Why is the gold spot price important and how does it affect your investment?

Wednesday 13 July 2022

Dear Investor,

Gold spot price

It’s a tool that many gold investors will never have to use. So, why is the gold spot price important and how does it affect your investment?

As the benchmark price for gold, the spot price influences every gold investment, from bullion and coins to jewellery.

We explore the dynamics of the gold spot market and its relevance to everyday investors.

Understanding the gold spot price

The gold spot price is simply the price at which you can buy or sell gold at this moment, for delivery in 2 business days.

It relates to gold as a commodity, after it has been mined and refined, and reflects gold delivered into London in the form of 400-ounce bars, the Loco London deliverable standard.

Gold products carry a higher price, reflecting the additional costs of fabrication. The spot gold price is typically quoted in US dollars per ounce but can be quoted in other weights and currencies.

On our website, ABC Bullion quotes the gold spot price per ounce in US, Australian, HKD and Chinese yuan.

How the spot price is determined

ABC Bullion’s Global Head of Institutional Markets, Nicholas Frappell explains that the spot price has traditionally been determined by approved market makers, usually making quotes to large institutions.

They provide buy and sell quotes to other market makers, banks, hedge funds, mining companies and other large market participants.

“The process of negotiating a buy or sell order takes about a few moments,” he explains. “It needs to happen that quickly because the gold price is moving every second, leaving the market maker potentially exposed. It’s a rapid and continuous process.”

Increasingly, this process is giving way to electronic platforms, in the same way that floor trading on the stock market has become a thing of the past. Now, computer programs can aggregate and match thousands of orders at the same price.

Frappell points out that the spot price also has a correlation to movements in gold futures, which provide another vehicle for price discovery.

Why the spot price matters

The emergence of electronic platforms has created opportunities for more investors to trade gold as a commodity. However, most gold investors prefer to hold physical gold in the form of gold bars, coins or jewellery.

Frappell says the gold spot price is an important measure regardless of how you structure your investment. Perhaps the most important element of the spot price is that it provides a price benchmark for gold investors all over the world, giving them confidence in the market.

“An investor buying physical gold has got to have an underlying price,” says Frappell.

“There’s got to be some process of price discovery that says this is the accepted price for gold.

“If you buy a half kilogram bar of gold, it should be reflective of the spot price plus the manufacturing cost of making that bar.”

Movements in the spot price can also help identify trends in the gold market so investors can manage their portfolios accordingly.

Factors affecting the gold market

There are many factors driving the gold market. Bullion is often seen as a safe-haven investment in times of economic uncertainty.

The spot price first reached US$1,000 an ounce in March 2008 during the global financial crisis and hit an all-time high of US$2,075 in August 2020 at the height of the COVID-19 pandemic. It again rose above $2,000 an ounce in March this year after the United States threatened an embargo on Russian oil after the invasion of Ukraine.

Investing in gold can provide a hedge against financial risk in challenging periods, including downturns in currency, shares, bonds and real estate.

Inflation, interest rates and monetary policy can also have a significant effect on the gold spot price. Since March, the spot price has fallen back to levels above the psychological barrier of $1,800 an ounce.

Frappell says the drop in recent months has largely been in response to central banks around the world tightening monetary policy.

“Higher real interest rates generally mean lower gold prices and vice versa,” he says.

He also notes an increase in short positions and a corresponding decrease in long positions in gold since April.

“It’s only one snapshot but it’s suggesting people aren’t as enthusiastic about gold at the moment,” he says.

Want to know more?

Gold has played a key role in the evolution of the world’s financial system, with the first gold coins struck in Turkey around 550 BC.

As Australasia’s largest independent bullion dealer, with 50 years’ trading history and full London Bullion Market Association (LBMA) accreditation, ABC Bullion is equipped to assist you with your gold investment needs.

It takes only a minute to set up an account with us and our expert team is ready assist you with any questions.

Warm regards,

The ABC Bullion Team