The gold spot price is the price at which physical gold can be bought or sold for immediate delivery. It changes constantly based on supply and demand factors globally. The gold futures price includes costs of storage, delivery, and financing, and is determined based on the current spot price as well as interest rates and supply/demand. The London Gold Fixing establishes benchmark prices twice daily for major currencies but only for large transactions of 400 ounces or more, so it is not the same as the generally available spot price. Trading gold futures provides an alternative to physical gold ownership that allows profiting from gold price movements without taking delivery of gold.
2. Points To Be Covered Today:
• Gold Spot Price.
• Factors That Gold Spot Price.
• Difference Between The Spot Price And Futures Price.
• London Gold Price Fixing.
• Trading In Gold Futures.
3. Gold Spot Price
• The gold spot price or current gold price is seriously misunderstood
by inexperienced investors.
• Many think it is determined by London Gold Market Fixing Ltd,
however it is not! Besides, the websites commonly use the gold real
time price, is not same as the gold spot price.
• The gold spot price or gold current price, at which the physical gold
can be sold or bought at a specified time and place.
• In contrast, a gold futures price is in relation to its current spot price
and time frame in question.
• The spot price is calculated according to the most recent average bid
price offered by the worldwide professional traders.
4. Factors Affect Gold Price
• The gold spot price is changed every minute. Of course,
those factors affecting the gold price (such as bid price,
ask price, or fixing price) are also affecting the spot
price, such as war, center bank, and supply and
demand.
• Another factor the gold investor frequently neglect is
transaction size.
• The weight of gold is bigger; the gold spot price is more
favorable.
• Thus, in the international worldwide of gold trading, size
matters.
5. What Is The Difference Between The Spot
Price And Futures Price?
• First of all, the two prices are not the same.
• A futures price, at which parties to a futures contract
agree to transact at on the settlement date.
• It is higher than the current spot price, for it must
includes fees of storage and delivery of the gold, also
includes finance charges because of the delay payment.
• Furthermore, the futures price is determined based on
the spot price. The money market rate and
supply/demand also affect futures price.
6. Is The Gold Spot Price Equal To Gold
Fixing Price?
• As a new gold investor who may hear the term "gold
fixing price" and think it is same as the gold spot price.
• In fact, it is not true. The gold fixing price is more akin
to a momentary spot price, that price is just for the five
major banks' most important customers who sale or buy
in multiples of 400 ounces gold.
• Thus, most investors can not buy or sale gold with the
gold fixing price.
7. London Gold Price Fixing
•It is a gold price which is fixed by the five
members of The London Gold Market Fixing
Ltd via conference call, which is used as a
benchmark to pricing the major global gold
products and derivatives.
8. How To Fix The Gold Prices
• The Gold Fix establishes the price at which supply meets demand - across
all the participating banks.
• And the participants must be members of the London Bullion Market
Association; they are Scotia-Mocatta , Barclays Capital (Replaced N M
Rothschild & Sons when they abdicated), Deutsche Bank, HSBC Bank and
Société Générale.
• The price of gold is fixed twice each business day at 10:30 am and 3 pm,
London time, and fixed in United States dollars (USD), Pound sterling
(GBP) and European Euros (EUR)
• The gold fix usually begins with the chairman declaring a gold price which
is very near the ongoing spot market gold price.
• Then, the participants will decide to erect flag or not based on their
customers' supply and demand. Until all of the members' flag is put down,
the gold price is fixed.
• Otherwise, the chairman must change the proposed price.
9. Why To Fix The Gold Prices
• There are lots of the banks' orders are limit orders. In other words,
the seller or buyer is willing to sell or buy at any price below or above
a certain limit.
• Consequently, if the chairman lowers price, more orders may come
into the pool; conversely, more orders may drop out of.
• It is really important that the gold fix price is not a fixed price.
• The gold fixing is the price at the exact instant in time at which it is
agreed.
• Within seconds, the price of gold will fluctuate again.
• In other words, our transaction of gold is not at the London gold
fixing, that is approaching to the gold fixing.
• As we deal our transactions, the London gold fixing often is used as
a benchmark.
10. Trading In Gold Futures
• Gold has attracted people due to its shine and density. The
precious metal can also be easily shaped into intricate designs.
• Over time gold evolved from being a collectable commodity to
a symbol of status, wealth and power.
• Indians, too, have had a love affair of gold for thousands of
years.
• So valued is the precious metal that it is considered auspicious
to purchase gold on festivals, worn as jewellery at religious and
social occasions and even sometimes eaten.
• For these and more reasons, the gold futures market is on the
rise.
11. Demand For Gold
• It’s estimated that Indians bought a mind-boggling 750-850 tonnes of
gold in 2019.
