Classification of Gold as a Precious Metal
Rare metals have higher economic potential than common metals. Of the five precious metals, gold has the largest market. Some investors refer to gold as a monetary metal because of its use throughout the history as a form of currency. Gold as an asset has a high store of value because it maintains its value without degrading. The yellow metal is also used in industrial units because of its desirable properties such as being a good conductor, malleability, and resistance to corrosion.
What Is Spot Gold?
The price of gold which is available for immediate delivery is known as spot gold. The most commonly used prices for spot gold are transactions for bullion coins. Because bullion dealers are always taking active orders for gold transactions around the world, the market for spot gold consistently trades close to 24 hours a day. The greatest trading activity takes place in London, Hong Kong, New York, and Zurich.
The Gold Futures Market
Gold futures are exchange-traded, standardized contracts in which the buyer takes delivery of a specified quantity of gold from the seller against a predetermined price in the future. Market makers and gold producers hedge their investments against the volatilities in the market by using gold futures, and as an easy way to make quick returns based off of movements made in the market.
A gold futures contract is a legal agreement for delivery of the precious metal at an agreed price in the future. These contracts are used by hedgers to minimize their price risk on the sale of physical gold or an expected purchase. Hedgers also provide opportunities to speculators to take part in the market.
Two positions can be taken: A short position (sell) is for making delivery obligations, while a long position (buy) is for accepting delivery of physical gold. Most gold futures contracts are agreed prior to fulfillment of the delivery date. For instance, this happens when investors switch position from long to short before the delivery notice.
Gold Futures vs. Spot Gold
There is a difference between the price of gold futures and spot gold. Gold futures represent the due amount to be paid on a date of delivery in the future. The prices for gold futures are higher than spot gold, as is commonly observed in the market. This difference depends on several factors such as the market demand for immediate physical gold, interest rates, and how many days remain before the delivery contract date arrives. The Forward Rate is when the difference between the two is expressed in terms of annual percentage rates.
Spot Gold is normally exchanged by independent dealers while gold futures depend on centralized exchanges which are accessible by investors for almost 24 hours a day. The price for spot gold is completely left to the market and unregulated. In the case of gold futures, the prices are regulated by the Commodity of Futures Trading Commission (CFTC) and the National Futures Association (NFA).
Change (Change in the Price of Gold from Previous Close)
The difference between the new prices of gold compared to the previous close is known as the change. Previous close doesn’t always have to mean ‘previous day’, it mainly depends on the prior day’s value. In the case of New York, the market stops trading gold on weekdays from 5:00 PM until 6:00 PM This means we will use the last price quoted at the 5:00 PM mark as the close of that day. Change is then known as the difference between the new price and the old price at 5:00 PM. So if gold’s last price at 5:00 PM was $1,500 on February 16, then if it is 6:30 PM on February 17, and the price is $1,502, the change will be seen as +2.00. If the price of gold is $1,550 on February 18 at 5:00 PM, the new change is then +50.00 at the new time.
- Gold Futures Change
- This is known as the difference between the prices of gold from what it was at the end of the previous trading session. The weekday closing time is currently set at 2:00 PM Eastern Time.
- 30 Day Change
- The most common positions that can be quoted are: A short position (sell), which is the obligation to make delivery, while long position (buy) is the obligation to accept the delivery of gold. Change occurs when an investor changes positions prior to the delivery notice.
- 1 Year Change (1-YR CHG)
- This is unlike “previous close” because the difference in the price of gold is compared from one year ago today.
How the Price for Live Spot Gold is Calculated?
Gold has a benchmark price that is set every day. The most common entities that make use of these benchmarks include producer agreements and commercial contracts. The benchmarks are based on the spot market’s trading activity on decentralized OTC or over-the-counter markets.
OTC means that the prices are not set by formal exchanges and are negotiated privately by participants over the phone or electronically. While prices for spot gold are not regulated, financial institutions still play a valuable role by serving as market makers, providing an ask price and bids for the spot market.
