Discussion for gold dealers
Technically “spot” refers to the price at which a futures contract for nearest active delivery month was most recently traded.
However, the vast majority of futures contract buyers have no interest in taking possession of the physical bars. And not many sellers intend to deliver the actual metal. Instead they are speculating only on price.
Many investors in physical metal wonder whether the futures markets are the best place for price discovery, given they are dominated by speculators and can often trade opposite fundamental drivers such as supply and demand. However, until investors demand change, the futures markets will continue to provide the basis price for physical bullion.
The LBMA is an association dominated by many of the world’s largest banks who also make a market in physical gold and silver bullion bars. The group is headquartered in London and is perhaps best known by bullion investors for establishing the “fix” price. This price is unlike the spot price in that it is set just once per day in silver and twice per day in gold. The fix price does not fluctuate from moment to moment.
And using a fix price makes it easy for either party to hedge. Bullion dealers, for example, can sell inventory to a customer and buy replacement inventory from a mint using the same fix price as the basis. Once again, they avoid worrying about the spot market moving against them during the period between completing the sale and making the offsetting purchase.
Since I just started to sell gold, I contacted several refineries to buy bars from at LBMA benchmark + making price.
But there is not way they supply such small quantities as a local gold dealer demands.
The only way to go is to supply from regional wholesaler who sell at spot price + a small premium.
The problem is there are days like last Friday when gold was up 1% in less than 2 hours. From the moment I sold a large bar to a customer, counting time to confirm the order with the customer, make the invoice and confirm the payment... the wholesale price of the bar was already as high as the price I sold...
If there are gold dealers here, how do you do to hedge against the spot price exposure?