What is a Spot Price?
What is a spot price? The spot price is a price for one troy ounce of gold, silver, platinum, or palladium, although the price is theoretical. This is the price that is made before the precious metal has been minted into physical products, such as rounds, bullion bars, or coins. The spot price is what you would pay for delivery immediately before the precious metal has been made into a product.
Most reputable online bullion retailers will display an up-to-date spot price on their website. Often times, you will find that the products themselves are a higher price than the spot price. This is normal, but many people wonder what the spot price is and how it relates to the overall price of the product. Most of the products available are not sold at the spot price, which is part of the bullion business. The amount of overage between the spot price and the product price is basically the . If you choose a product with a high numismatic value, then the price is going to be considerably higher.
Who Sets the Spot Price?
So now that we have explained more about the spot price, you might be wondering who is responsible for setting this price? This is not a simple answer though, as it is more of a complex matter than most people realize. There is a lot of derivative language and gold proxies that basically make the entire process more convoluted than it needs to be. Even experts have now started to get confused at the process and find it difficult to understand. When it comes to the price of physical gold, it is the derivative commodity contracts that usually determine the price. You would think it is those companies that are influencing the price, but this is not the case. These companies do not even exchange precious metals on a physical level most of the time. Many people think this entire process is very odd and unclear.
The real-world prices are determined by those contracts, which are all theoretical in nature. It is important to note that this only represents physical gold. There is a lot of tail wagging of the dog going on here. By that we mean the demand of the physical gold and the supply not really is a part of determining the up-to-the-minute gold spot prices.
What are Futures Prices?
You might have heard the term commodities before, and these include basically any raw good you can imagine. This includes soybeans, Platinum, Silver, Gold, Oil, Coffee, Crude, Cocoa, and cotton. There are many other raw goods out there which fall under the term commodities. You likely also know about the various exchanges that found through many regions all over the place. The commodities all have these futures contracts, which are then traded using these exchanges. CBOT, CME Group, COMEX, and NYMEX are just a few examples.
Looking closer at this, it is these future contracts that allow for everyone involved in the process to manage and determine the price risk among other things. The commodity producers, speculators, and end users all want to know what the risk is for these commodities. These futures contracts allow for these groups to figure out the rise and fall of the prices, manage the risk of the price, take and buy future deliveries of these goods, and much more. These futures prices are determined by looking at the potential price discovery contracts of each of these commodities. If you have seen Trading Places, then you know exactly what we are talking about.
In Trading Places, the biggest climax is when the orange juice futures are being traded. If you have not watched this yet, now might be a good time to get a better understanding of how it works. The fluctuating price in the markets is called the spot price. This basically is the price of the commodity being bought or sold for immediate delivery and payment on the open marketplace. The spot prices are also looking at the upcoming futures contract too though. This upcoming contract could be anywhere from a week or months down the road. Regardless of how far away this futures contract is, it will be influencing the spot price. Looking at gold as an example, every week day there is gold being traded almost every single hour. Weekends are the only time when gold is not being traded. The commodity exchanges basically determine the spot price for gold. These exchanges are found all over the world including Hong Kong, China, Chicago, New York, London, and Zurich.
Within the United States, COMEX is the largest daily influence of the gold spot prices. This is because of the fact that COMEX is a part of the New York Mercantile Exchange. That is the biggest and most important futures contract that gold has on the trading market. Some of the experts out there think that COMEX is not really the influencing factor, and also think the market fundamentals do not really play a role in the influence on gold spot prices.
If you look over at China, they have the Shanghai Gold Exchange, which is SGE for short. This is the biggest trading market for actual physical bullion. Every year the physical gold bullion grows, and could end up being what dictates the gold spot prices using fiat currency. The futures contracts in most exchanges is looking at the price being projected for 100 ounces of gold. Since this is a futures contract, it is projecting the price at a later delivery date. Even then, most of these futures contracts are not actually delivering physical gold, except for the SGE. The futures exchanges are looking at the 100 ounces of gold, but it is being done on paper instead of physical gold. These futures contracts are then traded for physical gold ounces, which are then delivered all over the world. All of this means that gold investors think that the real price discovery for gold bullion is impossible to figure out in the market today. Even the Chinese and Russian governments do not believe the real price discovery for this gold bullion can be determined in the market these days.
It is because of all of this that the gold investors choose to purchase gold bullion physically. This means that the possession is outside of central banking. The investors that choose to covertly buy the bullion includes foreign governments, such as Russia. It means that people can actually possess the physical gold and then get the future appreciation of value on that gold. This also means that they can take advantage of the risk hedging and also can pivot when it comes time for investing in the future. The actual deliveries of bullion that the Shanghai Gold Exchange makes really seems to make COMEX appear as nothing.
When it comes to gold bullion, it has been recognized through history as being a trustworthy and long-term way to store your wealth. It is one of the biggest and most common tangible assets in the world. The spot price is determined though, by the more short-term factors, including threats of inflation or deflation, as well as the sentiment of the speculator. Paper fiat currency and digital currency changes also impact the gold spot price. The demand of gold for the central banking industry, government deficits, and even interest rates from the central bank all determine the gold spot price. There is a lot of complexity with the gold spot price since so many of these short-term factors determine and influence the prices. Even other things like the climate around the world and current news will change the gold spot prices on a daily basis.
When you look at the bull market, it has only been around for gold since 2001. Ever since that time, the gold tonnage has increased over nine times on the COMEX. The gold being registered for delivery though has decreased significantly in the past 10 years. It is possible that the gold bullion banks that go through COMEX just have not wanted to part ways with the gold bullion yet. Insiders and experts only have the ability to speculate why this has happened. No one really knows why or knows how to increase the gold registered for delivery. It is just a guess at this point why the commercial banks have cut down on registered stocks that are eligible for delivery.
Review of Gold Spot Price
So to sum everything up about the gold spot price, the future markets all over the world are responsible for this fluctuation. The future markets are there to represent what is happening in real time all over the world with the prices of precious metals. When it comes to physical gold itself, such as bullion, the market for the physical gold is always looking at the gold spot price. This includes those items you might find at Veldt Gold, and gold bullion will always be a little bit above the spot price. You might be wondering how the gold markets will all play into your purchases of physical gold. If you want to purchase physical gold as an investment, you can think of it all this way:
The worldwide futures exchanges are where the derivative bets are places. Those futures traders are leveraging these bets.
The miners will mine the ore and then sell this and the gold dore bars. The miners sell to the refiners of the gold bullion. The price for this will be just a little below the gold spot price.
The refiners will melt the ore and then purify this ore so that it turns into gold bullion. Gold bullion is then sold to the dealers or the mints for a little bit above the spot price of gold.
The government mints and private mints then will strike all of the bullion and sell them to the various gold dealers around the world. This price is going to be a little bit above the gold spot price.
Lastly, the retail dealers of bullion, like Veldt Gold, will then make the bullion available on a public level near the spot price of gold. All of these bullion dealers will be competitive in terms of pricing.
When it comes to the spot price of gold, we hope our guide has helped you understand a little bit about how it is determined. It is definitely a complex process that does not need to be anywhere near this level of difficult or opaqueness. A savvy investor will be able to understand at least the basic principles of how this process works out. The gold spot price is one of the most important parts of buying gold, so it is worth taking the time to learn how the process works. If you are still unable to understand how the gold spot prices work, make sure you talk to someone savvy in this area before you decide to invest in gold. As we said, knowing the gold spot prices and how this is determined is an important part of making your gold investment decisions.