What is spot gold?
Spot gold is the price that can be paid for the immediate delivery of physical gold. This is the reference price used to determine gold’s price direction. Unlike most other commodities, the price of gold is driven more by sentiment than fundamental supply/demand balances.
Factors that typically drive the price of gold include the prevailing risk appetite of investors, how high or low interest rates are (or are anticipated to be) and how strong or weak the US dollar is.
The price of gold is typically quoted in US dollars, however, there is a live price for gold in all the world’s major currencies with the relative strength or weakness of those currencies against their peers, impacting how high or low the price of gold is in a specific currency. As such the dates of the specific record highs and lows of gold will vary from currency to currency.
Given how important gold is as an asset class, the spot price of gold is viewed as a key indicator of the relative health or weakness of the global economy.
This spot price is a reflection of what price gold is being exchanged for in over-the-counter (OTC) markets. If there are more buyers than sellers, then the price is likely to rise. If there are more sellers than buyers, the price is likely to fall.
How is the gold future price calculated?
As well as a spot, or current, price for gold, there is also an extensive futures market. Here, rather than buying or selling gold immediately, you are entering into a contract to buy or sell gold at a future date.
These futures contracts, which are typically of 100 ounces each, are struck on dedicated, regulated exchanges such as CME. Just like spot gold, there is a huge amount of liquidity on futures markets with traders and investors speculating the price of gold will be in the coming months.
In contrast to OTC markets, the gold owed on futures contracts isn’t typically physically delivered when the contract expires. Instead, traders will typically sell off any gold they have “bought” via the futures contract and buy back any they have “sold” meaning that at the point of expiry the amount they need to pay or be paid is just the losses of gains made in the intervening period since that contract was first struck.
By removing the need to pay up or deliver the gold at the time of the contract being agreed, it enables traders to build up positions many times greater than if all trades had to be physically backed up. The potential gains are therefore much greater if the price of gold moves in the right direction over the timeframe of the contract. Equally the potential losses are much greater if the price speculation doesn’t go as anticipated.
How is the gold price determined?
As well as spot gold and futures prices, there is also the daily London Bullion Market Association (LBMA) gold price. This is the global benchmark price for gold physically delivered in London, with the price fixed twice a day.
Originally this involved four banks meeting twice a day in a room near the Bank of England where they would have a verbal auction that would determine the price. This then evolved into an auction over the phone to now being fully electronic and administered by ICE Benchmark Association with 16 direct participants contributing to the price.
These take place at 10:30am and 3pm London time with a series of 30-second auctions being conducted until a balanced price is achieved. This price is published in US dollars and converted into Sterling and Euro prices based on the foreign exchange rate at the time of the settlement.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.