The gold price most often quoted is the ‘spot’ price, in US$ per troy-oz. Spot here means it is for immediate ‘on the spot’ settlement. However, although it is a commodity, not all gold is created equal. Because physical gold is traded in many different markets around the world, with different provenance, and in different forms, there are in fact many gold prices.

The most obvious difference in price is between physical gold (known as bullion) and financial (or paper) gold. The most quoted gold prices on financial markets are futures prices (futures are a contract for a trade at a specified time in the future). The relationship between the spot and futures prices will be affected by factors such as interest rates and storage costs. However, even if we ignore paper gold and focus on bullion, there can still be significant price differentials. Below we’ll discuss some of the major factors that will determine what price gold will fetch in an open market transaction.

Geography

In the two largest Asian markets, India and China, the gold price can vary significantly from the London benchmark. Both countries have cultural traditions of using gold, both in jewellery or decoration, and as a store of wealth. The gold price in India and China is therefore often driven by local factors rather than wider global markets. 

Gold on the Multi-Commodity Exchange (MCX) in Mumbai traded at an average discount to the LBMA price of around $4.80/troy oz since 2012. However, the nature of the local market led this spread to be volatile, swinging between a premium of $53 and a discount of $63 much of the time. Occasionally, the swings in supply and demand in the Indian market can become so substantial that the discount or premium can be as much as $100/troy oz.[1]

In China, since 2003 the Shanghai gold benchmark has traded at an average premium of about $5.70 to London. Most of the time this spread was less volatile than in India, varying between a premium of $34 and a discount of $22, though again with occasional very wide swings leading to premiums and discounts of more than $100/troy oz.

Provenance

The most prominent physical gold market is the London Bullion Market, run by the London Bullion Market Association (LBMA). LBMA stands at the centre of a network of gold experts and has a reputation as the ‘gold standard’ in bullion. LBMA partners with vaults, assayers and refiners to provide customers with an end-to-end audit of the provenance of the gold traded on its platform, allowing customers of the London market to trade with confidence. This assurance and convenience means LBMA gold can sometimes trade at a premium to non-LBMA gold of the same purity.[2]

Conflict gold

Provenance is a major focus of gold markets. LBMA refiners must adhere to the Responsible Sourcing Programme, under which third party annual audits ensures they are not using gold mined using slavery or child labour, and if sourcing gold from conflict areas, are doing so responsibly. The reputational risk to an LBMA accredited refiner of potentially using conflict gold would be very substantial, including removal from the Good Delivery list. For this reason, gold mined in Africa can often trade at a large discount to spot gold if there are concerns it could be mined in areas of conflict.

Gold collectibles

The most common forms of gold, apart from bars, are jewellery and coins. This collectible gold can sell for substantially more or less than the spot price depending on mintage. Low quality jewellery or coins of undistinguished provenance might be worth substantially less than the spot price. However, rare collectibles, often exhibiting high quality craftsmanship or the name of a prominent jeweller or mint, can easily be worth far more than their gold content would suggest [3]

Scrap gold 

Scrap gold is sold at a heavy discount to the spot price, as it will need to be melted down and repurified in order to be sold. Gold recovery in areas such as electronics often falls into this category, and is also used in fairly small quantities, meaning extracting it from the scrap can be an expensive process. This is especially true if the gold is mixed with another metal, such as silver, in an alloy.

Pricing gold is a complex process, and there is substantial expertise involved in making a determination of value. However, at Lexim, we focus solely on the purest possible bullion, 99.99%, solely from LBMA accredited refiners. This ensures that it trades as close as possible to the London market spot price, so our clients always know exactly what their gold is worth. Lexim offers a suite of products to meet the needs and budgets of almost any investor, including fractional ownership, and the gold we custody belongs 100% to our clients. 

[1] DuBois's calculations, using data from Bloomberg, World Gold Council, Multi Commodity Exchange, Reserve Bank of India, Shanghai Gold Exchange

[2] Responsible Sourcing | LBMA

[3] Durrett, Don, How to invest in Gold and Silver (2010), pp. 40-42