Who Sets The Price Of Gold
The spot price of gold or how much gold is worth at a particular moment in time is determined by trading activity on the world’s gold bullion markets. Traders on these exchanges are actively engaged in trading gold futures contracts. A futures contract is one in which a price is set for a specified amount of gold for delivery at a fixed date in the future.
The real-time, second by second, spot price of gold is the price of the futures contract of the “most active month” as it is trading on the exchange. The most active nearby month is called the “spot month”.
Not all bullion exchanges are created equal. The most important are the COMEX in New York and the LBMA in London between which on any given day, most of the gold spot price action will occur during their trading hours.
Other bullion exchanges exist in major cities such as Tokyo, Hong Kong, Sydney, Singapore, Shanghai, Dubai and Zurich. Given this global reach, a gold spot price is continually being established even when the COMEX and LBMA are closed, allowing gold to be traded 23 and half hours every day excluding weekends.
The London Bullion Market Association (LBMA) is open between 07.30 GMT and 15.00 GMT. For the best part of the 20th century it served as the gold bullion market, exercising massive control on the supply of gold as per the Bretton Woods system in which it was tasked with maintaining the price of gold at $35.
As with any price manipulation system, it was doomed to failure. During the height of the Vietnam conflict, intense pressure on the gold price forced the LBMA to take the drastic action of closing for 2 weeks on March 15th 1968. When it re-opened two weeks later, it had lost its largest supplier of bullion, the South African Reserve Bank which had switched to the Zurich Gold Pool made up of Switzerland’s three main banks: Credit Suisse, Union Bank of Switzerland (UBS) and Swiss Bank Corporation. The LBMA’s role was significantly reduced yet it remains today a major player in the bullion market.
Twice a day at 10.30am and 3.00pm it ‘fixes’ the price of gold thereby providing the official gold price used by producers, consumers and central banks . To individuals and private investors, this price fixing which takes a few minutes is little more than ceremonial. Rather than a ‘fix’ it is more a ‘quote’ of the current gold spot price.
The Commodities Exchange (COMEX) of New York is open between 08.30 NY Time and 13.30 NY Time. It began trading gold futures in New York on December 31st 1974, the first day after which U.S citizens were allowed to own gold after a period of approximately 40 years following Roosevelt’s gold confiscation of 1933.
An active market from the start, it rapidly grew in importance and oversees much of the daily movement in the spot gold price. In 1994 it became a division of the New York Mercantile Exchange (NYMEX) and the process of determining the gold spot price is now based upon the NYMEX ‘Rule Book’. Essentially the spot gold price is determined largely from the most ‘active month’ in the gold futures market i.e. gold that is bought and sold for delivery at a future date.
The combined trading hours of these two exchanges results in the gold spot price today generally seeing the most price action between the hours of 07.30GMT/ 03.30 New York Time and 17.30GMT/ 13.30 New York Time.