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The Spot Price and Actual Gold Prices

Today, gold and silver are normally trading beyond what we read as their spot prices. Although spot prices may reflect the supply-demand situation in the futures market, they are becoming less relevant when it comes to the physical precious metals market, which one invests in to best protect their savings.

Published: 26-02-2013 00:00

The Spot Price and Actual Gold Prices

The spot price

When one checks for the price of a commodity, one usually searches for a spot price, that is, the price for which futures of the commodity are traded.

But in the gold market, especially, it is almost next to impossible to find in retail a gold item at spot price, much more so below it.

Because of gold’s value as an inflation hedge, it has attracted investors seeking to avoid the depreciation of their currencies. Such demand for gold and silver allows for a higher premium on top of the given spot price. And in general, the smaller an item is, the higher its premium.

Why the discrepancy?

Why is there this seeming discrepancy between the spot price and actual precious metals transactions? In fact, the spot price no longer indicates accurately the supply-demand situation of physical metals. The futures market often involves transactions wherein the actual physical supply of the commodity is not ascertained or affirmed. This is possible because there is only a small portion of futures trades where the investor actually seeks delivery.

When an asset is sold multiple times beyond what is possible with actual supply of the asset, this makes for a temporary dip in the spot price. But the need for the actual physical good eventually makes for more physical buying than digital selling, and even the spot price will have to rise when this happens.

Lower prices not for long

In spite of the increasing scarcity and rising demand for precious metals, we have seen the gold price floating within a S$100/oz. range, and silver within a S$7/oz. range, for extended periods. It appears to be a time of adjustment. Soon though, because of the nature of the futures markets, doubts are bound to increase among traders as to their ability to obtain the physical metals.

When prices begin to manifest the rampant inflation of the money supply going on, the diminished worth of currencies will force people to look for alternative means of savings.

This is when the spot price of precious metals will once more reflect their rarity and value. We may not know the right time when this happens, but we are certain it will. And we should take every opportunity to ‘buy on the dip’ while we still can.