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What’s Really Happening in the Gold Market Today?

Blog Dec 16, 2009

Gold just like any other market is subject to supply and demand factors. When supply is low and demand is high the price goes up and vice versa. To understand the gold market one must understand the term “spot” price.

Gold, mankind’s universal and timeless money and store of value, it is traded in many ways. The easiest and most direct way, and the way that governs millions of transactions every day, is cash payment followed by immediate delivery. In these transactions, the agreed upon benchmark price is called the “spot” price. Another term frequently used term for this type of transaction is the “cash” price. Many major gold brokers set a minimum number of ounces for a transaction at the spot price.

New buyers sometimes mistake a futures price for the spot price. They are not the same. A futures price is a market-generated quote for delivery of a fixed amount of gold (frequently 100 ounces) at a specific time in the future. This price will be higher than that moment’s spot (cash) price because 1) it must include fees for storage and delivery of the gold, and 2) finance charges because payment will not be made until the delivery date.

Another spot-related factor gold investors frequently neglect is transaction size. Ten transactions of 10 ounces require a lot more time, expense, and effort on the part of a broker than one transaction of 100 ounces. In the international world of gold trading, size matters. Most buyers of gold do not buy at the spot price because the size of the transaction is too small. Most buyers are paying spot plus a premium. When supply is low the premium increases. Today expect to pay higher than $100 above the spot price for 1 gold bullion coin.

What you see being reported on everyday is the spot price of gold, and on an average day around 24 million ounces trades hands. You may have noticed that gold has been rising for around 10 years. Two major factors have contributed to this rise, liquidity and fear. So much money has been printed by the FED that it has to go somewhere. This liquidity raised all ships for a while. Real estate, stocks and gold all rose together for a window of time this decade.

Then we saw the collapse of the banking system in 2008 which has created fear, and gold values rose rapidly over the last year, from $870 per ounce at the end of 2008 to where it stands today at $1,137. Fear of inflation or a collapsing dollar will continue to put upward pressure on gold prices. In short, fear is what is driving the gold market today.

Thumbnail Photo We believe that everyone deserves a properly developed strategy for financial safety.

Lynette Zang

Chief Market Analyst, ITM Trading

Sources & References In This Article

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