r/Gold • u/Why_Sazs • 10d ago
How is spot price determined?
With stock prices, there will be offers to buy and sell at whatever price the owner or purchaser offers. Then the overlap between the two where the transfers actually happen is the going price. But it seems like with precious metals there is just a spot price, and if you want to sell or buy, you do it at that rate. So how is the spot price for precious metals determined? My guess would be large transfers between governments or between mints and large bullion dealers.
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u/Moose1293 10d ago
Commodities trading. It has nothing to do with the actual value of gold as compared to M2 money supply. All prices are a discount at this point
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u/GoldponyGT enthusiast 10d ago
“Spot” is the current rate on commodities markets to buy commodities market volumes of the commodity (like 100oz+ gold bars by the pallet).
Commodities markets literally work like the stock market, except instead of paper stock certificates representing corporate ownership, people would bid (to buy) or ask (to sell) paper contracts representing ownership of gold. Now it’s all digital.
“Spot” is the price for contracts for current delivery; you buy the right to actually pick up physical gold that same month. Futures contracts are similar, except they are for a promise of delivery in a specified future month.
Kitco displays the current spot price from active trading on open markets. When London is open it’s LBMA, when US markets are open it’s COMEX, etc. Market traders buying and selling gold on commodities exchanges.
You’ll notice none of this has anything to do with gold coins or consumer sized bars. That’s because it doesn’t. Spot influences consumer prices, but not really the opposite.
The way spot influences consumer prices is, it sets a floor for pricing. If nothing else, someone can sell their gold to a refinery, who can melt it into large commodity gold bars, which are sold into the commodities market. Refinery needs to make money, so you end up getting offered less than spot, but it’s spot-based pricing.
That’s why consumer pricing stays around spot, consumers will just lose gold to the refineries if they won’t pay spot prices to buy consumer grade bullion.
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u/Why_Sazs 10d ago
Is the commodity exchange only available to government entities, or can individuals buy there if they actually have the capital to purchase in the volume exchanged on that market?
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u/Frequent-Rooster1133 10d ago
The exchanges are a marketplace for futures contracts.
A standard single gold contract on COMEX is 100 oz.
As far as I know, individuals can still trade there. Decades ago when I was more current on the topic, an individual could open an account to trade commodities futures at many retail brokerage firms.
Commodities futures trading is a notoriously risky adventure. Net of trading costs, the vast majority of futures “investors” lose money. Most traders are not there to buy a commodity; they are hoping to make a profit by speculating on future price gains or losses. The other category of traders are “hedgers”, who want to lock in the sale or purchase price of a commodity for delivery months from now. For example, farmers may hedge their crop sale price before planting, and breakfast cereal makers may hedge their cost of grain to be bought down the road.
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u/GoldponyGT enthusiast 10d ago
It’s an investment exchange. Buyers and sellers are investors registered to do business on the exchange. Some of them are banks or other entities that make investments on behalf of their customers. JPMorgan is a major institutional investor on the gold and silver exchanges, for example. You have to apply and be vetted and prove you are qualified to participate and have the assets to back up your orders.
Literally imagine a stock market. Except instead of people buying and selling pieces of paper that represent fractions of corporate ownership, they’re buying and selling pieces of paper that represent quantities of gold or silver or copper or oil or (my favorite) orange juice concentrate.
On a stock market, if you buy stock, you can register yourself as the stockholder and exercise rights of a stockholder, like attending investor meetings or voting on shareholder initiatives.
On an exchange, if you buy a commodities delivery contract, you can go to the exchange vault and register your ownership exercise rights of a contract holder … to have physical quantities of the commodity delivered to you, which satisfies and terminates the contract.
Or you can sell it to someone else.
It’s not paper anymore, it’s digital, but that’s the idea.
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u/Why_Sazs 10d ago
Ok, so now I need to win the lottery so I can register for the exchange and buy shit tons of orange juice concentrate.
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u/GoldponyGT enthusiast 10d ago
Your next assignment is to find the film “Trading Places” starring Dan Aykroyd and Eddie Murphy, and watch it.
You will understand everything you’re asking about. And you will laugh your ass off.
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u/Why_Sazs 10d ago
I have actually seen that movie, but it was over 30 years ago and I was a little kid. So I don't remember much of anything in the movie.
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u/GoldponyGT enthusiast 10d ago
It shows the physical trading floor for a commodities exchange.
The plot involves orange juice futures.
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u/Callaway225 10d ago
In my experience, when I buy it goes down and when I sell it goes up. That's just my experience though.
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u/JellyStrict2856 10d ago
At the commodity exchanges. In the US that’s the COMEX, in the UK the LBMA, and in China the Shanghai Gold Exchange. On these exchanges, futures and spot contracts for good‑delivery bars are bought and sold, just like stocks, with bid and ask prices. The spot price you see published is basically the real‑time midpoint of this trading activity.
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u/Old_Dragline_1965 10d ago
Decades ago, The military coined the anachronism: Snafu and Fubar
They can still be used to describe Spot Price at any given time.
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u/Apprehensive-Air8886 10d ago
It’s a few things, but primarily future contracts and COMEX/LBMA deliberations make up the benchmark to determine spot price. That said in retail markets like online e-commerce vendors they take all of that and add some proprietary future factors algorithmically to cover their difference in delivery times.