What Determines the Spot Price of Gold?

The spot price of gold is determined by a discovery process of supply and demand. Gold market participants include buyers and sellers. Bid and ask prices are discovered within the over-the-counter (OTC) cash market as well as the commodity futures market. The spot price of gold is then posted on the gold exchanges.

The OTC segment of the gold market accounts for almost all of the physical exchange of gold. The benchmark spot price of gold is the London fix. This is the most widely used indicator of the spot price of gold in the OTC cash market. The London fix occurs twice daily. The AM fix and the PM fix involve gold dealers from London's five biggest bullion banks.

This process involves an announcement by the gold fix chairman of the current estimated spot price of gold. The participating banks determine the quantity of buyers and sellers they have at that price. If there are more buyers than sellers, the chairman will adjust the spot price upward. The spot price is adjusted downward if there are more sellers. This process is continued until an equilibrium is achieved, and this becomes the new spot price of gold.

The commodity futures segment of the gold market is the way that nearly all retail gold traders participate in the market. The spot futures price of gold is determined by supply and demand in the futures contract market. Gold futures spot prices are constantly changing because of the net effect of buyers and sellers opening and closing positions. These constant price fluctuations are applicable to the futures market more so than the OTC cash market.

The spot price of gold is influenced by many factors. Large gold traders such as central banks and gold mining companies exert upward and downward pressure on spot gold prices. Gold traders of this magnitude are able to adjust gold prices up or down to their advantage.

Supply and demand dynamics influence the spot price of gold. Supply flows include mine production, central bank sales and recycled gold. Demand flows include industrial, investment, central bank purchases and jewelry. Supply and demand for gold are widely dispersed around the world.

Buying gold at the spot price might not be possible for the retail investor. Taking delivery in the futures market is extremely rare. Tremendous leverage is used in the futures market. Taking delivery of one gold futures contract would require the investor to accept delivery of 100 troy ounces of gold — the equivalent of 6.9 pounds (3.1 kg) — which is the standard size of one futures contract.

The spot price of gold is primarily used for investing and speculating in commodity futures contracts. These contracts can be closed out at any time before expiration, resulting in a profit or loss. If delivery is taken, it usually is in the form of a certificate of ownership. The physical gold normally remains in a secure vault.