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Decoding Gold Prices - How Gold Prices Work

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By Paul Vanguard, for BullionMax.com

With this brief guide to gold prices, we're going to dive into the nitty-gritty of the gold market. How is the price set, how often does it move and why?

Let's start with the basics.

What is the spot gold price?

The spot gold price is gold's currently-traded market price, usually expressed in dollars per troy ounce. It’s the result of supply and demand, just like stock market prices per share. This is the gold price referenced by investors, news outlets and the markets.

Unfortunately, though it’s the closest thing we have to an accurate gold price, it’s also strangely hypothetical. The spot price of gold is mostly set by trading in hypothetical gold (in other words, financial instruments like futures and options – in other words, paper gold).

When you hear of support, resistance or all-time highs, you're hearing about the spot price.

Here’s the thing: you are incredibly unlikely to get your hands on physical gold at spot price (unless you mine it yourself).

What is gold fixing?

Some folks will tell you it’s pretty much what it sounds like, “fixing” as in “fixing a horse race.” The London Gold Fix started on September 12, 1919 and still works the same way (though the bankers don’t meet in person anymore):

  • Twice a day, gold dealers from London’s five biggest bullion banks report their orders to buy and sell gold.
  • If there’s an imbalance between supply and demand, the Gold Fix Chairman (yes, that’s a real job apparently) attempts to “fix” the imbalance by naming a price slightly above or below the spot price.
  • Gold dealers report back on whether their orders would buy or sell at the new price.
  • This process continues until all orders are cleared at this new, “fixed” price.

So the process is sort of an auction. The gold fix price is widely reported and has a big impact on the rest of the market. Even though London has a massive gold market, this entire process is pretty brisk… Martyn Whitehead, vice-chairman of the London Bullion Market Association (LBMA)v says:

Normally it's a 10 or 15-minute process, but it can take up to half an hour. The longest fixing actually took place back on 19th October 1987 - Black Monday. The London Gold Fix took two hours and 15 minutes to reach agreement that day.

The downside of this process is pretty obvious… prices are only set twice a day.

This price, specifically the final (PM rather than AM) gold fixing price, is typically used by very large gold owners like central banks and refineries to adjust the value of their holdings.

Why can't I buy gold at spot prices?

This is the number one question we’re asked, and not just by customers, by our friends and parents too. There are two ways to answer…

The easy way: Spot prices simply don’t take into account shipping, minting, packaging, storage and insurance. (Or even the razor-thin profit margins BullionMax charges.) All this, every single step in the chain, raises expenses on the finished product, whether it’s a gold American eagle or a gold bullion bar. This isn’t the Metaverse – real tangible physical products just cost more than imaginary gold!

The hard way: Spot gold is actually undervalued. Because it’s an unreal, frictionless and totally imaginary financial construct subject to manipulation from massive global banks and commodities exchanges, it’s simply worth less than actual physical gold. In other words, real gold is worth more than imaginary gold.

The even easier answer: Not even WE can buy gold at spot prices! It’s frustrating!

Is the price of gold the same everywhere worldwide?

Almost, but not exactly.

Heading up to 2019, U.S. traders and analysts were wondering if and when gold would reclaim its previous all-time high of $1,910. But in countries around the world, gold had already hit all-time highs in local currencies.

On the other hand, international gold prices are nearly always the same. If they weren’t, buyers would step in and buy where it’s cheap, and sell where it’s more expensive (this is called arbitrage) until prices matched and there was no profit to be made.

What is LOCO London gold price?

Intraday traders like gold very much, which means massive liquidity. LOCO London gold is the bullion that's backing daily trades of paper gold, stored in the city's underground vaults. This exchange-traded product is what clears all of today's paper gold trades.

What are bid and ask gold prices?

The Bid price is an offer to buy gold, and the Ask price is an offer to sell. The "spread," or the difference between these two figures, is how gold traders make money. (Basically through arbitrage, like we discussed above.)

How are gold spot prices different from gold futures and options?

Spot prices are more grounded in reality and more relevant to the moment.

Futures, as well as options and derivatives, are a speculative financial instrument. They’re a bet on future price changes. So options and futures bets are based on today’s spot price, and their profitability is defined by the change in spot price over time.

You know, this is too complicated to explain easily. The easiest way to compare would probably be to buy your first gold coin, and then download the Robinhood app and spend the same amount playing with options trading. See which is worth more at the end of the month. Please note this is not investing advice! But I still think you'd enjoy the coin more...

 

Paul Vanguard is a lifelong precious metals enthusiast and a proud member of the BullionMax team.

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