Spot price may be defined as the price at which transactions and delivery can be executed for a commodity in a given time. Unlike futures or forward contracts, spot prices present valuations at a given moment in time. It is an immediate price with settlement in two business days.
What is Spot Price
The spot price for gold relates to the price of an ounce of gold. Similarly, the spot price for silver relates to the price of an ounce of silver. The spot price for gold should not be confused with the price of physical bullion or with the LBMA Gold Price.
The spot price of gold is determined using forward month’s future contract with the highest volume. Gold futures are contracts for the delivery of physical gold at a specific time in the future. More than one month may be used to determine spot prices.
As an example, if November has less volume than December futures contracts, December is likely to have a greater influence on the spot price as more trading activity has taken place in that month. Traders would refer to December as “the spot month”.
How to Determine Spot Price
Data from commodity exchanges is used to determine the spot price for gold. Spot gold prices can also be influenced by geopolitical events, economic data, actions by federal reserve, and other political factors.
Experts suggest that all commodities are in a constant state of price discovery. The clock is always ticking as the price discovery is always taking place.
Each day, the LBMA sets a price called the London fix. The price is based on the prices of trades in gold futures. The London fix price gets adjusted to the trading in gold futures on COMEX as trading activity shifts to New York from London.
Effects on Transactions
While spot prices play a significant role in immediate purchase and sale transactions, it plays a more significant role in influencing the derivatives markets where traders look to target specific prices at a future time. Buyers and sellers use derivatives to reduce the risks associated with fluctuations in spot prices.
When considering spot prices, investors should be cognizant with the implications of currency. A hundred years ago, gold could be sold for $20 per ounce. Now, it can be sold for over $1,000 per ounce. Despite this seemingly huge move, the prices are not much different in real terms from what they were a hundred years ago.
At Lear Capital, pricing and purchase of gold and other precious metals is made simple. Customers continue to use Lear for its seamless processes and superior service delivery.