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What Is the Gold Price per Gram and How Do They Determine It?
The gold price per gram and how it is determined is a complicated concept.
For an average consumer, this entire concept can appear to be rather complex.
It is never just about one standalone price matrix that affects prices.
Gold is one of the most extensively traded commodities globally.
The daily trading volumes easily exceed 300,000.
Moreover, it trades both in the futures market as well as in physical form.
Gold is available in a variety of purity as well.
So, pricing gold is not that simple either.
There are many factors that play a role in the final price discovery.
The yellow metal is, after all, one of the most expensive metals in the world.
Often the gold price has a huge bearing on the overall market forces and average economy.
It is also a popular hedging tool for gold buyers and users.
In this condition, it is imperative to understand what sets the average gold price per gram.
What is particularly striking is that the gold price can differ from region to region.
Therefore, understanding how the pricing is determined is crucial.
After all, this is what will help you create a solid basis for your investment.
Another interesting aspect is what pricing you should follow?
Should you go by physical gold rates or paper rates?
Often when you look up for gold prices, you come across spot rate.
Often investors are worried if they should follow this rate.
This is because the physical rates are not same as paper rates.
So as an investor it becomes crucial to understand all these separate pricing triggers.
That alone can help you in assessing the gold price per gram properly.
Understanding the International Gold Pricing Standards
The international gold price is perhaps the most popular gold rates globally.
Be it the television screen, the stock market ticker or rates on international websites; it is this rate that you see being flashed.
Essentially you will get prices of gold for one troy ounce unit.
The gold price per gram is derived from this.
The troy ounce approximately 31 gm.
This is generally the rate of gold in the international markets that are trading 24×7.
Gold is traded continuously without a break in this market.
This rate is most commonly referred to as the spot price of gold.
It is normally in dollars per troy ounce.
That invariably creates a certain degree of standardization for users world over.
But it may not be the physical price of gold at a given instance.
It can be the spot trading rate sometimes and at other times, it may refer to a future contract.
Invariably the front-month contracts are the ones that show maximum volume.
There is hectic trading in these contracts, and that is how they play a crucial role in eventual price discovery.
So one thing is fairly clear, the international spot rice is invariably the futures rate.
It represents the price of the futures contracts in a conclusive fashion.
You must have understood by now that broadly speaking gold price is a function of market forces.
A generic law of demand and supply is what results in ultimate price discovery.
But how does this price lead to the final gold price per gram?
Well, for this it is important to understand how the international gold pricing is finalized.
That will eventually provide you pointers on how the pricing parameters are created.
It will also help you understand the concept of following price benchmarks.
How Is the Spot Gold Price Derived?
When you are looking to determine gold per gram, this is the most pertinent point.
Series of recent data and research indicates that the spot price discovery is a joint effort.
The gold trading rates at the London OTC and COMEX are matched and then combined.
This combination of rates yields the final price details.
It is common knowledge that higher trading volumes and liquidity conditions play a crucial role.
Both these international gold trading hubs command the biggest gold trade in terms of volume and liquidity.
As per 2015 and 2016 data, London OTC spot market represented close to 80% of world trade volumes.
COMEX too sees close to additional 10% of gold trading.
But if you are wondering if the results are skewed because of the larger share of one exchange, it is not true.
Many in-depth types of research indicated that COMEX, despite the lower share of trade has a deeper impact on prices.
This is primarily due to the accessibility element in terms of trading on COMEX.
Additionally, the extended trading hours on COMEX also plays a crucial role.
Together both these elements create a deeper and wider base for more appropriate price discovery.
Moreover, compared to the Over the counter trade in London, there is greater transparency in Futures trade.
Comparatively, the London markets are dictated by a string of select and active commodity brokers.
That makes the COMEX a more meaningful and important element of the whole process.
Compared to the size of the physical bullion markets in either London or New York, these exchanges are gigantic.
That inevitably makes them crucial partners in the overall price discovery.
So both these hubs together work to bring about the spot price closest to fair value.
How Is the Final Gold Price per Gram Arrived At?
So you can now get a fair value of how the indicative price is arrived at.
The final gold per gram inevitably follows the demand-supply matrix.
The spot gold price in this becomes an indicative rate on which the physical gold rates are based on.
So when you have a greater number of buyers ready to buy, sellers may raise the price.
But the opposite happens if the number of sellers is more than buyers.
In that case, buyers inevitably look at ways to acquire gold at a significantly lower rate.
The nearest month contract dictates the spot gold price.
Physical gold price per gram is a further derivation on this crucial number.
The trading volumes, liquidity and supply-demand together work towards final price discovery.
It is the same concept how the actual spot gold price is derived.
It is primarily based on the closest contract with the most hectic trading in it.
That indicates both participation and greater volume.
Needless to mention that this will yield a value that is much closer to fair value levels.
This is why the spot gold rates are such an important element of the overall price discovery mechanism.
They represent volume and a popular perspective.
Moreover, they become a basic yardstick on which the final valuation is derived.
Because gold is not just mined in one place and you do not have one unit released at a given point.
Though predominantly imaginary, the spot gold rates give users a basic concept of value.
That makes the final price discovery more meaningful.
If you see gold is not just bought or sold as an investment opportunity, there are many other usages like industrial opportunity and of course jewelry making.
Factors That Help in Determining Gold Price per Gram
Now that brings us to the next point that we must explore.
