Investors often ask questions like: “What is the Price of Gold?” or “What is Gold Trading at?”. We generally reply by stating the Spot Price of Gold as it is posted on various mercantile exchanges around the world such as in New York (NYMEX), Chicago (CME), London, Zurich, Tokyo, and Hong Kong. That is the price you even see posted on this website.
But What is a Spot Market? The spot market is where financial instruments, such as commodities and securities, are traded for future delivery. In spot markets, spot trades are made with spot prices. This varies from a futures market since a futures contract is based on delivery of the underlying asset at a future date. The current price of a financial instrument is called the spot price. It is the price at which an instrument can be sold or bought at a particular time and at a specified place (like an exchange). The New York Stock Exchange (NYSE) is an example of an exchange where traders buy and sell stocks. This is a spot market.
The Chicago Mercantile Exchange (CME) is an example of an exchange where traders buy and sell futures contracts. This is a futures market exchange. When it comes to precious metals, most contracts traded on these exchange are settled in cash, rather than on physical delivery of the precious metals. In other words, most of these contracts particularly when it comes to precious metals are simply instruments traders use to place bets of the future prices of the precious metals. Spot prices, while helpful in understanding the trends in gold and silver, are paper instruments and should not be confused with the delivery of a certain bar or coin in a physical form.
Trades that occur directly between a buyer and seller are called over-the-counter (OTC). These trades are not facilitated by a major exchange. In an OTC transaction, the price may be based on spot, or a future price/date. In an OTC transaction the terms are not necessarily standardized, and therefore, may be subject to the discretion of the buyer and/or seller. As with exchanges, OTC stock transactions are typically spot trades, while futures or forward transactions are often not at spot.
Are we confused yet? Let’s try to understand spot market considering a tangible asset:
With precious metals, how could one price be the same for every particular product? Although a bar or coin may be one total troy ounce, its fineness or purity may differ. Products may differ on quantity available, demand for a particular product, the condition of the product, product presentation, and rarity. Also for certain products, the carrying cost, wholesale prices, retail prices, and future prices of the underlying commodity may be rising or falling. Is the particular market in a bull or bear phase? Does the product’s price include insured shipping, management fees or sales tax?
Many precious metals dealers are advertising “lowest prices” and “buy closest to spot”. Our research has shown that many of these dealers are newer firms trying to attract customers without spending the advertising dollars that larger firms are paying. Many of these firms have been shut down due to bait and switch tactics which leave customers owning a product they had no intention of owning. Many of these low-cost products are the ones that the finest dealers in the country do not want. Many times the quantity offered at these prices are minimal and meaningless to certain accredited investors. Disclaimers are clearly on these sites that say products may be “discolored, chipped, or dented.” Packaging may be “torn, ripped, used, and quite possibly flawed.” Don’t be a client of a dealer who is building their client base on specials or deals. Your nest egg deserves the best products available and the best research.
At Midas Gold Group we are committed to providing the fairest product prices we can while considering the market we are competing in. The best advice we can give is to call for a complete explanation of the product you may be considering. We will use all of our industry contacts to provide the best possible options and recommendations for each individual investor. We can also explain how your particular product may (or may not) move accordingly as the spot market moves up and down on a daily basis.