How is Gold Priced?

The lustre of gold has always attracted different people for many reasons. Yet two questions have been around as long as humans have used it. What is gold worth? And less asked but even more important; how did that price become the accepted market rate?

Since it was first discovered, gold has always been a store of value. Throughout the ages, the ways that that value has been calculated have gone through many different iterations.

In the following article, you’ll learn about the history of gold pricing from ancient times to today’s markets. You will learn certain key trading-related terms which should help demystify any areas of confusion.

The Ancient World

Gold was first used as money in approximately 550 BC. It was so widely used that accurate historical pricing data is going back as far as 30 BC.

Unsurprisingly we have the Romans to thank for this documented price history. One of the first instances of gold valuation can be attributed to the Roman emperor Augustus. He ruled from 31 BC to 14 AD.

He “fixed” the price of gold at a set level so that 45 coins would be the same weight as one pound. This standardized measurement allowed for coins to be exchanged between different parties, each knowing what they were giving or receiving.

This price remained in effect until Emperor Marcus Aurelius Antonius, 211-217 AD, changed the “fix” from 45 coins to a pound to 50 coins a pound.

The gold “fix” suffered similar revaluations by Emperor Diocletian, 284 AD – 305 AD, who changed the “fix” to 60 coins per pound. The next Emperor Constantine The Great, 306 – 337 AD, also cut the “fix”. He changed the rate to 70 coins per pound.

What was the result of these devaluations? Inflation. A gift that still is with us to this day.

By 1257 AD the Roman Empire had long fallen, and England was establishing itself into a position of power. This was the year that they “fixed” the price of one ounce of gold at 0.89 English pounds. The English subsequently raised the price of gold by about one pound each century until 1717, by which point the price was 4.25 pounds per ounce. This price would remain in effect until the implementation of the 1944 Breton Woods Agreement. More on that later.

The Gold Standard

In the 1800s, many nations were issuing paper currency to be used for everyday transactions. The value of these banknotes was backed by the value of gold that was held by each nation. This was called the Gold Standard. Countries would retain enough gold to maintain this standard.

The United States joined the Gold Standard in 1900 with the passing of The Gold Standard Act. This Act made gold the only metal that banknotes could be exchanged for. At the time, this price was “fixed” at $20.67 per ounce of gold.

As the Great Depression devastated the US economy and individual Americans, they began to liquidate gold assets for dollars. The US Treasury Department started to worry if they would run out of gold. Again there was inflation.

In 1933 President Roosevelt decided that the only solution would be to outlaw the private ownership of gold coins, bullion, and certificates by US citizens. All privately held assets would have to be sold to the Federal Reserve.

This was finalized the next year when the US Congress passed the Gold Reserve Act. As well as prohibiting individual gold ownership it allowed President Roosevelt to increase the price of gold to a “fixed” price of $35 an ounce.

The US government stored all of this newly acquired gold at Fort Knox in Kentucky and the Federal Reserve Bank in lower Manhattan. By 1937 the value of those gold reserves had reached $12 billion. Not long after this, the US economy would find itself contributing to the War efforts, thus effectively ending the Great Depression.

Bretton Woods

As the end of World War 2 came into sight, western allies were meeting to decide how to move forward with a non-wartime global economy. The meeting was held in Bretton Woods, New Hampshire. In this agreement, most developed nations decide to “fix” the values of their currencies to the US dollar. The dollar was chosen because at that moment, the US held 75% of global gold reserves.

This agreement was to be key in the global implementation of the US Dollar as the global reserve currency replacing the British pound as the global reserve currency.

The End of the Gold Standard

US President Nixon effectively ended the gold standard when he directed the Federal Reserve to no longer convert US dollars to foreign banks seeking to redeem them for gold. Gold had still been “fixed” at $35 when this mandate was issued in 1971.

On December 31, 1974, President Ford repealed the limitation on US private citizens from owning gold coins, bullion, and certificates.

As the price of gold was no longer tied to the US Dollar and private ownership was permitted once again its price was now subject to the age-old factors of supply and demand. By 1976 the price had risen from $35 to $120 an ounce.

With gold no longer being held to a “fixed” price, new players became involved in the gold market and new products became available to trade. From gold certificates to Exchange Traded Funds (ETFs) to shares in mining companies to physical coins and bullion, each gives anyone from individuals to institutions different ways to get exposure to the gold market for participants from around the globe now.

Post Gold Standard

Presently gold is traded internationally on four primary exchanges in forward-based contracts referred to as futures. The LBMA also trades in the gold immediate settlement.  These forward contracts are standardized for a set amount of gold to be delivered at a specific date. The exchanges are:

• The Tokyo Commodity Exchange (TOCOM).
• The Shanghai Gold Exchange (SGE).
• The NEW York Metals Exchange (NYMEX).
• The London Bullion Market Association (LBMA).

Of these, the London market is the most important and influential. One of the reasons for this is that twice a day, at 10:30 AM and 3:00 PM, the LBMA announces the price of gold in US dollars. This is referred to as the London fix, either morning fix or afternoon fix and is generated through a transparent bidding process among major traders. The trading volume for deliverable gold in London is also larger than those of Tokyo, New York and Shanghai. Most trades in Tokyo are New York are cash-settled and only about 2% of trades deliver gold. This was illustrated by the addition of a 400-ounce gold contract last year. Before this, there was only a 100-ounce gold contract. 

