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The international gold price is a US Dollar price for gold established via gold trading on the world’s largest gold markets. In practice, the international price for gold is set by the gold markets which have the highest trading gold volumes and gold liquidity, namely the London Gold Market and the COMEX gold futures market. Between them, these two gold markets essentially determine the international gold price, as they account for a combined 85% of global gold market turnover. In other words, the London OTC and COMEX gold markets are jointly responsible for gold price discovery of the international gold price.
Local gold markets around the world are gold price takers and take in the international gold price, using it as a basis for setting and quoting their own local country gold prices.
The Spot Price for gold, or Gold Spot, is the current market price at which gold can be bought or sold in the wholesale market for immediate delivery and short-dated settlement. By convention, the Gold Spot price is quoted in US dollars per troy ounce, and the quotation refers to a standard amount of gold in the range of 5,000 to 10,000 troy ounces. Settlement date is normally trade date + 2, i.e. 2 business days after trade date, upon which payment has to be made. Market makers keep Gold Spot price quotes current by quoting continuous bid-ask prices during trading hours.
The Futures Price of Gold is a price at which delivery of gold could take place on a future delivery date based on a gold futures contract agreement between transacting parties. A gold futures contract is said to be in contango when the futures price is higher than the spot price. Conversely, a gold futures contract is in backwardation when the gold futures prices is below the spot price.
The London Gold Market is a wholesale gold market in which participants trade bilaterally, either by phone, via broker, or over electronic platforms. The London Gold Market is not an exchange-based market and so is referred to as an Over-the-Counter (OTC) gold market. The majority of gold trading in the London OTC gold market is spot gold trading (for immediate delivery of gold) in large quantities, generally between quantities of 5,000 to 10,000 troy ounces of gold.
However, the unit of settlement in the London OTC gold market is not physical gold but unallocated gold. Unallocated gold is a form of synthetic gold which is fractionally-backed by bullion banks and where trades are predominantly cash-settled. Huge volumes of unallocated gold trades are executed on the London gold market each day that are many multiples of the amount of physical gold underlying these bilateral contracts. See BullionStar's Infographic of the London Gold Market for more details.
The COMEX is an exchange-based derivatives market which lists gold futures contracts and which facilitates the trading of these contracts. The most actively traded gold futures contract on the COMEX is the 100 oz gold contract. Although this gold futures contract offers a physically deliverable option of gold, i.e. to receive 100 ounces of gold in the form of a 100 oz gold bar or three 1 kilogram gold bars, nearly all COMEX gold futures contracts are closed out, cash-settled or rolled over, and only a tiny fraction of contracts are ever delivered. See BullionStar's Infographic of the COMEX gold futures market for more details.
The international gold price is therefore set by 2 markets, the London OTC gold market and the COMEX gold futures market, both of which are paper gold markets and both of which generate trading volumes far higher than the amount of physical gold underpinning this gold trading.
The LBMA Gold Price is a benchmark gold price derived in an electronic gold auction which takes place twice per business day at 10.30 am and 3.00 pm London time. Direct participants in the gold auction are limited to a small number of bullion banks and other similar institutions which are members of the London Bullion Market Association (LBMA). However, other gold market participants such as gold refineries can participate indirectly through one of the direct participants.
The gold price published as the reference price after each auction is the US Dollar gold price derived in the final round of each auction when the auction’s buy volume and sell volumes are in ‘tolerance’, i.e. with less than 10,000 troy ounces between buy and sell volumes. Prices are also published in 11 other currencies in addition to the US Dollar price such as in Euros, Singapore Dollars and Swiss Francs.
The LBMA Gold Price auctions are administered and operated by ICE Benchmark Administration (IBA) on behalf of the LBMA, with the LBMA owning the intellectual property rights to the auctions and the auction data. The LBMA Gold Price auctions were launched on 20 March 2015 and replaced the previous London Gold Fixes which had fallen into disrepute.
The underlying asset traded in the LBMA Gold Price auctions is not physical gold bars but unallocated synthetic gold (which IBA refers to as “Spot Loco London Gold (unallocated)”). However, the LBMA gold price reference rate is used widely in the global bullion industry to value everything from gold-backed ETFs to OTC gold swaps, and also to value transactions in the wholesale gold market such as gold trades between gold mines and gold refineries.
ICE Benchmark Administration is also now the administrator for the LBMA Silver Price auctions, after the previous administrator and calculation agent, Thomson Reuters and CME, stepped down in 2017.
