Exchange (Spot) price of gold

The spot price of gold is the most common form of valuation of this precious metal and indicates the price for one troy ounce (31,1035 grams) of 99,99 percent gold or, according to the old designations, 24 karat gold. That price changes every second, and the distributors investment gold they take it as a basis for calculating the price of coins and bullion.

It is estimated that the daily turnover on the global gold market is about 200 billion dollars, of which 70% falls on the London OTC market, which is the largest gold exchange in the world. In order to ensure the quality standards of bullion traded in this market, the participants founded an association called LBMA (London Bullion Market Association), which today includes the vast majority of the largest refineries and mints of precious metals in the world. Gold bars made by mints with LBMA certificate are extremely appreciated and accepted all over the world.

How is the spot price of gold determined?

Most people do not fully understand how the price of gold per gram or the price of this precious metal on the world market is determined. Many people think that the current price is the last price of a physical gold bullion transaction. But the price gold actually consists of two variables. The LBMA sets the "London Fix" price every day - which is based on the price of the gold futures contract, while the other part of the price is the physical exchange of bullion with immediate delivery.

The volume of physical exchange is very small compared to the traffic that takes place electronically, so futures have the greatest influence on the spot price of gold. When buying gold bars or coins, the buyer is actually buying gold at the price at which also affected the futures market, where the classical supply and demand for gold does not have a decisive short-term impact. Real supply and demand affect long-term trends in the movement of this precious metal, while short-term movements (eg from today to tomorrow) mostly depend on the interest in buying and selling futures contracts and other financial derivatives on gold that are traded on stock exchanges.

What does the long-term movement of the price of gold depend on?

Unlike most products and services whose price changes periodically, the price of gold changes literally every second. Since the price rarely changes by more than a few thousandths in such a short period, jewelers and companies specializing in the sale and purchase of investment gold in the form of bullion adjust their prices every few minutes. The reason for the price movement is supply and demand in the global market, which consists of millions of participants, each of whom has their own reasons for buying or selling gold. Listed below are some of the most important factors and processes that influence the long-term movement of the price of the most famous precious metal in the world.

1. Gold mine operation

Mining of precious metals is an expensive and complicated process in which there is no guarantee that the expected amount of metal necessary for the business to be profitable will be found in the mines. If a smaller amount of gold, silver and other metals is mined, mining companies will ask for a higher price for their product, which can affect the rise in the price of precious metals on the world market. A rise in business costs such as worker wages or a rise in profit taxes can also lead to a rise in the price of gold and other metals. On the other hand, the opening of new mines and the discovery of rich deposits leads to a greater supply of the market and a drop in prices.

2. Gold jewelry

The most common reason for interest in gold is buying jewelry. Due to its rarity, beauty and durability, gold jewelry has been a status symbol for thousands of years and is traditional in most cultures a gift on many occasions such as birthdays, anniversaries and weddings. The demand for jewelry for wedding purposes is one of the most important factors of seasonal fluctuations in the price of gold. But it is not the wedding season in Europe or America, but in India. Namely, India is the second most populous country in the world with more than 1,3 billion inhabitants. This means that ten million weddings take place every year in India alone, usually towards the end of the calendar year (from October to December). Customs dictate that the bride must be presented with a large amount of gold, and when it comes to richer families, sometimes it is several kilograms of gold. The purpose of such gifts is to provide the woman and her family with a certain amount of capital that will not depend on employment, and which can be used in bad days if they come.

Jewelers know that they will sell a large amount of jewelry towards the end of the year, so they start buying gold en masse and making jewelry a few months before. Due to high demand, the price of gold per gram, as well as on the world market, usually increases by several percent during the summer and early autumn.

3. Industrial demand for gold

Apart from the jewelry industry, gold is also used in many other industries industries, such as the electronic equipment industry. It is an excellent conductor of electricity, so it is often incorporated into computers, mobile devices, calculators, GPS devices, etc. Since approximately one billion mobile phones are produced each year, a large amount of the yellow precious metal is incorporated into them. The space industry also needs a certain amount of gold, which it uses to protect astronauts and satellites from harmful radioactive radiation. Medicine is another field where precious metals are used. There are diagnostic methods that use a small amount of radioactive gold, which can be easily monitored as it passes through the body. In addition, gold does not corrode and is an extremely reliable material in electronic equipment, therefore it is used in the manufacture of automatic life support devices, where it is very important that they function without malfunctions. According to some estimates, approximately 10% of the gold produced globally goes to industrial applications. Therefore, the growth of production and sales of electronic equipment is likely to contribute to the growth of precious metal prices.

