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You may be curious as to how the gold market fluctuates or how its price is determined. Or how a spot price works in relation to the futures market. So, what do spot prices mean for gold, and how does it work?
Buying gold is an excellent option for investing. It can be volatile in the short term, but it has always maintained its value over the long term. There are several ways to invest in gold, such as bullion, coins, jewelry, stocks, and gold ETFs and mutual funds. There are pros and cons to investing in physical gold, but today we will focus on gold spot prices and the best time to buy gold.
There is confusion surrounding the spot pricing of gold and how it’s regulated. We understand you want to invest wisely and at a price that works for you, so here we will break down what spot pricing for gold means and how it works.
Defining the Spot Price of Gold
The spot price for gold is the current price being sold on the day and time of the transaction, although individuals can’t buy gold at a spot price. However, you can try to buy near its spot price. Gold prices are determined per ounce and on quality as well. Some get spot prices confused with futures prices.
The specific term for an ounce of gold is the troy ounce. A single troy ounce equates to 31.1034768 grams, though you may not see the word “troy” written out when purchasing it; for example, it’s simply written $/oz.
Many factors can affect the spot price of gold, such as the value of a currency, speculations of the market, gold futures fluctuating, current global events, and the demand for gold. Spot prices update each minute across the world and will update in accordance with the given time zone. Major world markets like China, New York, and London will see these changes as they come.
However, these spot prices are not affected by product or shipping costs, nor do they depend on specific or rare gold items. There is no consideration when it comes to the critical aspects in producing gold, like manufacturing, design, transportation, etc. While you can watch the spot price of gold, there’s no way you can purchase it at the spot price.
Spot Price Determination
How are spot prices determined? Surprisingly enough, it depends on the futures contract with the highest volume. It can be in the current month or a few months ahead.
For a hypothetical example, let’s say the cost of apples is 10 cents per ounce as of today. If we were to examine the futures contract for apples, the cost of apples per ounce might be about the same price in the current month of April. If we were to look at the futures for June, we see the cost at about the same as April. A few months later, in August, we see that the volume is the highest, so this month would determine the spot price. It seems that in August, there’s more activity, so therefore, it would be considered the spot month.
There are two terms you should be familiar with when dealing with futures and spot prices:
- Contango is the lowering of futures prices to meet low spot prices
- Backwardation is the rising of futures prices to meet high spot prices
Notably, backwardation leans towards a net-long position because prices aim to raise the value to reach their spot price when the contract grows close to expiring. Opposite of this would be contango, which favors shorter positions because the futures decline in their value when the contract grows close to expiring. The futures markets are liable to fluctuate over time, leading to temporary or long-term contango periods or backwardation. When trading on the stock market, it’s essential to look at futures prices to evaluate the spot price.
What does determining the spot price mean for gold?
Determining the spot price for gold doesn’t mean you can purchase it for the amount, but it helps you project the market trends for gold’s value, providing long-term investment opportunities. After multiples months of any given year, you can see how the market fluctuates from contango to backwardation, helping you establish the right time to buy. In essence, the spot price doesn’t directly affect the investor; it affects the accumulation of market trends and fluctuations throughout a given time.
While you can always check the U.S. Money Reserve for gold spot prices to see how they change, remember, you can’t buy gold at a spot price. However, you can buy it close to the amount of the spot price. For more information, check out the price chart for gold.
Changes in Spot Price
As mentioned above, there are many reasons for the spot price of gold to change or the fluctuation of contango and backwardation in futures. But what exactly changes the spot price of gold?
Gold prices can vary for more specific global reasons, like the economy, activity in the U.S. Federal Reserve, worldwide political news, gas and oil prices, and supply and demand. Just like with every commodity around the world, gold experiences stagnant periods of slight movement or periods of more movement and activity in the market.
Supply and demand control worldwide markets for gold and other precious metals. Every minute, the spot prices for gold change in the market, causing investors to keep track of their gold assets each day to see if they’re in a period of activity or stagnation. Some of the most known stock markets in the world are the New York Stock Exchange (NYSE), New York COMEX, among other regions such as Hong Kong, London, and Zurich. COMEX is the primary market for precious metals, and spot gold prices come from futures traded on COMEX.
What Should You Look For When Investing in Gold?
Once you understand how spot prices of gold work, how can you determine the best route to purchasing it? Should you observe the long-term directions gold’s been going in or the short-term, spot price trends? The truth is you should be following both.
While you can’t purchase gold from its spot value, you can check with the U.S. Money Reserve or the stock market to find how the spot prices fluctuate. If you’re looking to trade gold, check with the spot prices to see when your next move is. Even though you can’t buy from the spot price, it’s crucial to consider how these prices fluctuate on a daily basis to understand their market value. Don’t let the fluctuation in spot prices intimidate you when investing in precious metals, such as gold.
If you’re looking to invest in gold for the sake of investment growth, it’s best to observe the long-term trend in gold. Although you should always consider the spot pricing of gold, keeping up with the long-term market trends will give you a better feel of the market history. Over time, gold prices will fluctuate just as other commodities do on the market.
It’s important to understand that the value of gold will experience long and short-term effects from the market, but this doesn’t mean you shouldn’t invest. When looking to invest in gold for value growth, it’s critical to observe the overall market trends instead of daily spot prices. These long-term market trends will give you a good idea of how your investment will change over time.
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