It may seem odd that an asset can have two prices at once. But it is quite common in gold trading, and not just gold, even every other commodity is priced in a couple of ways.
However, if you are new to this market and are unaware of the basic difference between spot prices and futures prices in gold trading, worry not. To help you out, here is a detailed guide on what these prices are and how they differ from each other.
What is Spot Price?
The price at which you can buy and sell the gold in the market is known as the spot price of this precious metal. It is often quoted on the market tickers, representing the real-time value of gold for various transactions.
The spot price is primarily driven by the current supply and demand of gold, and it can be influenced by various factors like global economic conditions, geopolitical events, and investors’ sentiments. Moreover, the values of gold are susceptible to short-term fluctuations and unexpected events, which can sometimes lead to costly losses.
What is the Future Price?
In the diverse market of gold trading, the futures price is an agreed-upon value at which a contract for future delivery of gold will be exchanged. It is basically settled by considering the current spot price of the precious metal for factors like storage costs, interest rates, and expectations about the future supply and demand. The futures price is the value at which both the buyer and seller commit to a transaction of this precious metal, which will occur in the future at a later date, not immediately.
In gold trading, the futures price is affected by the current supply and demand of the asset. Additionally, there are some other factors that influence this value, such as interest rates and future predictions of the market.
Key Differences between Spot Price and Futures Price
Are you new to the market and wondering how to trade gold? Worry not, and before getting started, consider learning the key differences between the spot prices and futures prices of this valuable asset.
- Timing
The spot prices are just for the immediate delivery and transactions, while if we consider futures prices, they are all about the future.
- Price Determination
To determine the spot price of the gold, you have to analyze current market conditions. On the other hand, the futures prices are influenced by the current as well as anticipated future conditions of the market.
- Market Participants
If you are the one who always needs to execute immediate transactions, you will definitely consider spot markets. But the participants of futures markets are often traders and investors. They are here for hedging and speculating, so they can execute some successful transactions and earn a substantial amount of profit from the fluctuating prices of gold.
- Volatility
Many traders often invest in futures contracts to earn massive profits, as they are considered more volatile, especially in the short term. This is due to factors like margin requirements and leverage.