The London Metal Exchange (LME) publishes daily gold reference prices at 10:30 am, 12:00 midday, and 3:00 pm London time, and also publishes silver reference prices at the same times. The 10:30 am and 3:00 pm publication times coincide with the LBMA Gold Price auction times, while the 12:00 midday time coincides with the timing of the daily LBMA Silver Price auction.
Unlike the LBMA Gold Price which is derived from buy and sell orders within daily auctions, the LME gold price is a volume-weighted average price calculated based on trades executed in the LME’s Gold spot contract over a 2-minute period starting at the above times. These LME Gold spot contracts trade electronically on the LMESelect trading platform.
However, similar to the LBMA Gold Price, the LME gold reference prices also represent trading of unallocated (synthetic) gold in the London market, and not the trading of physical gold.
The LME’s gold reference prices were first published in late August 2017 but these references prices are not very widely used in the global bullion industry. However, the LME is making its gold reference prices available free of charge to market participants, and at some point in the future, the LME gold reference prices may gain some market share from the dominant LBMA Gold Price benchmark. See BullionStar coverage of the LME gold reference prices for further details.
The Shanghai Gold Benchmark Price is a benchmark gold price derived twice daily on the Shanghai Gold Exchange (SGE) via an auction of 1 kilogram gold bars. As such, it is the world’s only major gold price benchmark that is based directly on the trading of real physical gold bars. The actual trading unit in the auction is physically-delivered 1 kilobar lots of 99.99% purity gold or higher, with delivery locations in the SGE’s network of gold vaults across China.
The Shanghai Gold Benchmark Price auction (also known as the SGE Gold Fix) takes place at 10:15 am and 2:15 pm Shanghai time, and is conducted on the SGE’s electronic trading platform. Trading in the auction is conducted in Renminbi (RMB), and the benchmark gold reference price is published in RMB.
Like the LBMA Gold Price auction, the SGE Gold Fix auction seeks to establish a benchmark gold price at which demand and supply in the auction are in balance. The demand-supply tolerance within which the Shanghai auction settles (the point at which the auction rounds can complete) is a tolerance / difference of 400 kgs (12,860 troy ounces) between the bid and ask volume.
The SGE auction opens with a ‘reference price’ which is based on gold prices entered into the trading system by ‘Fixing Members’ and ‘Reference Price Members’' before the auction begins. There are 12 Fixing Members, all of which are banks, and the majority of which are Chinese banks. There are 6 Reference Price Members which comprise non-bank participants such as Chinese gold jewelry and Chinese gold mining companies. The SGE’s Gold Benchmark Price auction was launched on 19 April 2016, exactly one year after the LBMA Gold Price was launched. See BullionStar article on the Shanghai Gold Benchmark Price for further details.
The gold market is global in nature and it follows the sun around the world as gold marketplaces and gold exchanges open and close throughout the day. At any given time, the gold price is practically the same around the world, with arbitrage trading keeping prices in convergence. The exceptions are frictions caused by local country rules, such as gold import tariffs and gold sales taxes (e.g. in India) or gold import and gold export restrictions causing local premiums or discounts.
One of the two dominant venues for gold price formation, the over-the-counter wholesale London Gold Market, trades from 8:00 am to 4:30 pm London time with daily LBMA Gold Price auctions at 10:30 am and 3:00 pm. The other dominant venue, CME’s Globex electronic trading platform, on which COMEX gold futures are traded, is open practically 24 hours a day from Sunday evening New York time, right through the week. This platform sees significant trading during Asian hours as well as during the US and European trading day.
Within Asia, both the Shanghai Gold Exchange (SGE) in mainland China and the Chinese Gold and Silver Exchange (CGSE) in Hong Kong are important components of the global market that are located in the same time zone. The SGE has three trading sessions throughout the day, a night trading session from 8 pm to 2 am, a morning session from 9 am to 11:30 am, and an afternoon session from 1:30 pm to 3:30 pm. The CGSE in Hong Kong is open Monday to Friday with a morning trading session of 9 am and midday, and an afternoon trading session of 2 pm and 5 pm.
