Understanding the Pricing Of Gold
Gold is a commodity that is traded all over the world. However, unlike most commodities, gold is not traded independently in different stock markets. Gold is primarily traded on COMEX, which was once part of the New York Mercantile Exchange but is now part of the Chicago based CME Group. The daily volume of gold transactions is estimated to be about $200 bullion. About 76% of that trades on the London Bullion Market. COMEX handles most of over the Founder transactions mainly from traders who are members of the LBMA (London Bullion Market Association). Even though the association is overseen by the Bank of England the spot price off gold is expressed in US Dollars. The price is the same all over, but if you are in Australia you can use the daily exchange to get gold price AUD.
There is an actual historical reason why the world’s physical trading of gold happens in London. It goes back to the 1933 Gold confiscation by the US president Roosevelt, who mad it illegal for Americans to own gold. People were required to exchange their gold for paper currency. So the market moved from the U.S to London. When the law was repealed in the 70s the gold market was firmly entrenched in London.
How does it work?
The LBMA sets a price everyday based gold futures which are contracts of delivery at a later point in the future. This price is adjusted to the trading on COMEX. Technically, what we call the spot price is the value of gold when it is delivered now. So when you are buying or selling gold coins at the spot price this is the price expectation of the future rather than the current price of physical trade. The price of gold does not necessarily fluctuate because of supply and demand, but that because of changing expectations in future pricing.
Mind the dealer’s premium
The spot price of gold is based on an ounce of fine gold that is 99.99% pure. The spot price does not reflect the other costs associated with dealer and distributor mark-ups. The gold buyer has to make a profit so, he marks up the gold to cover costs and ensure a good profit margin. Gold buyers usually buy from individuals at below the spot price.
So, if the price of an ounce of gold is $1320 per ounce this means the price of .999 percent of fine gold that is deliverable at the moment. So when you are selling a troy ounce you are most likely selling it for the spot price minus the buyer’s premium. You cannot expect to get paid 100% of the spot price, but whatever price you are quoted should not be less than 60%, especially when you are selling .999 gold.
Is the price of gold the same all over the world?
The price of gold is the same all over the world. It may be quoted in U.S dollars in America, but Australians can get gold price AUD rates. If the price of gold varied from one country to the next arbitrage opportunities would exist.
Because the price of gold is controlled from one place, trading happens 24 hours and like every other commodity it swings up and down. It can sometimes go through extended periods of minimal activity and quiet trading or shoot up unexpectedly. The price is driven by a lot of factors like demand and flow of gold through the market.
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