Confusion About “Spot” Prices

Confusion About “Spot” Prices

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Introduction

In economics and finance, the term “spot price” is frequently used to denote the current market price of a commodity or asset for immediate settlement and delivery. While the concept of spot prices might seem straightforward at first glance, a deeper examination reveals many complexities that often lead to confusion among investors, traders, and even seasoned economists. This article delves into the history of spot prices, the factors influencing their fluctuations, and the common misconceptions that cloud our understanding of this crucial economic indicator.

History of Spot Prices

The origins of spot prices can be traced back to ancient marketplaces where traders gathered to exchange goods and commodities. In these bustling bazaars, the immediate exchange of products for agreed-upon prices was the norm, giving birth to the concept of the spot price. As economies evolved, so did the methods of price determination.

 

During the 19th century, the rise of standardized exchanges brought greater structure to spot prices. Markets like the Chicago Board of Trade (now the CME Group) introduced formalized trading pits where traders could trade open outcry, shouting and gesturing to convey their buy and sell orders. These exchanges facilitated transparent and instantaneous price discovery for agricultural products, metals, and energy resources.

 

The late 20th century witnessed a transformative shift with the advent of electronic trading platforms. These digital marketplaces allowed participants to submit orders and execute trades remotely, revolutionizing how spot prices were determined. The increased accessibility and speed of electronic trading further enhanced the efficiency of spot price discovery.

Factors Influencing Spot Price Fluctuations

Spot prices are influenced by various factors, making them highly susceptible to rapid changes. Some key factors include

 

  • Supply and Demand Dynamics: The most fundamental driver of spot prices is the balance between supply and demand. If demand exceeds supply, prices tend to rise, while an oversupply can lead to price declines.

 

  • Macroeconomic Trends: Economic indicators like GDP growth, inflation, and employment figures can impact spot prices. For instance, during periods of robust economic growth, the demand for raw materials such as oil and metals tends to increase, driving up their spot prices.

 

  • Geopolitical Events: Wars, political tensions, and trade disputes in major producing or consuming regions can disrupt supply chains and cause spot price volatility. Geopolitical uncertainty often leads to heightened market speculation.

 

  • Currency Strength: As many commodities are traded in US dollars, changes in currency exchange rates can influence spot prices for international participants. A stronger dollar can lead to lower dollar-denominated commodity prices.

 

  • Weather and Natural Disasters: Agricultural commodities are particularly sensitive to weather conditions. Droughts, floods, and other natural disasters can significantly impact crop yields and spot prices.

 

  • Technological Advances: Technological innovations in extraction, production, and transportation can influence the supply side of commodities, affecting spot prices. For example, advancements in drilling techniques have led to increased oil production in unconventional reserves.

Common Misconceptions

Despite its significance, spot prices often need to be more understood. Here are a few common misunderstandings:

 

  • Spot Price Equals Future Price: Spot prices reflect current market conditions, while market expectations of prices influence future prices later. These two prices can differ due to storage costs, interest rates, and anticipated changes in supply and demand.

 

  • Static Nature of Spot Prices: Spot prices are dynamic and change constantly based on market conditions. They are not fixed or static figures.

 

  • Uniformity Across Markets: While spot prices are generally used as a benchmark, slight variations can occur across different markets and exchanges due to transportation costs and local supply-demand dynamics.

 

  • Exclusively for Commodities: Spot prices are not limited to commodities; they can also apply to financial instruments such as currencies and securities.

Reasons for the Premium: Bridging the Gap

One common occurrence is when the actual price exceeds the spot price, resulting in what is known as a “premium.” A premium is the difference between the spot price and the price you pay for your precious metal. Several factors contribute to this phenomenon:

 

  • Transportation and Storage Costs: When dealing with physical commodities, transporting and storing the asset can add to the overall price. This is particularly evident in the oil market, where the price of oil might vary across locations due to transportation expenses.

 

  • Quality and Grade: Commodities such as metals and agricultural products have various qualities and grades. The price can differ based on the quality of the product, leading to variations between spot and actual prices.

 

  • Delivery Constraints: In certain markets, the availability of the commodity for immediate delivery might be limited due to logistical or regulatory reasons. This scarcity can lead to a premium being added to the spot price.

 

  • Market Illiquidity: In less liquid markets, where the trading volume is lower, the spread between the spot and actual prices can be wider. This can be observed in niche commodities or less actively traded financial instruments.

 

  • Time Value of Money: In financial markets, actual prices can deviate from spot prices due to the time value of money. This concept considers that money available today is worth more than the same amount in the future. As a result, actual prices for future delivery might be higher to account for this time value.

 

  • Market Sentiment and Speculation: Traders and investors might anticipate changes in market conditions, supply-demand dynamics, or geopolitical events that could impact future prices. This sentiment can influence actual prices, leading to premiums or discounts relative to the spot price.

 

One simple illustration to help you understand premium is the fee paid to the guy who digs up the gold or silver. So if you don’t like the premium, dig it up yourself.

Conclusion

Understanding spot prices is crucial for investing, trading, or economic analysis. These prices serve as a window into the current state of the market, reflecting intricate supply-demand dynamics, economic trends, and geopolitical events. By unraveling the historical context and factors influencing fluctuations and dispelling common misconceptions, stakeholders can better comprehend this intricate economic concept more accurately and nuanced.