Futures trading prices are based on the underlying spot gold price. The future price takes into account the spot price and the interest rate differential of future delivery dates. Supply and demand factors are not as influential as in other physical commodities because gold acts as a currency in many ways. It is borrowed and lent by central banks in the interbank market where the interest rate for gold is generally less than US rates. This serves to encourage the borrowing of gold which allows central banks to earn interest on their extensive gold holdings.

Even though traded globally, the majority of large volume trades happen at the LBMA. The average LBMA trading volume for gold in May 2019 at auction is approximately 18.6 million Troy ounces worth $23.9 billion. From these numbers, you can see that wholesale gold trading commands the lion’s share of the market. Most wholesale trading occurs on the LBMA. 

Gold is now traded at many smaller futures exchanges around the globe. These secondary markets tend to cater to local customers providing settlement options tailored for the local market. Be it a different contract size or settlement in local currencies.

Retail Gold Pricing

Any business that deals in gold buying or selling generally will look to the futures and London fixes to throughout the business day to determine their pricing levels. By watching the futures price, dealers can see any significant price changes in real-time. Most retail gold dealers do not make a profit from the change in the price of gold. Instead, their profit comes from the difference between the price they buy gold from a customer and the price they sell to another customer or counter-party.

This “bid/ask” pricing system is pretty much universal around the world. Gold dealers from Singapore to New Delhi to London to Toronto will all operate using the same model. Each and everyone will be different because of that spread in the “bid/ask.”

The reasons that spread vary so wildly come down to many factors. Shops with a smaller or tighter spread offer better pricing to their customers than a shop with wide spreads. A shop with a widespread will make more money per individual transaction. Still, it may do less business than a shop that has pricing that is more customer-friendly.

A lot of the time, the primary nature of a gold dealer will dictate how wide the spread is. For example, an established professional gold dealer with smelting and assay facilities on-site can generally offer better pricing than a cash-for-gold store or a pawn shop.

Another factor that can affect the size of the spread is market volatility. Market volatility occurs when the larger futures markets experience wild price fluctuations in short periods. It’s not uncommon for the price of gold to move more than $20 an ounce in just a few minutes.

Gold dealers that ignore more considerable market pricing changes can find themselves in the unenviable position of lost profits or, even worse, capital losses.

All of these factors contribute to the vast discrepancies in retail gold market pricing. It’s generally better to do business with a gold dealer that pays attention to the market throughout the day and who is also aware of what has happened in overseas markets to influence the current spot price of gold.

Grades of Gold

One area that remains to be discussed is the various grades of gold. This is referred to as purity or fineness. The two standard measurement grades are millesimal fineness and karats. One is decimal-based and the other fractional.

The millesimal system denotes the mass of the gold number of parts per thousand. So a measurement of 999.9 is considered to be pure gold. A measurement of 916 would be considered only 91.6% pure gold. For instance, Canadian Maple Leaf coins are 999.9 purity, and South African Krugerrands are 916 purity.

The other system of purity measurement are karats. Karat measurements are as follows: 

• 24 karat = 99.95%
• 23 karat = 95.83%
• 22 karat = 91.66%
• 18 karat = 75%
• 14 karat = 58.33%

While still used in the UK and the USA, the millesimal system is used more widely across the globe. The jewelry industry still widely uses the karat system to denote gold purity.

Gold purity is determined through a process called an assay. There are three main ways that gold is assayed today. The first is with fire, and the second is with aqua regia, a Latin term for royal water, a mix of hydrochloric and nitric acids. The third way and most straightforward method is energy dispersive X-ray fluorescence spectrometry. The last is most simple, and no gold is lost in the process of completing the assay. It is the quickest and easiest way to determine gold fineness accurately.

Obviously, the higher the purity content will make the gold more valuable than those with lower content. For example, if you are trying to sell two coins, both weighing one Troy ounce, one being 999.9 or 24 karat purity and the other being 583.3 or 14 karat purity. The first one will be purchased at a significantly higher price than the other. Even though both coins weigh one ounce, the first one is pure gold and the second one is just over half an ounce of gold. Different materials are making up the rest of the weight of that coin.

In Conclusion

Gold has been around longer than humans have, and thus, we have always been fascinated by it. Since our ancestors picked up the first nuggets, even they knew it was something special. The properties it possesses are remarkably unique from conducting electrical currents and how it is not susceptible to oxidization or rusting and its malleability. These properties mean gold can be used in many different ways by many various industries.

Every cell phone and computer has a small amount of gold in it to facilitate processing. The global jewelry market is vast, especially in Asia, where gold played a historical store of wealth as banks were traditionally not trusted. Dowries of gold are still traditional in many cultures.

As the global population continues to rise, demand for gold is almost guaranteed to rise in the future. This certainty will also ensure that global futures markets will have a vital role in determining the price of gold. Even if a sovereign nation were to declare a “fixed” price for gold, the fact that it trades freely in the rest of the world would make such a policy untenable. This interconnectedness of the global gold market makes the idea of returning to the “gold standard” highly unlikely.

The current market system of pricing is more than likely to remain in effect for the foreseeable future. The sophistication of the global markets now allows gold to be traded 24 hours a day. When it comes down to it, gold pricing is based on free-market supply and demand factors, making it an incredibly fairly priced product. You can rest assured that we will conduct your transaction as close as possible to the spot price at Guardian International Gold, whether you are buying or selling.

We’ve covered the history of gold pricing here, from Ancient Rome to our current modern-day. Hopefully, you now understand the history and current process with great clarity.

We’re here to help you as we feel our best customers are educated consumers. If you have any questions about selling or buying gold , please feel free to reach out to us.