Definition of Spot Gold

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Cory Kelly
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1 Definition of Spot Gold Definition of Spot Gold Spot gold is a commonly used standard for the value of an ounce of gold. Among small, individual and retail buyers of the physical metal, it is the most common and most important. Even though purchases from, or sales to, large bullion brokers will often range from five percent above to five percent below spot, most use the current spot price as the benchmark value for gold. Identification The spot price of gold is the going rate for a direct transfer of gold for cash. Most of the time, the spot price is lower than futures prices, reflecting the additional cost of storing the gold until delivery and the effect of speculation. If the spot price is higher than the future price, this condition is called "backwardation," and suggests doubts about future availability of gold on the spot markets. Features Gold spot is an "over the counter" market. This means buyers and sellers are not matched by market makers at an exchange, but rather come together on their own terms. The major spot markets are in London, New York, Zurich and China, with gold priced in the local currency. Each spot market has a list of accepted assayers (those who determine value), and gold bars with these marks are considered fungible for "good delivery." In addition to tracking prices of actual transactions continually, London sets two price "fixes" each trading day that are used globally as a reference value. Size Like futures markets, however, spot markets trade in units of considerable size. The specifications vary, but individual bars vary in size from 100 to 400 ounces. At $800 per ounce, this means each bar is between $8,000 and $32,000. Even so, minimum transaction restrictions can be as high as half a million dollars. These barriers to entry mean that relatively few large buyers can participate directly in the gold spot markets.

2 Significance Nevertheless, the official spot gold prices are used as the standard benchmark for individual transactions away from the official spot gold market. For a variety of reasons, these sales of gold can vary rather widely from the current spot price. The transactions are usually in significantly smaller quantities, or of non-standard purity or design, and some buyers or sellers can have profits priced into their bids or offers. Considerations The spot price of gold can fluctuate dramatically for many different reasons. Gold reacts strongly to changes in currency markets, and these can have an effect on the relative value between the different spot markets. Also, because the readily available supply of small bullion is not necessarily linked to the supply of investment bars on the spot market, tighter supply for individuals can keep prices significantly over spot. Top Reasons to Trade Gold Over the past ten years there has been a dramatic increase in interest in Gold as a form of investment and safekeeping. Many investors are just beginning to discover the ability to trade gold in the forex market. Prior to the 1990 s the forex market was primarily an exclusive investment vehicle that was dominated by large banks and financial institutions. However, today the ability to trade gold against other currencies and primarily the U.S. dollar is now available to retail investors. That means that you can login and trade gold on a 24 hour basis right from home with your own trading platform. There are a number of advantages to trading gold on a gold trading platform: Trade up to 100:1 Leverage The use of leverage (more buying power) means that you can increase your possible financial gain with a smaller initial risk of funds. For example if you were to open a trade with a risk of $1000 and you used 100:1 leverage, you would be able to trade $100,000 in value of gold through the forex account. Trade Anytime of the Day Trading gold in the forex market enables you to trade 24 hours a day during the weekdays between 5:00 pm Eastern time on Sunday to 5:00 pm Eastern time on

3 Friday. The forex market is an international market unlike traditional stock exchange markets which are limited to their specific business hours of trading. Massive Liquidity As a trader, one of the most important things to consider before entering any trade is will you be able to exit the trade. Every market trade in any investment requires a buyer and a seller. The forex market is the world s largest marketplace with over $3.2 trillion dollars of trading activity per day. That is good news for whenever you want to exit your gold trade. Trade up or down In gold market you can trade gold both up and down. Most people when trading only think in one direction and usually that direction is up. However, as a gold trader with a gold trading platform you have the ability of trading both for or against the price of gold. In other words if you think that the price of gold is going to go down rather than up you could buy the US dollar against the price of gold. A spot market The spot market is a public financial market, in which financial instruments or commodities are traded for immediate delivery. How Does the Value of Gold Get Determined? Supply and Demand Gold prices are driven primarily by the same principles that drive costs in all areas of the free market: supply and demand. However, when it comes to gold, there are a few nuances that make it just a bit different than most other commodities. One of these is the fact that gold is a non-perishable item that will never go bad and will never be thrown out or upgraded. Studies have shown that most of the gold that has been mined throughout history is still out there. A lot of gold's pricing has to do with changes in favor over the years with the general populace and professional investors. The Role of Central Banks Central banks hold the majority of the world's wealth when it comes to gold. They have these reserves as insurance against their clients' money. Because these banks

4 have such a large portion of the world's gold, much is dependent on their reserves and their individual policies when it comes to the cost of the gold itself. If a central bank in Europe decided to sell or expand a portion of its reserves, this can easily and quickly change the cost of gold. Factors That Often Raise the Price of Gold While a central bank selling off a portion of gold can only lower the cost, there are some factors that can substantially raise the price of gold. One such factor is bank failures. This is not a bank collapsing altogether, as there are federal insurance policies in place to prevent customers from losing their money in such a way, but rather when customers are suddenly facing lower investment returns and higher costs of portfolio management. At these times, if the problem is widespread, gold can easily go up in value. Another factor that can raise the price of gold is worldwide crisis, such as terrorism or war. Any time there is uncertainty in the socio-political climate, money markets are going to take a hit. This is when gold finds itself in demand, as people look for investments that will not lose their value. Where Does Gold Come From? Production: The top 5 gold producing countries are South Africa, USA, Australia, China and Peru. But despite the runaway price of gold, production has fallen steadily since One reason for this is the massively long lead time for exploration and production, which all but died off following the depressed prices of the 1990s. Also mining costs are high and new deposits hard to find, leading to fewer viable projects. Recycling: Yes, you may scoff, but melting down gangsters teeth and auntie s ear-rings is big business. This supply reacts to sudden changes in the price, but also to economic circumstances; an economic downturn will see a rise in recycled jewelery. Central Banks: Historically the world s central banks held large stocks of gold, which were used to back their currency. Over the past few years they've been ongoing sellers, but more recently steady buying by Russia and China have turned central banks into net purchasers. Separately the IMF continues to sell gold to raise funds. Central bank sales are regulated so as not to undermine the market price. Where Does It Go? There are 3 main sources of demand:

5 Jewelery-this accounts for just over 50% of demand Industry and dentistry- around 11% Investment- 38% and rising What tools do I need to trade gold? A computer or mobile phone with reliable high speed connection to the Internet, a reasonable grubstake, and real time information are all that are needed to begin trading gold. You do not even need the grubstake to practice on; a free demo account will be offered.

The Beginner s Guide to. Investing in Precious Metals

The Beginner s Guide to. Investing in Precious Metals The Beginner s Guide to Investing in Precious Metals Since the beginning of time, gold and silver have been recognized as valuable and a sign of wealth. Even today, precious metals hold a strong place