If you have considered the concept of investing in precious metals, you have likely heard the term “spot price” thrown around. This commonly used term is important for any investor of general commodities, as they allow for analytical decisions to be made when making basic investments.
While you might have been able to discern the general meaning of spot price and its usefulness to investors, we’re here to help you garner a thorough understanding of what spot price is and why it’s important within the precious metals market.
What Is Spot Price?
Whenever you see the term spot price, it refers to the current price at which any given asset can be bought or sold for within the marketplace. The spot price depends upon both the time and geographic location in which a person is attempting to either trade or sell their asset; however, some global commodities—e.g., precious metals such as silver and gold bullion—tend to conform to generally similar spot prices across the world. The reason for this is that these commodities are sold on a regular basis within a global marketplace, and their transactions are generally uniform besides required exchange rates.
Spot prices tend to be watched closely by investors dealing with the precious metals market as they tend to fluctuate on a daily basis—usually not by significant amounts, but enough to prove beneficial towards certain investment trading.
Now, there is another term that tends to show up from time to time within investing articles and spaces: “futures prices.” What are futures prices and how do they differ from the spot price of a commodity?
What Are Futures Prices?
The futures price of a specific commodity is determined contractually, in which a price is set for future sales, trades and deliveries of the product. Precious metals, along with other global commodities such as oil, wheat and corn, have futures prices that are determined ahead of time due to their continuous exchanges within the marketplace, as well as the demand they inherently have.
Futures contracts are set in place primarily to ensure that all vendors involved—producers, buyers and users—have a safety protocol in place in the event that any unfortunate, high-risk event were to take place. The benefit is that it allows parties involved to become part of contracts that extend into the future, allowing investments to be made for several years in advance. For instance, as a large-scale precious metals investor, it would be possible to make purchases of gold and silver based upon their futures prices—the futures price per ounce of gold or silver.
How Do Spot Prices Compare to Futures Prices?
You might have a current understanding of what a spot price and what a futures price are, but how do the two of these differ? Particularly, how do the spot prices of precious metals change over time while their futures prices remain intact?
The key difference is the contractual versus real-time pricing per one ounce of precious metal within the marketplace. Whereas the spot price tells the current buying and selling price for an available precious metal, the same precious metals futures price lists the contracted value of the metal already set for a time in the future. Comparatively, the benefit that a futures price offers to an investor is that it reduces the risk of investing, no matter how the spot price fluctuates from day to day, and possibly year to year.
While you can purchase gold and silver bullion with ease by following the spot price on a daily basis, the futures price of the precious metal will allow you to purchase amounts of a precious metal at a contractually predetermined price over a set period of time, removing the worry of market fluctuation. So even if the spot price of the contractually set precious metal ends up above or below the futures price you agreed upon, you will still be buying and selling the bullion at your contractually set price.
Simply put, the difference comes down to the type of investor you see yourself being, whether that be an “immediate” investor or a “seasonal” investor. Immediate investors are more likely to make investments based on the moment—how these people feel in the very moment while considering the market—and will rely on spot prices to determine when they invest. On the other hand, seasonal investors are more likely to rely on futures prices, as they will be able to submit and verify their investments whenever they’d like within their contractually committed window.
How Are Spot Prices Determined?
Supply and demand is regularly shifting due to the marketplace interest of a commodity shifting all over the spectrum from country to country, which then has an effect on global initiatives. Furthermore, the supply and demand is also considered due to the futures contracts set in place. The futures contracts give a relative projection of supply and demand prospects because the contracts outline month-to-month transactions that will be taking place with the commodity, showing how much of the product is expected to be bought or sold during a given time. Along with reducing overall risk, this allows the marketplace to effectively determine how the volume for the product will be moved globally, which will in turn allow for projections on the general price of the commodity.
What Causes Variations in Spot Prices?
The value of precious metals such as gold and silver vary on a regular basis due to a variety of conditions. For the most part, gold and silver prices have little movement on a regular basis, only featuring brief changes without much shifting; however, there are some periods of time where there are large-scale shifts in the spot price of each metal (especially for gold, considering how much larger its spot price is than silver).
