How is the Gold Spot Price Set?

Gold Spot Price – (n) the theoretical price of 1 troy ounce of gold available for immediate delivery before being minted into a bullion bar, round, or coin.

When you visit an online gold bullion dealer website like JMBullion, chances are you will see the live gold spot price quoted all over the website.

You may ask yourself, “How come the gold bullion products sold on the website are not priced at the fluctuating gold spot price?”.

What is the gold spot price, if not the price of gold itself?

If only it were that simple.

When you look granularly at how gold’s worldwide spot prices are determined you will find complexity. Given some of the vast gold proxies and derivative leverage involved in the world’s gold price discovery mechanism, some market experts believe the system has become backassward today.

The parties who have the most influence over the gold spot price are not for the most part exchanging the physical precious metal but instead using derivative contracts representing the underlying commodity to determine what the real world’s physical gold price is.

You wouldn’t be strange if you thought this situation didn’t make common sense.

Why would theoretical contracts representing physical commodities dictate the real world price?

If physical gold’s supply and demand is not in control of today’s gold spot price discovery are we not caught in a strange case of the tail wagging the dog?

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Commodities can be goods such as gold, silver, crude oil, platinum, wheat, corn, coffee, soybeans, cotton, and other items. These commodities all have futures contracts listed on various exchanges throughout the world. You may have heard of a few of them with acronyms like the COMEX, CBOT, NYMEX, CME Group, etc.

Futures contracts exist to provide commodity producers, end users, and price speculators a way to potentially and respectively manage price risk, buy and take future delivery of real world goods, or simply bet on a commodity’s price rise or fall.

The futures price for a commodity is based on the price discovery contracts for the supposed future delivery of that particular commodity.

A spot price is the fluctuating market price for an asset bought or sold on commodity exchanges contracted for immediate payment and delivery.

The spot price of gold is determined by the forward month’s futures contract with the most volume. At times this contract can be the current month or it might be two or more months into the future.

Gold’s spot price is traded close to 24 hours a day during week days halting on weekends. The spot price for gold is mainly derived from commodity exchanges centered in New York, Chicago, London, Zurich, China, and Hong Kong.

The largest influencers on gold’s spot price fluctuations today comes from the COMEX in the United States. For now the COMEX division of the New York Mercantile Exchange is still the most significant futures contract trading market for gold and consequently it has the most influence on gold’s fluctuating worldwide fiat currency spot price. One could make a case that the COMEX’s current influence on gold’s spot price is ultimately a gold derivative hologram and not truly based on market fundamentals.

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Conversely in the physical gold bullion world, China’s Shanghai Gold Exchange (SGE) is now the world’s largest physical bullion trading market. China’s physical gold bullion exchange (SGE) is growing year on year and may ultimately dictate the future of how the world’s gold spot prices in fiat currency fluctuate.

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On most exchanges, futures contracts for gold represent the price for a lot of 100 oz of gold at a future potential delivery date, yet most futures contracts (China’s SGE excluded) are not settled in the physical real world commodity, merely in cash value. In fact the high 90 percentile of gold futures contracts on the COMEX for instance are not settled with any physical delivery at all.

For the majority of futures exchanges, many 100s of ounces of digital gold futures contracts are traded on for every 1 physical ounce of gold bullion that is ultimately delivered upon in the real world. With this kind of leverage, many gold investors (China and Russia governments likely both included) believe true price discovery for gold bullion remains afar in today’s market.

Thus many gold investors and foreign governments are covertly buying physical bullion and taking possession outside the banking industry for future value appreciation, risk hedging, and pivot-ability for future investing.

For example now, China’s Shanghai Gold Exchange bullion deliveries dwarf the COMEX.

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Gold bullion is a tangible asset, and is generally recognized by most human beings, governments, and institutions as a trustworthy long term store of value.

Yet gold’s fluctuating spot price is typically affected by shorter term factors like speculator sentiment, potential price inflation/deflation threats (real or perceived), changing values of digital and paper fiat currencies, government and central bank gold demand, fluctuations in government deficits, market/central bank mandated interest rates, geopolitics, and news events.

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Did you know?

Ever since gold’s bull market began in 2001, eligible and registered gold tonnage on the COMEX has increased as much as 9 times.

Registered available for delivery gold as a percentage of total COMEX gold warehouse stocks has decreased sharply over the past 10 years. Perhaps the big gold commercial bullion banks on the COMEX don’t want to part with their gold bullion stocks at these current spot prices.

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Why the commercial banks have drastically cut down on their registered stocks (eligible for delivery) gold remains a mystery yet to be fully understood by market participants.

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Gold Spot Price in Review

The fluctuating gold spot price today remains a composite of the world’s futures markets (mostly the COMEX) buying and selling futures contracts representing the underlying real world precious metal price.

The physical market for gold bullion items (like the gold bullion bars and coins JMBullion sells) track the gold spot price but generally gold bullion product prices hover over the gold spot price. In other words, if gold’s spot price is $2,000 oz USD, you’ll find most physical gold bullion products priced slightly above $2,000 oz USD.

The flow from gold’s spot price to physical gold bullion delivered discreetly to door goes like so:

  • Futures traders make leveraged derivative bets on worldwide futures exchanges determining fluctuations in the gold spot price.
  • Miners dig gold ore from the ground (mostly as a byproduct as there are not many gold only producing mines in the world) and then sell mixed ore and doré gold 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 gold’s spot price.
  • Private and gov’t mints also strike bullion coins or pour bullion bars, selling them to gold dealers at prices typically just above the gold spot price.
  • Retail bullion dealers (like JMBullion) offer to the public gold bullion products competitively priced just over gold’s fluctuating spot price.

We hope this helps your better understanding of how the gold spot price is set and determined. It is certainly not a simple subject nor what the majority of market participants fully understand.

All Market Updates are provided as a third party analysis and do not necessarily reflect the explicit views of JM Bullion Inc. and should not be construed as financial advice.