How Current Gold and Silver Prices Are Determined

The markets for precious metals are among the most active in the world. In fact, there is an old saying that the precious metals markets never sleep.

Gold and silver trade internationally on bourses and electronic exchanges in financial centers such as Chicago, New York, London, Paris, Zurich, Istanbul, Dubai, Mumbai, Hong Kong, Shanghai, and Sydney. This means that gold and silver are being actively traded 24 hours per day, because, somewhere in the world the market is open at all times.

The prices of gold and silver fluctuate constantly based upon activity in the marketplace. The fundamental supply and demand factors feed into the process. As stakeholders in the market buy and sell gold and silver, the price goes up and down.

Various sources of supply and demand combine to drive the price of precious metals.

On the demand side, demand for gold and silver comes from three primary sources:

  • Investment demand: individual, institutional and official (government) demand for the precious metals play a major role in the overall demand picture. This demand can take the form of everything from small bullion coins and bars to large positions in Exchange Traded Funds (ETFs) which take large positions in precious metals.
  • Industrial demand: gold and silver have a large variety of industrial uses due to their unique properties, such as electrical conductivity, malleability, durability and resistance to corrosion. This makes them useful for many applications in the high tech world of electronics and modern industrial fabrication.
  • Jewelry demand: gold and silver have been treasured for centuries for their beauty and luster and this has most often been expressed in the form of jewelry crafted by artisans through the years right up to today. Not only does jewelry demand play a major role in the market for precious metals, but it is important to understand that in many Oriental cultures, jewelry is used as a storehouse of value to keep and pass family wealth down for generations. In these cultures, jewelry demand is closely related to investment demand and is a key ingredient in determining the price in the marketplace.

The supply of precious metals is much less dynamic than the demand side.

The supply of metals comes from new mine supply and recycled scrap metal and above ground stocks. It is important to note that it is said that all of the gold ever mined would be able to fit into a cube less than 20 yards on each side.

The fact that gold and silver are difficult to obtain—they must be mined in often remote places in the world using expensive methods—is one reason why they remain relatively scarce and thus valuable. This value tends to motivate holders of gold and silver to keep them for the long-term, thus adding to their scarcity in the marketplace.

The supply and demand of gold and silver are often manifested in the futures markets, where buyers and sellers are able to trade a variety of commodities and financial derivatives. In the case of gold and silver, futures prices actually help to determine the commonly-watched “spot price” which is merely the price of a commodity available for immediate delivery (as opposed to a futures price which could conceivably reflect the price of that same commodity available for delivery months and months into the future).

The spot price is most commonly expressed in US dollars, but is also increasingly expressed in a variety of foreign currencies such as European euros, Japanese yen, Chinese yuan, and even Canadian, Australian and Hong Kong dollars.