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Posts Tagged ‘spot price’
Is there a Current Floor to the Gold Price?
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Gold has been of value for over 5,000 years. Civilizations have risen and fallen, currencies have come and gone and yet gold still is coveted by people all around the world. Gold has never been worthless! It has always had some value to it; therefore it is different than most other asset classes. Stocks, bonds and paper currencies for example can all become worthless at some point.
But is there a floor under the price of gold? The simple answer is no. I am assuming that this question is pertaining to the government. Neither the U.S. Government, nor any other government has a floor price on gold. A floor price being the minimum a person or institution has to charge for it, or the lowest possible dollar amount it can fall to. Gold can free float as high or as low as the market’s action will allow. So the price is determined primarily by supply and demand. But there are technical tools that can help us understand the price action of gold.
This leads me to believe the question is this: what is the current support level on the price of gold? Most assets trade between support on the bottom and resistance on the top. These two figures are determined by previous market action. When an asset breaks a resistance level, that figure then becomes the new support level. The current support level on gold is $1,017 which was the last resistance level. The resistance level at the top is $1,218. Gold has not tested that level since it was set in December of 2009. In addition, recently gold has had difficulty breaking $1,045 on the bottom (the price at which India bought 200 metric tonnes from the IMF) and the $1,120 mark on the top. So I am calling $1,045 to $1,120 a smaller trading range within the technical trading range.
Should gold go below $1,045, look for it to test the $1,017 level. If gold breaks the $1,120 level on the top look for it to test the $1,218 mark. If gold should break the $1,218 level that would then be the new support level with the new resistance level being unknown because it has never been higher. If gold should break the $1,017 support level that would then become the new resistance level and the next support level would be around $1,000.
Technical language can be confusing, so if I have done so I apologize. In the simplest form, the current support level is $1,017 and the current resistance level is $1,218.
Gold Price Gains and Losses over the Last 3 Months
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The price action on gold has been hot lately. Gold closed at an all-time high on December 2nd of $1,212.50 per ounce. The price action prior to that was climbing almost daily from the $1,050 mark. After it reached the high of $1,212.50 it slowly made its way down to test the $1,050 support level. It came close to this support level but never broke it. It closed at around $1,058 on February 5th and since then has steadily climbed to where it sits today of $1,112.
The up and down market action can be scary for your average investor. This is why I always say, if you are not a day trader then you do not need to pay attention to the daily market action. What you are looking for are trends in the market. Trends are what tell you what to do in the long-term. Trends should guide your strategy. If you look at a chart of gold from 2000 to present you can see a long-term positive trend. It started at $252 per ounce and has been climbing ever since. Sure there have been some big corrections along the way, buy that is what you want. Ups and downs are a sign of a healthy market. If you were watching the daily market action you might have sold out too early. This is why trends are so important.
Take March of 2008 to November of 2008 for example. Gold rose to an all-time high of over $1,000 per ounce and steadily fell to $709 per ounce. Had you have sold out because of the downward slide, you would have missed out on the following upswing. As for the current trend, everything is pointing towards a continuation of the upward trend. Two of the biggest factors playing into the future of the gold market are the U.S. Dollar and normal bull market cycles.
The dollar has been in a steady demise for a few years now, and with all of the money printing going on with the U.S. government I don’t think it will be going strong anytime soon. I have written many times in this blog about the three phases of a bull market which I think is also a big factor contributing to the positive trend in gold. Many experts are calling for gold to hit $2,000 per ounce this year and $4,000 to $5,000 per ounce before the trend is over.
Cost of Gold
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The cost of gold is rising, and has been for the last 10 years consistently. This action confirms the current gold bull market (see the previous blog for 10 year spot chart). For individual buyers the cost of gold differentiates depending on what type of gold you buy. Whether you buy gold bullion coins or bars, or rare gold coins, these prices will vary greatly.
Currently the spot price of gold is at $1,175 per ounce. According to many experts this is a great value, because they believe gold will hit $2,000 per ounce this year. The spot price of gold is an indicator value, like crude oil is to gasoline, spot gold is to physical gold. Therefore the cost you pay for physical gold will be the spot price plus a premium. Typically the premium will be anywhere from $50 to $150 above the spot price.
Gold bullion coins cost more than gold bullion bars, due to manufacturing costs. Coins are struck multiple times and treated with more care than gold bars. Therefore if you are looking for the cheapest costing gold you should buy gold bars.
Rare gold coins cost more than bullion coins and bars. This type of gold can range in price from a few hundred dollars more than a bullion coin to seven figures. This is due to the rarity and quality of a particular coin. The more common and the lower the grade of a coin the lower the cost, the higher the grade and the rarer the coin, the higher the cost. This type of gold has benefits that extend beyond what bullion can provide. While rare gold coins have these added benefits they still have the intrinsic value of the gold itself, and history has shown that the value of gold has never been zero.