Is Gold Always Traded 24/7? If Not, Is There A Set Open And Close?
Trading for gold takes place Sunday through Friday, 23 hours a day. It is common for OTC markets to overlap. No market actively trades between 5 PM and 6 PM ET. Because of the presence of OTC markets, there are no closing or opening prices for spot gold.
For large scale transactions, most gold traders will utilize the benchmark price from specific periods during the trading day.
- How Is Bid Price for Gold Decided?
- The highest price traders want to pay for one ounce of gold is known as bid price.
- What Is Gold’s Ask Price?
- The lowest price at which traders want to sell their one ounce of gold is known as ask price.
Understanding the Bid-Ask Spread for Gold
The big-ask spread is the difference between the bid and the ask price. Liquid markets such as silver and gold have narrow spreads in the market. Other precious metals such as palladium and platinum might have comparatively wider spreads to reflect more liquidity in the marketplace.
What Are Benchmark Prices for Gold?
There are no official opening and closing rates for silver or gold. As a result, traders are forced to peg their investment decisions on benchmark prices which are decided by different organizations during different times of the day. The technical lingo for benchmarks is also known as ‘fixings.’
The leading organization that maintains benchmarks for different precious metals is the London Bullion Market Association (LBMA). It governs prices for gold and silver, both of which are well-respected benchmarks used by dealers in the precious metals marketplace.
The most typical way to determine benchmark prices is through electronic auctions between participating financial hubs such as banks.
The London Gold Fix was responsible for setting the benchmark price for gold for almost 100 years. This price was decided after a closed physical auction took place between participating bullion banks. These auctions are held twice daily, first in the morning followed by a second in the afternoon in London, England.
The London Gold Fix finally closed its operations in 2015, placing the entire responsibility for determining the benchmark prices on the LBMA, and this resulted in the inception of the LBMA Gold Price in March 2015. It was seen as a necessity since many banks moved their base of operations away from the Bank of England. This also marked the shift in price matching mechanism away from the traditional physical auction to the now open electronic auctions among participating members.
Benchmark prices are fixed twice daily, first at 10:30 AM followed by 3:00 PM in the afternoon.
There are many participating banks that include Bank of Communications, Bank of China, Goldman Sachs International, China Construction Bank, ISBC Standard Bank, HSBC Bank USA NA, Morgan Stanley, JP Morgan, Standard Chartered, Societe Generale, UBS, Toronto Dominion Bank, and the Bank of Nova Scotia – ScotiaMocatta.
Shanghai Fix was first launched in 2016. It governs the benchmark prices in China, and is commonly known as the Shanghai Gold Benchmark price.
The process to determine price follows the same mechanism as London Gold Price. The prices are determined twice every day from a 1kg contract, although the predominant currency is Yuan instead of the U.S dollar. The benchmark can be found listed on the Shanghai Gold Exchange.
Are Prices for Gold the Same Across the Glove for Every Ounce?
A single ounce of gold will be similarly priced throughout the world. Large-scale transactions usually deal in US dollars because of its popularity. The value of gold heavily depends on the country’s currency and follows an inverse relationship. It is typical for stronger currencies to have a lower value of gold, while the opposite is true for weaker currencies.
The most frequently used unit to quote the prices for gold is the ounce per US dollar, although it is common for OTC markets to utilize other options depending on the situation.
What Are the Different Units of Gold?
The entire precious metals market in general quotes prices in troy ounces. Throughout history, countries have used different systems including the metric system to measure the weight of gold in grams, kilograms, and tonnes, and similar prefixes.
- 1 gram = 0.032 troy ounces. Link Gold price per gram.
- 1 kilogram = 32.151 troy ounces. Link Gold price per Kilo
- 1 tonne = 32,151.7 troy ounces
- 1 tola = 0.375 troy ounces
Another popular unit for weight measurement is Tael (1 tael = 1.203 troy ounces) and is commonly used in China. The tola is typically used to measure precious metals in South Asia.
