WHAT REALLY IS THE GOLD PRICE ?
The price of gold is primarily determined by a combination of factors:
Are there more that we do not know?
Yes there is.
Gold price behaviour is and always been perplexing. The behaviour has foxed everyone over the centuries. Some have made it rich, some have been brought to rubble. Punting on gold (even silver) is a risky business.
However, let’s examine the current gold prices and why has gold shot up during the pandemic. This I’ll try to answer shortly.
In mean time let me tell you few facts: It is clear to pundits that the less is the information available, the greater will be the price volatility. It is an agreement between market participants to buy and sell gold at a fixed price or to maintain the market conditions to make the price stay at a certain level by controlling the supply and demand.
When are gold prices fixed?
Gold prices are fixed at the London Bullion Market Association on a daily basis (business days) at 10:30 am and 3pm (London time).
In which currency is gold rate fixed?
The gold fix is conducted in the US dollars, the Pound Sterling, and the Euro.
Who are the current participants in gold price fixing?
Barclays, Bank of China, Standard Chartered, Bank of Communications, ScotiaMocatta (Scotiabank) although now going slow, Goldman Sachs, Societe Generale, HSBC Bank USA, Toronto-Dominion Bank, UBS, JPMorgan Chase and Morgan Stanley.
The four categories of gold consumers:
- Jewellery producers
- Federal banks & Reserve Bank of India.
Types of gold rates
There are 2 types of Gold rates – spot price & a futures price.
Spot: This is the current market price at which gold is bought or sold for immediate payment and immediate delivery.
Futures: This is the price at which the participants in a futures contract agree to transact on the date of settlement.
What are the sources of gold pricing?
Over-the-counter (OTC) markets: This decentralised market, in which market participants trade stocks, is not listed on an exchange. The market participants trade by phone instead of a physical trading floor. Financial markets act as market makers and offer a bid or ask for a bid.
Bullion traders, Jewellers & Banks: Bullion traders, Jewellers and banks trade large volumes of gold for their clients. They buy and sell gold as part of the trading or manufacturing process which serve as a reliable source of spot pricing for gold.
Futures price is sourced on exchanges. Gold futures are traded on major exchanges around the world. These exchanges are the primary source of gold futures prices.
What are the major gold exchanges?
Multi Commodity Exchange (MCX), Mumbai
Commodity Exchange Inc. (COMEX), New York
Tokyo Commodity Exchange, Inc. (TOCOM), Japan
Dubai Gold and Commodities Exchange (DGCX), Dubai
Shanghai Gold Exchange (SGE), China
Istanbul Gold Exchange (IGE), Istanbul
Now that you know a bit of the behind the scenes of how gold is traded, I’ll come to why has gold shot up during the pandemic?
COVID-19 has impacted gold like never before. Mines have been shut. Operating a gold mine Is a complex matter, employing 1000s of people, machines and power. With the pandemic people had to be moved out shutting gold (and silver) mines. Restarting a mining operation is a 6 month process. Therefore as of August 2020, the normalisation process hasn’t even begun. Hence gold supplies are restricted to above ground stocks. That means scarce supply. The low cargo traffic has impacted transit of precious metal from their storage places to manufacturing or countries where they are required. With Customs offices being in restricted operations, clearing consignments also take time.
Then the governments need money. To print more money. That needs the backing of gold. If not inflation will zoom. Therefore tons of gold is being transported to countries like Germany, India, Japan, USA and UK. That puts pressure on availability. Pushing prices up.
Will this mean gold rates will reduce once Covid vaccine is found? Let’s note that the damage to the economy is palpable. Two financials balance sheets will be affected. Till March 2022. Lost business, profits cannot be made up easily. Hence there will be an economic slowdown. That may even bring flash points around the world. The rich will get richer.
The poor will get poorer. That means more gold will be booked by the rich to protect their investments. This will make gold even more resilient. Such factors make a easy cocktail for volatility. With an Indo-Chinese stand off, world tensions remain. Inflation is likely. Hence gold as a natural reserve is likely to be a long term hedge, with money moving out of stock markets and other low yield investments to gold.