Gold pricing

Gold pricing

Subject: Economy

Section: Inflation

Gold prices are not moving up even as inflation is raging globally. Traditionally, gold is considered to be the best bet against inflation. However, in the current scenario gold prices seem to be moving in a tight range even though inflation is making waves globally.

Cause?

• Tighter monetary policy-The rising rates will make it quite attractive for investors to stay in the currency to earn the higher currency yield leading to non rising demand of gold.
• The appreciation in the US Dollar due to rising rates of interest. Gold being quoted in US Dollars, the price is bound to come down.

Gold pricing:

Gold is dealt with by the four types of firms in the industry. They are exploration or development, mining, consumers and recyclers. The 3 categories of consumers are industrial, jewellery producers and investors.

• Gold prices are fixed on a daily basis.
• It is an agreement between the participants on the same side in the market to buy and sell gold at a fixed price or to maintain the market conditions to make the price stay at a certain level by controlling the supply and demand.
• Gold Fixing is done at London Bullion Market Association-The prices are set daily at 10:30 am GMT and 3pm GMT in US dollars.

Types of prices

There are 2 types of prices, spot price and futures price:

• Spot price-This is the current market price at which gold was bought or sold for immediate payment and delivery.
• Futures price-This is the price at which the participants in a futures contract agree to transact on the date of settlement.

Sources of pricing:

The spot prices are sourced at:

• OTC markets-This is a decentralized market of securities that is not listed in an exchange.
• Large banks and bullion traders-They buy and sell gold as part of the trading process and thus resulting in a reliable source of spot pricing for gold.

The Futures prices are sourced at 

The exchanges are the primary source of gold futures prices. The major gold exchanges are:

• TOCOM, Japan
• Shanghai Gold Exchange, China
• MCX, Mumbai
• DGCX, Dubai
• Istanbul Gold Exchange, Istanbul
• COMEX, New York

Drivers to determine the gold rates

There are 6 fundamental drivers that help determine the gold rates. They are as follows:

• Price movements of other commodities and the demand for these commodities. Indirect pricing of the production cost.
• US and Global inflation which is driven by the rising money supply.
• Twin deficits that result from trade and growth imbalances against the US. This culminates in a fear factor.
• Activities of the Central Bank such as money printing, gold purchases and sales.
• Real interest rates in the US, compared to inflation and wages. This culminates in financial repression.
• Using the production or demand or inventory formula in the form of demand and supply.

Gold pricing in India:

• International prices do have a bearing on gold rates in India, though the rates might not be the exact same as they are internationally.
• Gold in India is primarily imported by banks at an internationally determined rate.
• Banks supply this gold to dealers after adding their fee to it.
• The Indian Bullion Jewellers Association  IBJAthen gets into the act of determining prices by speaking to the ten biggest gold dealers in the country. These dealers give their respective ‘buy’ and ‘sell’ quotes, depending on the rate at which they purchased gold. IBJA then takes the average of these ‘buy’ and ‘sell’ quotes and determines the gold rate for a particular day based on this average. This average rate is adjusted for local taxes and a rate fixed accordingly.
• Dealers generally arrive at their ‘buy’ and ‘sell’ rates by taking the international cost of gold and multiplying/adjusting it to the exchange value of the Rupee and adding any import duties and taxes such as VAT. Dealers ensure that they add their margin to the rates they give, keeping in mind their requirements. This procedure ensures that gold rates in India are on par with international trends and customers can purchase gold without any worry of being cheated with regards to gold rates.