Gold pricing: The importance of the gold trading price
A summary of the essentials of gold pricing
This valuable precious metal and the development of the gold price
Gold has always had a special attraction for humans: For thousands of years we have valued the lustre of gold, its enduring value stability and diverse uses. Whether presented as elegant jewellery, high-quality electronics, or a lasting investment asset, this indestructible precious metal has many benefits and potential applications. Based on one troy ounce (31.103 grams), the value of gold is determined daily by the world’s major commodity exchanges – a price which governs the trading of gold bars and gold coins. Elsewhere, paper gold also influences market pricing.
Disclaimer: This article provides basic information about the gold price without claiming to be a comprehensive account. OrSuisse is specialist storage provider with no precious metal trading facilities. Thus we do not provide any binding price information nor do we offer to buy or sell gold or other precious metals.
This article provides basic information about the gold price without claiming to be a comprehensive account. OrSuisse is specialist storage provider with no precious metal trading facilities. Thus we do not provide any binding price information nor do we offer to buy or sell gold or other precious metals.
The gold price refers to the current world market price for one troy ounce of gold. The “troy ounce” (oz tr.), as it is often termed, amounts to precisely 31.1034768 grams – the old apothecary ounce. However, this unit refers only to the pure precious metal content of a product. This “spot price” for one ounce of gold is quoted in US dollars, with the price in other currencies derived directly from this USD gold price and then recalculated in accordance with the prevailing exchange rate. This procedure enables respective markets to quote the gold price in CHF or EUR, for example.
The gold price is also influenced to some extent by major market participants such as central banks, mining companies and the investment sector, as well as trading in paper gold. Raw material gold is traded daily at defined times on international stock exchanges such as the New York Mercantile Exchange (NYMEX). The New York Stock Exchange integrates the COMEX (Commodities Exchange), which is the world’s largest trading venue for gold futures contracts. Other important gold exchanges include the Shanghai Gold Exchange (SGE) in China and the Tokyo Exchange Group (TOCOM) in Japan.
Over-the-counter trading in physical gold, using Good Delivery gold bars, also plays a crucial role in determining the price of gold. The London Bullion Market (LBM) is the global centre for gold trading “over the counter” (OTC). The London Gold Fixing takes place twice a day, and the demand from major banks belonging to the London Bullion Market Association (LBMA) is particularly influential in this procedure.
Factors influencing the price of gold
As with almost every other trading commodity, supply and demand are the two principle factors which essentially determine the value of this precious metal and its current trading price. The supply of gold is influenced by production volumes and hedging sales (forward contracts by mines, for example, which stabilise and secure the price of their future production) involving large mining operators, as well as by the available quantities of recycled gold. A sale of inventory by central banks and/or by other institutional and private investors can also influence the gold supply.
In terms of demand, jewellery manufacturing has traditionally been the largest gold buyer, accounting for almost 50% of the market. Other major buyers include central banks and the investment sector, which can itself be further subdivided into physical bullion goods such as gold bars and gold coins, as well as exchange-traded financial products such as ETFs or ETCs. Unlike the trade in physical silver, the industrial demand for gold only accounts for around 7% of the market.
Other major influences affecting the price of gold include interest rates and inflation in different countries. In addition, geopolitical events such as armed conflicts, energy crises or health risks have repeatedly led to an increased demand for gold. Currency fluctuations can likewise prompt gold purchases, and here the US dollar is an important key currency. For example, when the Swiss franc is strong compared to the US dollar, gold can be bought at comparatively cheaper prices – so selling gold would then prove disadvantageous. However, when investors purchase gold coins or gold bars in Switzerland, it is the gold price in Swiss francs that counts.
When determining the price of gold, a distinction must also be made between the spot price and the futures price (the future market price). The spot rate defines the price for traders wishing to buy or sell physical gold products in the current market, while futures prices relate to the gold price quoted in contracts created to buy or sell gold at a defined point some time in the future. So spot and future prices will usually differ from one another simply because futures contracts are traded independently and will naturally specify different time periods. This, of course, means they can thus be above or below the current spot price. While gold futures contracts are one of today’s important investment products, they are also associated with a higher risk and thus require advanced market knowledge.
The historical development of the gold price
Modern retrospectives on the development of the gold price usually look back to the 1970s. The end of the Bretton Woods system (which tied the gold price to the US dollar) in 1973 signalled a new era in which the price of gold was freely determined. This subsequently led to a significant increase over the ensuing years, with the cost of one ounce initially rising from USD 65 to USD 850. This latter peak was reached in January 1980 and was to last for almost two decades.
By mid-1999, gold had reached a new low of USD 252 for the first time, which then prompted another change. Following the global financial crisis dating from 2007, an upward trend began. By 2011, this impetus had created a new all-time high gold price of USD 1,900. The following years once again marked a period of consolidation, before new highs of up to USD 2,063 arrived with the Corona pandemic in 2020 and the outbreak of the Ukraine war in 2022. In the period that followed these events, central banks – especially in China, as well as those in Poland and Singapore – consolidated their gold stocks in order to strengthen their own national currencies. Since then, gold prices have continued to rise steadily.
How does the economy influence the price of gold?
