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The spot gold price is constantly changing based on the purchase prices of gold futures contracts in commodity exchanges around the world.
Please visit here to customize a gold price history chart.
Gold Futures Price vs. Gold Spot Price
As the name implies, a gold futures contract – with a price agreement in the present – obligates the buyer to pay for the gold during a future delivery contract month.
However, a gold spot (market) transaction requires immediate payment followed by delivery of the gold bullion within days.
New York and World Gold Prices
The New York spot gold price is discovered during COMEX’s “open outcry” (live auction) in New York City and electronically via Globex (also COMEX) from 8:20 AM to 1:30 PM (EST) ... and after hours on Globex until 5:15 PM.
Discovery of the world spot gold price incorporates futures pricing from other international exchanges in addition to COMEX.
Due to the many time zones, the world gold spot price is continuously updated from Sunday evening thru Friday afternoon.
Market (spot) prices are gleaned from futures traded in nearby contract months. The operative word is “nearby” meaning a close contract month when delivery of the gold is completed.
However, since some nearby contract months have very low trading volumes, exchanges discover spot prices from nearby “active” or “base contract months” with higher volumes.
Who Discovers The Spot Gold Price?
An auction format is used by commodity exchanges to create competition between buyers vying for the same futures contracts, and vice versa for sellers competing for the same buyers.
The auctioning process is the most efficient method for discovering gold prices as each party determines what price best serves their self-interests.
What better way to determine gold’s true value than to create an environment that's globally competitive and lets market forces determine the outcome.
An excessive number of sellers (supply) can depress prices. But a surplus of buyers (demand) can cause prices to rise.
Gold fixing is the process of adjusting the price until the quantity demanded is relatively equal to the quantity supplied. This practice results in a more efficient allocation of gold. The London fix price for gold, an alternative to the spot gold price, is based on this model.
Hedging Physical Gold Purchases
Commodity futures contracts are useful financial tools for manufacturers dependent on the actual commodity to make their products.
For example, suppose a jewelry manufacturing company purchases physical gold to produce its products for the upcoming Christmas shopping season.
However, the company wants to protect the value of its gold purchase if the spot gold price drops – due to a lackluster economy - before it can make and sell its products.
If the spot gold price drops, the jewelry maker will have to lower the prices of its products since the jewelry industry is competitive. Lowering its prices may cause the jewelry producer to lose money.
The company assumes investor demand for gold bullion will not counteract the effects of a sluggish economy on gold prices.
So to sustain the profit margin on its base material, the company sells gold futures of equal value to offset its cash purchase of gold.
The company can further capitalize on falling gold prices by buying gold futures to replace the contracts it sold.
Gold Futures Speculators
Speculators are another group of gold futures investors. Their primary motivation is to earn profits on changing gold prices, and they usually have little interest in taking delivery of any gold.
Some speculators who buy (long) gold futures believe gold prices will appreciate and produce profits as a result.
It’s true gold futures speculators can make a significant amount of money in a short amount of time.
However, they can also lose the farm
- figuratively speaking - if they are not skilled.
For example, when a speculator agrees to a short position in a futures contract, he/she is agreeing to sell gold, at a certain price and a future date, based on his/her view that gold prices will drop.
Gold prices do fall so the speculator takes a long position (buys same gold amount) in a futures agreement with another party at a lower price to offset (liquidate) his/her open short position -- before delivery is required.
The speculator earned a profit since the cost of the offsetting contract was less than the amount earned from the “short” contract.
Conversely, had gold prices increased the speculator would have lost money. Jump to the Speculator and the Hedger Section to read a generic example of a silver futures transaction (very similar to gold futures).
Although they add value to the marketplace, many believe speculators also contribute to gold and silver spot price volatility.
Please click here to learn more about gold and silver futures.
Actual delivery of the gold bullion in completion of a gold futures contract is uncommon. Futures contracts, also called paper gold, are usually settled before physical delivery of the gold is necessary.
How do you think the spot gold price would change if a majority of gold futures contract owners demanded delivery because of a major event?
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