Understanding the Difference Between One Ounce and One Troy Ounce
Troy ounce has been used historically by the Roman Empire to weigh and set prices for precious metals. Back then, all currencies were valued in terms of their equivalent weight in gold (or other precious metals). This process was later borrowed by the British Empire which tied one pound sterling to one troy pound weight in silver.
The US also used the troy ounce system in 1828. A troy ounce is bulkier than one imperial pounce by about 10 percent. A troy ounce is equivalent to 31.1 grams in weight, while an imperial ounce is equal to 28.35 grams.
Why US Dollars Are Used to Quote Prices for Gold
It is possible to buy gold in just about any currency, but the US dollar is the most popular choice because all fiat currencies are compared to it. This is because of the privileged position of the US as the world’s largest and most stable economy. The US dollar is also used to pay for all global imports and exports, so it makes financial sense to measure gold value according to this currency.
As a result, the dollar is widely considered as ‘reserve currency’, which means that it is used in international transactions by major institutions and governments across the world. The US dollar has become the defacto reserve currency since the start of the 20th century.
Why Is There a Difference Between the Prices of Gold and Silver?
The primary reason behind the large discrepancy in the value of gold and silver is due to their rarities. The usual market principles such as supply and demand play a pivotal role in determining the value of gold. Since gold is low in supply, it is also much harder to obtain than other metals.
Silver is much larger in supply and is easier to mine. In fact, silver is often obtained as a by-product of other metals during mining. Silver can be obtained at a rate of 0.07 parts per million. In contrast, the average occurrence rate of gold is 0.004 parts per million.
What Is the Gold to Silver Price Ratio?
The gold to silver ratio involves simple mathematical principles. It shows you how many kilograms or ounces of silver it would take to buy a single ounce of gold. If this ratio is at 50 to 1, it means that 50 ounces of silver would be required to obtain one ounce of gold.
This ratio is used by investors to decide if one of the metals is overvalued or undervalued and if it is a good time to sell or buy a particular metal.
A higher ratio means that silver is more favored. On the other hand, a lower ratio shows the exact opposite and usually means that now would be the best time to buy gold.
Mining of Gold
Gold is mined through various processes. Some of these methods include panning, placer mining, hard rock mining, dredging, by-product mining, and sluicing. Historians are unsure when and where gold was first mined, although the most conclusive evidence dates back to 7000 years ago.
The world’s largest gold mining companies by market cap are Newmont Mining, Barrick Gold, AngloGold Ashanti, and Newcrest mining. The highest producers of gold by quantity are Australia, South Africa, Russia, United States, China, Peru, and Canada.
The World Gold Council
The World Gold Council (or WGC for short) was first founded in 1987. It is the bullion industry’s market development organization which is largely responsible for developing innovative uses of gold, creating new demand, and bringing new products to the market. The organization is based in the UK and has a roster of several members including major gold mining companies.
There are 17 members of the organization, including Franco Nevada, Goldcorp, Barrick Gold, Silver Wheaton, Barrick Gold, Yamana Gold, Arnico Eagle, and others.
What Is the London Bullion Market Association?
The London Bullion Market Association (LBMA) is based in London. It is an internationally recognized trade association which largely represents the precious metals market including gold, platinum, silver, and palladium.
It has a long list of members including 140 companies that comprise of fabricators, traders, refiners, and more. The LBMA is not listed as an exchange, although it is responsible for determining benchmark prices for precious metals and PGMs. The Good Delivery List is published by the LBMA, a benchmark standard for the quality of gold and silver bars around the world.
What Are SPDR Gold Shares?
SPDR Gold Shares, short for GLD, is the largest gold-backed exchange-traded fund in the world. It is marketed and managed by the State Street Global Advisors. The market cap for GLD is $32.44 billion as of March 2019. The exchange-traded fund was first launched in November 2004. It originally appeared on the New York Stock Exchange under the name streetTRACKS Gold Shares.