In Japan, one hour ahead of Shanghai and Hong Kong, gold trading also takes place on the TOCOM futures exchange. Heading west from China, other important gold trading centres are Singapore, India and Dubai, each of which has an active wholesale market as well as gold futures platforms, e.g. India’s MCX and Dubai’s DGCX. West of Dubai, Turkey’s Borsa Istanbul also hosts a physical gold trading market and a gold futures market. Within Europe, the gold markets of Russia, Switzerland and Germany are notable, with Zurich in Switzerland being a particularly famous and historical gold trading centre.
When looking at the gold price during the day, it's often useful to think about which of the world’s gold trading centres are open and active at that particular time.
India does not have a centralized gold exchange, although such an gold exchange has been proposed at various times with the backing of the World Gold Council. Instead, India operates a decentralized gold market and is the world’s second largest gold importer. Designated banks and other state authorized entities import gold into India in the form of refined bars and gold doré through major ports of such as Delhi, Bangalore and Chennai. The gold then passes through a large network of gold wholsealers and gold refineries on to gold retailers.
The gold price in India, known as the Gold Rate, differs from the international gold price due to gold import duties and goods and services tax (GST). Various benchmark gold rates are calculated in India by polling wholesale gold market participants in a number of Indian cities. These include gold rate polls by Platts and Indian Bullion and Jewellers Association (IBJA).
A number of gold weight measurements are used around the world for the trading of gold and for gold price quotations for gold trading. These weight measurements include the Troy Ounce, the Kilogram / Gram, the Tola, and the Tael. However, other weight measurements also exist. The gold price is most often quoted in US dollars per troy ounce because this is the standard quote convention used for gold trading in the world’s largest gold markets, the London Gold Market and COMEX. A troy ounce is a standard and traditional weight unit used for measuring precious metals, with 1 troy ounce approximately 10% heavier than the more commonly used avoirdupois ounce.
Since most gold markets around the world are price-takers, these markets either directly use this US dollar per troy ounce gold price quote, or else indirectly use the US dollar price per troy ounce in calculating and adjusting their local currency denominated gold prices.
In China, the Shanghai Gold Exchange’s gold contracts are quoted in Yuan per gram, with the most commonly traded gold contract being the gold kilobar contract. In Hong Kong, the Chinese Gold and Silver Exchange (CGSE) quotes some of its gold contracts in kilograms (a Hong Kong dollar Kilobar gold contract and a Renminbi Kilobar gold contract), some of its contracts in terms of troy ounces (loco London gold contracts), and some in terms of the weight measurement Tael.
The Tael, also known as Tael Troy, is a traditional Chinese precious metal weight measurement. In Hong Kong, the Tael is equal to 37.429 grams or 1.20337 troy ounces. This would mean, for example, that a 5 Tael gold bar weighs 6.01685 troy ounces. The Tael weight specification is not standard across Asia and can vary. In Vietnam, the Tael equals 35.5 grams, or 1.2057 ounces.
The Tola is a traditional precious metals weight measurement used in India and other parts of Asia. A Tola equals 0.375 troy ounces. Common gold bars weights as denominated in Tolas are the 5 Tola gold bar and the 10 Tola gold bars. This means that a 10 Tola bar weighs 3.75 troy ounces, and a 5 Tola bar weighs 1.875 ounces.
In Thailand, the standard gold weight unit is the ‘Baht’ unit, with 1 Baht equal to 15.244 grams or 0.4901 troy ounces. This should not be confused with the ‘Baht’ Thai fiat paper currency which derives its name from the traditional ‘Baht’ weight measurement.
1 troy ounce = 31.1035 grams
1 kilogram = 1000 grams = 32.1507 troy ounces
1 Tael = 37.429 grams = 1.20337 troy ounces
1 Tola = 11.66 grams = 3/8 troy ounce (or 0.375 ounces)
1 Baht = 15.244 grams = 0.4901 troy ounces
There are many gold markets and gold trading venues around the world, some far larger than others, and some that are very influential for gold price discovery due to their large trading volumes and high liquidity.
London is a wholesale gold market and the global centre for Over-the-Counter (OTC) gold trading where market participants range from bullion banks, central banks and institutional investors, to refineries, gold mining companies and gold jewelry companies. Gold also trades OTC in the Swiss financial centre of Zurich.
Physical spot gold trades on China’s Shanghai Gold Exchange, Hong Kong’s Chinese Gold and Silver Exchange (CGSE), Russia’s Moscow Exchange, and also on the physical spot exchange of Turkey’s Borsa Istanbul.
