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.
- Asset class
- Commodities (monetary metals)
- Instrument type
- Spot / allocated & unallocated bullion
- Traded
- OTC (London), exchanges (COMEX, Shanghai)
- Typical users
- Central banks, funds, jewellers, savers
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.
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.
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":
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, ~$50bn/day; 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.