The value of gold is typically expressed in terms of the exchange rate with the US dollar. We refer to the value of the precious metal measured in USD per ounce. This is commonly known as the "London Spot Price" of gold. The London Spot Price is the global benchmark used for valuing gold worldwide.
The value of gold is typically expressed in terms of the exchange rate with the US dollar. When we hear that the gold is up or down, we refer to the value of the precious metal measured in USD per ounce. This is commonly known as the "London Spot Price" of gold.
London Spot Price
The London Spot Price is the global benchmark used for valuing gold worldwide. The term ‘Loco London’ refers to gold and silver bullion that is physically held in London; ‘loco’ is related to the Latin word ‘location’, and here it is used as a prefix indicating a specific place. Therefore, if gold were exchanged in Tokyo, it would be called Loco Tokyo or Tokyo gold, or if the exchange took place in Hong Kong, it would be Loco Hong Kong or Hong Kong gold.
Gold has no nationality, but London became a hub for gold historically and is still a major centre for gold delivery. In practice, when an order to buy gold is made, it is converted into US dollars. The payment is made in New York, and the funds are transferred to accounts in London. This process, regulation, or structure is universally accepted. Companies engaged in gold trading typically hold gold accounts in London and conduct deliveries there.
Gold trading worldwide
Trading based on the London Spot Price is conducted in most countries and regions worldwide. The gold trading day begins in Australia and New Zealand, followed by Tokyo, Hong Kong, Singapore, Zurich, and London, and finally ends in New York.
Almost simultaneously with the New York close, trading for the next day starts in Australia and New Zealand. This means that the gold market operates 24 hours a day. The structure of buying and selling involves banks, securities firms, and trading companies.
The rule of one price
Gold can be traded at the current spot price and through future contracts involving predetermined future prices and settlement dates. Moreover, gold follows the Law of one price. This law states that the price of an identical asset or commodity remains the same globally, regardless of where and when it is purchased within the same period. This is due to arbitrage trading.
Arbitrage trading aims at exploiting price differences between theoretically equivalent items. For example, buying at a lower price and selling at a higher price to increase profits. In the gold market, securities dealers engage in continuous arbitrage trading. They calculate the theoretical prices of gold based on different currencies and interest rates in different countries, identify price differentials, and conduct arbitrage trading. Initially, there may be price variations, but when prices decrease, the asset will be bought, leading to price increases. When prices move up, gold is sold, causing prices to decline, ultimately resulting in the convergence of prices.
It is important to note that though gold follows the Law of One Price, the price of gold is not absolutely one price in the market.
Many factors in the market can affect this rule. Transport and insurance costs for physical delivery will add to the price. Taxes or import duties vary from country to country and may impact the gold price. Currency exchange rates may affect local currency pricing. Market hours and liquidity may cause short-term divergence of prices. Hence, while a 1oz gold coin in a country might sell at a premium due to demand, local taxes, or limited supply; on a wholesale level (institutional spot or futures markets), prices will tend to converge.
Gold’s link to the USD
The value of gold is expressed in terms of the exchange rate between 1 ounce of gold and the USD; in other words, how many US dollars it takes to buy 1 ounce of gold. The ounce is the unit of measurement commonly used for precious metals like gold, platinum, silver, and palladium, and 1 ounce equals 31.1035 grams. While dealing with decimals can be cumbersome, it is essential to remember this value if you have an interest in gold. The ounce serves as the fundamental unit for precious metals.
After World War II, the US became the centre of the global economy, and the USD became the benchmark for assessing the value of various currencies. Similarly, the value of gold is measured against the USD. This is why statements like ‘gold is expected to break through $2000’ or ‘gold is projected to drop below $1500’ refer to how much 1 ounce of gold costs in USD. The XAUUSD is traded 24 hours a day worldwide.
Keen to start trading gold?
Gold has been making the headlines recently, reaching all-time-highs. However, it has also experienced a correction due to profit-taking after reaching record highs. Nonetheless, continued investor interest is likely to create demand again.
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