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Decoding the Gold Market: How Does The Price Of Gold Develop In The Markets?

Published by honor in category Market News on 29.09.2023
Gold price (XAU-GBP)
1,928.22 GBP/oz
  
+ GBP1.04
Silver price (XAG-GBP)
23.09 GBP/oz
  
- GBP0.00
Gold bar

The intricate world of gold investment offers a blend of allure and complexity that captivates both the novice and the seasoned investor. At the heart of this world lies the pivotal concept of the “spot price,” which serves as a mirror to the current value of gold in global exchanges. It is crucial for every investor to grasp how this spot price is determined and how it underpins the value of their investments.

Refinery Perth Mint provides an enlightening overview, elucidating that the spot price is the prevailing rate in the market where a distinct asset, such as gold, is exchanged. Despite fluctuations due to time and geography, this rate remains surprisingly consistent across the global economy, thanks to the equilibrium of exchange rates.

Gold investors, driven by the pursuit of a safe haven asset and the intent to hedge against inflation, remain vigilant to the oscillations in the gold market. Their decisions, often grounded in meticulous observations, are influenced by various factors. Among these, central banks, including behemoths like the Federal Reserve, wield considerable influence, primarily through the modulation of interest rates, which in turn sways gold prices.

Adding layers to this intricate tapestry are exchange traded funds (ETFs) and transactions involving physical gold. Both these entities are tethered to the immutable laws of supply and demand. The sheer volume of gold traded, whether through ETFs or the over-the-counter (OTC) market, is a reflection of the overarching investor demand, serving as a barometer for the factors propelling gold prices.

Navigating the intricate corridors of the gold market not only equips investors with insights into the immediate dynamics but also illuminates the long-term ramifications of parking their funds in this precious metal. It is a journey of discovery, shedding light on the multifaceted dimensions of economics, market forces, and global finance.

The most important gold and silver markets

Gold and silver prices are mainly formed in two key markets. Below, we look at what a “fair” price means to precious metals traders.

Over-The-Counter Market (OTC)

The OTC market consists of traders who trade one-on-one with other traders. It is a network of traders who independently trade with each other during market trading hours.

The OTC market primarily refers to professionals and legal entities trading in 400-ounce gold bars (and 1000-ounce silver bars). These deals are usually concluded in London. At the same time, you must remember that with precious metals traders who deal with both buying and selling (such as Tavex), you are also making an over-the-counter transaction.

Over-the-counter (OTC) trading is usually done over the phone or through a dedicated digital trading platform. The conditions of concluded transactions are not public there.

Therefore, given the nature of the market, it is often difficult to know exactly what this over-the-counter price is. Considering this, traders in precious metals often rely on data from service providers such as Reuters or Bloomberg. It also relies on the daily fixed prices of the London Gold and Silver Market.

This spot price is usually updated by the precious metals departments of major banks. In essence, it is a platform or forum where banks can make their prices public. However, unlike the stock market, this does not mean that you are obliged to make transactions at these prices.

In comparison, it can be pointed out that on public exchanges (for example, futures markets), it is much easier to determine the price.

Futures Exchanges

Futures markets are public and regulated markets where gold and silver futures are traded. A future is a contract between parties that obligates the underlying asset to be bought or sold at a previously agreed-upon time and place. For gold and silver, the US COMEX market is the most influential.

Often, the price of futures with the nearest expiration date is reported as the spot price. Technically, this is not correct because the future reflects the future price, while the spot price reflects the current price.

The immediate delivery of gold and silver is based on the local futures exchange. Therefore, from the retail customer’s point of view, the spot price derived from futures is essentially the current price.

In Which Market Is The Price Of Gold Formed?

Futures and spot prices of gold are closely linked. How? Arbitrage traders play a crucial role. They look for price differences between these two to earn profits. Their strategy is simple: monitor the money-to-gold lending rates. If the difference becomes significant, they might sell futures and buy gold at the OTC spot price, or do the opposite. This ensures that the prices between the two don’t vary significantly.

Now, where is the gold price primarily determined? The debate continues. Some say it’s the US futures markets, while others argue for the Shanghai Gold Exchange or the London OTC spot market. This dominant exchange can shift over time. Apart from these, various other elements also influence gold’s price. An interesting fact? The London OTC market, when it comes to the volume of gold traded, is much bigger than the COMEX. In fact, these two markets combined handle over 90% of the global trading volume.

Precious Metals Traders’ Spot Price

So, how do precious metals traders (including Tavex) determine their own spot price that is presented to clients?

They consider the factors below:

  • Spot prices and futures prices may change after the price is agreed with the customer. A transaction in the wholesale market may be executed at a different point in time, which means that they may differ from the customer price (both for buying and selling).
  • OTC and futures markets are essentially wholesale markets where larger volumes are traded. However, a client of a precious metals trader (such as Tavex’s client) usually buys much smaller quantities. This means that one large trade on the OTC market is at one price, while many smaller trades on the resale market are priced differently.
  • A precious metals trader may not be wise to rely on Reuters or Bloomberg spot prices when fixing prices in the OTC market. This is the case, for example, if the markets move very quickly and the so-called gold banks (market makers) do not update their prices on the platforms quickly enough.
  • In the futures market, traders in precious metals also have to pay brokerage fees. In both the futures market and the over-the-counter market, there are costs associated with hiring dealers and concluding transactions.

To account for the above factors, the precious metals trader adds a margin to the spot price or futures price. The spot price is dynamic, affected by many factors such as interest rates, market sentiment and geopolitical events.

It is worth noting that this spot price margin is in addition to the markup added to the price by the refiners who have to refine the gold to a specific purity and mint it into coins and bars.

Since there are many different price formation factors, the spot prices of traders in precious metals can be very different.

This can be confusing for new investors in the gold market. We are usually used to the fact that, for example, a specific share has a specific price on a specific stock exchange. It can also raise the question of whether the price shown up front is “fair”.

The only way to recognize a fair price is to do what precious metals traders do – they try to make deals with traders who offer the best price. The question must be asked whether the trader in precious metals treats customers fairly and acts honestly. Is the pricing transparent and easy to understand? The people who analyze it become part of a network of OTC traders who shape the market.

Key Takeaways

The gold market, with its intricate network of traders, central banks, and investor demand, serves as a testament to the power of supply and demand. Whether one is drawn to gold ETFs or prefers the tangible nature of physical gold, understanding the factors influencing the price of gold is essential. Central entities like the Federal Reserve, along with prevailing interest rates, have a profound impact on the demand for gold. In the ever-evolving landscape of investment, gold remains a beacon for those seeking a long-term, safe haven asset. As with any market, transparency and honesty among traders are paramount, ensuring that gold investors can rely on the stability and fairness of their chosen investment avenue. As the quest for a “fair” price continues, one must always remain vigilant and informed, ensuring the best possible outcomes in the gold market.

Gold price (XAU-GBP)
1,928.22 GBP/oz
  
+ GBP1.04
Silver price (XAG-GBP)
23.09 GBP/oz
  
- GBP0.00

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