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Who Determines the Price of Gold?

Thursday, February 28, 2019

Since mankind first discovered gold, it has been viewed as a precious asset, used to make highly coveted objects of art and jewellery and traded between investors. We have used it as currency in the form of coins and formed it into bars to make is more storable. But have you ever wondered who decides the gold price?

Here we take a closer look at how the price of gold per gram is determined and who sets the price of gold in the UK today.

Gold as an investment

Investors who have spread their cash over various commodities, stocks, funds and shares often also buy gold in order to diversify their portfolios. This is because they see it as a hedge against inflation or currency value fluctuations. After all, gold is known to stand up against these variables and is traditionally thought to retain value through economic and political turmoil, offering a shelter for investors from what can sometimes be a volatile investment market.

So who actually determines the price of gold?

The very first gold mined in Brazil in the gold rush of the 1600s came to London and the city has been home to the only bullion market whose accreditation is globally accepted ever since. For gold prices, London is the centre of the universe. The bullion market whose accreditation is observed all over the world is called the London Bullion Market Association (LBMA).

The gold price per gram is now set by the LBMA’s ICE Benchmark Administration (IBA) using an auction system that is operated electronically. This has been the case since 2015, before which a very dated telephone system had been used for more than a century.

In recent years, every day at 10:30am and at 3:00pm UK time, the LBMA publishes the gold price. The actual price of gold per gram changes throughout the day in response to trading that takes place via an anonymous auction every 45 seconds. Gold buying and selling activity carried out by investors, central banks and consumers all over the world impacts the price of gold per gram.

What pricing models are used to determine the price of gold in the UK today?

The gold spot price and the gold futures prices are used to help the LBMA value gold each day. Both these pricing models are taken into account. Let’s look at these a bit more closely.

Gold futures prices

The gold futures prices are those quoted in contracts agreeing a deal involving the delivery of a specific amount of gold on a future date. The prices quoted on these gold futures contracts are the basis of the LBMA Gold Price.

How are gold futures prices actually determined?

Several factors affect the gold futures prices quoted in contracts. These include the levels of supply and demand for gold, the rate of return for the recipient of the gold, the gold spot price and the likely cost of storing and transporting the gold.

The gold spot price

The gold spot price is the gold price per gram paid currently. It is worked out as the average gold price quoted at any current time by traders using the gold on the wholesale market. The prices are quoted for gold located in London. Gold settled in other locations, whether it be Australia, Dubai or New York, is then quoted in terms of a premium or a discount to the UK spot rate.

How do general market conditions affect the price of gold per gram?

Economic uncertainty or even recession can have a major impact on the gold price. This is due to the fact that gold is seen as a ‘safe haven’, which means that the world’s central banks will increase their exposure to gold when uncertainty or economic turmoil looms.

What effect do currency value fluctuations have on the price of gold per gram?

Monetary policies, such as quantitative easing, or inflation, for example, can lead to currencies depreciating and investors will often respond by increasing their gold exposure. Due to the finite nature of gold, it often retains its value, whereas currencies are easily affected by wider economic factors.

The price of gold increases when a greater number of people are investing in it. As a result, when currency values fall, the price of gold per gram often increases.

What effect does supply and demand have on the gold price in the UK today?

The rules of supply and demand are simple and well-known. If there is a shortage of a particular commodity, but demand continues, the price of that commodity will often increase. This is true of everything from gold, to food and property.  

If gold supplies reduce and demand increases, the gold price per gram will usually rise. During times when the demand for gold falls off, but supplies are plentiful, the price will fall. You must remember, though, that gold supplies are finite. No more can be produced, just mined.

So should I invest in gold?

Gold has long been seen as a relatively low-risk asset class that can hold its own through difficult economic and political times. Investing in gold can be a useful way to spread the risk in your investment portfolio and you can start buying gold coins and bars with as little as £50.

Perhaps the most durable reason why gold has remained such a popular asset class throughout the ages is that it is tangible. You can hold it in your hands, put it physically in a safe and know that it isn’t going anywhere unless you want to sell. It’s also stunningly beautiful and has an enduring allure that has attracted people to it for thousands of years.
You can keep up to date with the latest gold prices here.