• This makes it one of the biggest markets for this precious metal in
the world.
• A large chunk of sales comes from weddings — 50 percent of annual
gold demand is for weddings!
• Gold is also sought after by Indians and elsewhere around the world
as an investment.
• Many people consider gold to be a safe asset that earns good
returns. Of course, in India, equity has outperformed gold in the past
few years.
12. Demand For Gold-I
• Fund managers like to have some gold in their portfolio to act as a
hedge against an economic downturn.
• This is because gold prices tend to move in the opposite direction to
those of assets like equity.
• In times of economic prosperity, companies do well, and their share
prices go up and beat gold in terms of returns.
• However, during a downturn, gold does better as people tend to
invest more in the precious metal than in companies.
• Gold is considered as a defensive investment – bought by those who
feel that an economic downturn is imminent.
• Moreover, gold has a good track record of beating inflation as well.
13. Demand For Gold-II
• Central banks the world over – the Reserve Bank in India —
prefer to keep some amount of gold in their treasuries since the
precious metal is considered more stable than currencies.
• The gold acts as some insurance against unpredictable
economic events.
• Gold is also used (to some extent) in manufacturing because of
its various qualities like malleability, ductility, high melting point,
and stability.
• It is used in sectors like space, medicine, technology and
dentistry. However, the fact remains that an overwhelming 75
per cent of newly mined gold is used in jewellery.
14. Production And Prices
• For a long time, South Africa was the biggest gold producer in
the world.
• The scenario has changed in the past few years, and in 2017,
the most significant primary gold producer was China with 440
metric tonnes, followed by Australia (300 mt), Russia (255 mt)
and the USA (245 mt).
• The reason why gold is so expensive is because of the low
production. In 2018, only about 3,300 tonnes was produced the
world over.
• Compare that to steel — around 149 million tonnes of the metal
was produced at the same time!
15. Production And Prices-I
• As mentioned in previous slides, gold prices tend to increase during
an economic downturn. Interest rates too affect prices – when
interest rates rise, investors will prefer to put their money in fixed
income instruments rather than in gold.
• Another is seasonality.
• Gold prices in India move up at certain times of the year, like the
festival of Diwali and the wedding season.
• During wars and times of civil unrest, people may prefer to hold gold
as it is easily portable and has widespread acceptability.
• There is also a correlation between the value of the US dollar and
gold. A weak dollar will lead to higher gold prices.
• This is because the weakness of the dollar indicates a weak
economy, and people would instead invest in gold rather than an
investment option whose performance is linked to the economy.
16. Gold futures
• There’s another way of investing in gold without actually holding
the metal, and that is to buy futures.
• According to global markets company CME Group, “Gold
futures are hedging tools for commercial producers and users of
gold.
• They also provide global gold price discovery and opportunities
for portfolio diversification.”
• These futures are traded on international exchanges like the
New York Mercantile Exchange (Nymex ) and the Tokyo
Commodity Exchange.
• In India, you can trade these futures on Multi Commodity
Exchange (MCX).
17. Gold Futures-I
• Since gold prices move in a direction opposite to those of many other assets like
equity, it’s an excellent source of hedging.
• Of course, holding and trading gold in physical form is not very convenient
because of security concerns and assessing the purity of the metal.
• You can, of course, hold these futures till maturity and take delivery of the metal.
But if you sell them before expiry, you can trade without having ever to take
possession. Settlement of these futures contracts takes place on the 5th of every
month.
• If you don’t want to take physical delivery of the metal, you should square off your
position before the 1st of the month. Delivery is in numbered gold bars of 995
purity.
• For those who want to profit from price movements in the precious metal, these
futures are an excellent option.
• Gold futures contracts are available in several sizes, so you can find one that
suits your budget.
• For example, there is you can get a gold contact for 1 kg if you are a significant
player.
• There are also several smaller sizes like Mini (100 gm), Guinea (8 gm) and petal
(1gm).
18. Gold Futures-II
• Like most other commodities, the margins for gold futures in India are quite low,
at around 4 percent.
• So traders can take significant positions in these futures. For example, you will
be able to take a position of Rs 1 crore in gold futures by paying a margin of only
Rs 4 lakh.
• The extensive exposure will mean more opportunities for profit.
• But the risks are high as well. Gold is an internationally traded commodity, and
events in any part of the world will affect gold prices in India as well.
• Any mistake in your assumptions could lead to significant losses.
• Trading in the gold futures market needs a massive appetite for risk, nerves of
steel and a thorough understanding of the precious metal and its place in the
world economy.
• Gold options were introduced recently on the MCX. These are considered safer
than futures because you have the choice of not exercising your right to buy/ sell
the contract at the strike price.
• For those who don’t have the stomach for risk, this could be a better `option’.
