Where the Market Price of Gold Come From?
Monday, March 30, 2015
Dr Brian Lucey, Charles Larkin and Fergal O'Connor consider a number of key questions about the trading activity in the gold market. They present an academic perspective to questions such as where the market price of gold came from, whether the location of the market has a dominant influence on others and whether pricing is a process that is mixed.
Gold markets around the world itself spread, with trade occurring in regulated exchanges in dozens of locations. However, it remains in many ways bipolar..jpg)
So far, London still dominates as a trading center for gold with 86% of business going on there, around 90% of them are physical transactions. While more than eight times smaller, options and futures exchanges Americans are far more transparent with a constant flow of daily price and volume, the information inherently lacking in London OTC market. And while other major markets grow, they still account for more than 3% of turnover. Thus, the analysis of 'gold market' can be reduced, as far as may be possible, for the analysis of these two markets. It is clear, first, that the primary market remains the London and New York and second, clear who 'led the dance'. Although larger, the dominance of OTC trading places in London makes the effect more difficult to understand. Volume alone does not by itself create a dominant market.
This is not a phenomenon unique to gold. Equity and bond analyst must grapple with the discourse on the market any other market-leading for decades. There are a large number of papers and analyzes in which there is a market leading and following the market, at the macro level. Recently, there has been good progress of economic and statistical methods that allow a particular focus to be shed on this issue at the level of individual assets. Consider for example the stock 'Siamese twin', in which the same claim on the assets traded in the two markets. Examples include Royal Dutch Shell Plc or Unilever / NV, or more commonly cross-listed stocks. Evidence so much that even when the stock must move together in a predetermined manner, shares - these shares are not. Therefore, the stock - this indicates that the stock market makes the price not only on the basis of return on assets, but also based on some information 'local'.
If we think about the gold we can imagine two spot market, and look directly by abstracting from travel and related costs, the price of an ounce of gold in the market should be roughly equal to the price of the others. With a few modifications we could see a similar argument for gold futures and cash gold market.