Figure out your goals and objectives, and then acquire the right type of gold to support those goals. The cost will vary, but this should not matter. It is more important to acquire the right type for you then to buy the cheapest gold.
Can Gold Ride out the Financial Storm
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Gold bullion and rare gold coins is the perfect instrument for riding out any financial storm. Global debt crisis, banking failures, over printing of money/collapse of the dollar, inflation/hyperinflation, turmoil in stock markets are a few examples of when gold shines. Gold has been valuable to human being for over 5,000 years. Currencies have come and gone, civilizations have fallen and technology has advanced and throughout all of it gold has proven to retain its worth.
The main reason people buy gold is to diversify their portfolio against downturns in paper assets. For example, when the collapse of many big banks in the U.S. occurred at the end of 2008, gold went from around $725 per ounce to close to $925 per ounce, a 27% increase. In 1987 when the stock market crashed, the infamous Black Monday, gold shot up to $500 per ounce, which was the highest level since 1983.
Gold bullion is primarily a hedge against inflation. In 1910 one ounce of gold could buy roughly 222 loaves of bread. Today that same one ounce of gold can buy roughly 275 loaves of bread. The dollar however has lost 95% of its purchasing power. If you owned $100 worth of gold in 1910 (5 oz) it would be worth roughly $5,500 today. In comparison, if you had $100 dollars in 1910 it would be worth roughly $5 today. That is a pretty big difference.
There have been many financial and global crises over history, and yet gold has always survived as a safe haven. Therefore don’t you think that as we continue to go through this global financial crisis gold will continue to be a safe haven for your dollars?
On a side note, look at the chart below, for the last 10 years gold has been in a positive trend cycle. Does this look like a bubble formation? Absolutely not! It has accumulated approximately 17% per year, building support and resistance all along the way.
Gold Bullion Coins
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Gold Bullion Coins come in many shapes and sizes, from as small as 1/25oz to as large as 220 pounds. The 220 pound coin was minted in Canada and is worth millions of dollars, however most gold coins that people buy are 1oz or smaller. Many countries have a mint at which they produce their own gold bullion coins. Here is a rough list of gold bullion coins:
American Eagle
Australia Kangaroo
Austria Koronas
Austria Ducats
Austria Vienna Philharmonic
Canada Maple Leaf
Chile Peso
Chinese Panda
Colombia Peso
England Britannia
French Franc
Holland guilders
Hungary Koronas
Isle of Man Angel
Isle of Man Persian Cats
Italy Lire
Mexico Pesos
South Africa Krugerrand
Swiss Franc
These coins range in gold purity. For example, the American Eagle is 22 carats which is 90% gold and 10% of another metal for durability. The coin still contains 1 ounce of pure gold. The Canadian Maple Leaf on the other hand is 24 carats. It is still 1 ounce of pure gold therefore it is a smaller sized coin than the Eagle because it does not contain any other metal. The sizes of gold bullion coins vary for this reason.
As you can imagine, every coin has a different design and some are more beautiful than others, but for the most part this makes no difference on the value. A gold bullion coins value is determined by how much gold it contains. Therefore any common issue coins do not carry any collector premium. If you own a 1oz American Eagle then it is worth the spot price of gold plus a premium depending on supply and demand, and the particular broker/dealer you are working with.
Bullion coins can be acquired in a self-directed Gold IRA. In certain instances they are reportable to the IRS upon the sale of them and they are considered to be subject to confiscation by the government. With all of the upward predictions for 2010 that are coming out these coins could be worth much more in the future.
What’s Really Happening in the Gold Market Today?
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Gold just like any other market is subject to supply and demand factors. When supply is low and demand is high the price goes up and vice versa. To understand the gold market one must understand the term “spot” price.
Gold, mankind’s universal and timeless money and store of value, it is traded in many ways. The easiest and most direct way, and the way that governs millions of transactions every day, is cash payment followed by immediate delivery. In these transactions, the agreed upon benchmark price is called the “spot” price. Another term frequently used term for this type of transaction is the “cash” price. Many major gold brokers set a minimum number of ounces for a transaction at the spot price.
New buyers sometimes mistake a futures price for the spot price. They are not the same. A futures price is a market-generated quote for delivery of a fixed amount of gold (frequently 100 ounces) at a specific time in the future. This price will be higher than that moment’s spot (cash) price because 1) it must include fees for storage and delivery of the gold, and 2) finance charges because payment will not be made until the delivery date.