Apart from COMEX, which is the dominant global centre for gold futures trading, gold futures also trade on the TOCOM futures exchange in Tokyo, China’s Shanghai Futures Exchange, India’s MCX futures exchange, the Dubai Gold and Commodity Exchange (DGCX), Singapore’s SGX, Russia’s Moscow Exchange, Korea Exchange, and Borsa Istanbul’s Precious Metals Futures Market. Gold Krugerrands even have their own listing on South Africa’s Johannesburg Stock Exchange.
There are also gold futures contracts offered by the London Metal Exchange and Hong Kong’s HKEx exchange. In New York, gold futures also trade on the Intercontinental Exchange (ICE), while ICE also offers loco London gold futures. Gold also trades locally OTC in physical gold centres such as Thailand, Vietnam, and in the Singapore bullion market.
A number of national gold mints are acknowledged for their expertise in the production of investment grade gold bullion coins. These national mints include the Royal Canadian Mint, Australia’s Perth Mint, the US Mint, the Austrian Mint, Britain’s Royal Mint and the Chinese State Mint. The Royal Canadian Mint, for example, is well-known for its fabrication of Gold Maple Leaf bullion coins, while the Perth Mint produces a number of flagship gold bullion coins such as the Gold Kangaroo and Gold Lunar series. The Austrian Mint is famed for its production of the Gold Philharmonic bullion coin series.
Many of the well-known investment grade gold bar brands are produced by specialist gold refineries. These include popular investment gold bars from the Swiss refineries PAMP, Argor-Heraeus, Valcambi and Metalor, and German precious metals refiner Heraeus. Some of the national mints also operate their own gold refineries, and so leading gold bar choices also include gold bars from the Perth Mint and Royal Canadian Mint.
As the world’s physical gold markets are price takers that use the international gold price as established on the London OTC and COMEX gold markets, these physical gold markets take in the gold spot price feeds as discovered on these international gold markets.
Prices for gold bars and gold coins therefore reflect the spot gold price but additionally they also contain a premium which is that part of the gold bar or gold coin price in excess of the gold value of the gold metal contained in the gold bar or gold coin.
The gold price premiums are based on a number of factors such as gold refining, gold fabrication and minting costs and other costs of the refiner or mint, for example, distribution, insurance and marketing, and in some cases precious metals wholesaler costs. Some of the most popular gold bullion coins that derive their prices from the international spot price of gold are the Canadian Gold Maple Leaf from the Royal Canadian Mint, the Australian Gold Kangaroo Nugget from the Perth Mint, the Gold Brittania from the Royal Mint, the Gold Philharmonic from the Austrian Mint, the American Gold Buffalo from the US Mint, and the Chinese Gold Panda from the Chinese State Mint.
As per all physical precious metals, the market forces of demand and supply will also affect the size of a gold bar’s or gold coin’s premium. If a particular gold bar is in short supply, its price premium will be higher. Likewise, if demand for a certain gold bar is relatively high, its price premium will increase, and vice-versa.
Premiums on gold coins will generally tend to be higher than those on gold bars due to higher fabrication costs. Premiums on larger gold bars and gold bars will tend to be lower than premiums on smaller gold coins and gold bars, as fixed costs comprise a lower percentage of the overall price of the product.
The Bid price for a gold bullion bar or gold bullion coin, also known as the buy price, is a price quote for an immediate purchase of that gold bar or gold coin. The Ask price for a gold bullion bar or gold bullion coin, also known as the offer price or sell price, is a price quote for an immediate sale of that gold bar or gold coin. The spread between ask and bid is usually expressed as a percentage. The more liquid the market for a particular gold bullion product, the lower the spread.
In the wholesale gold market, Bid - Ask prices will be influenced by quotes from market makers as well as from market orders and limit orders entered by transacting participants.
The Gold / Silver Ratio is a relative value measuring the price of gold in relation to the price of silver. If using the price per ounce for each metal, the Gold / Silver Ratio indicates how many ounces of silver it takes to buy 1 ounce of gold. The comparison will work with prices in any currency as long as the weight unit is the same for both metals. By convention, the Gold / Silver Ratio is usually discussed in terms of the US dollar price of gold divided by the US dollar price of silver.
The Gold / Silver Ratio is most useful when looked at over the long run where the movement of the ratio in bands and relative to historic ranges and moving averages can be observed. For example, a ratio of 80, which is near the long-term peak for the measure, indicates that gold is expensive relative to silver, and could signal that the ratio is going to revert to lower levels, which would mean a relatively stronger performance of silver relative to gold. Other precious metals ratios that use the same approach are the Gold / Platinum Ratio and the Platinum / Palladium Ratio.
