A simple internet search for official gold prices in troy ounces will produce many results with multiple gold price feeds. Even when simultaneously comparing prices site by site, the gold prices can vary by up to 1% or even 2%, making it difficult to determine the best way to assign prices to gold bullion products. Rest assured, there is a logical explanation, and it comes down to understanding the difference between spot gold price and futures gold price.
The spot gold price is the current market price at which gold can be bought or sold in the LBMA Over The Counter (OTC) market for immediate delivery. The London Bullion Market Association’s (LBMA) daily gold and silver auctions are a global benchmark for pricing gold, and gold’s spot price reflects the live price of physical gold in the physical bullion marketplace at any given moment. Large market makers, also known as Direct Participants (DP), access these daily auctions, which officially price the metal when purchased in bulk, commercial quantities. Working alongside these DP’s, the Intercontinental Exchange (ICE) facilitates trade for smaller institutions and producers seeking direct access to investment-grade LBMA Good Delivery bars. ICE clears these contracts through ICE Clear U.S. and delivers the gold bars in London from unallocated vaults, which is known as “Loco London.”
On the other hand, the futures gold price is the agreed-upon price for a gold transaction that will settle at a specified future date. Gold futures are standardized contracts traded on centralized exchanges, where buyers and sellers commit to transact a certain amount of gold bullion at a predetermined price on a set, future date. The largest derivatives marketplace in the world, the CME Group, operates four futures exchanges, including COMEX, for trading gold futures. COMEX futures contracts are leveraged derivative products, typically settled in the form of cash, but traders in long positions may stand for and take physical delivery after contract settlement. And unlike OTC contracts that settle with immediate delivery, COMEX futures contracts settle at a future date. The GC1! is the “front month” contract, which is the nearest expiring futures contract. The GC2! is the first “back month” contract, which is the second expiring futures contract after the front month. The front-month futures contract captures a majority of trading volume, offering liquidity for all market participants.
Under normal conditions, or “contango,” the futures gold price will be higher than the spot price due to the “cost of carry” (storage, insurance, financing costs) for the physical commodity. “Backwardation” is less common and occurs when futures prices are lower than current spot prices due to a premium placed upon immediate delivery or expectations about future market conditions.
Gold has been a symbol of wealth and security for centuries. As a cornerstone of investment portfolios, it’s natural to wonder: What actually determines
Gold has been a symbol of wealth and security for centuries. As a cornerstone of investment portfolios, it’s natural to wonder: What actually determines
