Spot gold is a commonly used standard for the value of an ounce of gold. Among small, individual and retail buyers of the physical metal, it is the most common and most important. Even though purchases from, or sales to, large bullion brokers will often range from five percent above to five percent below spot, most use the current spot price as the benchmark value for gold.
The spot price of gold is the going rate for a direct transfer of gold for cash. Most of the time, the spot price is lower than futures prices, reflecting the additional cost of storing the gold until delivery and the effect of speculation. If the spot price is higher than the future price, this condition is called "backwardation," and suggests doubts about future availability of gold on the spot markets.
Gold spot is an "over the counter" market. This means buyers and sellers are not matched by market makers at an exchange, but rather come together on their own terms. The major spot markets are in London, New York, Zurich and China, with gold priced in the local currency. Each spot market has a list of accepted assayers (those who determine value), and gold bars with these marks are considered fungible for "good delivery." In addition to tracking prices of actual transactions continually, London sets two price "fixes" each trading day that are used globally as a reference value.
Like futures markets, however, spot markets trade in units of considerable size. The specifications vary, but individual bars vary in size from 100 to 400 ounces. At $800 per ounce, this means each bar is between $8,000 and $32,000. Even so, minimum transaction restrictions can be as high as half a million dollars. These barriers to entry mean that relatively few large buyers can participate directly in the gold spot markets.
Nevertheless, the official spot gold prices are used as the standard benchmark for individual transactions away from the official spot gold market. For a variety of reasons, these sales of gold can vary rather widely from the current spot price. The transactions are usually in significantly smaller quantities, or of non-standard purity or design, and some buyers or sellers can have profits priced into their bids or offers.
The spot price of gold can fluctuate dramatically for many different reasons. Gold reacts strongly to changes in currency markets, and these can have an effect on the relative value between the different spot markets. Also, because the readily available supply of small bullion is not necessarily linked to the supply of investment bars on the spot market, tighter supply for individuals can keep prices significantly over spot.
Joseph Nicholson is an independent analyst whose publishing achievements include a cover feature for "Futures Magazine" and a recurring column in the monthly newsletter of a private mint. He received a Bachelor of Arts in English from the University of Florida and is currently attending law school in San Francisco.