Where Do Spot Prices Come From?
For novices to the bullion investing community, it may well appear as if their new circle of acquaintances are speaking a foreign language. Like all specialized fields however, numismatology, the study of coins and money, requires a certain command of the nomenclature in order to thrive and survive. Those considering an active plunge into the bullion market have probably already stumbled against the term “spot price,” so understanding its meaning and importance is a great place to begin building your numismatic vocabulary.
Spot price is important because it denotes the price that you would pay if you were to buy your gold or silver bullion at that moment in time. As with all investment opportunities however, you want to move beyond mere definitions and find out where spot prices come from and what influences its daily market fluctuation.
The Relationship of Spot Prices to Future Prices
Whereas the spot price delineates the price of a commodity, in this case gold or silver bullion, if purchased or sold for immediate delivery, the futures market represents the price of those commodities at a specific time and place. Future contracts on commodities helps producers, sellers, and buyers a hedge against price risks moving forward, and can easily extend quite far into the future depending on the commodity. Crude oil futures, for instance, can extend for several years before expiring. When contracts are made for precious metals, the future contract price is based on the price of one ounce of either gold or silver.
When determining spot prices, traders look to the front-month, futures contract that exhibits the most volume. For instance, say the current spot price of gold is $1,500 as of August 23 with the price closely approximating August futures contracts, which represents the nearest monthly contract. Conversely, since this tabulation occurs at the end of the month, many traders will roll their contracts into October, which will then pick up substantial volume owing to the fact that the August trading cycle is winding down. As such, October’s volume will determine the spot prices of gold and silver.
Driving Changes in Spot Prices
Living in a global economy, it is potentially possible that events on the other side of the planet can rock the price of gold and roil the expectations of those looking at investment options in fine metals. Price drivers include, beyond the market forces of supply and demand, such things as geopolitical news and events, economic factors, governmental actions like the Federal Reserve System, and a myriad of other factors completely out of the investors control.
The bullion market is a constant state of flux, and buyers and sellers are in a constant state of price discovery as the myriad of factors continuously change the pricing landscape. Gold and silver bullion is traded on exchanges around the world from New York to Hong Kong to Zurich. The most well recognized of these exchanges is the New York COMEX (Commodities Exchange) where the spot price point is established from anticipated futures contracts.
Spot Prices: A Moving Target
If you are considering driving into the world of bullion investing, the spot price is the expected amount that you would pay for a single ounce of gold or silver precious metal slated for immediate delivery. Tied to the future contracts negotiated on the commodities exchanges, the savvy gold or silver investor has one eye on the current rate, and the other poised to look into the future to see what direction the market is moving towards when making a buying decision. Knowing what the spot price is, and where it comes from, you are in a position to make knowledgeable investing decisions.