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If you’re considering making an investment in gold for your future, you’ve probably got a variety of questions that need answers. Some of the biggest concerns new investors have relate directly to gold price and why it fluctuates.
After all, back in October 2002, the price of gold was around $275 per ounce. Just 10 years later, this same precious metal would cost over $1,700 for an ounce. With such a massive price change, it’s imperative that you know what you’re getting into.
The following guide on gold prices will help you understand fluctuations in value, why you may see different prices, and everything else you need to know to make an informed decision. With this information, you’ll be more prepared to start investing in gold.
How Is Gold Price Determined?
There are a variety of factors that can affect the value of gold. Unfortunately, it’s not always the economic foundations most expect that end up determining prices. With this precious metal constantly being mined, for instance, one might predict the value to decrease as supply increases.
In reality, this isn’t how it works with gold. One reason behind this is that gold often stays off the market — in storage vaults or jewelry cabinets — once it’s purchased by an investor. Another major factor is that analysts believe gold mining peaked years ago.
This means the supply of gold has remained relatively stable over the years. Because of this, it’s more beneficial to ask “Who sets gold prices?” rather than asking how the price gets determined. Answers could include the London Bullion Market Association (LBMA) or the ICE Benchmark Administration (IBA).
The former of these organizations owns the rights to the LBMA Gold Price electronic auction system. This is the process that replaced the long-used London Gold Fix, which conducted price fixing via teleconference. Of course, a single organization doesn’t decide gold prices.
In addition to a panel of chair members and an oversight committee, the following banks are the participating members as of May 2021:
- Bank of China
- Bank of Communications
- Citibank N.A. London Branch
- Coins ‘N’ Things
- Goldman Sachs
- HSBC Bank USA NA
- Industrial and Commercial Bank of China (ICBC)
- StoneX Financial Ltd
- Jane Street Global Trading LLC
- JP Morgan Chase Bank N.A. London Branch
- Koch Supply and Trading LP
- Marex Financial Limited
- Morgan Stanley
- Standard Chartered Bank
- The Toronto Dominion Bank
The LBMA process decides the value of gold, but it was the IBA that implemented the auction system. The IBA publishes a gold price twice every day — once at 10:30 a.m. and again at 3 p.m. local London time — and creates a worldwide benchmark.
Gold fixing by the IBA is actually only meant to set a price for members of the London bullion market to settle their contracts. Due to the international reach of the members, though, this is the standard recognized for most gold products throughout the world.
While the LBMA Gold Price only posts twice a day, prices of the precious metal adjust in real-time thanks to auction evaluations. Because of this, you could see these prices fluctuate every couple of seconds.
While they set the benchmark price in U.S. dollars (USD), the LBMA also provides prices in 16 additional currencies. The USD is the standard, though, so these prices only apply to contract settlement prices for LBMA members.
What Can Affect the Value of Gold?
The LBMA system is an informal process, but it’s recognized around the world. Of course, participant members don’t randomly select the current gold price. There are a variety of factors that can directly affect the value of the precious metal, and the LBMA accounts for each of these.
This guide previously touched on the unusual effect of supply in the gold market. It isn’t consumed like some other assets, so all mined gold throughout history is still floating around out there.
Since many people store this precious metal for years and much of what’s mined gets used for industrial, jewelry or medical purposes, the amount of gold available remains relatively steady. While this is going on, the number of people who may want to purchase gold increases every day.
This isn’t to say that supply plays no role. The worldwide supply can change based on certain factors unrelated to new mining. The gold price also increases as demand for the precious metal goes up, but larger factors can affect this as well.
Supply and demand combined with investor behavior essentially dictate the live gold price. Each of these can change based on the following factors:
Gold Futures Price
One need only look toward the LBMA when asking “What is the price of gold?,” but what’s the primary source of information used by this system? The answer is gold futures prices. These come from contracts that promise a specific amount of the precious metal delivered at a certain future date.
The banks, organizations and others creating these futures contracts consider a variety of circumstances. These include:
- Estimated transportation and storage costs
- Predictions of supply and demand
- The amount of risk on return
- Gold spot price
The spot price is important, and it’s likely the most common gold price you’ve encountered. This is the price of any precious metal that can currently be delivered immediately after purchase. Current futures contracts dictate this price, and futures are typically more valuable than the gold spot price.
If a remarkable demand for gold suddenly occurs, though, gold spot prices could exceed futures contract prices.
Central Banks
Another significant factor that affects the gold price is the actions of central banks. They have massive amounts of gold, and if they suddenly sell it all, the market could become flooded with the precious metal. Although this situation is very unlikely to happen, as central banks use gold as a safe store of value, it could play a major role in the price
Central Banks are typically buyers of gold rather than sellers and continue to add to their gold reserves during all stages of the economy. Individual & institutional investors are more active in their trading; buying & selling gold depending on it’s short to medium term price movement.
Speculation
The actions of central banks and governments can have a significant impact on the gold price. The most successful investors can speculate these actions and act accordingly. When this occurs, it can create movement in the value of gold as demand for the commodity changes.
Other Market Conditions
The factors described above play important roles in the value of gold. While understanding these can help you make better investment decisions, it’s important to remember that the gold price is dynamic.
Gold is one of the most liquid assets traded in the global market, therefore there are always dozens of factors affecting its price at the same time. Fortunately, gold has long been a historical store of value. This means the commodity will always have worth, providing investors peace of mind and protection towards their financial portfolio.
Spot Price vs. Bullion Price
You can find the spot gold price per ounce or the gold price per gram easily online, but you may discover you can’t purchase coins, bars and other items at this price. That’s because there is a difference between the spot price and what you’ll pay when making a purchase.
Several factors contribute to this:
- Transportation costs
- Storage and warehousing costs
- Refining and manufacturing
- Minting costs
- Hedging
- Dealer costs
Bringing gold to the public costs money. While the asset often gets sold at the spot price, this is typically only to specific entities. Only certain bullion dealers have the capital necessary to purchase gold directly from certain mints, and they frequently need to meet certain requirements to do this.
Gold items often have a long and costly journey before they get to you, so without the purchasing power of large dealers, most people will pay a premium for what they’re getting. Items also sometimes carry a higher value than their gold content, referred to as the item’s numismatic value. An 1822 Half Eagle coin, for instance, sold for $8.4 million in March 2021.
Factors to Consider Besides Gold Price
The gold price history, type of item and a variety of other factors can affect your investment as well. While the following issues don’t relate directly to the global value of gold, they are important to consider when you make a purchase.
- Weight: The weight of an item is not necessarily its weight in gold. A South African Krugerrand, for instance, is only 91.7 percent gold. Investors should make sure they are paying for the item’s precious metal value, and not it’s entire weight.
- Type: The type of gold you invest in will have a major effect on its value and liquidity. “Scrap gold” from eBay, for instance, will not be as valuable as bullion that comes as coins, bars and gold collectibles.
- Charts: Historical charts show you how gold has performed over the years and its current value. Checking these before making a purchase makes you a more informed investor.
- Trends: You can check the live gold price anytime to discover which direction gold is heading, but it’s also important to understand why. Seemingly unrelated trends may have a direct effect on price movement.
Start Investing in Gold Today!
There are many major influences that can affect the prevailing gold price, and it may seem difficult to understand them all. Fortunately, you don’t have to attend business school in order to make smart investments in this and other precious metals.
This guide has provided you with a foundational understanding of how the gold price gets determined and how to make the best investments. At Silver Gold Bull, you’ll find a variety of different gold investments along with the information you need to make smart purchases.
Get started by purchasing your first gold item or contact us today if you have questions.