This name was changed to SPDR Gold Shares later in May 2008. It trades on the NYSE Arca. GLD also trades on the Singapore Stock Exchange, Hong Kong Stock Exchange and the Tokyo Stock Exchange.
Is Buying a Single Gram of Gold Worth It?
Since gold is widely considered as a store of value and a monetary metal, any quantity of the yellow metal is worth it. A single gram of gold is a great way to diversify investment portfolios because of low barriers to entry. While small quantities of gold are affordable, there are other options of purchasing gold.
Some of these options include the APMEX-branded gold bars and Vacambi Mint gold bars. Gold can store value and adds one more layer of dimension to an investor’s portfolio.
Gold Has Numerous Applications
While gold has been the cornerstone of flourishing capitalistic markets, it has found numerous industrial uses such as the manufacture of electronic devices for GPD units, and personal use as jewelry. The latter is more popular in South Asian countries during the wedding season.
Gold has many desirable properties that are not easily found in other metals. It can conduct electricity but does not corrode. It is malleable and ductile, which means it can be sculpted and shaped.
Gold is utilized in the medical field and is best for crowns, bridges, fillings, and other orthodontic applications because of being chemically inert. Many patients are not allergic to the metal, making it ideal for treatments. Scientists use trace amounts of isotopes of gold in diagnosis and radiation treatments.
Due to its luster, gold is used in awards, statues, and crowds. It’s exceptional beauty and rarity has turned gold into a status symbol. The metal is used in everything from Olympic medals to Academy Awards, and holds high esteem throughout the world.
Buying Gold for Investment
Although no investment is completely devoid of risks, gold is one of the few assets that come with no strings attached. It is a great way to diversify your portfolio because prices have historically grown with the passage of time. Many people see gold as a stable form of investment because prices continue to lurch ahead even though bonds, stocks, and the US currency come crashing down.
Understanding the Dow to Gold Ratio
The Dow to gold ratio is a measure of the stock market in comparison to gold. The Dow gold ratio been observed to move downwards in the wake of panic associated with inflation and deflation. During the Great Depression, the Dow to gold ratio stood at 1:1. In January 1980, both the Dow Jones Industrials and gold prices sported a handle at 850, thus reaching 1:1 ratio.
The Dow to gold ratio has fluctuated from 16 to 20 between 2017 and 2018. Analysts believe that the ratio will fall in favor of gold during the next financial crisis while some believe that the ratio will return back to 1:1.
As an example, a 20,000 Dow and $20,000 gold price may seem impossible to achieve today but when panic spreads in the market, price extremes on either side could be reached, sometimes even simultaneously.
Can Gold Bullion Be Traced by the Government.
In many cases, dealers are not obligated to report the transaction to federal agencies or the IRS. The only exception is under the extremely rare condition when the transaction exceeds $10,000 in value and the payment is made in cash or using two or more instruments of cash (such as traveler’s check, money orders, or cashier’s check).
Understanding the Role of Central Banks on the Price of Gold.
Central banks are national banks that issue currencies and govern monetary policies in regards to their country. They also provide banking and financial services to the local government and helps regulate the commercial banking system.
The central bank has a lot of influence when it comes to money matters in the country. It directly controls the supply of money in the country to help stimulate the economy as needed. Some examples of central banks include the Federal Reserve in the United States, the European Central Bank (ECB), the Bank of England, Deutsche Bundesbank in Germany, and People’s Bank of China.
Central banks control the country’s reserves, including foreign exchange reserves which consist of foreign treasury bills, foreign banknotes, gold reserves, International Monetary Fund reserve positions, short- and long-term foreign government securities, and special drawing rights.
Factors That Influence the Gold Market.
