Gold has been widely used throughout the world as money, for efficient indirect exchange (versus barter), and to store wealth in hoards. For exchange purposes, mints produce standardized gold bullion coins, bars and other units of fixed weight and purity.
Although the prices of some platinum group metals can be much higher, gold has long been considered the most desirable of precious metals, and its value has been used as the standard for many currencies. Gold has been used as a symbol for purity, value, royalty, and particularly roles that combine these properties. Gold as a sign of wealth and prestige was ridiculed by Thomas More in his treatise Utopia. On that imaginary island, gold is so abundant that it is used to make chains for slaves, tableware, and lavatory seats. When ambassadors from other countries arrive, dressed in ostentatious gold jewels and badges, the Utopians mistake them for menial servants, paying homage instead to the most modestly dressed of their party.
Gold rate determination- History
The price of gold is determined through trading in the gold and derivatives markets, but a procedure known as the Gold Fixing in London, originating in September 1919, provides a daily benchmark price to the industry. The afternoon fixing was introduced in 1968 to provide a price when US markets are open.
Historically gold coinage was widely used as currency; when paper money was introduced, it typically was a receipt redeemable for gold coin or bullion. In a monetary system known as the gold standard, a certain weight of gold was given the name of a unit of currency. For a long period, the United States government set the value of the US dollar so that one troy ounce was equal to $20.67 ($0.665 per gram), but in 1934 the dollar was devalued to $35.00 per troy ounce ($0.889/g). By 1961, it was becoming hard to maintain this price, and a pool of US and European banks agreed to manipulate the market to prevent further currency devaluation against increased gold demand.
On 17 March 1968, economic circumstances caused the collapse of the gold pool, and a two-tiered pricing scheme was established whereby gold was still used to settle international accounts at the old $35.00 per troy ounce ($1.13/g) but the price of gold on the private market was allowed to fluctuate; this two-tiered pricing system was abandoned in 1975 when the price of gold was left to find its free-market level. Central banks still hold historical gold reserves as a store of value although the level has generally been declining. The largest gold depository in the world is that of the U.S. Federal Reserve Bank in New York, which holds about 3% of the gold known to exist and accounted for today, as does the similarly laden U.S. Bullion Depository at Fort Knox. In 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes.
Sometime around 1970 the price began in trend to greatly increase and between 1968 and 2000 the price of gold ranged widely, from a high of $850 per troy ounce ($27.33/g) on 21 January 1980, to a low of $252.90 per troy ounce ($8.13/g) on 21 June 1999 (London Gold Fixing). Prices increased rapidly from 2001, but the 1980 high was not exceeded until 3 January 2008 when a new maximum of $865.35 per troy ounce was set. Another record price was set on 17 March 2008 at $1023.50 per troy ounce ($32.91/g).
In late 2009, gold markets experienced renewed momentum upwards due to increased demand and a weakening US dollar. On 2 December 2009, Gold reached a new high closing at $1,217.23. Gold further rallied hitting new highs in May 2010 after the European Union debt crisis prompted further purchase of gold as a safe asset. On 1 March 2011, gold hit a new all-time high of $1432.57, based on investor concerns regarding ongoing unrest in North Africa well as in the Middle East.
From April 2001 to August 2011, spot gold prices more than quintupled in value against the US dollar, hitting a new all-time high of $1,913.50 on 23 August 2011, prompting speculation that the long secular bear market had ended and a bull market had returned. However, the price then began a slow decline towards $1200 per troy ounce in late 2014 and 2015.
Purity Of Gold
Like other precious metals, gold is measured by troy weight and by grams. When it is alloyed with other metals the term carat or karat is used to indicate the purity of gold present, with 24 carats being pure gold and lower ratings proportionally less. The purity of a gold bar or coin can also be expressed as a decimal figure ranging from 0 to 1, known as the millesimal fineness, such as 0.995 being very pure.
Consumption pattern of Gold
The consumption of gold produced in the world is about 50% in jewelry, 40% in investments, and 10% in industry.
According to World Gold Council, China is the world's largest single consumer of gold in 2013 and toppled India for the first time with Chinese consumption increasing by 32 percent in a year, while that of India only rose by 13 percent and world consumption rose by 21 percent. Unlike India where gold is used for mainly for jewellery, China uses gold for manufacturing and retail.
Day to day Change of Gold Prices
Gold price do change everyday. There are some price fixing body and some factors which drive the price of Gold and even other precious metals. Here are the factors playing role behind the jumping graph of the gold price.
The basic factor which is the ABC of economics, the Demand and supply law which plays a very crucial role in the marking of price.
The price fixing and administration body for the gold.
Its very well known, The basic demand and supply Law is main factor. The price increases when there is high demand against the insufficient supply of gold. Its vice-versa when there is high supply in comparison with the low demand. Consumer and the suppliers are the De facto governors of the price.
