The Price, Exchange Rate and Price Formation of Investment Gold

Gold coin with two pandas, 1 kg of pure gold, bamboo-patterned background, 10,000 yuan face value, with symbols of China.

How is the price of investment gold products calculated?

The price of investment gold is based on the spot price of fine gold. Added to this are the manufacturing cost (the price at which the product can be purchased from the mint or refinery), shipping and insurance costs, transaction fees, and the dealer's margin.

In order to display a more attractive price on their website, some dealers may add bank transaction fees or cash handling charges separately after the fact. In the US market, it is common practice for dealers to show their best price (which may only apply above a certain order volume) and then detail the surcharges in the web shop. In any case, gold dealers operate on very tight margins, with the typical commercial markup falling below 1.5%.

What is a realistic price for gold?

The smaller the denomination of an investment gold product, the higher its relative production cost. A 2-gram wafer, for example, can carry a manufacturing cost of up to 12%. Larger bars of 250 grams, 500 grams and 1,000 grams typically have production costs below 1%.

For coins, the annual mintage volume makes a significant difference. One-ounce gold coins are well suited for investment purposes, as their production costs are competitive with bars.

On top of manufacturing costs come shipping, insurance, transaction fees and the dealer's margin.

What is the gold exchange rate?

Gold is a traded commodity, just like equities. Banks and major trading houses trade it around the clock, except at weekends. Because supply and demand shift minute by minute, the gold price moves continuously. The price of the 400-ounce Good Delivery bars traded by international banks, investment funds and central banks differs by only a few basis points from the price of "paper" gold traded on electronic exchanges.

Where can you find the gold spot price?

The physical gold price changes second by second, but in London it is fixed twice daily at set times. The London fixing plays a special role because it is widely used as the settlement price in commercial contracts. It is determined at 10:30 and 15:00 London time on every trading day. If you want to track the continuously moving gold price, it is worth following the GLOBEX gold futures price.

Why does the gold price change constantly?

In the short term, the gold price is driven primarily by commercial transactions and exchange-traded speculation. The balance between supply and demand shifts continuously, and this affects the price. Over the longer term, international interest rates, inflation expectations, the strength of the US dollar, and expected returns from bonds and equities all shape the price. Market fears can push the gold price higher, as gold has always been regarded as a safe-haven asset. An annual range of 12-16% between the minimum and maximum gold price is considered entirely normal.

The gold price in Hungarian forints is also influenced by the USD/HUF cross rate. It is often the case that when the dollar strengthens against the euro, gold weakens slightly against the dollar, but this is not set in stone, as correlations themselves change over time.

Why is the Panda more expensive than the Vienna Philharmonic gold coin?

This comes down to production costs and the pricing strategy of the mint. The cheapest coins (Krugerrand, Vienna Philharmonic, Maple Leaf, Kangaroo) are struck in very large quantities, which means the mint can afford to release them with a smaller margin. The Panda commands a higher price because its mintage is lower and the mint positions it as a premium product.