What is Spot Price? Understanding Bullion Prices
What is a spot price? How does a spot price compare to a futures price?
If you're wondering this, you must find out the answer before putting any money into an investment of any kind. This is because you will only be able to make the most profitable investment decisions if you know the current spot price of gold or silver.
Understanding the relationship between spot and futures prices allows you to better anticipate price swings and time your investments accordingly.
First, it's helpful to define exactly what the "spot price" means, especially in the context of precious metals.
What is the Spot Price?
Understanding the spot price is straightforward. The current market value of a commodity, such as silver, is known as its "spot price." If you were to buy a stock at its current price, you would acquire the asset in its current market condition.
Spot prices may fluctuate based on supply and demand. The spot prices of most aids are somewhat volatile and are constantly shifting. Suppose you're just starting in the investment world. In that case, you may be perplexed by the idea of buying an asset whose value is constantly fluctuating.
You shouldn't base your investment decisions solely on the spot price. This is because, while spot prices do fluctuate, they rarely do so significantly as to ruin an investment. The spot prices of different assets also fluctuate to different degrees.
It's possible, for instance, that silver's spot price is more prone to wild swings than gold's. This is because silver is in high demand from industries that produce electrical devices and is also frequently purchased as an investment. When compared, however, gold's price has shown comparatively little volatility.
This is because gold's primary uses are as an investment and in the jewelry industry, despite its versatility in other areas. In times of economic uncertainty, gold is often sought out as a "safe-haven" investment due to its historically stable price.
The idea of a spot price appears straightforward at this point. You may not realize that spot prices are frequently compared to futures prices.
What is a Futures Price?
When it comes to spot prices, there isn't much to consider. Trading shares of stock at the current market price, or "spot price," involves exchanging the shares for a predetermined amount of cash. However, futures prices can make an already complicated situation even more so.
Futures contracts serve as the basis for setting futures prices. Futures contracts attempt to predict an asset's future price based on that asset's current spot price. The question is, "How?"
Futures contracts incorporate both the spot price (the current value of an asset) and projections of how that value may change.
Shipping and storage fees, shifts in supply and demand, the rate of return, and the contract's expiration date are all examples of such variables.
Depending on when the contract expires, it might be easier to foresee some of these factors. If your futures contract doesn't expire for a long time, the cost to store the underlying asset will rise, driving up the asset's price. If your contract is short and the asset in question won't be stored for an extended period, you may not have to worry about storage fees.
Futures prices and contracts are nothing more than well-informed guesses about an asset's future value.
However, you can better understand the factors that may affect the prices of certain assets by familiarizing yourself with the specifics of futures and spot prices.
Specifics on Spot and Future Prices
Keep in mind that futures prices can be significantly different from spot prices. It's important to remember, though, that just because an asset's futures price is high now doesn't mean it will remain so in the future. The price of futures is determined by the myriad of economic variables we've already discussed.
Futures prices can be lower than spot prices in some instances. Price movements in futures markets can either be in contango or backwardation. While "contango" may sound foreign, it simply describes how the futures price falls to meet the lower spot price.
In contrast, backwardation occurs when the futures price increases to reflect a rise in the spot price. Since the value of futures contracts tends to fall as the maturity date of the contract approaches, contango favors shorter positions.
Backwardation, on the other hand, favors long positions due to the expectation that the price will rise as the futures contract approaches the date of maturity.
Understand the True Market Price
Whether you plan to invest using the spot price or the futures price, you'll be able to make more informed decisions with this data at your disposal.
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Disclaimer: Content on this website is not intended to be used as financial advice. It is not to be used as a recommendation to buy, sell, or trade an asset that requires a licensed broker. Consult a financial advisor.