What Is the 'Spot Price' of Gold and Silver?

 
Jesse's Café Américain

This is a partial reprise of a post from two years ago. The question has again arisen about the discrepancy between the spot price of gold and silver, and the prices shown on the front month of the futures market.

When you ask even an experienced trader, or even an economist who may have received a Nobel prize, 'What is the spot price, where does it come from, who sets it?' you will often hear that this is the last physical trade, or the current market price of physical bullion for delivery.

Here is a fairly typical explanation one might get from an 'industry expert.'

"That is why the New York Spot Price is different from the London Gold Fix price. The spot price changes on a regular basis, just as stock prices do, and reflects the bid and ask prices quoted by wholesale dealers for spot delivery."

Well, does it?

Actually despite what you might think or what you might have heard, it does not.

There is no centralized and efficient national market in the US for the sale of physical bullion at anything resembling a 'spot price.' What is their telephone number, where are their prices and trades of actual transactions posted? Who collects and is privy to that knowledge, and how are they regulated? Who is buying and selling TODAY, with real delivery of bullion as the primary objective?

There are a few large wholesale markets for physical bullion in the world, where real buying and selling can occur, with delivery given and taken. The most famous is the London Bullion Market Association, which is a dealer association, an over the counter market where the price is set twice a day and called the 'London fix,' but each counterparty stands on their own with no central clearing authority.

As an aside, there are credible claims and factual evidence that the LBMA has slipped into a paper market with multiple claims on the same unallocated bullion with daily trade volume in multiples of available supply, a fractional reserve bullion banking as it were. Some say the leverage is 100:1.

The reason that physical trading in bullion became so highly concentrated in London was best explained to me by a large bullion dealer. "This situation exists because of the gold confiscation in the US in 1933. When that happened, physical metal trading in the US came to a complete stop. When gold ownership was again made legal on December 31, 1974, the physical metal trading had become so developed outside of the US that it stayed there and never really returned."

But once the London Fix is over, and the trading day moves with the sun, the New York markets open and become the dominant price setting mechanism. Where and how is that price obtained? Where is the price discovery?

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