Math and the Consumer’s Money
How is the price of gold determined?
The price of gold on the market has had a long and lustrous past. It’s been used as money for centuries because of its rarity and, no doubt, luster, heft, and malleability. Gold pricing is thought to have begun in London in the late 17th century; by 1717, then Master of the Mint, scientist Sir Isaac Newton (the same Newton of “laws of gravity” fame) declared that the gold price would be 4.25 pounds per troy ounce, an amount that was held mostly the same for close to two hundreds years.
Although the first gold standard was established by the Bank of England in 1696, it took until around the late 1800s for most other European countries to adopt a gold standard. Many of these countries halted the standards during the financially troubled times of World War I; then began again in earnest after World War II. The U.S. dollar represented a gold rate of $35 per troy ounce after the war; by 1971, the U.S. stopped the convertibility of the dollar to gold (yes, at one time, although difficult to do, you could “trade” a dollar bill for gold). One can see evidence of this on the older “silver certificate” one dollar bills printed before 1971. Other countries also dropped the currency-into-gold standards, with Switzerland being the last country to do so in 2000.
Today, gold is still sold most often as gold coins, with each coin having a certain amount of the metal, usually one troy ounce. The daily price of gold is determined by the trading on several exchanges, with the price of gold based on the London gold fix. The gold fix, or price, is set twice a day: at 10 a.m. and again at 3 p.m. in London, the latter time originally chosen to coincide with the opening of U.S. markets. The gold fix is determined by several banks (or bullion trading firms), a system that has not changed in decades, but the member banks have changed. Gold is also traded based on a “spot price”—the price paid for immediate delivery (versus “futures prices” in which delivery and payment is made at a future date)—and is derived from global over-the-counter gold trading markets.