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Gold – Spot Price and Forward

Today’s gold spot price at market close was $1,432.73 per ounce.

In a nutshell, when looking at precious metals, “spot price” means that’s what you’d pay right now to settle a purchase. A spot settlement usually takes place one or two business days after the trade date.

In contrast to a spot price, there’s also a “forward price.” Basically, this price comes into play when you’re dealing with a forward contract. This type of purchase contract is also known simply as a “forward.”

The forward price refers to what you pay when the terms of the contract–including the price you agree to pay–are set and agreed upon. Also agreed upon is what you’re going to get for your money. But no immediate transaction takes place. Instead, with a futures contract, both payment for and receipt of the commodity take place at a later date.

So, what does one price have to do with the other? And what does this mean for gold prices?

Theoretically, these two values may be useful in predicting future movements in the price of gold.

The spot price–also known as the spot rate–and the forward price can be used in combination to give us some idea of market expectations regarding future gold prices. There’s a bit of a formula involved, and this is perhaps an oversimplification. But here’s one theory:

The difference between the forward price and the spot price of a commodity should be roughly equal to the earnings accrued by the commodity holder, plus any finance charges.

So, when considering gold prices, the difference in the spot price and the forward price should be roughly equal to a combination of two factors: first, the dividends that are payable during the time period between purchase and actual settlement (payment). Second, the interest that is accrued.

This is why, for nonperishable commodities like silver and gold, spot price and forward price can be useful in helping to predict future price trends.

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