o3 BLOG | Investing
Gold Spot Price Explained — Spot Price vs Futures
If you’re new to gold investing and just starting your research, you will almost likely come across a number of words that describe the price of gold. While novice investors may feel that viewing the live gold price provides enough information about the gold market, it is important to understand the differences between gold spot and futures prices, how they are derived, and what each represents. While spot prices are time and specific to certain regions, the spot price of most securities or commodities, such as gold tends to be reasonably uniform in a global economy.
Spot Price vs Futures Price
- Spot or current market price of gold
The spot gold price is simply the current market price of gold at which traders can perform over-the-counter trades with each other. It is the cost of one troy ounce of gold, and the greater the price, the higher the demand.
- Gold futures prices
Gold futures are regulated public exchanges where gold (in the form of contracts) trades for its expected value at a later date or in the future. The future price represents that although the buyer is willing to buy and set now, the actual transaction will not occur today.
Futures traders most commonly use the time between the first contract and the final exchange to sell or buy back any contracts they have purchased. When the exchange (or settlement) day approaches, they will have to settle their earnings and losses.
The Principles of Spot Price
The term “spot price” most commonly refers to the price of commodity futures contracts, such as those for oil, wheat, or of course, gold. Hence stocks are continually trading at the spot price. You cash out after buying or selling a stock at the quoted price. The primary distinction between spot and futures prices is that spot prices are for immediate purchase and sale, whereas futures contracts postpone payment and delivery to predetermined future dates.
Contango is the term you’ll encounter when you see that the spot price is typically lower than the futures price. Contango is quite common in the case of commodities with high storage costs. On the other hand, backwardation is a situation in which the spot price exceeds the futures price.
In either case, it is expected that the futures price will eventually converge with the current market price.
Some factors that are used to determine the spot price of a commodity include expected changes that could affect supply and demand, the risk-free rate of return for the commodity holder, and transportation costs in relation to the contract’s maturity date. Futures contracts with longer maturities typically have higher storage costs than contracts with close expiration dates.
Spot prices are constantly changing. While the spot price of securities, commodities, or currency is essential for immediate buy-and-sell transactions, it has a more significant impact in large derivatives markets. Buyers and sellers of securities or commodities can use options, futures contracts, and other derivatives to lock in a specific price for a future time when they want to deliver or take possession of the underlying asset. Buyers and sellers can mitigate the risk posed by constantly fluctuating spot prices using derivatives.
Futures contracts are also an essential way for agricultural commodity producers to protect the value of their crops from price fluctuations.
What affects gold spot prices?
While gold investments are the primary driver of the gold market, people also purchase gold for various other uses, including use in the technology and medical industries and jewellery production. Many factors influence the spot price of gold, however, the following are key factors that are driving the value of gold right now.
Falling stock markets
In bearish markets, the stock market can significantly impact spot prices. If the stock market falls and investors lose confidence in their investments, there may be a trend toward increased gold sales, affecting the spot price.
Gold is the ultimate safe-haven asset, and historically, its value goes up during uncertain times, including economic crises, so geopolitical factors play a significant role. Economic and political unrest conditions are continuously contributing to the rising spot price of gold. (After all, gold is known as a “crisis commodity” for a reason.) Whether you’ve purchased gold bars or other forms of gold, a weaker economy will add value to your investment due to the increase in gold’s spot price.
Fluctuation in fiat currencies
As previously stated, even though gold is traded internationally, the spot price is usually expressed in US dollars. As a result, as the value of the dollar rises, gold becomes more expensive for those purchasing it abroad. This has the potential to lower the spot price. However, if the US dollar falls in value, foreign investors are more likely to buy, causing the spot price to rise again.
Other significant factors that can influence the spot gold price are:
- Jewelry demand
- Inflation or deflation
- Oil and Gas Prices
- Stock Market
- Rates of interest
- Equities Markets
You should now have a better understanding of the spot price of gold, which will help you if you’re considering investing in gold or gold stocks. As gold and gold investment products should make up at least 5-10 percent of your portfolio, it is helpful to know that the best time to buy is when spot prices are low. This is especially true if you’re using gold as a hedge against inflation or economic uncertainty, as the value of gold will inevitably increase during these times.
To learn more about other gold investment products and how O3 Mining can help strengthen your portfolio, reach out to our investors team today.
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