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Who Sets the Gold Spot Price?

Gold Spot Price – (n) the theoretical price of one troy ounce of gold available for immediate delivery before being minted into a bullion bar, round, or coin.

When you visit the website of a reputable online Precious Metals retailer such as APMEX, you should see the live, up-to-the-moment spot price of Gold, and the other main Precious Metals, prominently available all over the pages. You may wonder why the Gold products for sale on a reputable dealer’s website are more expensive than the Gold spot price. What exactly is the Gold spot price, if Gold products are not that price? That is simple. Even the most honest companies must charge a small premium for running their business. The amount over spot price that you pay covers the cost of doing business for the company. There may be considerable premium attached if you choose an item with great numismatic value.

Who sets the Gold spot price?

You many naturally wonder next, who sets the Gold spot price in the first place? The answer to that question is not quite as simple. When you examine how the worldwide Gold spot price is determined you will see that it is quite complex. The massive Gold proxies and derivative leverage involved in determining the Gold price have made the process to convoluted that even experts believe that it is becoming impenetrably difficult to understand. The entities with the most influence over the Gold spot price do not generally exchange physical Precious Metal, but instead use derivative commodity contracts to determine the price of Physical Gold. If you think this situation is odd and opaque, you are not alone.

How do theoretical contracts representing physical commodities dictate the real-world price? If the supply and demand of Physical Gold does not set the up-to-the-moment Gold spot price, does that mean we have entered the area of the proverbial tail wagging the dog?

Commodities

Commodities are raw goods such as Gold, Silver, Platinum, crude oil, cocoa, coffee, soybeans and cotton, just to name a few. Each of these commodities have futures contracts traded on various exchanges throughout the world. You have certainly heard of a few of them—COMEX, CBOT, NYMEX, CME Group, etc. Futures contracts provide commodity producers, end users, and speculators the means to at least attempt to manage price risk, buy and take future delivery of real world goods, or simply bet on a commodity’s price rise or fall, respectively. Futures prices for a commodity are based on the price discovery contracts for the supposed future delivery of that particular commodity. Did you ever see Trading Places? The climax happens over the trading of orange juice futures. A spot price refers to the fluctuating market price of a commodity bought or sold on the open market for immediate payment and delivery. However, the spot price takes into account the next largest futures contract. This contract may be for next week or a few months later, but it is influencing that spot price. Gold is traded almost 24 hours a day during week days, but stops on weekends. The spot price for Gold is generally determined by the commodity exchanges centered in New York, Chicago, London, Zurich, China, and Hong Kong.

Right now, COMEX in the United States is the largest influencer of the daily Gold spot price, because the COMEX division of the New York Mercantile Exchange is still the most significant futures contract trading market for gold. Some experts argue that the COMEX’s current influence on the spot price of Gold is ultimately a mirage and not really based on market fundamentals.

Conversely, China’s Shanghai Gold Exchange (SGE) is now the world’s largest trading market for physical bullion. China’s physical gold bullion exchange is growing with each passing year and may ultimately dictate gold spot prices in fiat currency. On most exchanges, futures contracts for Gold represent the projected price of 100 ounces of Gold at a future potential delivery date, yet over 90% of futures contracts, excluding China’s SGE, are never settled with any Physical Gold delivery at all. It’s settled in cash. The majority of futures exchanges represent many 100s of ounces of “on-paper” Gold futures contracts traded for every single ounce of Physical Gold that is ultimately delivered in the real world. This kind of leverage means many gold investors, including the governments of China and Russia, believe that true price discovery for Gold bullion remains impossible in today’s market.

For this reason, many gold investors, including those foreign governments, covertly purchase physical bullion and take possession outside the central banking industry. This way, they can hold onto Physical Gold to take advantage of future value appreciation, risk hedging, and pivot-ability for future investing. At this time, China’s Shanghai Gold Exchange actual bullion deliveries dwarf the COMEX.

Gold bullion is a desirable tangible asset, generally recognized throughout history by human beings, governments and institutions as a trustworthy long term way to store real wealth. But Gold’s fluctuating spot price is typically affected by short-term factors like speculator sentiment, potential price inflation/deflation threats, changing values of digital and paper fiat currencies, government and central bank Gold demand, fluctuations in government deficits, market or central bank mandated interest rates, geopolitical climate and news events. It doesn’t need to be this complex, but it is.

Did you know?

Ever since the bull market for Gold began in 2001, Gold tonnage on the COMEX has increased more than nine times over. However, Gold registered as available for delivery has decreased sharply over the past 10 years. Perhaps the big Gold bullion banks on the COMEX don’t want to part with their gold bullion stocks at this time. Even experts and insider can only speculate as to why commercial banks have drastically cut down on their eligible-for-delivery registered stocks.

Gold Spot Price in Review

In short, the fluctuating Gold spot price is composite of the world’s futures markets representing the underlying real world Precious Metal price. The market for Physical Gold, such as that in the form of bullion items available for purchase at APMEX, tracks the Gold spot price religiously, and Gold bullion product prices tend to hover just over the spot price of Gold. This is a way to be aboveboard with buyers.

So how does the open Gold market play in to how you purchase Physical Gold for your personal investments? It looks like this:

  • Futures traders make leveraged derivative bets on worldwide futures exchanges.
  • Miners extract mixed ore from the ground and then sell it and Gold doré bars to fine bullion refiners, typically pricing their goods just below the world’s gold spot price.
  • Refiners then melt and purify the ore into fine Gold bullion, which is then sold to mints or bullion dealers at just above the spot price of Gold.
  • Private and government mints strike bullion coins or pour bullion bars, selling them to gold dealers at prices typically just above the Gold spot price.
  • Retail bullion dealers, including APMEX, offer to Gold bullion products to the public competitively priced close to the spot price of Gold.

We hope this helps you understand how the spot price of Gold is determined. It is decidedly complex, but the savvy personal investor does well to have at least a working understanding of such an important and impactful part of buying Gold.

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