 

Spot and actual prices might appear synonymous but encapsulate different market aspects. While spot prices provide an immediate gauge of market sentiment, actual prices reflect the reality of executed transactions, often incorporating various premiums or discounts. Understanding the reasons behind these discrepancies is essential for making informed decisions in the complex world of financial markets. As investors navigate the intricacies of spot and actual prices, they can better navigate the challenges posed by transportation costs, quality differentials, market illiquidity, and the ever-present influence of time and sentiment.

 

So you have decided to buy silver online.

Great choice. Let’s talk about silver.

Silver is exceptionally popular today. Part of the reason for this is the belief that it’s potential for upside value increase is even greater than the same belief in gold. In fact, there is a very good book on this subject entitled: “ Why Silver Will Outperform Gold by 400% in the coming years”. It’s a very scholarly book and quite convincing. Give it a read if you have the time.

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Mind you, one need not look as far as that book to find evidence of the common belief that silver has great potential for growth in the near future. All one has to do is go to the web or even Youtube and there are advocates of this thought at every turn.

At Durham Precious Metals we believe that silver is an easy choice because it gives a sense of substance due to its lower cost per ounce than gold.

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Probably 90% of our business is silver sales so this sentiment is fairly unanimous throughout the public. 10oz bars seem to be the most popular. Generic rounds and Silver Maples seem to be the next most popular and 1oz bars a close 4th place. It is our opinion that 10 oz bars and 1oz rounds are your best value as their premium over spot is very reasonable. However, there is no wrong choice when it comes to our silver product line because we try to concentrate on product lines with low premiums anyway.

Silver has always been a form of money. There are those that will argue that silver has been demonetized but we beg to differ. All one has to do is refer to the (CCRA) definition for 999 bullion. It is deemed by Rev Can to be a “ financial instrument”. Enough said on that subject!

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From a utility standpoint, silver has somewhere in the neighbourhood of 60,000 industrial uses including painting the backs of mirrors to create the reflective surface to collecting radiation in solar panels. If nothing else, the lack of an above ground supply of silver ( which is relatively new historically) will keep the demand for this metal strong since for most applications there is no viable substitute.

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Can you imagine the mayhem that would ensue if all the major electronic manufacturers came grinding to a halt due to a silver shortage? It would be catastrophic to the economy. We believe that this fact alone will be a major driver of support for the silver price when the powers that be run out of tricks in their attempt to suppress the price of silver. And yes, we agree that this practice goes on in plain sight and that the regulators turn a blind eye. Let’s hope justice prevails and that the historic silver/gold ratio returns to its traditional level.

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In the meantime…keep stacking!

So you have decided to buy gold online.

Great choice! Let’s talk about gold then, shall we?

Gold is, and always has been, a favorite of collectors of precious metals. Its 6000-year history of sustaining wealth is unprecedented. The yellow metal has launched wars, bought fortunes and has been a form of money throughout that history. It is one of the densest metals and also one of the densest elements on the periodic table. It weighs in at a density of 19.32 grams per cubic centimeter. Water, by contrast, has a density of 1 gram per cubic centimeter.

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Platinum is the densest of the common 4 precious metals at 21.45 grams per cubic centimeter.

People will often ask when gold is the right choice to buy as opposed to other metals such as silver. This is a very common question. There is no easy answer that anyone can give to someone so we always boil it down to practical applications.

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Consider how much of an investment you are planning to make over-all throughout the course of your precious metals buying.  If you are planning on purchasing, for example, $10,000 worth of metals and then cap your spending then it really doesn’t matter which metals you buy. The volume of the purchase will be relatively small in terms of weight and size. Our main concern and Durham Precious Metals comes down to simple things like , cost of storage, cost of shipping and bulk. We are always trying to help our customers have the best experience as metals collectors.

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For example, if you were to tell us that you are considering selling a piece of real estate and use the proceeds to buy metals then gold would be our suggestion. The reason comes down to volume and weight at this point. Several hundred thousand dollars of silver would be an incredible amount of bulk at this spend level. Hundreds of pounds of silver would be hard to store practically and would be more expensive to store as well. If you are the DIY type it would also be harder to hide than a comparable dollar amount of gold.

Keep in mind that at the time of this writing gold is about 75 times more expensive in dollar terms as the same weight of silver. That equates to 75 times less bulk per dollar spend. This will make it much easier to hide or store if you are looking at large purchase amounts.

Price of Gold?

If you are only considering a small total purchase amount either of the metals is perfectly fine. The one consideration we always emphasize for small purchase amounts really comes down to personal perception. Here is what we mean. Silver is 75 times more bulky per dollar spend. Obviously, it is going to feel a lot more substantial if you buy $5000 worth of silver and have several hundred ounces to admire than only about 3 ounces. It’s a perception thing at this point but perception matters to people since perception can make us feel a particular way about what we spend our money on.

In closing, gold and silver are both great choices and neither is wrong in terms of their value of utility. They have both had a long history as a store of wealth and that isn’t likely to change any time soon.

Buy both with confidence. Buy Gold Online

We often carry pieces that we don’t list on site so feel free to call us for an up-to-date list.

About DPM

When you consider silver value and gold value, the wise choice is to stock up today. At Durham Precious Metals we make it easy and convenient to buy silver and buy gold online.

For those who are serious about investing in gold and silver bullion, DPM is your one-stop store to buy gold and buy silver, whether it be through our website or our retail store.

Many people want to know where to buy gold and do not realize they can avoid the traffic hassle of driving into the city and visit us at DPM located in Oshawa, Ontario. See our Retail Store page for directions. Our customers are delighted with our competitive silver price. We carry mint direct silver bars, silver coins, gold bars and gold coins.

Make Durham Precious Metals your choice for gold and silver bullion.

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