Gold Prices: Who Sets the Prices of Precious Metals?   by JR White

in Investment    (submitted 2010-11-20)

Gold fixing. Silver fixing. Troy ounce. Loco London. The jargon of the precious metals market can be confusing to investors used to investing in securities. But once you learn it, the principles become clear. Let us define some of the terms so we can understand how the gold price and the prices of other precious metals are determined.

What is a troy ounce?
Precious metals (gold, silver and all platinum-group metals) are measured and priced in troy ounces (named for the fair town of Troyes in northern France in the Middle Ages), and large quantities are sometimes stated in metric tons. Historically, a troy ounce was 1/12th of a troy pound (a measure that is no longer used). It is equal to 480 grains (sometimes used to define weights of coins when minted) and also equal to 20 pennyweights (still used by jewelers who buy gold).

By official definition, one troy ounce is equivalent to 31.1034768 grams. Since 1000 grams is one kilo, 1 kilo = 1000/31.1034768, or 32.1507466 troy ounces. Thus there are 32.1507466 troy ounces in a kilo and 32,150.7466 troy ounces in a metric ton (typically rounded in the trade to 32,150 troy ounces and used for describing large quantities, not for pricing).

For the curious, there are 14.58333 troy ounces in an avoirdupois pound, which is useful to figure out how much a given quantity of gold or silver weighs in familiar terms. A 400-ounce gold bar weighs 400/14.58333, or 27.43 lbs. A 1000-ounce silver bar weighs 1000/14.58333, or 68.57 lbs., more than you care to be carrying around with you.

Fineness
Fineness is the purity of the precious metal in an alloy, as determined by assaying the bar, expressed in parts per thousand. Each metal has a minimum standard of purity set by the market. London good-delivery gold bars (weighing approximately 400 ounces) must be at least 99.5% pure gold, or 995 fine. Some gold coins and small gold ingots are refined up to 99.99% pure gold, generally stated as.9999, or four nines.
Gold is sold by its fine weight, so a customer who buys a 400 ounce.995 bar that weighs exactly 400.000 troy ounces will pay for only the fine gold content (the fineness times the gross weight of the bar): 400.000 x.995 = 398.000 troy ounces. Each good delivery bar will be stamped with the mark of the refiner, year of manufacture, purity, gross and fine weignt, and a unique bar number. Sometimes weights of small bars will be rounded, so a kilobar might be sold as 32.15 or 32.151 gross weight.

Silver bars must be at least 999 fine and are sold by gross weight rather than fine weight. Platinum and palladium ingots and plate must be at least 999.5 fine and are sold by fine weight.

Supply and demand
Precious metals trade freely on and off exchanges. The market prices of all precious metals are determined by supply and demand as reflected in bids and offers and thousands of daily transactions. The London gold and silver bullion markets and Comex exchange futures market in New York are the most liquid precious metals trading forums. They are kept closely in line with each other through dealer arbitrage. Prices of all other forms of gold and silver are based on the prices in these markets.

The London fixings
The so-called London fixings in gold, silver, platinum and palladium are not conspiracies but actually auction markets. The mechanism of the fixings is to find by successive trials the single price for spot (that is, physical for 2-day settlement) at which all orders of buyers and all orders of sellers (primarily bullion dealers and their largest customers) are matched and balanced. The single fixing prices of each metal are used as benchmarks for pricing metals contracts between dealers, mining companies, refineries and fabricators throughout the world.

Gold is fixed twice daily starting at 10:30am and 3pm London time by the five members of the London Gold Market Fixing, who act as brokers for their customers. Silver is fixed daily at noon by the three members of the London Silver Market Fixing.
Platinum and palladium are fixed daily at 9:45am and 2pm by the four fixing members of the London Platinum & Palladium Market.

Dealer prices
Bullion dealers and banks, whether in London, New York, Zurich, Hong Kong, Singapore, Sydney, Dubai or anywhere else in the world trade throughout the day, and their realtime bid and asked prices for spot gold, silver, platinum and palladium are published on various sites on the web, including goldprice.org and thebulliondesk.com. Coin dealers generally base their prices for bullion coins and small bars on the bullion dealers London delivery spot price (called loco London) and will add a premium to it representing the mint fabrication cost and the dealers shipping cost from the mint, overhead and profit. The typical premium for one-ounce gold bullion coins is 5-7%, higher (around 15% or so) for fractional coins.

Comex contracts
The Comex division of NYMEX (part of the CME Group) trades gold futures and options contracts of 100 ounces minimum 995 fine during the New York day and electronically on Globex, plus mini-futures contracts of 1 kilo (32.15 ounces); and silver futures and options contracts of 5,000 ounces minimum 999 fine, plus mini-futures contracts of 1,000 ounces.

About the Author

As a former bullion dealer Jerry White has bought and sold millions of ounces of precious metals. Gold and silver offer opportunities for profit and safety not available with any other investment. He recently published a precious metals investor's guide , How to Buy Gold and Silver Today, to help investors avoid pitfalls and choose appropriate forms of gold to meet their goals.