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How Gold Spot Price Works

How Gold Spot Price Works

Gold is a precious metal sought after as both a luxury and an investment. It comes in various shapes, sizes, and purity levels or fineness, creating a range in gold market value.

Gold is frequently purchased and traded by investors in the investment market in gold bars and gold coins, which come in many different forms, from gold eagle coins to weighted gold bars. Of course, these types of gold come at a cost, but how much?

Are you ready to start investing in gold in real-time, or are you curious about how much your gold coins or bars are worth? If so, then you should learn and understand what the gold spot price is and how it works.

Let’s go over the basics of spot price and how it affects the price of gold.

What Is a Spot Price? 

Spot price is the established price of currencies, securities, or commodities, such as gold or silver, to be bought or sold on the current day. 

The spot price of gold indicates the anticipated ask or bid value per troy ounce. The bid price is the maximum amount of gold a dealer is willing to part with, measured in troy ounces. The ask price is what they’re willing to sell it for. If you are looking to either purchase gold or sell gold today, for example, you’d refer to the spot price for the locked-in daily rate.

Because the rates lock-in daily, this means that the price can fluctuate. Gold spot prices refresh every minute, and viewing these gold price charts, especially on a daily basis, can get you the best deals. But remember that live gold prices and the matching price chart are primarily used by gold refiners, miners, banks, and dealers when buying and selling gold bullion coins. This price is different from that of the finished product purchased on the market. Finished products can include dealer markups, premiums, and additional costs.

How Is the Spot Gold Price Determined? 

As mentioned before, spot prices refer to the cost per troy ounce of gold. One troy ounce equals 31.1 grams, which is different from a standard ounce that equals 28.35 grams. Keep in mind that spot prices are determined internationally and could slightly vary depending on the location. They are also typically listed in U.S. dollars, regardless of its local currency.

Two primary organizations affect how you’ll determine spot price:

  1. London Bullion Market Association (LBMA)
  2. Gold Futures

London Bullion Market Association (LBMA) 

Founded in 1987 by the Bank of England, the London Bullion Market Association (LBMA) sets the standards for precious metals and bullion products. They are an international trade association serving as a benchmark across the globe for gold pricing. 

History tells us that in 1933, President Roosevelt declared that American citizens could no longer own gold privately, requiring gold owners to convert their gold into U.S. dollars (USD). Because of this, the trade of gold began to move from the U.S. to London. Later in the 1970s, the rules changed, and people could own gold once more. By then, the formation of the LBMA was underway by the Bank of England.

The ICE Benchmark Administration (IBA) works with LBMA in administering the live gold spot price. IBA holds 30-second auctions, recording the price per round. If the difference between the buying and selling price, known as imbalance, is within a specified threshold, the price is published. The LBMA includes the London and New York markets. Gold is bought on the London market then traded on the COMEX in New York, the world’s largest futures trade exchange. 

The LBMA set a standard for the trade of gold and silver called Good Delivery. Gold and silver refiners must apply to be added to the list. This list requires that gold bars need to meet certain requirements before they are approved for trade. Only accredited refiners are accepted.

The requirements of Good Delivery Standards include:

  • Troy Ounce Weight: Gold content must contain a minimum of 150 troy ounces and a maximum of 430 troy ounces.
  • Dimensions: The length, width, height, and slope or undercut of the gold bar help determine its worth.
  • Purity or Fineness: Bars need to be 995.0 parts per thousand fine gold to be approved.
  • Appearance: A serial number, level of fineness, and refiner stamp must be marked on the bars. In addition, the bar should not show signs of holes, cracks, cavities, blisters, etc. It should be smooth and easy to handle.

Visit the LBMA website to view the Good Delivery List or learn more about the requirements to be included on the list.

Gold Futures and Futures Contracts 

Gold futures have a history. The first traded futures contracts date back to the mid-19th century, and it wasn’t for gold or silver—it was for grains. It’s simple: Futures contracts represent the trading price established in the future. These are contracts drawn up and agreed upon by buyers and sellers that trade on a specified date. 

Gold futures are traded on the COMEX market. COMEX is run by the Chicago Mercantile Exchange (CME) through the New York Stock Exchange (NYMEX). Spot prices move based on the actions of two groups: the hedgers and the speculators. The balance of buy and sell positions hugely determines the spot price.

Hedging and speculation are two commonly used terms in gold futures and futures contracts

Hedging focuses on reducing the risk of loss in the stock market. Through hedging, you want to protect investments from the movement of future prices and currency values. It’s used as a type of insurance in the event something goes wrong. For example, if the value of stocks decreases and your portfolio is at risk, gold investments act as a hedge and can stabilize the portfolio.

Speculation sets an expectation that there will be an end profit through buying and selling. This is where day traders fall into place. Although there is a level of risk involved, speculators are driving towards making a profit, not playing it safe.

You don’t pay the contract's total value upfront to invest in gold futures. Instead, you place a small deposit, a percentage of the contract, as a down payment. Yes, there is risk involved. These types of investments can result in either significant losses or huge wins. This could be an option for you if you do not want physical gold to store. 

You can choose to take delivery; however, most contracts never deliver as it is a lengthy process to follow. Plus, there are plenty of other gold purchasing options that make obtaining physical gold easy.

Why Does the Spot Price Fluctuate? 

Gold is a commodity, meaning that it is dug up from the Earth and is bought, sold, or exchanged for a comparable value. There is an undetermined amount of remaining gold left to mine. Because it is time-consuming and challenging to discover, the amount of gold circulating is low. 

The spot price of gold can fluctuate for many reasons. This includes:

  • Supply and demand
  • 24-hour gold trade across the world
  • The expectation of future prices, from gold futures and futures contracts
  • The quantity of gold being mined and its purity
  • Inflation or deflation
  • Amount of jewelry production and demand
  • Geopolitical and environmental factors
  • Interest rates

For example, if a substantial amount of gold deposit is uncovered from a mine, the spot price of gold will fall. If gold becomes scarce, the reverse effect takes place. The mining process is long and strenuous, from discovering it to refining the precious metals.

Another example relates to the stress of the economy. Demand can quickly change due to economic uncertainty or geopolitical stress such as a pandemic or a war. The spot price of gold often rises during these more difficult times. 

Check the spot price daily and review historical fluctuations. Follow current events and the price of the dollar. Knowing what’s happening in the world now that could potentially cause a change in the price can affect your trade and investment decisions.

The Bottom Line 

The spot price dictates the current daily rate gold is purchased or sold at. Supply and demand play an important role in determining the price of gold or any precious metal in addition to economic and political factors. The spot price is prone to fluctuate daily because of it. Keep an eye on the spot price and analyze trends while buying or selling gold. It serves as a solid benchmark when making important investment decisions.

Gold is an investment that lasts a lifetime. Start investing in gold today the affordable way through a subscription plan you choose and control. Watch your gold grow over time with Acre Gold. Visit Acre Gold today and begin having gold bars delivered straight to your doorstep.


Sources:

Spot Gold

Spot Price - Definition, Example, Spot Prices vs Futures Prices

LBMA: The Independent Precious Metals Authority

LBMA Gold and Silver Price