When someone asks what the price of gold is, the answer depends on which gold market he means.
In most cases, the different gold markets are close enough that the minor differences are insignificant. TV news anchors just want to know if the price is in a major trend, up or down (up). Old Uncle Ernie could be reminiscing about the bull market of the 1970s and comparing the price back then to the price today (spoiler: it’s higher today).
The Three Gold Markets
But if you’re studying gold, you may be curious about the differences between the three markets:
- Spot (also known as loco London)1
- COMEX futures
- Retail (i.e., physical coins and bars)
It must be emphasized that these are three different markets. That is, there are different buyers and sellers. Hence there are different balances of supply and demand. And the price in one market is not the same as in the other two.
The prices in these markets are usually very close to one another, but they’re not the same.
If the prices in two different markets are normally very close, then there must be some force that ties them together. It does not happen by accident, and no one maintains it out of charity.
This distance, price A minus price B, is called the “spread.” The wider the spread, the more money that a trader can make, bringing the prices closer together again. This means he would prefer to wait for the spread to widen. However, he has competitors.
Your local gas station might like to charge you $20/gallon for gasoline, but its competitors are happy to undercut that price. So, the gas station would lower its price, and its competitors would lower their price. Eventually, they would stop, and a price truce would be worked out (for a while). The truce occurs when the marginal gas station won’t go any lower.
Source: Keith Weiner | Mises Institute
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