Another spot-related factor gold investors frequently neglect is transaction size. Ten transactions of 10 ounces require a lot more time, expense, and effort on the part of a broker than one transaction of 100 ounces. In the international world of gold trading, size matters. Most buyers of gold do not buy at the spot price because the size of the transaction is too small. Most buyers are paying spot plus a premium. When supply is low the premium increases. Today expect to pay higher than $100 above the spot price for 1 gold bullion coin.
What you see being reported on everyday is the spot price of gold, and on an average day around 24 million ounces trades hands. You may have noticed that gold has been rising for around 10 years. Two major factors have contributed to this rise, liquidity and fear. So much money has been printed by the FED that it has to go somewhere. This liquidity raised all ships for a while. Real estate, stocks and gold all rose together for a window of time this decade.
Then we saw the collapse of the banking system in 2008 which has created fear, and gold values rose rapidly over the last year, from $870 per ounce at the end of 2008 to where it stands today at $1,137. Fear of inflation or a collapsing dollar will continue to put upward pressure on gold prices. In short, fear is what is driving the gold market today.
Selling Price of Gold Coins
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People always want to know what the prices of gold coins are. First you have to determine if you are buying bullion gold coins or numismatic also known as rare gold coins. These two types will vary in price dramatically.
Bullion gold coins are based on the spot price of gold plus a premium. The spot price of gold is the cash price for immediate delivery, usually on 100 troy ounce contracts. Gold coins will usually be priced higher than gold bars of the same ounce size because they are more costly to produce. Individual buyers of gold bullion coins almost never buy them at the spot price. If you did you would be buying them under the wholesale value. Therefore one can expect to pay the spot price plus a premium depending on the broker/dealer you are working with. Typically the premium will be 10-12% above the spot price on gold bullion coins. In addition, depending on supply and demand factors some gold bullion coins may be priced higher than others. For example, 1oz American Eagle coins and the time of this writing are more sought after than the 1oz Canadian Maple Leaf, therefore one can expect to pay a few dollars more for the American Eagle.
Rare gold coins on the other hand are much harder to price due to quality and rarity factors involved. Rare gold coins are graded on a scale from 1-70, 70 being perfect condition. Typically the lower a coin is on the grading scale the closer it will be to the spot price and vice versa, the higher a coin is on the grading scale the further away it will be from the spot price. Rare gold coins also vary in rarity. Some coins are very rare and some are fairly common and thus easier to come by. The rarer a particular coin the more expensive it will be. Therefore prices on rare gold coins can range from close to the spot price all the way up into the seven figure range. Both types of gold coins will do different things for your portfolio. This is why it is important to work with a company that you trust that will help you to determine the best gold coins to meet your goals and objectives.
Factors Affecting the Gold Spot Price
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Gold, mankind’s universal and timeless money and store of value, is traded in many ways. The easiest and most direct way, and the way that governs millions of transactions every day, is cash payment followed by immediate delivery. In these transactions, the agreed upon benchmark price is called the “spot” price. Another term frequently used term for this type of transaction is the “cash” price. Many major gold brokers set a minimum number of ounces for a transaction at the spot price.
New investors sometimes mistake a futures price for the spot price. They are not the same. A futures price is a market-generated quote for delivery of a fixed amount of gold (frequently 100 ounces) at a specific time in the future. This price will be higher than that moment’s spot (cash) price because 1) it must include fees for storage and delivery of the gold, and 2) finance charges because payment will not be made until the delivery date.
Another spot-related factor gold investors frequently neglect: transaction size. Ten transactions of 10 ounces require a lot more time, expense, and effort on the part of a broker than one transaction of 100 ounces. In the international world of gold trading, size matters.
Here are some factors that influence the spot price of gold:
· US Dollar- The US Dollar exchange rate is allegedly the most significant factor influencing the price of gold. US current account deficit is financed through foreign investments. Any contraction in the volume of inflows reduces the demand of US Dollar, causing erosion in its value. In such conditions, the mass sentiments tilt towards safer investments in the form of precious metals, which are not similarly affected by economic distress. Therefore, there is a negative correlation between the price of precious metals and the Dollar value.
· Industrial Demand-One other major demand driver for gold is the level of industrial production. It bears a positive correlation with the price of gold.
· Central Banks-The Central Banks, apart from maintaining foreign exchange reserves, also maintain gold reserves as a safety net against inflationary conditions, to boost public confidence, income on lending, and so on. Often these banks control the supply of gold in the market and affect its domestic prices.
· Economic and Socio-Political Uncertainty-In the case of strong inflationary trends in the economy, wars, economic depression, and other socio-political disturbances, the paper currency loses its value. This enhances the demand of precious metals and consequently, sets an upward spiral in their prices.
Click here to view a spot price indicator tool. It is located at the top right of the page (colored in grey).
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