Spot Prices and Why They Matter

Key Takeaways

• Spot price refers to the ‘cash’ market price for immediate delivery
• Spot prices facilitate the pricing of derivatives, such as options and futures
• Spot prices are essential for both technical and fundamental analysis
• Spot prices allow investors and traders to make informed decisions

The spot price is the price at which a defined underlying asset can be bought or sold for immediate ‘cash’ delivery and settlement within a market. For gold and silver, the price quoted is defined in respect of currency (e.g. US dollar), quantity (e.g. per troy ounce), purity (e.g. 99.5%) and physical delivery location (e.g. ‘Loco London’).

While spot prices are notionally for immediate delivery, in practice this will take place shortly after the transaction. For gold and silver, this is typically two trading days later at ‘T+2’.  

Spot prices might also differ between different markets for otherwise identical assets. For instance, spot gold in Shanghai typically trades at a premium to spot gold in London, due to gold import controls in China, despite being the world’s most liquid gold cash market.

How Does the Spot Price Compare to Other Prices?

Spot prices are used as reference points to, or an input for, a range of other prices used by traders and investors. In this article, we will explore how spot prices relate to strike prices, futures prices and a range of other market prices and valuation tools.

Spot Price vs Strike Price

While spot prices are a feature of ‘cash’ markets, strike prices are a feature of options markets. When applied to gold and silver, they describe the price at which options may be exercised to buy (for a call option) or sell (for a put option) a specific quantity of defined quality metal at a specific expiration date (for a European option) or expiration period (for an American option). The world’s biggest market for gold and silver options is the COMEX.

Options to buy (calls) are said to be ‘in the money’ if the option strike price is below the relevant current spot price. Conversely, options to sell (puts) will be ‘in the money’ if the option strike price is above the current spot price. If an option strike price is equal to the current spot price it is said to be ‘at the money’. All other combinations of spot and strike price prices will be ‘out of the money’.

Options markets will typically offer options at a range of fixed strike prices both above and below the spot market level for a range of expiration dates.

Spot Price vs Futures Price

A futures price relates to an obligation to buy or sell a defined quantity and quality of an asset at a specific time in the future. For non-perishable commodities such as gold and silver, the spot price is typically below futures pricing, a condition known as contango. This arises because precious metals incur significant ‘costs of carry’ – comprising storage, insurance and funding costs – which must be factored into the futures price.

Futures prices are not forecasts of future spot prices, though they are often presented as such. At any one time, a futures price merely tells us the price at which an investor can immediately buy or sell a futures contract. However, spot and futures prices will necessarily converge as they approach the futures expiry date. COMEX is the world’s biggest market for gold and silver futures.

Spot Price vs Market Price

Although spot prices and market prices are frequently used interchangeably, a formal treatment distinguishes between the two terms. Simply, while all spot prices are market prices, not all market prices are spot prices. Specifically, the spot price refers to the current market price in the cash market.

Conversely, current futures and options prices are market prices, but not spot prices, being the product of futures and options markets respectively. Even the price of gold coins might be considered a ‘market price’ (for coins), though the cost of gold content of the coins will be at a substantial premium to prevailing spot prices.

While such distinctions might appear trivial, they can often be important to investors when market commentary loosely refers to market pricing. In precious metal markets, it is not unusual for spot (cash) market prices to be used interchangeably with short-dated futures prices as both are liquid reference points. Although related, they are not identical.

How Can Investors Use the Spot Price?

Spot prices are useful for investors in several ways:

Firstly, spot prices are the building blocks of technical analysis. While technicians can employ many tools in assessing market conditions and outlook, none of this would be possible without a consistent time series of spot pricing data available for processing. Such analysis is often used in precious metal trading strategies, yielding specific prices and ranges at which to buy, sell or hold.

Secondly, spot prices can be used to assess the relative valuation of precious metal assets and related instruments. For instance, knowledge of current gold spot pricing can inform investors of the discount or premium of physical gold ETFs, gold bars or gold coins. Moreover, spot prices are an essential component in determining corresponding options and futures prices and have wider applicability to other gold and silver contracts.

Finally, spot prices can be used to assess the current fair value of gold and silver through fundamental analysis. While there is incomplete agreement on the drivers of gold and silver spot prices, common factors in pricing models include the current and projected levels of interest rates, inflation, the US Dollar, metal supply and metal demand. A significant deviation between the spot and modelled current price may be a signal to buy or sell precious metal exposure.

How to Buy Gold and Silver at Spot Price

In almost all instances, the ability to buy physical gold and silver at spot prices is reserved for the bullion banks that deal in wholesale precious metal cash markets. Other participants, particularly small retail investors, usually incur a range of transaction fees and commissions which will generate a ‘spread’ against prevailing spot prices. However, Kinesis enables every investor seeking to expand their acquisition of precious metals, to access physical gold and silver at very tight spreads through live physical pricing aggregated across a wide-reaching global network. Find out how you can start trading gold and silver with Kinesis here: https://kinesis.money/kinesis-money/.

Mike is a market strategist and media commentator with 30 years of experience analysing precious metals markets. He developed his expertise working as an investment banker in emerging markets such as South Africa, Russia and Chile.

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.

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