What market gold prices really are
We often hear phrases like «market gold price» or «world gold price». Let's find out their exact meaning and why we, ordinary investors and buyers, can never purchase gold for its market price. Is there any kind of an evil conspiracy that prevents common people from purchasing gold?
So, the market prices are formed by the demand to supply ratio. This ratio in its turn is affected by various economic, politic, military, climatic and demographic factors and sets of factors. All kinds of market manipulations also have a dramatic influence on this index.
We are not going to further detail concerning London Gold Fixing or trading on the COMEX as there is plenty of information about these aspects on the Internet. Our goal is to answer just one single question: «Why can't we buy gold for its market price»?
The most obvious answer sounds like this: «We can not do it for the same reason that prevents us from purchasing wheat, beef, coffee and other goods for market prices». Exchange goods are always sold in large lots. In order to buy gold for its market price in the stock market you have to be an extraordinarily rich person. In the stock market gold is sold in moulded unsightly bars with ragged edges. During the cooling of metal golden bars are deformed. Each bar weighs 400 oz. According to the LBMA (London Bullion Market Association) standards, this quantity is equal to 12 kilograms of gold with a fineness of at least 995.
But even if you have enough money in order to buy one or more golden bar, it gives you neither the right nor the opportunity to purchase gold for its market price. You don't only have to be rich enough, but you also must become a bidder officially. If you want to purchase gold online in the stock market personally, without dealing with exchange brokers, it is also going to be quite an expensive option.
Direct participation in gold exchange trades is mostly expansive, so only serious and large traders, like central banks, mints and the world's top gold manufacturers can afford it.
If you are just an ordinary oligarch who can sometimes purchase a couple of 12 kg golden bars after breakfast, even in this case you have to deal with an authorized commercial agent. Of course there is going to be an additional charge for his services. Taking part in gold trading is a certain kind of business, not an unselfish hobby or some kind of charity. Of course you can pay for direct participation in gold trading, like any other common oligarch would. But, in the first place, if you only plan to buy gold occasionally, these expenses will be ungrounded, to say the least. In the second place, the final cost of gold would be affected by the right to participate in the exchange trades.
Now let us consider the situation concerning investment gold bars and coins. Unlike bank gold bars, most of investment gold bars are rather stamped than moulded. It helps to produce smooth bars with plain surface with no distinctive moulding defects and imperfections. However moulded investment golden bars are also available on the market, but they usually weigh 0.5 kg or more. Futhermore, investment gold bars have a fineness of at least 999 or 999.9, while bank gold bars have a minimum fineness of 995.
In order to make an investment gold bar out of a bank gold bar, it needs to be refined. Due to different fineness you will inevitably get a slightly lighter bar. The loss of weight can easily reach 0,5% (999.9 – 995). The situation concerning manufacturing of investment coins is pretty much the same. During the mintage base metals are added to precious metals in order to harden them, however gold is always preliminarily refined in order to reach a fineness of 999 or even higher. All the above-mentioned operations are power-consuming and include logistical, industrial and energetic expenses. Risk insurance and maintenance of security also come at a considerable cost. All these factors affect the final price of golden bars and coins. Otherwise gold manufacturers would have gone into smash.
Buyers purchase investment gold bars, not bank bars, so it is them who cover all the above-mentioned expenses: stamping of coins, developing their design, manufacturing of compression moulds, numeration of bars, maintenance of equipment, wages, original packaging.
This is the exact reason why we can never buy gold for its official market price. More precisely, nobody in the world can buy gold for its market price. As it has already been mentioned, the final price is affected by the expenses, needed to take part in the exchange trades, and many other factors. So what is the «market price» and why do we need it if nobody can buy gold for this price?
The market price is a benchmark that can be used as a basis for further negotiations. It is sometimes called «spot price», while all the extra charges turn into premium over spot offers.
As you can see, there is no dark conspiracy that raises the prices of gold investment products. There are only inevitable expenses needed for making investment gold bars out of uncomely bank bars.
In summary we would like to add that gold is both an article of exchange trade and a type of currency.
Comparing with other exchange trade goods, additional charges for gold are absolutely minimal. The price of beef or coffee on the exchange market is twice as high as the final retail price of these goods and even worse things happen. The difference between the exchange price of gold and the retail price of investment bars and coins rarely surpasses the 5% limit. With due regard for the constant increase of gold price it makes such purchases economically sound and provides good opportunities for capital investment.
If your golden coin or bar are well-preserved and have no defects, the world market price of gold will correspond with the selling price of your particular property.