It is important for one to understand what the spot price actually means. The spot price is simply the price at which a commodity could be transacted and delivered on right now. This is in contrast to futures or forward contracts. The spot price of gold refers to the price of one ounce of gold and the spot price of silver refers to the price of one ounce of silver. Gold and silver must be of specific fineness requirements.
What Are Futures Prices?
The futures prices of a commodity are contracts that designate a price for future delivery of the commodity. Commodities such as gold, silver, crude oil, wheat, corn and coffee all have futures contracts listed on them through various exchanges. These futures contracts may provide producers, end users and others involved in the commodity with a way to potentially helpmitigate price risk. Futures contracts can extend quite far into time. For example, one could buy or sell a contract on crude oil that expires in several years. The futures contracts for gold and silver represent the futures price of one ounce of silver or gold.
How Exactly is the Spot Price Determined?
The spot price is determined by the front month futures contract with the most volume. Sometimes this contract may be the current month, and sometimes it may be two months or more out in time. Let’s look at an example.
Currently, the gold spot price today on August 19th is ~$1,295 per ounce. Now, if one were to look at the futures contract chain for gold, one will see that the August gold futures contract is trading at the same price. The August gold contract is the nearest month gold contract. One can also look at the October contract which is currently trading at about the same price, as well.
October has a lot more volume than the August contract, because the August gold futures contract is expiring and those not wanting to take or make delivery have already rolled their positions out. The December gold futures contract has the most volume, and therefore would likely determine the spot price. This is because December is where the action is and the trading is taking place. Market participants are using the December contract for their purposes whether it be hedging or speculating. December would therefore be referred to as “the spot month.”
What Drives Changes in Spot Price?
The price of gold, silver and other commodities are affected by numerous things. Gold prices, for example, go through periods of little movement and go through periods of a lot of movement and great volatility. Spot gold prices can potentially be affected by such things as economic data, geopolitical news or events, Federal Reserve action or comments and many other potential drivers.
The laws of supply and demand for gold, silver or other commodities may be seen in world markets. The gold market is in a constant state of price discovery. In fact, all commodities could be said to be in a constant state of price discovery. This price discovery occurs virtually around the clock. Gold and precious metals are traded on exchanges all over the world. These exchanges include New York’s COMEX, London, Hong Kong, Zurich, Australia and Shanghai. The New York COMEX exchange is perhaps the most well-recognized when it comes to gold trading. Spot gold prices are derived from futures contracts traded on the COMEX exchange.