How is the gold price calculated?

Q: How is the gold price calculated?

A: The price of gold has soared over the past decade, no doubt piquing many investors' interest in this precious metal as a potential investment.

Like many assets, the price is driven by supply and demand. If there are more investors looking to buy or invest in this rare metal, this will send the price upwards. Conversely, if there are more sellers than buyers, the price will fall.

Gold is often seen as a safe haven asset in times of political or economic instability, which in part explains the price rises of the last few years.

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Investing in gold is not the same as walking into a high street jeweller's and purchasing a gold chain or pair of earrings. The price tag set by the retailer will depend on a whole host of factors, from the quality of the metal, the degree of craftsmanship, VAT and taxes, as well as the retailer’s mark-up.

When investors talk about gold prices, they are specifically referring to the commodity's 'spot' price. This is the theoretical price in dollars of a set weight (a troy ounce) of pure 24-carat gold, before it has been refined and processed.

This benchmark spot price is based on the prices set out in near-term futures contracts that are traded by major banks and wholesale investors on exchanges like the COMEX in New York and the London Bullion Market Association (LBMA). The LBMA also sets a 'London Gold Fix' twice a day, based on the average price of contracts it is trading. From these various trades an average market price is set, which moves on a daily basis.

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Gold investors will inevitably pay a premium on this spot price. If investors are buying a gold ETF, for example, there will be additional dealing and platform costs to pay. This premium is likely to be even higher if investors are buying gold bullion or coins, where there may also be shipping and storage costs, plus potential taxes, depending on where in the world you are making this purchase.

It’s also important to remember that gold prices are generally quoted in dollars. This means that if you are buying in sterling, currency fluctuations can also affect the price you pay and the value of any gold holding.

• Read: What is the best way to invest in gold - ETFs or gold miners?
• Read: Should I invest in gold - and how?
• Read more of our articles on gold

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.