Many of the well-known reasons to buy and hold physical gold are based on the way the gold price behaves versus the prices of other assets. For example, physical gold retains its purchasing power over long periods of time and is a trusted store of value. Gold retains its value because the gold price constantly adjusts to changes in the general price level. Thus, physical gold, in the form of gold bars and gold coins, makes an excellent inflation hedge. This is why gold is known as an inflation barometer and why the gold price is closely monitored by financial markets.
Gold is also a safe haven in times of financial and political crisis. Because gold is highly liquid and doesn’t have any counterparty risk, investors flock to gold as a safe harbor during financial crises, knowing that the gold price will remain stable or rise, thereby protecting their wealth. This safe haven characteristic of gold is why gold is said to provide financial insurance. Many central banks hold substantial physical gold in their reserves for precisely these reasons, i.e. because gold is a store of value (war chest) and a safe haven that provides financial insurance.
The gold price is influenced by a number of external factors. Over the long term, one of the key drivers of the gold price is the rate of inflation and inflation expectations. Over the shorter term, some of the demand drivers for gold include the level of real interest rates, the relative strength of the US dollar, financial market and political risk, growth or contraction in income levels, the influence of central bank gold sales and gold lending transactions. Inflation and inflation expectations will also affect the gold price over the short term.
Gold supply will have an influence on the gold price. but it’s important to appreciate that the potential supply includes the above ground stock of gold and not just the annual supply of gold (flow). About 190,000 tonnes of gold are known to have been mined throughout history, and most of this above-ground stock can still be accounted for. For example, approximately 90,000 tonnes of gold is held in the form of jewelry, 33,000 tonnes of gold are claimed to be held by central banks, 40,000 tonnes are under the control of private gold holders, and the rest has gone into fabrication and industrial uses.
Annual gold supply comprises new gold mine supply, but also recycling of scrap gold, central bank net sales of gold, and at times the conversion of large wholesale gold bars into smaller gold bars such as kilo gold bars. Gold therefore has a very high stock-to-flow ratio, which is a factor to watch in terms of its impact on the gold price.
On a fundamental level, annual gold demand can be divided into gold jewelry demand, gold investment demand such as gold bars and gold coins and gold-backed ETFs, industrial gold demand including technology, medical / dental, and electronics, and central bank gold demand. Industrial gold demand will be more price inelastic, with investment and jewelry demand more price elastic and sensitive to changes in the gold price.
Although it's difficult to know what the gold price would be if the physical gold market traded free from the subduing influences of gold derivatives and synthetic gold, it is interesting to calculate what gold prices would need to be if gold either fully or partially backed the world’s outstanding money supply and monetary debt.
Historically, gold has been the anchor of the international monetary system, with physical gold actually backing fiat money supply and monetary debt. This was the case as recently as August 1971 before which the US dollar was convertible into gold for dollar liabilities held by foreign central banks.
The US Treasury is claiming to own gold reserves of 8133 tonnes. If these reserves are valued at a gold price of US $1350, the value would be US $352 billion. Given that US broad money supply is more than US $18 trillion, for the US broad money supply to be fully backed by US Government gold would imply a gold price of US $69,000 per troy ounce.
The world’s total broad money supply is running in excess of US $85 trillion. The world’s above-ground gold stocks of 190,000 tonnes, if valued at a gold price of US$ 1350 per troy ounce would be worth US $8.25 trillion. If world money supply was fully backed by gold, this would require a US dollar price for gold of just under US $14,000 per troy ounce. Even a 40% gold backing of the world’s total money supply would require a gold price in excess of US $5,500.
Total central bank gold holdings of 33,000 tonnes (assuming no gold lending), would be worth $1.45 trillion at a gold price of $1350 per troy ounce. If the world’s money supply was fully-backed by central banks’ claimed gold holdings, this would imply a US dollar gold price of approximately US $80,000 per troy ounce.
Central banks and monetary authorities hold gold as a reserve asset on their balance sheets, and usually value it at the market price of gold or else an average of recent market prices. One exception is the US Treasury which values its gold holdings at an historical book value prices of $42.22 per troy ounce.
