A quick tutorial on how the spot price of gold is determined.
What is spot?
Spot is a reference to time. It is simply today’s price to exchange a good or service today. Spot transactions should be thought of as transactions in the present moment. Whether its gold, oil, dollars or anything else, if you want it today that’s a spot transaction. Like Amazon Prime Now delivery — those are spot transactions.
Spot = today by midnight at the longest or this exact second at the shortest.
Who decides the spot price?
Gold spot is quoted twice each day by the London Bullion Market Association (LBMA) at 10:30 and 15:00 London BST. These time periods are often referred to as the morning fix and afternoon fix.
The twice-daily auction for the LBMA is conducted by the ICE Benchmark Administration.
To find the spot price visit this link: ICE Report Center – Data
How is the spot price determined more than twice per day?
Unfortunately, the LBMA only provides a spot price twice daily. Like most markets, gold trades throughout the day and night while the LBMA prices are static and only update twice per day. For buyers and sellers of gold in the spot market, there needed to be a way to agree on a dynamic spot price.
Fortunately, a good solution exists and only requires basic math: Gold futures.
What are gold futures?
Gold futures are simply an agreement to trade gold in the future, such as in 30 days or one year, at a price agreed today.
Gold futures are a very deep and liquid market and there are several gold futures exchanges around the world. The largest and most respected in the world, however, is known as the COMEX.
To keep it simple, just remember that spot equals “today,” or even more specifically, it could mean right this second. Futures equals anything beyond today, in other words, the future!
The relationship between LBMA spot and COMEX futures
If we have a spot price from LBMA that is given twice per day and we have a futures price from COMEX that is updated throughout the day, we can use some simple math to net-present value the COMEX futures prices to today. In reality, we need only look at the COMEX futures price at 10:30 and 15:00 BST, when LBMA releases their spot prices, and compare the difference. Once we know the difference between the spot price and the futures price, we can calculate a dynamic spot price. Problem solved!
Even though COMEX does not publish this dynamic derived spot price, it is often referred to as COMEX spot by market participants.
The details of dynamic spot gold prices
COMEX gold futures are available for the following months: February, April, May, June, July, August, October, and December.
Spot is calculated by using the futures price from the most active futures contract, which is usually the contract with the earliest date, also known as the “front” or “near” month. Please note, however, that the most active and front-month are not necessarily the same. Spot is calculated from the most active contract. Traders often move their positions from the front month to the next upcoming month. That means the most active contract could be the second month or even third-month contract where the most volume is found.
What is an exchange for physical (EFP)?
EFP is simple. EFP is the difference between the most active futures contract price and the COMEX spot price.
If someone with a futures contract decided they wanted to trade their futures contract for physical gold today in the spot market, it would be called an Exchange for Physical.
If the spot price is higher than the price of the most active futures contract, then the person wanting to have gold today rather than waiting for their gold in the future would have to pay the price differences to exchange their futures contract for the physical gold in today’s spot market. Depending on market dynamics, that could also work in reverse where the spot market is less than the futures price. Thus EFP can be a positive or negative number.
Who can trade at COMEX spot prices?
Let’s imagine COMEX spot as the prices available to the biggest players in the gold market. That’s usually banks like J.P. Morgan and large brokerage firms like INTL FCStone that are trading between each other.
All two-way dynamic markets have a price at which a buyer is willing to pay, known as the “bid,” and a price at which the seller is willing to sell, known as the “ask” or “offer.” The difference between the bid and the ask is the spread. Pretty easy right?
Using the COMEX spot prices, these large financial institutions then add their spread and quote their own spot price to their customers.