Determining the value of gold is not as straightforward as pricing assets. Gold is dealt with by the four types of firms in the industry. They are exploration or development, mining, consumers and recyclers. The 3 categories of consumers are industrial, jewellery producers and investors.
Gold prices are fixed on a daily basis. It is an agreement between the participants on the same side in the market to buy and sell gold at a fixed price or to maintain the market conditions to make the price stay at a certain level by controlling the supply and demand. Gold Fixing is done at London Bullion Market Association. The prices are set daily at 10:30 am GMT and 3pm GMT in US dollars.
Types of prices
There are 2 types of prices, spot price and futures price.
This is the current market price at which gold was bought or sold for immediate payment and delivery.
This is the price at which the participants in a futures contract agree to transact on the date of settlement.
Sources of pricing
The spot prices are sourced at:
This is a decentralized market of securities that is not listed in an exchange. The market participant’s trade by phone or fax instead of a physical trading floor. What acts as the spot price is the financial institutions that act as market makers and offer a bid or ask for a bid.
Large banks and bullion traders
Bullion traders and banks trade large volumes of gold for their clients. They buy and sell gold as part of trading process and thus resulting in a reliable source of spot pricing for gold.
Futures price is sourced on Exchanges. Gold futures are traded in the major exchanges around the world. These exchanges are the primary source of gold futures prices. The major gold exchanges are:
- TOCOM, Japan
- Shanghai Gold Exchange, China
- MCX, Mumbai
- DGCX, Dubai
- Istanbul Gold Exchange, Istanbul
- COMEX, New York
Closing price of Gold
There is no official closing price of gold. The firms use the following two options as the daily closing price:
- Fix price of gold
- Closing price calculated by data vendor. Data vendors use a specific documented methodology to determine the closing price.
Drivers to determine the gold rates
There are 6 fundamental drivers that help determine the gold rates. They are as follows:
- Price movements of other commodities and the demand for these commodities. Indirect pricing of the production cost.
- US and Global inflation which is driven by the rising money supply.
- Twin deficits that result from trade and growth imbalances against the US. This culminates a fear factor.
- Activities of the Central Bank such as money printing, gold purchases and sales.
- Real interest rates in the US, compared to inflation and wages. This culminates financial repression.
- Using the production or demand or inventory formula in the form of demand and supply.
What helps drive the price of gold, one of the most precious metals of the world is the demand for gold, the amount of gold reserves in the Central Bank, value of US dollar, desire to hold gold as a hedge against inflation and currency devaluation.
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