things being equal, an asset that has high liquidity is better than one with lower liquidity, for two related reasons. 

The first is that an asset with higher liquidity is easier to buy and sell than one with low liquidity. 

Secondly, an asset with high liquidity may be traded with a minimal impact on the price, relative to an asset with low liquidity.

Many people are surprised to learn that physical gold is one of the most liquid asset classes in the market, with average daily turnover in 2019 of more than USD 145 billion. 

This is demonstrated in the chart below, which plots the dollar value of turnover in gold alongside a range of other assets. Note that the asset classes are colour coded depending on whether they are equity (red), fixed income (black) or currency (green) markets.

Daily liquidity (USD billion) in 2019 – Various asset classes


Source: The Perth Mint, World Gold Council

With daily liquidity matching the S&P 500, the world’s premier equity market, gold has a much higher liquidity than many major currency pairs and indeed many bond markets.

Where is gold traded? 

Liquidity in the gold market stems from two primary sources. Over the counter (OTC) bullion trading, as well as trading that takes place on futures markets, accounts for more than 85% of gold market turnover. 

The remainder comes from a range of other sources, including turnover on the Shanghai Gold Exchange, the London Metal Exchange and the global gold ETF market, which includes products like Perth Mint Gold (ASX:PMGOLD).

The table below provides a detailed breakdown of average daily turnover from these sources across the 2019 financial year. 


Source: The Perth Mint, World Gold Council

Takeaway for investors

A key benefit of gold, as one of the most liquid asset classes in the world, is that it gives investors peace of mind knowing they can sell when they need (or want) to sell.  

Provided an investor has bought gold from a reputable counterparty like The Perth Mint, and is storing it with that counterparty, then they should find it easy to liquidate their holdings at any point in the future. 

References

Trading volumes, World Gold Council. Accessed 27/10/20


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