EDUCATION
We have had several people ask how The Perth Mint sets its US and Australian dollar precious metal spot rates.
Our spot prices are based off Reuters and other feeds we get from information providers as well as quotes direct from bullion banks. We then add a margin, which changes dynamically during the day depending on our view of what the real/executable spot market price is and the flow of buy and sell trades from our clients.
The reason I’ve used the phrases “based off” and “real/executable spot market price” is because precious metal is not traded exclusively on a public and regulated exchange. Precious metal markets operate much like the internet – it is a network of dealers (some large, some small), independently trading with each other, and it is the sum of those individual trades that makes up the “spot market”.
Precious metals are traded on public exchange, such as the COMEX futures market and Exchange Traded Funds on stock exchanges, but these are only a small part of the worldwide 24 hour a day trading that occurs.
Precious metal dealers often use Reuters or Bloomberg. However the spot price displayed on these information services (usually under the code XAU) is just an indicator of where the market. This spot price is updated by the bullion desks of the big banks and is, in effect, a bulletin board or forum where these banks can publish their prices in the hope other dealers will call them up to do a trade. Sort of like an advertisement. Unlike a stock market, it is not a commitment to deal at those prices, but most times you can. However there are many times, especially when the market is moving quickly, when the dealers don’t have time to update their quotes and so when you ring them up, they say “Sorry, Reuters off the market, my current price is $5 below the screen”.
As a result, when you call a dealer for a price, they themselves cannot really know exactly where the market is. As a result they add a margin to cover themselves if the Reuters price was not right. Generally this margin is small because dealers are in constant contact with each other, doing deals, talking and exchanging information on what they are seeing in the market and so have a sense of whether Reuter’s price is accurate.
The dealer also has to consider that by the time they get off the phone with you and then call a wholesale dealer the market may have moved, so they also include an amount into the margin to cover themselves if the market moves against them in between the phone calls. How much they add depends on how volatile the price has been, and this often changes during the day.
Sometimes if your deal is big enough and the market volatile, they’ll get another trader on their desk to call a bank and get a firm price before they quote to you. If you’re lucky enough to have that much money, give the dealer your answer quickly, because the bullion bank dealer on the other end of the phone isn’t going to want to sit on their quote for too long because he/she has got to trade it as well.
Also included in the margin is an amount cover the costs of running a trading desk, for example, the time spent talking to you, to do the other side of the trade with the bank, to wire funds, bank fees etc.
Often when clients ring up to buy and we quote them a price, they say “Well, where can I get what the spot price is?” so they could work out if our price was “fair”. Our answer is usually “It doesn’t exist. You could spend a few thousand getting a live Reuters data feed, but even that is just indicative.” Being used to the comforts of a stock market where everyone knows what the price is, many don’t like that answer and think we are pulling a shifty on them. Hopefully this article explains why that isn’t the case.
If you want to know if you’re getting a fair price, all you can do is what we do, which is to ring around to see who is offering the best price at that time. You’re now part of the precious metal “network” of traders.
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