In general, it can be said that the price of gold tends to rise when the economy is performing poorly. And conversely, when the economy is flourishing, investors are more likely to favour stocks and other assets rather than putting money into gold as a “safe haven” destination (see the next chapter also). According to market analysts, this activity can soon lead to a fall in the price of gold. So, in times of economic uncertainty, investors are more likely to turn to gold, given that, for many, this precious metal represents a calm, stable anchor in difficult times. A good example of this phenomenon occurs during a period of rising, or generally high, inflation: In such a climate, capital is often secured by purchasing gold to offer some protection against capital’s consequent loss of purchasing power.
The behaviour of central banks is another important indicator of the price of gold. These institutions often hold large gold reserves in the form of good delivery bars – standard gold bars of some 400 ounces (around 12.4 kilograms). The reasons behind this strategy are the same as those which encourage private investors to buy gold. These would, of course, include gold’s historical status as an ultra-reliable asset – a reputation which has persisted down the ages. Furthermore, gold has regularly proven itself in times of crisis due to its long-term value retention. And due to this low risk of default, gold is often used alongside other assets to diversify a portfolio and thus spread any financial risk. In addition, extensive gold reserves can promise stability and security in the event of a currency collapse.
According to the World Gold Council, the USA has the largest gold reserves with over 8,000 tons, ahead of Germany (3,350 t), Italy (2,450 t), France (2,430 t) and Russia (2,230 t). In total, around a fifth of all the gold which has ever been mined is now stored in the vaults of central banks – which is why central banks are considered a key driver of the gold price.
Gold as an investment product
What applies to central banks applies equally to private investors. The only difference is that private investors rarely buy 12-kilo bars, but purchase gold bars or gold coins in the more commercially available denominations of one troy ounce and 100 grams up to bars weighing one kilogram. Such bullion gold tends to be purchased more often in times of crisis. Because of its stable value, gold has for decades been considered a safe haven whenever the economy is burdened by geopolitical incidents, or when there are imminent fears of inflation and recession. So, despite the attractions of investments such as stocks or bonds, gold products are generally the go-to option at such times.
Value stability is an enduring feature of physical gold. Although it does not pay regular interest or dividends, it still tends to show a continuous increase in value, especially over the longer term. Investors can see this for themselves by comparing the development of the spot price of gold over the last few years.
The value of gold (and its durability) can also be illustrated using a simple everyday example: In 580 BC, the Babylonian ruler Nebuchadnezzar II determined that an ounce of gold was worth about 350 loaves of bread. The amazing thing is that this equation still largely holds true in modern times. At a price of around 4 Swiss francs for one loaf of bread, you would have received the same number of loaves at the end of 2019. And nowadays, you could expect to receive around 500 loaves of bread in exchange for one troy ounce of gold – in return for one Krugerrand coin, for example.
Tips for physical gold storage
Thanks to its high value density, gold is much easier to store than silver. For example, a physical gold holding worth 500,000 Swiss francs can still be easily stored in a safe deposit box, while a silver holding of similar value would require far more storage space. Nevertheless gold bars and gold coins need to be stored in a manner appropriate to their value. From this perspective, home safes and bank safe deposit boxes are generally inadequate, or else cannot meet customer expectations of respectful privacy and discreet processing. So many investors prefer to store gold outside the EU.
Private storage providers such as OrSuisse from Switzerland can compensate for these shortcomings because they operate bank-independent facilities. At OrSuisse, gold is stored in a modern high-security environment with client holdings kept individually in allocated and segregated storage. In contrast to collective storage arrangements, this means the original precious metal delivered into storage always remains the property of the client. If their gold is later removed from storage, the same pieces would then be returned to the customer.
In addition to this, OrSuisse clients also receive tradeable warehouse receipts for their stored gold. These can be used just like securities under the Swiss Code of Obligations. So OrSuisse negotiable warehouse receipts can be easily transferred by endorsement, or could be used to secure loans. Anyone in possession of a receipt upon which they are named, or their name is endorsed, is thus entitled to request the release of the precious metal described in the document. This effectively means physical gold can be sold at any time, even without any movement of goods.
A summary of the essentials of gold pricing
- The price for one troy ounce of gold is determined daily on international trading platforms and initially issued in US dollars.
- This price is then converted for individual countries using the current exchange rates – which produces a gold price in CHF, for example.
- The most important gold-trading markets include the New York Stock Exchange COMEX for gold futures contracts and the over-the-counter London Bullion Market for physical gold.
- The gold price is dependent upon supply and demand. However, currency fluctuations, geopolitical events, key interest rates and inflation can also influence the gold price.
- The current spot price and futures prices quoted in gold futures contracts are equally important for determining the gold price.
- One fifth of the world’s total gold reserves are stored in central bank vaults and the USA has the world’s largest gold reserves. The buying or selling of gold held by central banks can influence the gold market.
- Physical gold is considered a safe haven, especially in times of crisis. During economically difficult times, investors prefer to buy gold bars or gold coins as protection against the effects of inflation and recession.
- Bank-independent individual storage in a high-security warehouse in Switzerland is a good option for the safe storage of physical gold.
- The storage provider OrSuisse issues tradeable warehouse receipts for deposited gold, which can be used just like securities. These OrSuisse negotiable warehouse receipts allow the sale or transfer of precious metals without any physical movement of goods.
