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Who Determines the Price of Gold World?
Who Determines the Price of Gold World?
June 7, 2016 By: A Muttaqiena View: 162 Share This
As is generally the market price of goods in real terms and in financial markets, the gold price is a result of the strength of the buyer and seller in the free market. However, if we are specifically talking about the price of gold, then there are plenty of markets where commodities are traded. There is a futures market, the spot market. There is a London market, there is a market in New York. So who determines the price of gold? Arkadiusz Sieron, a certified investment advisor, explained at length in his column on the Resource Investor website.
Gold Prices - illustration
London And New York Not Dominant
Sieron discuss several scientific studies that examined the topic of who sets the world price of gold. One of them, Lucey et al. (2012) to monitor the price of oil on the London A.M. Fixing and New York COMEX closing price since January 1986 until the end of July 2012, but found that between them there was nothing to dominate in the market.
London and New York, according to the terms Sieron, is a bipolar world and the price of interdependence with each other. Interestingly, the researchers also found that the portion of the contribution both markets at any price is not stable, depending on the situation. When the collapse of the Soviet Union, the exchange rate crisis in 1992 and the incidence of Lehman Brothers, London is the dominant market. However, when the currency crisis Rubel and the 9/11 attacks, New York tends to dominate.
Read also: Bullion, Comex, and Other Terms In Gold Trading
Futures Market Rule
Meanwhile, Hauptfleisch et al. (2015) used data intraday price of gold in London, the OTC market, and the US futures market from 1997 to 2014. They found that although the volume of gold traded on the New York less than the volume of spot trading in London, but the futures market tend to play a more important in the value of gold. COMEX dominance strengthened in 2016 when the 24-hour trading platform that is fully electronic Globex began to be used. Since then, COMEX gold prices always lead the whole day, no matter at what time trade.
Here it can be concluded that a trading volume just is not as important as the structure of the market. Futures markets provide benefits similar to the spot market for investors, speculators, and the perpetrators of hedging. Futures markets more transparent, highly liquid, and allowing participants to transact more quickly, both with leverage or option, without involving the delivery of physical goods.
Therefore, the futures markets react more quickly to the emergence of the information and immediately put it in the gold price. Its effectiveness is so high that spot gold price is actually derived from the price of gold futures, although theoretically gold futures prices should be determined on the spot price, the level of risk, maturity contracts, and other factors such as the cost of storage. In practice, the spot price instead it is determined by the price of the nearby futures contract month with the highest volume.
Read also: 7 Myths Determinants Gold Price Movements
Spot Gold Price Not Physical Current Price
It should be emphasized here: "spot gold price" is not the price quoted on the last physical transactions nor the price of physical gold at this time, nor is the gold price benchmark London Bullion Market Association (LBMA). Spot gold prices are net present value (net present value) of the price of gold futures in the nearest months, while the price of gold LBMA is a picture of the gold prices quoted traders in the spot market OTC London on wholesale transactions.
Furthermore, "the actual spot price", namely the price offered by the sellers of gold bullion (bars and coins) were different from COMEX spot price and the London Fix. Gold bullion sellers usually display a higher price, because they bear the cost of greater than wholesalers, and then me-markup the price to make a profit.
Conclusion
In the end, Sieron concluded, although the market has been globalized theoretically, but in practice remains bipolar with US futures market was in a dominant position in the formation of the gold price. It was not showing any manipulation, rather it is proof of the high efficiency of the public and the centralization of the futures market there than the OTC market is decentralized and not transparent.
Here's the reality: the price of gold is mainly determined in New York. And who determines the price of gold here? COMEX participants and their trading positions that determines the price of gold.
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