How Gold Market Price is Determined

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The Gold Fixing Process

The first gold rush of 1697 brought the first gold from Brazil to London. Today, the LBMA (London Bullion Market Association) manages the London Good Delivery List, the only bullion market accreditation accepted across the globe.

For over a century, five companies ran the London Gold Market Fixing Company and set prices through a process conducted by telephone called the “London Gold Fix.” In 2015, the IBA (ICE Benchmark Administration) took over and replaced the process with an electronic auction system called the LBMA Gold Price. The LBMA owns the rights to the process. An oversight committee, banks, and a panel of chair members make up the IBA.

The members of the London Gold Market Fixing Limited meet twice daily at 10:30 a.m. and 3 p.m. GMT. The chairman announces a starting price and each bank specifies how many bars of gold they will buy or sell at that price.

If there are too many buyers and too few sellers, the price is raised; if not enough buyers want to buy at a certain price, it is lowered. When the number of buyers and sellers are within 50 bars of one another, the price is set.

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Benefits of Gold Fixing

Gold fixing prices are widely used by people and businesses all over the world. This process helps parties work with a universally accepted price standard, making it easier and fairer to conduct business.

Banks use these prices to conduct trading on the gold futures market and to value daily inventory, while refineries and mines use market prices to value their inventories. Sellers also rely on these prices to set prices for gold and objects that use gold as part of their manufacturing process.

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Other Factors That Influence Gold Prices

What affects gold prices other than the LBMA pricing process? Three main external factors have a significant influence on the price of gold.

  1. Supply and Demand

The basic principle of supply and demand is a major influencer of gold prices. When gold demand is high and supplies are low, gold prices will rise. In the opposite scenario of high supply and low demand, prices decrease.

Since gold is finite, supplies will always be limited. By some analysts’ measure, the world reached peak gold years ago, so production levels will only continue to decline. Gold demand from investors, central banks, and the medical and technology sectors remain strong. This means a steady increase over time.

  • Market Conditions

Political and economic events shape a lot of market conditions, which also influence gold prices. Gold prices often tend to reflect a nation’s economic health. In recent years, political and economic turmoil in Europe has also increased the purchasing of “safe haven” assets like gold.

  • Currency Depreciation

Currency depreciation occurs when a country’s currency loses value in relation to one or more foreign currencies. Inflation and monetary policy are two common causes of currency depreciation.  Inflation is essentially the decrease in purchasing power of a currency.

This provides a direct correlation between currency and gold prices. For example, between 2005 and 2015, the purchasing power of the dollar decreased by nearly 20 percent. During this time, gold prices increased by over 169 percent.

Since gold tends to maintain its value and currency is subject to significant variations, investors protect their portfolios with gold. When a nation’s currency is weak, investors turn to gold, increasing demand, and prices.

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Photo by Jingming Pan on Unsplash

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