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What is Spot Price?

August 06, 2010274 view(s)

The spot price is the price that is quoted for immediate payment and delivery of a commodity, a currency, or a security. However “immediate” has a different meaning than in normal usage. Since these trades are generally—especially for commodities—dealing with large quantities of an item, instant delivery isn’t reasonable. Because of this, settlement usually happens with one or two business days of the trade.

Gold Forward Price

While spot price refers to the price agreed upon for immediate settlement, the forward price refers to the price for a forward or futures contract. In a trade with the immediate settlement, payment and delivery happen within a couple business days of the trade. In a forward or futures contract, however, the contract is to pay and deliver the currency, security, or commodity at a price agreed upon today but at a future date.

Market expectations

With a non-perishable commodity like gold bullion, traders know that there will be as much gold today as there is tomorrow or in five months. The amount of gold in the world never changes, although demand does. This is what drives prices for gold and other precious metals higher or lower.

Because the trader knows that the amount of gold will stay steady, when determining the spot price, traders take into account what they expect the price of gold to be in the future. For example, if you had an ounce of gold worth $1100 today and you know with 100% certainty that it would be worth $1200 next week, would you sell it for $1100? Of course not, you would try and find a buyer who is willing to pay $1200.

But—of course—we can never know for sure what the future demand and future price of gold and other precious metals will be. Because of this traders do their best to estimate what it will be in the future and price their trades accordingly. Because of this unknown future value, speculators may come in to try and make money through trades.

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