How Is Gold Spot Price Determined?

The spot price of gold is set daily in New York and London.
The spot price of gold is set daily in New York and London. (Image: lingots d'or image by dead_account from <a href=''></a>)

The spot price of gold or any other commodity is the price you would pay for immediate “on the spot” delivery of that commodity with immediate payment to the seller. With gold and other nonperishable commodities, says the investor education website, the spot price reflects the market’s expectations of future price direction. If the market expects higher future gold prices, the spot price goes up. But if the outlook for gold prices is gloomy, the spot price goes down. The spot price of gold is set in commodity exchanges in New York and London.

What Are Commodities?

Commodities include unprocessed agricultural products such as corn, wheat, cattle or hogs, industrial raw materials such as crude oil, natural gas, copper or zinc, and precious metals such as gold, silver or platinum. These items and scores of other commodities are traded in markets called commodity exchanges. There are commodity exchanges in all the major economic powerhouse countries.

Commodity Trading

The commodity exchanges trade commodities for immediate delivery and payment—the spot market—or for future delivery and payment at a specified time to come. That is the “futures” market. Companies use the futures market to ensure they have the commodities they will need at a known price. Speculators use the futures market to try to make a profit from price fluctuations; they don’t intend to deliver or receive the actual commodity. For gold spot pricing, says, the most important exchanges are the New York Commodities Exchange (Comex) and the London Gold Exchange.

Comex Spot Price

The Comex bases its daily spot price of gold on the price of gold futures. Comex gold futures are contracts to receive or deliver a 100-troy-oz. gold bar at the midpoint of a specified future month. One bar is one contract. The Comex sets its daily spot price by watching the price of gold for the future month for which the most contracts for 100-oz. gold bars were traded. This is called the “most active month.” Comex bases its daily spot price on the average price of gold futures for the most active month during the last two minutes of the trading day. Trading for the day stops at 1:30 p.m. U.S. Eastern time, so the spot price is based on the average price of gold futures for the most active month that were traded from 1:28 p.m. to 1:30 p.m. That amount is divided by 100 to get the daily Comex spot price per troy ounce.

London Spot Price

The London Gold Exchange fixes its daily gold spot price in a different fashion. According to the London exchange’s website, the daily spot price is based on orders to buy or sell gold from customers of the five global investment banks that make up the membership of London Gold Market Fixing Ltd. They are Barclays Capital, Deutsche Bank, Scotia Mocatta, HSBC and Societe Generale. To fix the daily spot gold price, representatives of the five banks convene by telephone conference call at 10:30 a.m. and 3 p.m. London time. One member is the chairman.

Opening Bid

The chairman announces an opening price per ounce, based on recent worldwide gold trades. That price is relayed to customers of the five banks. Based on orders from customers, each bank declares itself either a buyer or seller at that price, and the number of 400-oz. gold bars it wishes to trade. If the opening price produces only buyers or only sellers, or if the number of bars being sold and bought doesn’t balance, the chairman moves the price up or down until a balance is achieved between bars being bought and bars being sold. At that point, the chairman declares the price to be fixed.

Quick Process

Each daily fixing continues until there’s a price that satisfies both buyers and sellers. Normally, the whole process takes about a half-hour, but it can drag on longer in times of economic turmoil. The afternoon fixing in London coincides with the opening of the financial markets in New York, so the London afternoon price generally is the starting point for gold trading on the Comex.

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