What is the spot price and how does it come about?

In the precious metals market, people often talk about the spot price of gold or silver, for example. What exactly is meant by the spot price and how it is established is explained in this article. 

What is the spot price? 

The spot price of gold is the most current gold price at which gold can be bought and sold on immediate delivery. The name is therefore derived from buying gold 'on the spot'. The spot price moves constantly throughout the day and its level is influenced by recent events and developments in the market. The spot price is usually quoted per ounce of gold and the value is displayed in US dollars. When you buy physical gold, the price will always be a few percentage points higher than the spot price. This is so that the gold trader can cover his costs.
 
 

How is the spot price established? 

When determining the spot price, we look at gold futures contracts with the highest volume. Gold futures are contracts that define how much it would cost to buy a certain amount of gold in the future. Future contracts are used in the trading of many commodities such as oil, grain and coffee. This is because the contracts can offer guarantees of price to producers using these commodities in their production process. Future contracts of gold or silver represent the price of an ounce of silver or gold in the future. In reality, future contracts are also often bought by speculators in the market. When determining the current spot price, one looks at future contracts in which the largest volume is recorded. The volume depends on the quantity of gold and the price at which the gold is traded. It may be the case that it is in future contracts of the current month that the largest volume is fixed, but it may also be the case that it is several months further into the future.