There are many factors that go into the spot prices of gold and silver. Though they are different metals, spot prices for gold and silver tend to parallel each other. It is very unlikely for the price of gold to go in one direction and for silver to go in another. When it comes down to it, spot prices tend to flow in the same direction across the entire precious metals market, which also includes platinum and palladium.
Usage of Gold and Silver
Industrial usage is one of the driving factors behind the pricing of any commodity, and precious metals are no exception. Silver and gold are both used to create many more items than most people can even imagine. From car parts to computer parts, precious metals play a role.
Outside of industrial usage, jewelry has some of the biggest influence in how the market prices gold and silver. When there is significant demand for metals, the price is going to rise. If there is little demand, prices are likely to remain flat or fall.
Whether you are an individual or an entire government, gold and silver serve as one of the premier forms of investment. There is no way it can be artificially produced, which ensures its rarity and inherent value. Understanding this, you will realize that those entities with larger buying power will play a sizable role in the pricing of metals. If an individual purchases gold or silver, the market won’t realize. If an entire government buys gold or silver, like India or China, the market will be impacted.
Reasons for Price Movements
Aside from usage and general large buys, the prices of gold and silver tend to move with influence from current news and world events. If there is worry about the stability of a currency, gold and silver will generally see an uptick in spot prices. If the United States Dollar (USD) strengthens for extended periods of time, you should expect to see a downtick in the prices of precious metals. When currency becomes weak, metals become stronger, and vice versa.
Beyond currency movements, general economic news also affects the price of gold and silver. If the Fed (United States) makes an announcement in regards to any sort of government policy (be it interest rates, general economic outlooks, etc.), gold and silver usually react in one way or another. Gold and silver frequently play off of expected future events. Of course, this is true for almost any form of investment, and prices can certainly be reactive as well.
In the end, there are almost infinite factors that come into play when discussing spot price of gold and silver and how it is determined. Supply and demand define the prices for all commodities, with ETFs and other similar vehicles setting the bar for the price of physical gold and silver. The prices of gold and silver are literally changing by the second, and with a bit of research, you might even be able to predict the next move.
How Spot Prices are Calculated
The final section of this article will explain how spot prices are actually calculated. Spot prices are determined by futures contracts. Futures contracts are traded in much the same way as stocks and other commodities. A future contract exchanges delivery of an item (gold and silver in this case) for a set price, with quantity and exact order details being specified from contract to contract.
When considering gold and silver, the most well-recognized platform is COMEX, which stands for commodities exchange. COMEX is based out of New York, much like the majority of financial trading companies. COMEX is part of the NYMEX, the New York Mercantile Exchange. Gold and silver both find the bulk of their pricing determined by the trades that take place here. When futures contract trades take place in New York (and around the world), the prices of gold and silver adjust accordingly.
The reason futures contracts are used to set the spot prices is because the majority of the daily traded volume of gold and silver is done electronically as opposed to physically. Since more gold and silver are traded electronically via futures than physically delivered, the futures markets provide the most accurate, up to date prices for both gold and silver.
Now that you understand the spot prices of gold and silver, as well as how they are calculated, let’s discuss how to actually buy physical gold and silver bullion. Our next article will specifically compare the differences between buying online and buying locally.