Gold and silver prices are a complicated topic when compared to other commodities like stocks and currencies. With the other commodities, the price is dependent on the information surrounding the commodity, its location or its supply coupled with the demand for it. Once this information is available, an investor in these commodities is able to understand how the price moves, but this principle is not really applicable when it comes to gold and silver. Because these metals are considered money, they are much more susceptible to speculation and manipulation.
About Precious Metals
In order to understand how gold and silver prices are set, it is a good idea to have a clear definition for precious metals and look at some basics of the industry surrounding these metals. First, there is the definition of precious metals, these are a naturally occurring metals that are rare and that have a high economic value.
Firms that deal with precious metals involve those that are handle exploration for these metals and development of mining operations as well as mining companies and consumers. Lastly, there are the recyclers of precious metals. The consumer group consists of three subsets, which are industries, the producers of jewelry and investors.
The Fixing
The fixing refers to a daily process wherein participants agree to sell their precious metals at a particular price. They may also make an agreement to ensure that market conditions keep prices at a certain level.
In 2015, the old method of fixing the price was discontinued and a new electronic method adopted for greater clarity. An auction for the gold price is held with anonymous bids and offers published onscreen in real time. The imbalance will be calculated with the price being updated until the buy and sell orders match up. Participants must be members of the London Bullion Market Association (LBMA), which is the body that governs the London gold market. The LBMA sets the price of gold and silver twice each business day. This price is set in US dollars.
The Difference Between Spot and Futures Prices
The spot price of an asset is its current market price at which it is purchased or sold for immediate payment and delivery. This is different from the futures price, which is the price that the two participants in the transaction agree to settle on at a future date.
Entities Responsible for Spot Prices
Over-the-counter (OTC) Markets
This is a decentralized securities market that is not listed on an exchange. Here, the participants make trades via phone, fax or electronic network.
Major Banks and Bullion Traders
These entities trade precious metals in high volume for their clients.
Entities Responsible for Futures Prices
Exchanges
Futures contracts for precious metals are traded in exchanges all over the world, making these exchanges reliable sources for precious metals futures prices.
The gold fix is important since in essence it sets the price of gold bullion, which means that it also sets the price of products related to gold. It should be noted that it does not set gold and silver prices for the whole day, just at a particular point in time.
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