Whether you are going to sell or trade precious metals, you must know and understand how their prices are determined. Remember that setting the prices of precious metals is not the same as determining the value of assets like equities or fixed income, nor it is easy.
In this gallery, we are going to provide you with the basic information you need to know how precious metals prices are set.
What makes a metal precious?
Metal is considered precious if it is rare, naturally-occurring, and has an important economic value. Most precious metals emit a high lustre. Examples of precious metals include (but are not limited to): gold, silver, platinum, palladium, ruthenium, rhodium, and iridium.
The businesses that are known to deal with precious metals are:
- Firms that deal with exploration and development of precious metals
- Mining companies
- Consumers (industrial companies, jewelry companies, and investors)
Fixing is a daily transaction that involves two parties on the same side in the market. Their intention is either to buy or sell precious metals in a set price or to keep market conditions under control in such a way that the prices stay at pretty much the same level. Controlling supply and demand is one of such ways.
During the proceedings, there are changes in orders as prices of the precious metals fluctuate. The price is considered “fixed” when the orders are finally fulfilled or satisfied.
The London Gold Fix
The London Gold Fix (or London Fix or simply Gold Fix) is a procedure in which the price of gold is determined on the London market by the five members of the London Gold Pool. This “fix” also applies to other precious metals like silver, platinum, and palladium.
Informally speaking, the London Fix has been recognized as a benchmark for pricing most of the precious metals and their products as well as derivatives on several markets all over the world.
The fixing of gold occurs twice daily (at 10:30 AM and at 3:00 PM, London time) by five members of the London Gold Market Fixing and silver is fixed daily at noon by three members of the London Silver Market Fixing.
Sources of Pricing
The current market price of an asset or security at which it is bought or sold for immediate payment and delivery, at a particular place and time.
Over-the-counter (OTC) market – also known as “off-exchange trading,” is a decentralized market of securities that are not governed by an exchange. Parties involved in this market do remote transactions through phone, fax, or electronic network as opposed to doing transactions from the actual trading floor. Major Banks and bullion traders are also a good source for spot pricing as they trade large volumes of precious for clients through buy and sell…
The price at which two parties are involved in a futures contract agree to carry out transactions on the settlement date is known as the Futures Price. This is also the foundation for the LBMA Gold price and not only gold but other metal prices are determined here. Futures Price method is affected by several factors such as the changes predicted in the demand and supply of gold, its spot price, the cost of transportation and storage and the risk-free rate of return. At current, the worlds largest gold futures trading exchange is COMEX, with offices in more than 150 countries.
Some of the other major precious metals exchanges include TOCOM in Japan, Shanghai Gold Express in China, MCX in Mumbai (India), and DCGX in Dubai (UAE) and Istanbul Gold Exchange in Istanbul (Turkey).
Unlike stocks which are listed on stock markets (official closing hours and closing prices), precious metals bear no “official closing price.” It’s because they are traded in several OTC markets across the globe, 24 hours a day.
Some businesses require a daily “closing price” as part of their day-to-day operations. In order to achieve that, they have to choose two options:
- Use the fixed price for the precious metal
- Use the “closing price” determined by the data vendor.
Official Trading Hours
Multiple OTC markets across the globe trade precious metals. Trading officially begins on Sunday at 6:00 pm EST (the opening of Japan markets) and officially ends on Friday at 4:30 EST (the closing of the US markets).
Apart from the LMBA pricing method, there are several other factors that influence the gold prices; the important factors are as below:
1. Market Conditions
Market conditions mean the political and economic health and stability of a nation. Gold Prices are many at times highly affected by these conditions. At the time of recession, gold prices are most likely raised while during political and economic disorder, the prices of gold usually fall and people tend to buy gold as an asset.
2. Demand and Supply
This is one of the fundamental rules and factors that affect the pricing of everything and anything, including gold. When gold is in high demand and there is less of its supply, the prices will rise and when there is high of supply, the prices will decrease for more people to purchase. Analysts also say that the gold’s supply was in peak some years ago and supply now onwards will only fall, continuing the gold greater in demand.
3. Currency Depreciation
Due to inflation and failed monetary policy, a country’s currency may lose its value as compared to other foreign currencies. In such a situation, the investors divert from cash to gold and make their savings by holding/purchasing gold, hence affecting the gold demand and prices.
Gold is a precious and attractive gain not only for investors but also several countries where it is bought for use in weddings such as India and Pakistan. Whether you want to buy gold for personal use or for investment, understanding the gold market will always be helpful for you to make a wiser decision.