Gold is one of the most important commodity markets in the world, with only crude oil being more valuable. Despite this, the bullion’s price doesn’t function on the basis of supply and demand. As is typical of most commodities, their prices are determined by expected demand and market supply.
Prices tend to rise when demand is high and inventories are low; however, in the case of gold, price are more heavily influenced by fluctuations in the currency and interest rates.
Some analysts like to think of gold as a currency instead of a commodity because of its intrinsic value. It is commonly believed that gold prices are driven by sentiment instead of traditional market factors. Gold has traditionally had an extremely inverse relationship with bond yields and the US dollar. Here’s the rule of thumb: when the dollar and interest rates go down, gold rates soar.
How is the Price of Gold Moved by Interest Rates?
Put simply, interest rates are the cost of borrowing money. Lower interest rates imply that it would be cheaper to use the country’s currency in order to borrow money. Interest rates tend to have a strong impact on economic growth. Central banks use it as an important tool to make decisions in regards to monetary policies.
It is common for central banks to decrease interest rates if they lead to better economic prospects. Lower interest rates result in increased consumption and investment by the local population. The disadvantage is the low interest rates decrease currency and bond yields, both of which positively influence gold prices.
Why Do Central Banks Use Quantitative Easing?
Quantitative Easing was first utilized by central banks in 2008 to address financial crisis. Japan is the first country to use this monetary policy tool. It saw widespread use after the former chair of the Federal Reserve, Ben Bernanke, introduced the concept in the US. Ben used Quantitative Easing (QE) to respond to the fall of Lehman Brothers, a major investment bank.
QE was used to purchase bad debt from major commercial banks in order to prevent Lehman Brother from defaulting, all the while increasing the supply of money. After the success of the move, other central banks have implanted QE, including the European Central Bank.
QE is not without its risks; one example is the rise in inflation if excessive money is created to purchase assets. It can fail if the money provided by the central bank fails to reach the average consumer or businesses alike.
What Are Safe Haven Assets?
Gold is a great way of storing wealth and has been used for this purpose since the ancient Egyptians. Despite having a history of being highly volatile, gold has traditionally performed well above expectations during tumultuous periods such as economic weakness, political disruptions, and financial turbulence.
In order to stabilize the economy, central banks create dovish monetary policies and introduce fiscal initiatives to influence the country’s currency and stimulate more demand for gold. It is commonly observed by investors to buy gold when they tend to lose confidence in their currency.
Tracing the First Time Gold Was Utilized as Currency
While the use of gold as a means of creating wealth dates back several thousands of years, historians have found archaeological evidence of gold coins being first used by King Croesus of Lydia in present day turkey or 550 BC. Gold was commonly known as electrum in its earliest days.
Names of Popular Gold Coins
All major manufacturers of gold print their own bullion coins. This product is a less risky means of storing physical gold. Only governments have the authority of producing gold coins with monetary face values, and even then, the face value is less than the coin’s intrinsic value. Private companies produce their own mints, also known as gold rounds.
All governments in the world, except for South Africa’s Krugerrand gold coin, have face values which are based on the current global price of gold.
Here are the top five gold coins that a person can invest in:
- American Eagle
- South African Krugerrand
- Vienna Philharmonic Coins
- British Britannia Coin
- Canadian Maple Leaf
When is the Price of Gold at its Strongest?
It is not easy to predict when gold prices will pick up pace. The bullion after all, is not dependent on traditional demand and supply factors, and is based entirely on market sentiments. Gold has been observed to perform well in an inflationary environment, periods of high uncertainty, and when the nation’s currency deflates.
Although gold has had its fair share of historical highs and lows, the yellow metal has traditionally followed an upward trajectory of growth. September is usually the strongest month for gold. This is because many jewelers stock their supply of gold in order to prepare for the upcoming holiday season.
January is the second strongest month for gold because of strong purchase patterns observed among eastern nations to prepare for the Lunar New Year. The worst performing months for gold have been March, April, and June – in order from bad to worst.