Traditionally, there are a number of factors that affect the spot price of each precious metal, ranging from the stock exchange, supply/demand, the state of the U.S. economy, both global and national newsworthy headlines, commentary taken from large precious metal sellers and many more factors.
Touching on supply and demand, both silver and gold face spot price shifts and volatility due to the global marketplace. Because this supply and demand is determined in reverence to the world markets, these commodities see a great deal of shifts because the interest in them is changing from country to country across the globe. Due to this varying interest within various time zones, the spot price of these precious metals shifts on a recurring basis.
While the constant shifts in spot prices might seem strange, or confusing, it is all for good reason. The reason for this is that the spot price means more than supply-and-demand transactions. In particular, spot prices also have a serious relation to the derivatives market: futures price contracts, options and more. These derivatives are related directly to futures contracts, as they allow people trading these commodities to lock in prices for a future time, while also mitigating risk.
Furthermore, the trading of these precious metals takes place on a recurring, 24/7 basis. In some exchanges, such as the New York City COMEX exchange, spot prices for metals such as gold and silver are normally determined by futures prices, due to those who are both buying and selling these precious metals within the market.
The Usefulness of Spot Prices
The variations and connections between the commodities market and their futures contracts show how useful spot prices are for investors, producers and sellers. While producers of commodities and purchasers of said goods will rely on futures contracts to set standard costs for month-to-month transactions, the amount of a commodity that these producers and sellers might require will vary. Because they cannot wholly determine just how much of a product they might need to purchase or sell, the spot price market helps as it allows for them to make purchases regarding any unexpected sales. Similarly, it can help sellers decide when to get rid of any surplus product that might be lying around, allowing them to decide when they would like to sell their products, particularly when it hits a reasonable enough price to shed to investors and users.
As stated prior, spot prices are also beneficial to anyone interested in investing in large quantities of precious metals, as it will allow for them to consider buying futures contracts. This can make for a great option for any basic investors, or anyone who is considering stocking up on precious metals to then begin trading it in the future. However, variations between futures contracts and current spot prices will allow the two to interplay between one another. In the event that futures contract prices continually increase, investors will begin purchasing goods based off spot prices instead. Thus, spot prices can help lower the overall costs of futures contracts, as it will allow basic amenities to be purchased at reasonable levels, as most investors will rely on futures contracts to purchase quantities of commodities.
How Spot Prices Help You
This might seem like a lot of information for a beginner, as purchasing both precious metal bullion or coins can be difficult, especially when attempting to purchase solely based off current spot prices. Having this knowledge on hand makes it relatively easier to make investments into the precious metals market.
As someone considering investments into the precious metals sector, it is important to keep the concept of spot prices in mind. If there is something you have in mind—whether it be basic investing or venturing into the field of collecting rare coins—you should still remember how spot prices will affect your decisions.
Interested in investing in rare, collectible coins? There are a great deal of standard American coins to choose from, but you want to ensure that you’re making the most sound investment you can. Only interested in obtaining rare coins? Feel free to buy as your finances see fit, getting the best coins to complete your collection. Are you more intrigued by just purchasing coins whose value is almost entirely tied to the spot price of the precious metal contained? Consider purchasing more popular coins to make the most of your investment, such as American Eagles (either gold or silver).
Interested in the latter of the two? If that is the case, it is time you begin taking a closer look at the spot price for the type of precious metal in which you are most interested in investing. Live, updated web pages can be found with each, all of which provide you with both live and historical information regarding the precious metal you are considering. Once you have determined a spot price that you feel comfortable investing in, whatever that might be, you should take the time to begin researching reputable retailers—sellers who can be entrusted to make secure, reliable transactions in which coins are both protected and pure.
Online dealers can be beneficial when considering some of your first investments, as they will often offer both live bullion spot prices on their site, alongside a swath of products that are sure to allow you to make more sound investments.
If you happen to have any questions about investing, or are in need of advice, Provident Metals is a source available to help you. We have numerous resources to help you begin investing, especially continuous updates concerning precious metals news and live gold and silver spot prices. Feel free to contact us with any questions you might have about our various offerings!