How is the Gold Price Determined?
Gold has been a symbol of wealth throughout history, and mankind has always considered gold to be a highly valuable asset. Although gold has always been traded, these days there is, of course, a set gold price per gram.
But who decides the gold price? Here we look at how the price of gold per gram is determined and who sets the gold price in the UK today.
Why do people invest in gold?
Gold is seen by some investors as an effective hedge against inflation. Investors with their cash spread across different commodities, funds, stocks and shares often also buy gold in order to diversify their portfolios.
Gold can withstand currency value fluctuations and will often retain its value through times of economic turmoil, offering a shelter for investors from a volatile investment market.
Who decides the gold price?
London is the centre of everything gold-related – at least when it comes to setting the price of gold per gram. The first gold mined from Brazil during the gold rush in the 1600s was delivered to London and the city remains home to the only bullion market whose accreditation is globally accepted. That bullion market is the London Bullion Market Association (LBMA).
Since 2015, the gold price per gram has been set by the LBMA’s ICE Benchmark Administration (IBA) using an auction system that is operated electronically. This system replaced a rather dated telephone system that had existed for over 100 years!
Now, the LBMA Gold Price is published twice each day: once in the morning and once in the afternoon. The gold price itself fluctuates throughout the day to reflect the trading going on through anonymous auction rounds that take place every 45 seconds.
The prices respond to activity from investors, central banks and consumers all over the world. Gold prices in the UK today are published by the IBA in US dollars.
Factors that affect the gold price
- Market conditions
- Supply and demand
- Currency fluctuations
- The state of the global economy in general
How do general market conditions affect the price of gold per gram?
Gold prices tend to increase during times of economic uncertainty or recession. Therefore, gold is often viewed as a ‘safe haven’ for investors and central banks around the world will often increase their exposure to gold when the future looks uncertain from a political or economic point of view.
The price of gold reached record highs in August 2011, during the recession, when it peaked at US $1,917.90 per ounce.
How does supply and demand affect the gold price in the UK today?
As most of us will be aware, the price of all commodities is impacted by supply and demand. If there is a shortage of wheat one year due to weather conditions, the price of flour and bread may increase. If the growing conditions for certain vegetables are perfect one season, their price will come down in the supermarkets.
The same can be said for gold. If there is a slower supply for gold and an increase in demand, the gold price per gram will soar, and vice versa. However, one thing that keeps gold popular as an asset class and keeps its price relatively high is the fact that supplies of gold are finite. More can be mined, but no more can be produced.
How do currency value fluctuations affect the price of gold per gram?
When currencies lose value as a result of monetary policies or inflation, for example, investors often increase their gold exposure in order to protect their cash. Gold tends to retain its value, due to its finite nature, whereas currency values can increase or fall hugely in response to wider economic factors.
When more people want to invest in gold, the price of gold increases. Therefore, as currencies depreciate, the price of gold tends to increase in response.
OK, but how is the price of gold per gram actually determined?
There are two main variables that traders use to put a value on gold: the gold spot price and the gold futures price. Let’s look at these two pricing models a bit more closely.
- The gold spot price
The gold spot price is the price of gold per gram paid at any particular time. It is taken as the average gold price quoted right now by traders buying and selling gold on the wholesale market. The prices are quoted for gold settled in London. Gold in other locations is then quoted as being at a discount or premium to the UK spot rate.
- Gold futures price
The gold futures prices are those quoted for the physical delivery of an amount of gold at a specific date in the future. These deals are agreed through contracts that carry the gold futures prices and these are used as the base for setting the LBMA Gold Price.
How are gold futures prices determined?
The price quoted in gold futures contracts is affected by changes in the supply and demand for gold, gold spot prices, the rate of return for the recipient of the gold and the likely cost of storing and even transporting the gold.
So, what’s the conclusion?
Gold has always been a popular investment. It is relatively low risk and can therefore help to lower the risk in your investment portfolio. It’s easier than ever to buy gold coins and bars, so anyone can do this really. If you check out our gold bars online , you’ll see that you can start investing in gold with less than £100.
Ultimately, gold is a tangible asset that has remained popular and valuable throughout the centuries and it’s likely to remain that way. Don’t just take our world for it, the great J.P Morgan once said: “Gold is money, everything else is credit.”
You can keep up with the latest gold prices here.
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