Spot value is a commonly used standard for the value of an ounce of gold. Among small, individual, and retail buyers of the physical metal, it is the most common and most important. Despite the fact that purchases from, or deals to, large bullion brokers will often range from five percent above to five percent below spot, most use the spot value as the benchmark value for the commodity.
Spot value is the going rate for an immediate exchange of a commodity for cash. More often than not, the spot price of gold is lower than futures prices, reflecting the additional cost of storing the commodity until delivery and the impact of speculation. If the spot value of the asset is higher than the future price, this condition is called “backwardation,” and indicates doubts about future availability of the commodity on the spot markets.
Gold spot is an “over the counter” market. This means buyers and sellers are not matched by market producers at an exchange, yet rather meet up on their own terms. The major spot markets are in London, New York, and China with traded investments priced in the local currency. Each spot market has a list of acknowledged assayers (the individuals who determine value), and bullions with the market imprints are considered fungible for “good delivery.”
Like futures markets, however, spot markets trade in units of considerable sizes. The specifications differ, but individual bars vary in size from 100 to 400 ounces. At $800 per ounce, this means each bar is valued between $8,000 and $32,000. The minimum transaction restrictions can be as high as half a million dollars. These barriers to entry mean that relatively few large buyers can participate in the spot markets.
How Is Spot Value Determined?
The spot value reflects the market’s expectations of future price direction. The spot value of the commodity is set in commodity exchanges in New York and London.
What Are Commodities?
Commodities include natural food items such as corn, wheat, cattle or pigs and industrial raw materials such as crude oil, natural gas, copper or zinc. These things and scores of other products are traded in markets called commodity exchanges.
The commodity exchanges trade things for immediate delivery and payment in the spot market or for future delivery and payment. That is the “futures” market. Companies use the futures market to guarantee they have the products they will require at a known price. Speculators use the futures market to attempt to make a profit from price fluctuations; they do not intend to deliver or get the actual commodity. For spot, the most important exchanges are the New York Commodities Exchange, and the London Gold Exchange.
The daily spot price is based on orders to buy or sell the commodity from customers of the five worldwide investment banks that make up the membership of London Gold Market Fixing Ltd. To modify the spot price, representatives of the five banks convene by telephone conference call at 10:30 a.m. and 3 p.m. London time.
Daily price fixing continues until there is a price that satisfies both buyers and sellers. Generally, the entire process takes about half an hour, however it can last longer in times of economic turmoil. The time of the price fixing in London coincides with the opening of the financial markets in New York, so the London afternoon price is the starting point for the commodity trading on the Comex.
Traditionally, the value of the investment was seen to reflect monetary inflation, that is, inflation of the money supply. Since the fractional banking system under the Federal Reserve is inherently inflationary, the total amount of money in circulation has a tendency to expand, at times rather strongly.
Spot price and the Dollar
The value of the dollar reflects the soundness of the US economy. However, in a floating currency system where the dollar is only priced relative to other floating currencies, it is increasingly difficult to use currency movements as a measure of the economy. Still, precious metals are a hedge for large institutions against devaluation in the US dollar. As the value of the dollar goes down relative to other major currencies, the worth of the investment has a tendency to rise.
The only real immediate impact the investment has on the economy is in the mining sector, where individual companies may be highly sensitive to market fluctuation. Since miners make their profit from selling precious metals, their profit margins are largely determined by the prevailing market value of the commodity.
Gold is mainly used as a raw material in the jewelry, electronics, medicine and aviation industries. Any changes that affect those end markets could affect the price of the investment.
Events such as natural disasters, political unrest and financial instability all cause the price of the investment to rise or fall. Whenever investors lose confidence in traditional vehicles such as stocks, bonds or land, they can simply cash out and invest in the commodity. This helps them secure their assets during uncertain times. Such increases in demand send the value of the asset soaring.
Higher rates of inflation lead to elevated gold prices. The opposite is not always true, however. Deflation does not automatically lower the value of the asset.
There is a correlation between the price of oil and gold price. Rising oil prices cause an increase in inflation. That in turn prompts a surge in the price of the commodity. Political instability in oil-rich nations affects supply, which drives oil and the commodity’s prices higher.
Hoarding and Disposal
There is a finite quantity of the precious metal on the planet, which helps add to its value. However, if one or all investors choose to sell their investments at once, the excess quantity of the commodity accessible would drive down the price. On the other hand, if an investor purchased large quantities of the commodity and stored it, the absence of supply would increase the price.
The Perception of The commodity
The price of the precious metal will continue to follow certain trends so long as investors have confidence in the merits and value of the metal.
Gold that can be traded on the market originate from three main sources: mining, recycling and national banks. Mining is a relatively steady source, and opening of new mines serves mainly to replace the old ones, without increasing the worldwide supply.
Gold has industrial and scientific applications, accounting for around 10 percent of the worldwide demand. Two-thirds of worldwide supplies are used in the jewelry industry. The main factor on the demand side affecting the price of the precious metal is investment. Investing in the precious metal can mean buying physical gold or related investment items.