There are some pricing fixing and its governing and administration bodies which work on the international and nation level. Before 2015 London Gold Fix was the regulating body. But in 2015 a new body named LBMA (London Bullion Market Association)was formed and was administered by ICE Benchmark Administration. This organization in co-ordination with the national organization of the various governments of the world in jointly decide what should be the price to cost the Gold/Unit. In India MCX (Multi commodities Exchange), regulates the price of gold, with a keen examination of Demand and supply in the Indian Market, International Market, Market condition (Inflation or deflation) and it co-ordinates with LBMA. But on an informal note, LBMA doesn’t disturb or interrupt more in the decision taken by the nation bodies like MCX, TOCOM, COMEX, SGE etc. Thus they fix both Spot Price and Future price of gold.
The price of Gold Changes 24x7 & there is no fixed closing price for gold.
Interesting terms about gold pricing
Whether you trade or mine or recycle or sell precious metals, you must understand how to price them. Determining the value of precious metals is not quite as straightforward as pricing assets such as equities or fixed income.
In this page, we explain how gold prices are set, answering questions such as:>
- What is “the fixing” and who sets these prices?
- What are spot and futures prices?
- What are the sources of spot and futures prices?
- What are precious metals?
WHAT ARE PRECIOUS METALS?
A precious metal is a rare, naturally occurring metallic chemical element of high economic value. Gold, silver, platinum, iridium, rhodium and palladium are precious metals.WHAT TYPES OF FIRMS DEAL WITH PRECIOUS METALS?
There are four types of firms in the industry:
WHO ARE THE CONSUMERS?
There are three categories of consumers:
- Jewelry producers
WHAT IS THE FIXING?
The fixing (or fix) is a daily process, an agreement between participants on the same side in a market to buy or sell precious metals at a fixed price, or to maintain market conditions such that the price stays at a given level, by controlling supply and demand. Orders are changed throughout the proceedings as the price is moved higher and lower until such time as the orders are satisfied and the price is said to be “fixed”.
On March 20, 2015, the historic London Gold Fix was discontinued and replaced by the LBMA Gold Price, for which ICE Benchmark Administration (IBA) became the administrator.
IBA hosts an electronic auction process for the LBMA Gold Price. This process is independently administered and tradeable, electronically and physically settled, conducted in dollars, with aggregated and anonymous bids and offers, and published on-screen in real time.
The LBMA Gold Price is set twice daily in US dollars at 10:30 am and 3:00 pm each business day.
These are the two types of prices.
The spot price is the current market price at which an asset is bought or sold for immediate payment and delivery. It is differentiated from the futures price, which is the price at which the two participants in a futures contract agree to transact on the settlement date.
OTC Markets: A decentralized market of securities not listed on an exchange, where market participants trade by phone, fax or electronic network, instead of on a physical trading floor.
Financial institutions act as market-makers and offer a bid/ask which acts as the spot price.
Large Banks & Bullion Traders: Banks and bullion traders trade large volumes of precious metals for their clients. They buy and sell precious metals as part of the trading process and, as a result, are reliable sources of precious metals spot pricing.
Exchanges: Precious metals futures contracts are traded in major exchanges around the globe. These exchanges are a key source for precious metals futures prices. The major precious metal exchanges are as follows:
Unlike stocks, which are listed on venues (e.g. NASDAQ, NYSE) with official trading hours and closing prices, precious metals trade all around the world in multiple over-the-counter markets, for practically 24 hours per day. As a result, there is no “official closing price” for precious metals.
Firms that require the capture of a daily “closing price” as a part of their business process have two options:
1. Use the Fix Price for the metal.
2. Use a “Closing Price” calculated by their data vendor. Most data vendors calculate closing prices using a specific, documented methodology. For instance, one of the methodologies used is to take a snapshot of spot prices at a precise time during trading.
Precious metals trade in OTC markets around the globe. Trading starts Sunday at 6:00 pm EST, when the Japan markets open, and ends Friday at 4:30 pm EST, when the U.S. markets close. There is also a 45-minute period from 5:15 to 6:00 pm EST, Monday through Friday, when trading is closed.
How Indian gold prices are fixed
How are the benchmark prices for gold in India fixed? The truth is that there is no commonly accepted benchmark. Given that there is no physical market where gold is bought and sold, participants still rely on informal gold price quotes disseminated by the jewellery trade.
The gold imported into the country is brought in through the nominated agencies, mainly banks. Banks supply this gold to bullion dealers, at a price that includes customs duty after adding a fee to it. The IBJA- Indian Bullion Jewellers Association, a Mumbai-based association of gold dealers, then announces a rupee price for gold every day based on quotes from its member dealers.
These dealers base their quotes on how much gold they would like to buy or sell at a given price. Ketan Shroff, the spokesperson for IBJA, explains- “For the opening and closing rates we provide, we call up ten large dealers and take ‘buy’, ‘sell’ quotes from them. We then average it out to arrive at the price for the day”. This is the daily gold rate (after adjusting for state taxes) that retail buyers usually pay when they purchase jewellery at outlets in their city.
Some gold dealers arrive at the day’s spot price using the near-month gold futures contract on the MCX. Others arrive at the calculation thus. They take the international price of gold, multiply it by the rupee/dollar exchange rate and add the import duty (10 per cent) and other levies such as VAT and Octroi to arrive at the landed price for gold. To this they add the premium that the importing bank demands and also their own profit margin.