How the gold market works

What gold is as a market 

Gold is unusual among commodities in that it is barely consumed. Copper is drawn into wire and buried in a building, oil is burned, wheat is eaten, and each of those uses removes the unit from the market permanently. Gold is not destroyed by its principal uses. Jewellery is worn and eventually recycled, bars sit in vaults, coins change hands, and the metal recovered from all of it re enters supply at a refinery. Almost every ounce ever mined still exists in some form, so the market clears against that entire accumulated stock rather than against the amount dug out of the ground in a given year.

This is why the vocabulary of other commodities fits gold poorly. A disruption at a large copper mine removes a meaningful share of the metal available that year; the same disruption at a gold mine removes a rounding error from a stock measured in decades of production. Gold therefore does not price off the marginal cost of extraction. It prices off the willingness of existing holders to keep holding, which is a monetary question rather than an industrial one.

Where the price is set 

Two venues matter and they are structurally different. The larger by volume is the London over the counter market, where bullion banks deal directly with each other and with clients in unallocated accounts, settling against metal held in London vaults to a defined good delivery standard. There is no exchange, no central order book and no public tape; the market association that governs the standard publishes a benchmark price fixed by an electronic auction twice each business day, and that published benchmark is what contracts, refiners and central banks reference for valuation.

The second venue is the New York futures market, where standardised dated contracts trade on an exchange with a visible order book, a clearing house between the parties and published open interest. Futures are where most speculative and hedging volume is expressed, and where price discovery is most visible minute to minute. The two venues are linked by arbitrage: because metal can be shipped between vaults and financed at a knowable rate, a persistent gap between the London price and the front futures month invites the trade that closes it. The symbol XAU/USD refers to the spot price, meaning the price for immediate delivery, expressed in US dollars per troy ounce.

Who trades it 

• Central banks and sovereign funds, which hold gold as a reserve asset outside any other country's liability. They are among the few participants whose horizon is measured in decades, and their net buying or selling is reported with a lag by national authorities and by industry bodies.
• Jewellery manufacturers and their supply chains, concentrated in India, China, Turkey and the Gulf, whose demand is seasonal, price sensitive and tied to weddings, festivals and gifting cycles rather than to financial conditions.
• Miners and refiners. A producer with unsold output can sell forward to fix a price, and refiners run a continuous physical book converting doré and scrap into deliverable bars.
• Exchange traded funds holding allocated metal, whose published holdings are one of the few daily observable measures of investment demand, and bullion banks who make prices and finance inventory.
• Financial participants with no physical interest, present in futures and in over the counter contracts, who take the other side of everything above.

What moves it 

The most durable explanation of the gold price is the real yield channel. Gold pays no coupon and no dividend, so holding it means forgoing whatever a comparable safe asset would have paid after inflation. When inflation adjusted yields on government debt rise, the opportunity cost of holding a non yielding asset rises with them, and when real yields fall the cost of holding gold falls. Practitioners generally describe the relationship as inverse and loose rather than mechanical: it explains a large share of the variation over long horizons and can be absent for months at a time.

The dollar is the second channel, and it is partly arithmetic rather than behavioural. Because the reference quote is in dollars, a change in the dollar against other currencies changes the price a non dollar buyer faces even if the dollar price has not moved at all. That mechanism is separable from any view about gold itself, and it is set out in full in the guide on gold quoted in other currencies.

Three further inputs are watched routinely. Official sector buying is a slow but large flow, and a sustained programme of reserve accumulation by central banks removes metal from the tradeable float. Exchange traded fund holdings are the fastest visible proxy for investment demand, published daily and readable as a flow rather than inferred from price. Physical demand from the jewellery centres is the countercyclical component: it tends to fall as prices rise and recover as they fall, which is why it dampens moves rather than driving them.

The safe haven description deserves a qualification, because it is the claim most often repeated and least often examined. Gold has risen during some periods of financial stress and fallen during others, and it has fallen sharply during liquidity events in which holders sold whatever could be sold to meet obligations elsewhere. The honest statement is that gold is uncorrelated with equity markets over long samples rather than reliably negatively correlated, and an uncorrelated asset is not the same thing as a hedge.

When it trades 

Gold is among the closest things to a continuous market. Dealing runs from the Sunday evening open in Asia through to the Friday close in New York, interrupted only by a short daily maintenance break, because physical dealing in London and Zurich, exchange trading in New York and Asian hours in Shanghai and Hong Kong overlap around the clock. The precise session and break are published per instrument in its contract specifications rather than being a property of the metal.

Depth is not distributed evenly across that window. It is deepest through the London morning and again where the London afternoon overlaps the New York morning, which is also when the second daily benchmark auction takes place. It is thinnest in the hours after the New York close and before Asia opens properly, and quoted spreads in thin conditions widen accordingly. Scheduled United States inflation and labour releases, and the statements that follow central bank rate decisions, are the events around which activity concentrates most sharply.

How a CFD on gold settles 

A contract for difference on XAU/USD references the spot gold price and settles in cash. No metal is allocated, no bar is moved and no vault receipt changes hands. The difference between the opening and closing price is multiplied by the number of troy ounces the contract covers, and that amount passes between the two parties. The quote convention is dollars per troy ounce, so the smallest quoted increment is a fraction of a dollar rather than a fraction of a cent, and a move that looks small against a four figure price is a large money amount on a full contract.

The last row is the reason gold positions are commonly sized differently from currency positions. A move of well under one percent in the underlying produces a four figure money result on a single full contract, because the notional value of a contract on a metal priced in the thousands is large. Profit and loss is calculated on that full notional value while only a percentage of it is posted as margin, so an adverse move is measured against the whole contract and a loss can exhaust the margin posted entirely rather than being limited to it. A favourable move is measured on identical terms.

A spot gold contract carries no expiry, so it remains open until it is closed or until the margin held against it fails its requirement. It does carry a financing adjustment for each day it is held past the daily cut off, reflecting the cost of carrying the underlying metal, and that adjustment accrues in both directions depending on the side of the contract. Contracts written on a dated futures month instead inherit that month's last trading day and are closed or rolled on it.

Ounces, grams and the retail price 

Gold is quoted internationally per troy ounce, which is not the ounce used for anything else, and it is sold to the public across the Gulf and South Asia per gram at a stated purity. The two are reconcilable with one conversion, and doing that conversion is the only way to compare a screen price against a shop price honestly, because the difference between them is a making charge and a margin rather than a different market.