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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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