How Spot Price Is Set

Some of the first things you see when you visit the JM Bullion site are the spot prices for gold, silver, platinum, and palladium. That seems simple enough – the spot price is merely the price of these metals.

That’s not quite correct. It turns out that the spot price has more flavors and complexity than that, and it is inaccurate to relegate it as the objective price of these metals.

For those with a passing interest in precious metals, the finer details of the spot price might not be important. However, if you are here as an investor looking to grow your knowledge base, you need to understand how a spot price comes into the world, and what it has to do with the prices you pay for physical bits of gold, silver, platinum, and palladium.

What is a spot price?

To most people, a spot price is merely the price to buy an ounce of gold, silver, platinum, or palladium prior to its conversion into a bar, round, or coin. Specifically, it refers to the price of a troy ounce, which is roughly 10% heavier than a standard ounce, but that’s mostly a semantic difference to the layman.

However, the nature of the way these metals are most traded in this day and age makes that definition somewhat incomplete. Prices are usually determined by the simple supply and demand of physical objects. The price is the equilibrium point between how much the seller is willing to accept for its trade and what the buyer is willing to spend in return.

The problem with precious metals’ spot prices is that the primary actors on the spot price are almost always buyers who are not taking actual delivery of the gold, silver, platinum, or palladium they are buying. Instead, these spot prices are largely determined by precious metals futures contracts.

What is a futures contract?

A futures contract is an agreement between a buyer and seller to transact on a certain day in the future. The contract sets the quantity and price of the item(s) to be sold in stone.

The price of any good rises and falls due to various internal and external factors. This movement, while normal, generates a degree of risk for both the sellers and buyers of the goods because not every seller or buyer is ready to complete a transaction all the time.

For example, an investor has decided to buy a certain amount of gold, but he only has a certain amount of budget to do so. He won’t receive his budget until next month, but the current price of gold is such that if the price stays the same, he will be able to buy the gold he needs with the budget he has.

However, if the price of gold happens to increase, then the investor will have a problem. Suddenly, he cannot get the amount that he wanted to get with his budget.

So, he elects to negotiate a futures contract with the seller right now. He pledges to buy his required amount of gold at the current price with his projected budget.

Now, if you’re wondering why the seller would agree to this kind of deal, remember that the road goes in both directions on price. If the seller is worried that the price may decrease next month, then she would be better served to lock up the sale at the current price.

This type of scenario doesn’t just occur for gold, by the way. Many commodities, including palladium, platinum, and silver also trade in this manner.

Commodity exchanges rule the market

Although it is possible that a buyer and seller might independently agree to a futures contract on a product, most futures contracts are traded on a public exchange. Precious metals futures are traded around the clock on weekdays on COMEX, the New York-based exchange for precious metals.

Where the spot price more accurately originates from the ever-changing market price used as the underlying value for futures contracts on the COMEX. The price used by the largest trades each day or hour has the most influence over the actual spot price of palladium, gold, silver, and platinum.

As we mentioned, most of these trades on COMEX do not involve the actual delivery of the physical metal. In fact, it is estimated that more than 90% of COMEX futures contracts are settled without any involvement of their underlying physical metals at all.

If we expand to look at almost all similar commodity exchanges, we see the full scenario of the overall market for precious metals. For every 1 troy ounce of physical silver, platinum, gold, or palladium exchanged, hundreds of ounces are traded as futures contracts.

This situation is a potential problem for precious metals investors for two reasons. One, because of their volume, futures contracts represent a source of heavy leverage, which could bode ill for the entire market if the supply of any of these metals suddenly increased and caused a significant devaluation of the underlying physical commodity. Leverage amplifies whichever direction an investment moves, for good or for ill, so a drop in the current prices could have far-reaching effects.

The other issue is the fact that there are many subjective elements that can combine to affect the value of precious metals, in one way or the other. Concerns about inflation fears about fiat currency, interest rate fluctuations, unplanned demand from central banks or governments, and the actual and perceived effects of geopolitical events can monkey with the spot price both positively and negatively. After all, many of those in the futures markets are speculators, and their entire lives are predicated on reading the tea leaves, so to speak.

What role does the spot price play for the actual metals?

If you are planning to trade on the futures market, we wish you all the luck in the world. However, if you are, like most of us, more interested in acquiring physical gold, silver, platinum, and palladium for your own stack, collection, or investments, you may be wondering how the spot price plays a part in the prices you pay.

The spot price acts like an anchor for all parties along each precious metal’s supply chain. Miners excavate the ore and sell it to refiners at a price slightly below the spot price.

Refiners then refine and purify the metals. The metals are now of the finest quality and are in bullion form. The refiners then sell the bullion to mints at a price just above the spot price.

Mints, in turn, create the various bars, coins, and rounds that they deem most likely to appeal to the general public. They sell these items at a price slightly higher than the refiners’ price, but not too far above spot, to dealers like JM Bullion.

Finally, we at JM Bullion and other precious metals dealers price our products strategically to compete with each other’s offers. However, we try to leave just enough room to make a bit of profit for ourselves when you make your purchase.

In other words, you are buying gold, silver, platinum, or palladium at slightly above the spot price when you buy it, regardless of whether it’s from us or anyone else. However, the value you can realize comes from the potential appreciation of the asset over time. If all goes well, the value of your metal(s) will eventually overcome the spread that you paid to us and turn into a win-win scenario for everyone.

Hopefully, you now have a better understanding of the meaning of the spot price for gold, silver, platinum, and palladium, and how it affects the prices that you pay. If you still have any questions, though, don’t be afraid to reach out to us at 1-800-276-6508. If you prefer, you can also email with a more specific concern through one of the links here.

Our up-to-the-minute spot prices are provided by a variety of reliable sources. For more information on precious metal spot prices and charts, please see our Silver Prices, Gold Prices, and Platinum Prices pages.