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People often wonder how the actual value and price of gold is determined, who makes these assessments, and what factors are included in determining its value. This guide to gold prices answers these questions and several other common questions about the gold market.

Where Gold Prices are Determined

Gold price fixing is handled by a group called London Gold Market Fixing Limited. Its participants are international banks, and they must also be members of the London Bullion Market Association in order to qualify for inclusion in this group. Current members include Barclay's, HSBC, Scotia Mocatta, and Societe Generale. The London Gold Market Fixing Limited group has been assessing the fair market price of gold daily since 1919. Different banks have been members of this group over the years. Each morning, these banks determine how much gold they will buy or sell at a particular price point. They handle these transactions on a large scale. Daily gold price fixing used to take place on the premises of Nathan Mayer Rothschild & Sons, a multinational banking company located in London, but it now takes place on a dedicated conference call line because members are not all in close proximity to one another. The process takes place through conference calls that happen twice daily, with the only exceptions being Christmas Day and New Year's Day, when there is only one conference call. During these calls, gold is offered at a certain price point, which starts at or near the current one. The process simulates the fulfilment of orders at various prices until a balance is found among buyers and sellers. If there are more sellers than buyers at the proposed price point, the price is lowered. If there are more buyers than sellers, the price is then raised. When the numbers of buyers and sellers fall within 50 bars of each other, the price is fixed at that price for the remainder of the day. Buyers are charged a nominal fee per ounce of gold purchased to fund this process for these market makers.

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Factors That Influence the Gold Price

In addition to price fixing, several other factors influence gold prices. They include supply, demand, various international currency values and futures markets. Gold's supply is relatively stable because its quantities are always going to be limited. The demand, however, fluctuates on a daily basis. Demand increases when more people are buying gold, and when demand goes up, so does the price. The number of buyers and sellers also plays an important role in determining the price of gold at any given moment. When the market is flooded with gold, the price decreases. When it is more scarce on the market, the value increases. Prices tend to remain steadier with gold than with other less stable commodities. Its rarity helps to keep its value relatively high compared to other types of investments. This tends to be true even when the gold markets have a greater number of sellers than buyers. The value of a particular currency also determines the price of gold in that particular exchange. Purchasing power for various goods and commodities correlates with the strength of a currency, so strong dollars mean more purchasing power. Gold itself is considered to be a good, not a currency, and the market treats it as such. This makes it possible for people to use different world currencies to trade this commodity at fair market values.

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Why Inflation Doesn't Negatively Affect Gold's Value

Historically, gold's value has substantially exceeded inflation rates. The same amount that could be purchased in 1919 for a little less than five pounds sterling is now worth over 1,000 British pounds. Price fixing began after World War II, after most countries stopped using the gold standard. The reason currency stopped being backed by gold was because nations were hesitant to trade gold with other countries after the war ended. A new way was needed to decide on pricing for gold so that it could continue to be exchanged in international markets. The process of gold fixing was devised as an accurate way of regularly determining its fair market value. London Gold Market Fixing Limited makes it possible to assess a fair value for gold relative to various currencies, and it has proven to be an excellent method for keeping gold relatively immune to rates of inflation over time. For this reason, gold not only retains its value, but also continues to increase in value as inflation continues to lessen the buying power associated with different currencies.

Why Gold Prices Fluctuate

Gold prices fluctuate because the factors that determine its value are always changing. Currencies fluctuate in value, making the price vary according to those different currency values. Supply and demand also fluctuate. However, the supply has remained somewhat stable over time. For that reason, demand is a more important determining factor than supply. When there are few buyers, but high numbers of sellers, the price is lower. When there are many buyers, but fewer sellers, the price is raised. This works according to the basic rules of supply and demand that relate to any commodity or good. Because the gold standard is no longer in use, gold is assessed in the same manner as other goods and commodities on the exchange market.

The Role of Gold Spot Pricing

Gold spot prices are the values agreed upon by a buyer and seller at a given moment in time. Because the prices of metals are always fluctuating, a spot price locks in a price based on both its current value, and to some degree, the futures market. Because the fixed price changes each day, the spot price is also subject to variations from day-to-day. The spot price factors in both time and place to determine a value measured using a particular currency. Spot pricing is most often used in working out futures contracts of various commodities, including gold.

