Informational Article

Spot Gold Price

In theory, the spot price of Gold is the price at which you can buy 1 ounce of Gold on the spot and take physical delivery. Gold's spot price changes day to day and minute to minute. The two charts below show daily spot prices in April 2011 and intra-day spot prices for the first three days of May 2011.

As you can see, the spot price of Gold rose from approximately $1,420 per ounce at the beginning of April 2011 to roughly $1,540 per ounce at the end of the month - quite a steep gain within just a month.

Intra day spot gold price chart April 2011. Source: www.kitco.com
Source: www.kitco.com

The second chart shows 24-hour spot prices (in red) for May 2, 2011, along with closing prices for May 1, 2011 (in blue) and opening prices for May 3, 2011 (in green).

24hr spot gold price May 1-3, 2011. Source: www.kitco.com
Source: www.kitco.com

The second chart also shows trading times on various exchanges in Hong Kong, London, New York (on the Globex), New York (NYMEX) and Sydney. In addition, Gold trades on many other local exchanges in various countries. The Globex is a 24-hour electronic trading platform for metals futures including Gold.

Spot Determination

While the theoretical definition of the spot price sounds simple, its actual determination is not so easy.

Gold trades all over the world, every day, in different time zones. And as the intra-day 24-hour chart for May 2, 2011 shows, Gold markets never asleep.

How then are spot prices derived?

Like any thing that trades, spot prices too are determined by supply, demand, and expectations of Gold's value in the future. While one buyer may think Gold prices will rise over the next 30 days, another may think they'll fall. Reconciling millions of traders' views on the future of Gold is not an easy task. So it really boils down to supply and demand.

In addition, two entities, the London Bullion Market Association (LBMA) and the New York Mercantile Exchange (NYMEX) set Gold spot prices daily and give the market some direction on what Gold should trade at - with no mechanism to control, regulate or enforce Gold prices.

Gold trades in a free market, and market forces collectively determine its price.

Spot Gold Price History

First, some history. Gold used to trade actively in the United States. However, in 1933, supposedly because of the threat of bank failures during the Great Depression, President Roosevelt issued Executive Order 6102 that prohibited the holding of Gold coins, Gold bullion and Gold certificates. Citizens were only allowed to retain Gold coins worth $100 and violators faced harsh punishment. The Order exempted Gold that was used in industry, profession or art.

This Order stayed in effect until it was finally repealed by President Ford in 1974, 40 years later.

Over that 40 year period, much of the Gold trade moved across the Atlantic to London, where the LBMA's gold fixing took on additional importance.

However, since 1974, the NYMEX (and specifically, its Commodity Exchange, or COMEX) has gotten back into the game and sets spot Gold prices daily (on days when the COMEX is open for trading).

COMEX Spot Price

The COMEX spot price is set daily at the close of trading at 1:30 pm New York time.

Ironically, this spot price is derived from the prices of futures contracts. A futures contract is basically an agreement made today to buy 100 oz of Gold at some future date, at a price agreed upon today. There are Gold futures contracts for every month. The COMEX is the world's largest market for Gold futures.

Every trading day:

  1. The COMEX analyzes data on Gold futures traded between 1:28 pm and 1:30 pm Eastern time (the last 2 minutes of trading before the exchange closes)
  2. determines the month that saw the most active trade
  3. averages futures prices for that month, over the last two minutes of trading, and
  4. announces that average price per ounce as the COMEX spot price for Gold.

So, interestingly, the COMEX spot price for Gold is set not on the trading of actual Gold bullion but on paper contracts.

London Fix

The London Bullion Market Association (LBMA) fixes the spot price of Gold twice a day - at 10:30 am and 3 pm London time. The LBMA is an association of Gold dealers that trade over the counter.

Representatives of its five largest Members - Barclays Capital, Deutsche Bank, HSBC, Scotia Mocatta and Societe Generale - get together on a conference call twice daily. At the start of each fixing, a Gold price is announced and relayed to customers of these members, who enter orders to buy or sell Gold bars at the announced price. If the volume of buy and sell orders does not match (within 50 bars), the price is reset and bids are again invited. When buy orders match sell orders (within 50 bars), the Gold price is fixed and announced in British Pounds, the Euro and the U.S. Dollar.

Other Markets

COMEX and LBMA spot prices only act as guidelines for trading across the rest of the world. For example, traders in Hong Kong could well drive the price of Gold up or down based on news or perceptions that occur while New Yorkers are fast asleep. So Gold largely trades on global news and its perceived impact on Gold.

Spot Gold Price and You

Investment banks and financial institutions trade physical Gold and paper futures based on the spot price of Gold.

Individual investors typically buy Gold from retail dealers, who use the spot price as a baseline and typically charge you a premium over spot when you want to buy Gold from them. They often pay you a discount to spot if you want to sell Gold to them. This difference between the spot price and the price you pay per ounce is called the premium.

The difference between what you pay when you buy and when you sell is called the bid-ask spread, and is how dealers cover their costs and make a profit.

Looking the premiums currently being asked for various gold coins and bars from a dealer at the time of this writing (April 28th, 2011) the premium ranges from 1% to 8%. For example, when the April 28th, 2011 current spot price was $1,534.10, dealers charged $1,656.83 - an 8% premium over spot - for a Special Gold Maple, while a Canadian gold bullion bar commanded only a 2% premium.

In summary, spot gold prices vary by the minute, serve as an indication of what Gold is trading at in world markets, and set a baseline for retail Gold purchases and sales.