The final gold price is undeniably a function of the market force.
But what exactly are the factors that comprise of market forces?
Well, depending on markets and regions, there are numerous elements involved in this process.
Some of the most important factors that help in gold price discovery are:
Physical gold demand
Demand for jewelry making
The extent of gold investment in the market.
Demand in the currency market
Central bank demand
Inflation and economic scenario
Overall risk appetite in the market
The geopolitical factors aiding gold demand and risk opportunities
Equity market conditions.
You will notice that all these elements together work towards creating the so-called gold valuation.
Whether you are looking at spot gold rates or physical gold rates, these factors remain same.
Gold investments are primarily safe haven investments.
They are predominantly an outcome of how investors perceive fund allocation to the yellow metal.
Interest rates and monetary policies too impact prices in a meaningful way.
It goes on to dictate the final demand and trading volumes.
Often they play a crucial role in overall risk appetite as well.
Both the stock markets and currency markets impact gold demand significantly.
This is because gold often comes across as an alternative investment destination.
This is why you may see gold prices appreciating in a bear market situation.
The weak dollar and strong gold combination is also an outcome of this factor.
When the opportunity cost of investing in gold reduces, its demand increases.
That, in turn, affects the pricing.
So finally, it is all about how these individual factors affect overall gold demand.
The demand-supply matrix therein gives the final gold price per gram.
Is There Any Standard Global Gold Price?
As a result of widely spread out gold trade, the pricing variations are normal.
This is exactly why the gold price per gram is so closely linked to spot gold prices.
But that does not mean, spot gold rates are uniform across the world.
The spot gold market trades 24×7.
This means that gold is being traded at some or the other market through the day.
So depending on the time zone, you may have higher volume trades in Asia, Europe or America.
The region-specific conditions will, therefore, have a strong bearing on the overall results.
But there is another important factor.
This is the currency that is used to trade gold.
You have to remember that gold is traded in different currencies across the world.
So whether you are a buying a gram of gold in Japan or the United States will no doubt impact the rates.
Moreover, the spot gold rate is an open market rate.
That means it will never be same at two given points.
This price is constantly on the move.
The physical gold price is an extension of this rate.
As a result, there will be slight variation in the gold price per gram.
But broadly speaking, the variation is in a relatively narrow range.
The difference is more a function of local demand-supply.
The local currency rates too have a bearing on the broad value.
Depending on the demand, the physical gold rate may be at a premium or discount to the spot price.
But typically the gold price per gram is almost always at a premium to actual rate.
This is because the spot gold price is primarily notional in value.
It is a price assumption on the basis of the perceived valuation.
Understanding the Difference Between Spot, Future & Physical Gold Rates
Typically the gold price per gram is a function of three cardinal factors.
You have the spot gold rate, the future gold rate and finally the physically gold price.
Now each of these represents the unique gold transaction and trading markets.
Independent demand in these markets, as well as the peripheral demand, impact the final pricing.
You have to take all of these elements into consideration.
Gold is undeniably one of the most important investment opportunities in the world.
For centuries, it has been one of the best representatives of value and consistent trading alternative.
Despite the prohibitive cost and relative risk, it is still an important constituent of our portfolio.
You may hold gold in paper terms or physical form; the value is interlinked.
The spot gold rates are most dynamic in this context.
They change from minute to minute and market to market.
They are the ones that are most sensitive to the peripheral market conditions.
In many ways, they go on to create the relative price variations as well.
The rates for the gold futures in comparison is amongst the costliest.
This is again because it is a notional value of gold that is assumed on the basis of several factors.
The market predictions, the interest rate and geopolitical equation decide premium in case of Futures.
As a result, it also factors in any potential expense that may be incurred in future.
When you are buying physical gold, the price per gram will again depend on local conditions.
The form in which you are buying physical gold will also impact prices.
Coins, bars and jewelry all have separate rating parameter.
The only thing that is static is they are all derived from the basic spot value.
The Tax Impact
The gold price per gram will always be higher for physical gold.
One key aspect for this is the cost of holding physical gold.
Holding physical gold has many myriad elements added to it.
The first and foremost is the taxation part.
Many individual markets may levy a certain tax on holding gold.
So buying or selling gold in these individual markets will command a certain tax.
Now that will affect demand for physical gold.
Sometimes, governments levy these taxes to regulate the demand for gold in individual markets.
That apart, the form in which you hold physical gold can also dictate the gold price per gram.
You will typically notice that the cost of gold coins may be more than gold bars.
Again the form in which gold is traded most commonly also impacts prices.
For example, gold bars are traded more extensively amongst institutions.
But then again, gold coins are popular amongst the retail customers.
Selected countries have a far higher demand for gold jewelry.
So in these countries, buying gold jewelry can attract slightly variable rating.
Moreover, jewelers will also include the making charges at this rate.
That will also lead to some variation in the overall cost element.
Therefore, the gold price per gram is a function of several elements.
There cannot be any one factor that impacts prices.
Moreover, the value of physical gold in itself is a derivation of spot gold prices.
The reason why spot gold is at a discount is that it is a notional rate.
The gold valuation incorporates geopolitical situation and economic elements.
The final pricing is a combination of all of these.
But the international spot gold price undeniably impacts the gold price per gram most distinctly.
This sets the broad direction and trend of the global gold price per gram.
The remaining variations are all a function of local factors that impact gold price per gram.