Collectively, national central banks and multinational institutions such as the European Central Bank (ECB), the International Monetary Fund (IMF), and the Bank for International Settlements (BIS) are known as the “official sector”
Together these entities claim to hold a combined 33,000 tonnes of gold, making the official sector the largest single gold holder in the world. However, since central banks engage in gold lending and gold swaps, where gold is transferred to commercial bank borrowers (bullion banks), and the central banks then hold a claim on the amount of lent gold, the amount of gold that the official sector actually holds is probably far less than 33,000 tonnes. Gold lending and leasing by central banks by definition increases the supply of gold to the market and will have a subduing influence on the price.
Famously, US Federal Reserve chairman Alan Greenspan in 1998 when addressing the U.S. House of Representatives Committee on Banking and Financial Services commented that “central banks stand ready to lease gold in increasing quantities should the price rise.”
As gold lending positions are continually rolled over by the bullion banks, these gold lending deals can remain open for years and there will not be a corresponding positive impact on the gold price until the lent positions are closed out. Most of this gold lending activity occurs in the opaque and secretive London Gold Market, facilitated by the Bank of England as well as through the BIS in Switzerland and the Banque de France in Paris. As such, due to the market’s lack of transparency, there is little information on the true scale of gold lending and outstanding gold swaps, and what the gold price would be in the absence of this gold lending. Likewise, if the true scale of these gold lending activities was revealed, it would indicate how much physical gold the official sector is missing, that eventually needs to be bought back.
There is ample documentation from the 1980s detailing that central banks fear rising gold prices, and that they at times plan or engage in schemes to regulate and stabilize any increase in gold prices. This was in an era of supposedly free gold markets. See for example "New Gold Pool at the BIS Basle, Switzerland: Part 1" and "The Bank of England and the London Gold Fixings in the 1980s".
Gold supply available to the gold market at any given time consists of gold from mine production (new supply) and also existing gold from above ground stocks of gold.
In their demand - supply equations, the prominent gold consultancy companies such as Thomson Reuters GFMS, Metals Focus and CPM Group, define gold supply as gold mine production, gold scrap supply and gold producer hedging / dehedging, but to this could be added other gold supply categories such as central bank gold bars that are sold or lent into the market and then transformed into smaller gold bars such as 1 kg gold bars.
New gold supply from gold mining production is approximately 3200 tonnes per year. Existing above ground stocks of gold total approximately 190,000. In theory, nearly all above ground stocks of gold will be available to the market at the right price.
Gold has been known to human civilisations for over 6000 years, and has been used as a form of money for more than 2500 years. During this time gold has performed a number of monetary functions. It has circulated directly as gold coinage, been used to back circulating paper currencies, and been the anchor of the international monetary system.
The first recorded use of gold coins as circulating money is attributed to the Lydian civilization under King Croesus in circa 560 BC. Lydia was located in an area which is now in modern Turkey. Following this, gold coinage was adopted and used in Persia, Ancient Rome, and the Portuguese and Spanish empires. Circulating gold was then subsequently used in the British Empire, the United States, and in many other countries through the 19th century and 20th centuries, During the same era, many countries also were part of various gold standards, where gold backed the monetary system and the money supply.
Right up to August 1971 when the US suspended US dollar convertibility into gold, gold was still the anchor of the international monetary system. Today gold still continues to be held in substantial quantities by the central banks of the world as a reserve asset on their balance sheets.
The contemporary global gold market comprises two sets of gold market venues, namely the paper gold markets of London and the COMEX which predominantly trade derivatives on gold and synthetic fractionally-backed paper claims on gold, and the physical gold markets which trade real physical gold, such as spot trading on the Shanghai Gold Exchange. Currently, the international gold price is almost entirely determined from trading in the London OTC and COMEX derivatives gold markets.
However, if in the future, there was a general shift in investor sentiment to a preference for holding physical gold and away from holding the fractional claims on gold traded in the paper gold markets, this could cause a disconnect between the gold prices set by the two sets of venues. A shift towards physical would increase physical gold demand at the margin causing a rise in prices in the physical gold market. At the same time, selling pressure in the paper gold markets as investors sought to convert or sell their fractionally-backed paper claims and move into physical, would cause a fall in the prices derived in those paper markets (the international gold price).
A trigger that could cause such a shift would be, for example, a realisation by a critical mass of paper gold investors that their claims on physical gold were inadequately backed to allow conversion into physical gold. For more discussion of this subject, see the BullionStar article “What sets the Gold Price – Is it the Paper Market or Physical Market?”
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