4. Gold reserves of central banks

The activity of central banks is an even more important factor affecting the price of gold. With the aim of diversification, many countries that have excess capital invest money in bonds of other countries, but in case that country goes bankrupt or there are sanctions or war, there is a risk that they will not be able to access their capital. For this reason, in the last ten years, more and more central banks have decided to invest their excess capital in gold bullion. Namely, the possession of large gold reserves gives the state a greater degree of independence regarding the situation on foreign financial markets and relations with other states. Given that central banks have huge amounts of capital at their disposal, they often buy or sell hundreds of metric tons of the yellow precious metal, on the basis of which the price of gold can move significantly. One of the reasons why the Swiss franc is a strong and valued currency is precisely the large reserves of gold that Switzerland owns.

5. Speculative demand

Due to the increasing interest of the public in investing in precious metals, the financial industry has created different ways to trade and invest in metals. It is no longer rare that investment funds they invest part or all of their capital in gold bars or financial derivatives related to the price of gold, such as futures contracts, options or financial contracts for difference (Contract For Difference - CFD). Although the trading of financial derivatives on precious metals usually does not involve the transfer of bullion from one safe to another, such transactions also affect the price on the world market. Namely, if the person who owns physical gold sees that the price is the most important gold exchanges increased by a few percent, they will ask for a higher price for their products than before. On the other hand, a potential buyer of investment bullion will be ready for a higher price if he sees that the price rises to e.g. the London gold market, which is the largest in the world. In this way, all market participants adapt to the new price.

Regardless of whether it is the demand for physical gold bars, coins or financial contracts linked to the price of gold, there are regularities in the interest in buying gold, as well as in the movement of the price of this precious metal. The interest depends on the economic situation because gold, due to its limited quantity, offers protection against a bad economic situation, i.e. it serves as a safe haven in uncertain times.

6. The price of gold in crises

When the economy is in crisis or recession, there is a drop in trust in state and financial institutions. Namely, many companies and citizens in such situations are no longer able to return loans to banks. This increases the risk that banks will not be able to pay out savings to their depositors. Some of the bank's depositors decide to withdraw their money and purchase of investment gold, after which they no longer have to worry about whether their bank will go bankrupt or not. Considering the relatively stable amount of gold that is produced in the mines every year, the increased demand for this precious metal leads to an increase in the price. If some of the banks really go bankrupt, the interest in investing in precious metals will increase manifold. This is exactly what happened during the financial crisis that began in 2008. The more financial institutions fell into trouble, the more the price of gold rose, and by 2011 it had doubled and reached the highest level in history. It is to be expected that a similar scenario will be repeated in the next economic crisis, which will inevitably come sooner or later.

7. The effect of inflation on the price of gold

Besides the recession, there is another economic situation that has a big impact on the price of gold. This is a period in which the rate of inflation in the economy is high. Inflation means a general increase in the prices of products and services, i.e. a fall in the value of money (it is possible to buy fewer products for the same amount of money). High inflation occurs when economic growth is above average and citizens and companies are able to buy more products and services at higher and higher prices. If the central bank is unwilling or unable to tame the real inflation rate by raising interest rates, savings those citizens who do not want to spend lose their value, which makes them poorer. Because of this, some of them decide to buy gold, which leads to an increase in the price of this metal.

The economic situation can also lead to a medium-term drop in the price of gold. This happens when the economy comes out of recession, when confidence in the state and financial institutions returns. When the fear of bank bankruptcy subsides, citizens and investment funds decide to invest in precious metals less often, so the price of gold, silver, platinum and palladium falls. Another situation in which the price of gold falls is a period of relatively low inflation and high interest rates. Then saving in the bank and investing in bonds pays off, so part of the owners of bullion and gold coins decide to sell and invest their money.

Conclusion

All of the above factors affect the short-term and long-term fluctuations of gold prices, and it is very difficult to estimate where the price will be tomorrow or in a few weeks. Therefore, precious metals should be considered a long-term investment. Practice has shown that the periods when savings in the bank are more profitable than owning investment gold do not last long. In the long run, any paper currency without gold backing loses value, and many have completely failed. From approx 800 paper currencies, less than 200 of them have survived to this day, and each of them today has a much lower purchasing power than a few decades ago.

Periods of falling gold prices should be used for more favorable purchases gold bars or gold coins such as Austrian ducats Francis Joseph, which are also categorized as investment gold. In this way, long-term preservation of capital value and independence from financial institutions is achieved.

Author

Center of Gold

Notes:

1. Every reference on this page to "Centar Zlata" refers to the company Saiva doo
2. The texts on centarzlata.com serve exclusively to inform and educate about financial and precious metal markets and should not be considered as investment advice.