Gold Prices and Numismatics

While gold fixing affects the international prices of gold, the prices of collectible coins are not determined by this method. Numismatic coin collectors often command much higher prices for their gold, because this type of gold trading accounts for factors that other types of gold trading do not. Collectors who are interested in collecting coins value different coins according to additional criteria, such as the rarity, age and condition of the piece. For this reason, coins can sometimes be worth far more than the spot price of gold itself. Numismatic coins are generally of more interest to those who want to collect coins for their collectible or historical value, while being mindful of the option to sell them at a profit in the future. It is important to note that numismatic coins have higher value among collectors than investors, so selling them often requires waiting for another collector to purchase a particular numismatic coin.

Gold Prices and Bullion

People whose interest in gold relates more to investing than collecting are drawn to bullion. Investors tend to prefer bullion over numismatic coins because bullion always lists a standardised weight, its gold content, and its value tends to be more easily agreed upon in various markets. Because bullion focuses on the standardised commodity itself, it can usually be sold or traded faster than numismatic coins. People who invest in bullion do it primarily to secure their wealth in a form that isn't prone to the same wildly-varying fluctuations to which currencies are subject. It can be sold at spot prices at any given time without a long wait to find the right buyer.

How Currency Fluctuations Affect the Gold Price

Currency fluctuations affect the gold price by changing the amount of gold that can be purchased with a single dollar. A strong Australian dollar means more buying power for gold and other commodities. When the dollar is strong, more commodities can be purchased for lower dollar amounts. When the dollar is weak, however, fewer commodities can be purchased with that same dollar. Standardised units of measure make this commodity value to currency ratio easier to determine, and makes it easier to assess why the prices are fluctuating. 

Various Market Factors that Affect Gold Prices

Changing gold prices reflect several different market factors. They can indicate a change in demand or a change in the value of a particular currency. However, understand that it is not just Australian currency values that must be assessed to make sense of this equation. Currency values in other countries must also be assessed and compared against the others' values. When the price of gold has increased in each currency at an equal ratio, this indicates that the price has increased due to demand. If the price has decreased at equal ratios, the overall demand for gold is lower. However, if the price of gold has only changed dramatically for a particular currency, this indicates that the change was related to the value of that currency. 

How Futures Markets Affect Gold Prices

Futures markets are speculative markets. There are different market considerations that are used when determining futures, and there are few common trends that make it somewhat accurate to predict. For example, during times of economic crisis, people often buy gold to protect their wealth. When economies look bleak, gold futures generally look strong. Gold prices also tend to increase along with inflation, often surpassing it. Speculative increases in demand can also raise the prices of gold futures. Futures contracts promise delivery at a later date at a price currently agreed upon. Futures contracts are one of the ways investors use gold to achieve different goals: hedging against inflation, speculation, or plain investing. In futures markets, the only variable is price. Quantities, quality, time and place of delivery are all standardised. 

Why Gold is a Relatively Safe Investment

Gold is a safe investment for various reasons. One reason is because it has historically proven to be a commodity with a relatively stable—and limited—supply. It retains its value very well, and it typically does not drastically change in value as other types of investments often do. While there is always some risk involved in investing, these risks are lower with gold. Standardised measurements make it easy to trade around the world, and fixed pricing guarantees fair market value. Investors who want to protect their wealth trust this investment because of its proven track record. That is why people flock to buy this precious metal when economic troubles hit, and it's why those who keep gold in their portfolios use it to offset losses from riskier investments. 

People have used gold as an instrument of trade and investment for thousands of years. Until the early 20th century, gold itself was actually a form of currency, and most nations backed their own currencies by what was referred to as the gold standard. Since the gold standard fell into disuse, this precious metal has been regarded as a commodity with values that have significantly outpaced inflation. Because of this, investors still turn to gold to protect their wealth from inflation and other market forces that can lessen the value of their holdings. Because gold fixing helps to keep the prices of gold stable across international markets, this precious metal continues to be a popular way for investors to carry on a tradition that goes back to ancient times—converting wealth into gold.

30 Days - Gold price development - Goldspot

Gold price development - Gold Spot Price