Using The Spot Price Of Precious Metals To Your Advantage

Knowledge of the spot price of precious metals is crucial to successful investment. Many investors get started investing in precious metals and are initially disturbed by the separation between the spot price and the actual values of assets made from silver, gold and platinum. Understanding how to interpret this data can help you overcome early uncertainties about investments in these assets.

What Is Spot Price?

The spot price is not the price of anything that you can actually buy in the precious metals market. When this term is used of other financial instruments, such as futures contracts, it does in fact refer to the exact and momentary price of the assets. However, with regard to precious metals it cannot describe an actual price.

Spot price refers, for example, to the price of an ounce of pure gold. However, any precious metal that has been produced by a mint or other business requires design and production costs that must be recouped. Therefore, bars and coins made from precious metals always cost more than spot price.

How Is Spot Price Determined?

The spot price of precious metals was once determined or fixed by governments and large exchanges. Today, the spot price is largely determined like the prices of stocks are. There is a massive amount of trading going on in certain exchanges and the average price of the purchases and sales made there are used as a guide for everyone else’s purchases.

Oddly, more than 400 ounces of silver are traded for every ounce actually delivered as a result of these trades. The other precious metals have similar records with regard to delivery. The reason is that many people buy precious metals but only hold onto them for a few minutes before selling them to another investor.

How Can You Use Spot Price?

You can use the spot price of precious metals to guide your investments. While day traders may use price-performance software to accomplish this, you can also use some historical knowledge to help you derive the largest gains possible from your precious metal purchases and sales. Take the price of silver as an example.

The spot price of an ounce of silver has always had a certain ratio with that of gold. While the ratio changes over time and occupies a wide range of prices for a short period, it always tend to move back to a value that leaves silver worth about six or seven percent of the value of gold. At the present time, the spot price of silver is equal to less than 2% of the gold spot price.

Knowledge of this unusually low spot price has moved many investors to make some interesting calculations. The results of these calculations have encouraged them to buy more silver. If the historical ratio is legitimate, then silver values could easily double or even triple in short period of time. Anyone holding onto silver assets would profit immensely. This is how understanding and using spot price can work to your advantage.

When you are buying precious metals, spot price movements can also help you determine when to sell and when to buy more. However, it is important to use the spot price as a guide and not simply react to it. Instead, the adage about buying low and selling high should always remain in the forefront of your mind. A falling spot price may not be reason to ignore a precious metal or sell your holdings. Instead, you can watch for the inevitable rebound and buy even more when it is on its way back up.

The rebound is inevitable because there is so much legitimate demand for precious metals. Looking at historical spot prices can help you understand how and when these assets are likely to recover higher values. This information can also help you avoid losses with precious metals investments. Make yourself aware of spot prices and invest.

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