What is a Spot Price?
What is a spot price? The spot price is the theoretical price for one troy ounce of gold, silver, platinum, or palladium. This is the price made before the precious metal is minted into physical products, such as rounds, bullion bars, or coins. The spot price is what you would pay for immediate delivery before the precious metal is made into a product.
Most reputable online bullion retailers display an up-to-date spot price on their websites. Oftentimes, you find that the products themselves are at 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 numismatic value. If you choose a product with a high numismatic value, then the price is going to be considerably higher.
Who Sets the Spot Price?
Now that you understand the spot price, we can explain who is responsible for setting this price. This is not a simple answer, though, more complex than most people realize. There is a lot of derivative language and gold proxies that make the entire process more convoluted than it needs to be. Even experts are often confused about the process and find it difficult to understand. When it comes to the price of physical gold, the derivative commodity contracts determine the price.
It seems that companies influence the price, but this is not the case. Most of the time, these companies don’t even exchange precious metals on a physical level. Many people think this entire process is very odd and unclear.
Contracts determine the real-world prices, which are theoretical in nature. It is important to note that this only represents physical gold. There is a lot of “tail wagging the dog” going on here. This means that the supply-demand of physical gold is not really a part of determining up-to-the-minute gold spot prices.
What Are “Futures Prices”?
Commodities include any raw goods you can imagine. This list includes everything you can buy: beans, Platinum, Silver, Gold, oil, coffee, crude products, cocoa, and cotton. There are many other raw goods that fall under the term ‘commodities.’ You likely also know about the various exchanges found in many regions. Commodities all have these futures contracts, which are traded using these exchanges. CBOT, CME Group, COMEX, and NYMEX are just a few examples.
These futures contracts allow everyone involved in the process to manage and determine the price risk, among other things. Commodity producers, speculators, and end users all want to know the risk for these commodities. Futures contracts allow groups to figure out the rise and fall of prices, manage the risk of the price, take and buy future deliveries of goods, and much more. Futures prices are determined by looking at the potential price discovery contracts of each of these commodities.
Regardless of how far away this futures contract is, it influences the spot price. Using gold as an example, every weekday gold is traded at almost every single hour. Weekends are the only time when gold isn’t traded. The commodity exchanges determine the spot price for gold. These exchanges are found all over the world, including Hong Kong, China, Chicago, New York, London, and Zurich.
In the United States, COMEX is the largest daily influence of the gold spot prices. This is because COMEX is part of the New York Mercantile Exchange. COMEX is gold’s biggest, most important futures contract on the trading market. Many experts think that COMEX isn’t really the influencing factor and that the market fundamentals don’t really play a role in the influence on gold spot prices.
Real-Life Example: Trading Places
Take the show Trading Places. The biggest climax is when the orange juice futures are traded. The fluctuating price in the markets is called the spot price. This is the price of the commodity that is bought or sold for immediate delivery and payment on the open marketplace. The spot prices also looking at the upcoming futures contract too, however. This upcoming contract could be anywhere from a week to months down the road.
The Example of COMEX and the SGE
If you look at China, they have the Shanghai Gold Exchange (SGE). This is the biggest trading market for actual physical bullion. Every year the physical gold bullion grows and is possibly what dictates the gold spot prices using fiat currency. The futures contracts in most exchanges look at the projected price for 100 ounces of gold. Since this is a futures contract, it projects the price at a later delivery date. Even then, most of these futures contracts don’t actually deliver physical gold, except for the SGE. The futures exchanges look at the 100 ounces of gold, but it is done on paper instead of with tangible gold.
These futures contracts then trade for physical gold ounces, 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 don’t believe that today’s market can determine the real price discovery for gold bullion.
Because of all of this, gold investors choose to purchase gold bullion physically. This means that the possession is outside of central banking. Investors who choose to buy bullion covertly include foreign governments, such as Russia. This means that people can actually possess the physical gold and then benefit from the future appreciation of its value. This also means that they can take advantage of 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 seem to make COMEX appear as nothing.
The Complexity of the Price
History recognizes gold bullion as a trustworthy and long-term way to store your wealth. It is one of the biggest, most common tangible assets in the world. The spot price is determined though, by more short-term factors, including threats of inflation or deflation, as well as speculator sentiment. Paper fiat currency and digital currency changes also impact the gold spot price. The demand for gold from 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 change the gold spot prices on a daily basis.
Interesting Fact
Gold entered the bull market in 2001. Gold tonnage increased over nine times on the COMEX. The gold registered for delivery, though, decreased significantly in the past 10 years. It is possible that the gold bullion banks that go through COMEX didn’t want to part ways with the gold bullion just yet. Only insiders and experts have the ability to speculate the reason for this. 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 delivery-eligible registered stocks.
Review of Gold Spot Price
To sum up, the futures markets all over the world are responsible for this fluctuation of the gold spot price. Futures markets 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 physical gold is always looking at the gold spot price. This includes items found at Veldt Gold. Gold bullion will always be a little bit above the spot price. How do the gold markets all play into your purchases of physical gold, you ask? When thinking of purchasing physical gold as an investment, think of it this way:
The worldwide futures exchanges are where the derivative bets are placed. Those futures traders leverage these bets. Miners extract and then sell ore (often in gold ore bars). Miners sell to gold bullion refineries. The price for this is just a little below the gold spot price. Refiners melt the ore and then purify it so that it turns into gold bullion. Gold bullion is then sold to dealers or mints for a little bit above the spot price of gold. Government and private mints then strike all of the bullion and sell to gold dealers around the world. This price is now a bit above the gold spot price. Lastly, retail dealers of bullion—like Veldt Gold—make bullion available on a public level near the spot price of gold. All of these bullion dealers are competitive in terms of pricing.
Educating Yourself is Key
When it comes to the spot price of gold, we hope our guide helped you understand a little bit about the process. It is definitely complex, but it doesn’t need to be anywhere near this level of difficulty. A savvy investor can 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 experienced 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.