7 Facts About the Spot Gold Price
Any savvy precious metal investor following the market closely is going to want to know the spot price of gold regularly. It's something that can be Googled and checked on any number of websites relatively easily. What most investors probably don't know is that determining the spot price of gold itself is a complicated matter. It's not like all the gold in the world is located in Fort Knox, and in this day in age it's very rare for investors to actually trade gold bars or gold coins between one another. Obviously with the invention of technology and in consideration of the speed at which the markets move 24 hours a day, 7 days a week and 365 days a year, it only makes sense that the majority of gold trades being made are fulfilled on computers where no gold is actually exchanged physically.
That makes logical sense. The ways in which different markets come up with prices probably doesn't make sense to the average person. This post aims to explain all of that as simply as possible.
Thus we countdown the things investors need to know about the spot gold price.
How Markets Determine the Gold Spot Price
Gold proxies and derivative leverage. Those terms don’t exactly roll off of the tongue. But they are the mechanisms that drive the spot price of gold. Derivatives contracts (or futures contracts) are contracts that represent the price of an asset or commodity. Many commodities are traded using this mechanism, not just precious metals. Soybeans, wheat, coffee, silver, cotton, oil and many other commodities are traded using such contracts.
These contracts are traded on various exchanges in futures markets. Their acronyms are not as immediately familiar to the average investor since the average investor is usually just focused on stocks, bonds, mutual funds or real estate, but the acronyms may sound familiar. Popular futures exchanges include: CBOT, COMEX, NYMEX or CME Group among many others.
At the end of the day no matter how they are traded, futures contracts exist to provide investors, producers of commodities (aka farmers and agribusiness companies) and end users of commodities a way for managing risk and reward, buying commodities and goods, or simply a way to bet on the price to go up or down.
A futures price for any commodity is based on the price discovery contracts for the future delivery of a specific commodity.
The spot price of gold is taken from the forward month’s futures contract. Not just any contract though. The contract with the highest price. The contract can represent the current month or it can represent the price two or three months into the future.
Gold’s spot price is traded 24 hours a day but does not trade on weekends the way foreign or digital currencies do. Trading gold in the international marketplace happens on exchanges in New York, Chicago, Hong Kong & mainland China, Zurich, London.
The Most Important Gold Spot Price Exchanges
Of all markets determining the gold spot price across the world, the COMEX exchange in the United States as well as markets in China are the most influential. COMEX is by far the most influential futures trading market and therefore influences gold’s spot price the most.
In Asia, its China’s Shanghai Gold Exchange is the most important trading market. The difference with the SGE is that its pricing is focused on the price of actual gold bullion, not a futures contract. It’s growing aggressively year over year as it has been for a long time now.
Trading 100 Ounces
When an individual investor wants to walk into a jewelry store, bank or depository to buy gold, they’re likely thinking of buying in grams or ounces. They’re not likely to buy hundreds of ounces at a time of course, but public markets like COMEX and others do. Futures contracts are traded in increments of 100 ounces, and the key thing to note about that is that roughly nine out of 10 futures contracts on the COMEX don’t require physical gold at all.
This may be a weird concept to wrap one’s head around but in a world where markets move so quickly and the value of gold is so highly sought after, trading contracts that represent gold but don’t actually require the physical variety to trade hands is not only practical, but necessary for the betterment of the broader global economy.
It’s estimated that for every one pound of actual bullion gold that trades hands, 100s of futures contracts get swapped. That’s good for retail investors and even more advanced investors trading large volumes, but the downside of these kinds of digital trades is that it is difficult to pinpoint exactly how much bullion gold is worth. That’s especially true when a federal government decides to make a deal that affects the broader gold market. Like when China or Russia, two of the world’s biggest players in the gold market, buy or sell gold for example.
What Really Impacts the Gold Spot Price Fluctuations
It’s not just the large volume international deals that change the price of gold on a day to day, moment by moment basis. There are many other factors that drive the daily, short-term price of gold.
The average retail investor in any given market is the most likely player in the game to be a speculator. Especially within the world of commodities, the temptation to make a lot of money fast drives many investors to make short-sighted moves or even get into day trading futures or options contracts related to commodities. A large number of investors playing the short game can definitely have a noticeable impact on the gold spot price.
Threats of Price Inflation or Deflation
This really has to do with the broader economy. As many investors know, gold is seen as a great store of value during recessions or hard times. It’s every survivalist’s safe haven for when the world ends. But the reality is the world doesn’t have to end for investors and global citizens to want to hedge against potential unrest in their home countries or across the world.
Governments and major corporations most certainly possess a lot of power when it comes to controlling the inflation or deflation of an asset. While most investors think about the printing and manipulation of fiat currencies in this context (consider what’s happening in Venezuela right now), the reality is that any asset’s value can be inflated or deflated.
Gold is a good hedge against foreign currencies or the stock market, but no completely save from risk. That’s why risk and reward always go hand in hand with investing.
News and Current Events
A major terrorist attack, a plummeting stock market, a big change in political leadership; all of these things can impact not only the spot price of gold, but the general sentiment of investors everywhere. During times of unrest, gold usually goes up in value, but there have been many times throughout history where the news of the day involved governments instituting and successfully executing large scale gold confiscation programs.
The Rise and Fall of Interest Rates
When banks increase the cost of borrowing money, investors pull money out of the market. When banks lower the cost of borrowing, investors pour money back into the market. National banks certainly have the power to sway market sentiment, and gold is just one asset class among a whole slew of investment types that far from immune from interest rates.
Other Factors in Determining Gold Spot Price
The supply and demand of gold available between governments and central banks also affects the price. That’s because large institutions tend to trade larger volumes. Believe or not, changing values of both fiat currency and digital currency can affect the price of gold too. At the end of the day, fiat and digital currencies can only communicate value based on some sort of fundamental worth or underlying asset, so they all fluctuate together in some form or fashion.
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