How and who determines the price of gold? What are the main factors that influence the fluctuations in the price of gold? The value of gold is never equal to the price of gold!
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Before we ask about the price of gold and who determines it, it is important to define which price we are talking about!
Unlike typical consumer products, this is not as straightforward, as here the manufacturer and trader do not determine the price of gold. This is why it is harder to determine who is actually responsible for determining the price of this prestigious metal. In this article, I will present the general factors and elements that have a direct impact on the fluctuation of gold prices in the world.
Determining the price of gold
Postoje dvije različite cijene zlata:
- Spot price - This is the current price of gold for immediate purchase.
- Futures price - This is the price at which participants in a futures contract agree to exchange on the settlement date.
The current gold price is largely the result of trading futures contracts on commodity exchanges in various cities such as New York, Chicago, London, Zurich, China, and Hong Kong. The most influential gold market today is the COMEX division of the New York Stock Exchange, as it has the most important market for trading gold futures contracts and therefore has the greatest impact on the fluctuation of the spot price of gold. It can be said that COMEX’s current influence on price is based on financial instruments or derivatives of gold rather than the intrinsic value.
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Who determines the price of gold?
The algorithm uses the same data as banks and markets to determine the latest gold rate; this includes changes in demand and any changes in major currencies such as the pound, dollar, and yen. It is important to note that investors cannot buy gold at the current rate. This is due to various costs such as mining and refining.
The cost paid for gold is the current rate plus these additional costs, as well as any commissions and margins of the trader. These additional costs are known as a premium. To get the best value when investing in gold, it is important to look for coins or bars with low premiums. Trading on the international commodity market at the current rate is available from Sunday at 23.00 GMT to Friday at 22.00 GMT.
Therefore, the daily gold price is determined by an agreement between participants in the market to buy and sell gold at a predetermined rate or try to maintain a market price evenly by controlling supply and demand. This process is known as “Gold Fixing” and takes place in the London Bullion Market Association. The price is set twice a day at 10.30 and 15.00 (GMT) and is measured in US dollars.
What are gold futures contracts?
A gold futures contract is a type of gold trading that does not include immediate payment or delivery of the asset. Payment and delivery terms are set for a later date, known as the “settlement date.” Gold futures contracts allow traders to quickly buy and sell large amounts of gold without waiting for physical delivery.
Image: Gold futures contracts allow for the quick purchase and sale of large amounts of gold.
Miners, refineries, traders, and gold consumers can manage the risk of gold price fluctuations by trading gold futures. Gold suppliers can buy “short” positions to set the selling price, while consumers can buy “long” positions to secure the purchase price. In addition, many speculators also exploit derivative financial instrument markets for gold, taking a long position if they expect the gold price to rise and a short position if they expect a fall.
Central bank reserves
Since the US abandoned the gold standard in 1971, central banks have invested heavily in their gold reserves, with numbers in 2019 slightly lower than record numbers in 2018.
The biggest buyer was Turkey, followed by Russia, Poland, and China with a total of 650 tons of gold purchased in 2019, slightly less than the 656 tons purchased in 2018. This is one of the highest levels of gold purchases in the past 50 years.
The US dollar and the price of gold
The value of the US dollar usually has an inverse effect on the price of gold as the metal is denominated in US dollars. When the American currency is strong, the gold price remains low and regulated, but when the dollar is weak, the gold price rises due to increased demand. This can be understood as protection against inflation, which occurs when prices start to rise. As inflation increases, the gold price also increases.
Image: The price of gold negatively correlates with the US dollar.
Gold is generally classified as a commodity, but it is more similar to a currency in terms of its properties. Unlike other commodities, it has a low correlation with them and is not used as frequently in industry. In addition, it is not tied to any particular country but is a global currency often determined by the state of the US economy.
Gold production
Gold producers face rising labor costs, which represent about half of their total production costs. The issue of filling vacancies is still open, which in turn leads to higher labor costs. In addition, inputs such as steel, cyanide, lime, and explosives represent about 25% of their cost base, while energy only requires 15%. In addition, the ongoing conflict between Russia and Ukraine continues to significantly impact energy prices, which will only further increase the gold price.
Photo: Price of gold compared to the production costs.
Gold is not like any other commodity that is consumed or burned, so if prices fall below production costs, production will not decrease in the same way as with other commodities. This is because the yellow metal is not consumed, but accumulated. This means that even if production decreases, the supply of gold does not decrease, as there are already large stocks. As a result, the connection between production costs and gold prices is weak, and production costs often follow prices – when gold prices rise, mining companies will invest in methods of obtaining more gold, which will increase production costs. Data from Agnico Eagle, one of the world’s largest gold producers, show that production costs rose during the bull market in gold in 2000 and then fell during the bear market that followed.
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Countries that influence the current price of gold
China, South Africa, the United States, Australia, Russia and Peru are some of the main players in the global gold mining industry. The amount of gold mined also has a significant impact on its price, indicating the balance between supply and demand. In 2018, gold production was 3,260 tons, a significant increase compared to 2010, when 2,500 tons were reported.
Photo: World gold production by country
Since 2016, the amount of gold mined has not significantly changed. This is because the easier-to-mine gold has already been extracted and miners now have to work harder to reach higher-quality reserves. Such work and increased difficulty in obtaining gold expose them to greater risks and increase the impact on the environment.
It is important to note that it will now cost significantly more to mine smaller amounts of gold than previously, which will result in higher gold prices.
World Gold Council (WGC)
The World Gold Council is a non-profit organization that promotes the gold industry. Based in London, it is composed of some of the most reputable gold producers and aims to increase demand for gold. For example, the WGC is the creator of the first ETF fund backed by gold.
Slika: World Gold Council (WGC)
Final thoughts
World events have caused economic uncertainty. Gold has attracted investors as a form of protection against inflation and a potential investment. Gold prices have risen significantly in the past decade, leading many to wonder how much further the price can rise. Expert opinions vary, with predictions ranging from $1,000 to $15,000, so as investors, you must decide for yourselves who to trust with your money.
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