Precious Metals Spot
Also known as: Gold, Silver, Bullion, XAU
Gold and silver, bought outright — the oldest financial asset, still trading like a currency without a country.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
Buying gold or silver "spot" means owning the metal itself — as bars in a vault, coins in a safe, or claims on pooled bullion. Unlike almost everything else on this site, it pays nothing: no coupons, no dividends, no rent. Its entire return is the change in its price.
Why has it stayed a core asset for five millennia anyway? Because gold is nobody's liability: no issuer to default, no central bank to print it (mining adds ~1.5% to supply a year). People reach for it when they distrust the alternatives — inflation, banking stress, war, sanctions. Central banks themselves hold 35,000+ tonnes and have been net buyers for years.
The market quotes gold like a currency: XAU/USD, dollars per troy ounce, trading nearly 24 hours between London vaults, COMEX futures and Asian exchanges.
a paymentsomething deliverednot a payment
The same purchase can leave you an owner or an unsecured creditor. Both are sold as buying gold, and the price difference between them is the reason.
Buying it
- You → Bullion bank There is no commission on a dealing spread — the cost is the gap between what the bank buys and sells at, and on coins and small bars it is far wider than on the wholesale market.
Unallocated: cheaper, and a debt
- Bullion bank → You Nothing is set aside. It trades easily and costs little to hold, and in an insolvency you rank with the bank's other unsecured creditors.
Allocated: dearer, and yours
- You → Bullion bank Charged because specific bars are being held for you. That fee is the price of the difference.
- Bullion bank → You Your property, not the bank's asset, and not part of its estate if it fails.
Either way
- Bullion bank → You Metal pays no coupon and no dividend. With storage on top, the running yield is negative before the price does anything at all.
Vaults, bar lists and how a wholesale bar is movedafter the trade
something deliveredonly if a condition is metnot a payment
Allocation
- Bullion bank → The vault Listed by serial number, weight and fineness on a bar report you can ask for.
If you want it delivered
- The vault → You A wholesale bar is around 400 troy ounces and does not subdivide. Taking anything smaller means having it recast, at a cost.
- You → The vault Metal that has left an approved chain of custody needs assaying before it re-enters it, which is why leaving it in the vault is the cheap option.
- Asset class
- Commodities (monetary metals)
- Instrument type
- Spot / allocated & unallocated bullion
- Traded
- OTC (London), exchanges (COMEX, Shanghai)
- Typical users
- Central banks, funds, jewellers, savers
Which risks decide the outcome
Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.
- Marketdecides it
- Creditbarely applies
- Liquiditymatters
- Fundingbarely applies
- Operationaldecides it
What decides it here. Unallocated makes you an unsecured creditor of a bullion bank; allocated makes you an owner and charges you for the difference. Both are sold as buying gold.
3 · IntermediateHow it works in practice
Forms of ownership (the details matter)
- Allocated: numbered bars, yours outright — no bank credit risk, storage fees.
- Unallocated: a claim on a bullion bank's pool — cheaper, but you're an unsecured creditor.
- ETFs/ETCs: listed wrappers holding allocated metal — the modern default (see ETC/ETP).
- Coins/small bars: premiums of 2–8% over spot; the crisis-demand tier.
What actually moves the price
- Real interest rates — gold's arch-nemesis: when inflation-adjusted bond yields rise, non-yielding gold suffers; the (usually) tight negative correlation with TIPS yields is the first chart of any gold analysis (its post-2022 loosening — central-bank buying era — is the second).
- The dollar: priced in USD, so dollar strength is a headwind mechanically and behaviourally.
- Official-sector and safe-haven flows: sanctions-proofing reserves became a visible driver after 2022.
Silver's split personality
Half monetary, half industrial (solar, electronics): higher beta than gold (the gold/silver ratio is a sentiment gauge), with genuine supply-demand cycles gold barely has.
4 · AdvancedPricing & valuation
Pricing framework: a currency with a lease market
Gold's forward market obeys currency-style parity with the gold lease rate \(\ell\) as its "foreign interest rate":
What the symbols mean
- Fthe forward or futures price
- Sthe price of the underlying today
- rthe interest rate, per year
- Tmaturity, in years
Central banks and ETFs lend metal; jewellers and shorts borrow it. \(\ell\) is normally slightly positive (contango near full carry); backwardation in gold is rare and treated as physical-stress signal (2020's COMEX-London dislocation, when refinery and freight shutdowns broke the EFP arbitrage, is the case study).
Valuation models (all partial)
- Real-rate regressions: log gold vs. real yields + dollar + risk factors — the workhorse, with regime shifts.
- Monetary ratios (gold vs. money supply, reserves): long-run anchors with heroic error bands.
- Options market: gold vol skews toward calls in crisis eras — the mirror of equities — making gold vol a risk-off asset itself.
Market plumbing
London OTC (LBMA): unallocated transfers between bullion banks, by far the largest venue; COMEX: the price-discovery futures layer, linked by the EFP (exchange-for-physical) basis; Shanghai: premium/discount signals Chinese demand. Basel III's NSFR treatment of unallocated positions keeps reshaping bullion-bank economics.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow practitioners think about it
Now say it back
Close the page and give Precious Metals Spot in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — two parties wanted opposite things badly enough to write it down.
- What the contract obliges, and when — not the payoff; the obligation.
- Where the money comes from — name the source, or you have described a hope.
- What makes it lose — the ordinary way, not the dramatic one.
Put Precious Metals Spot beside any other instrument →
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