Precious Metals FAQ
Basics and key terms for gold, silver, platinum, and palladium investors.
This FAQ covers the foundational concepts and trading terminology used across the WatchGold platform. It is for educational purposes only and does not constitute investment advice.
1. The Basics
What is gold and why is it valued?
Gold (chemical symbol Au) is a dense, soft, ductile precious metal that has served as a store of value, medium of exchange, and reserve asset for thousands of years. It is valued for its scarcity, durability, resistance to corrosion, and universal recognition. Today gold is held by central banks, used in jewelry and electronics, and traded as a financial asset.
What is silver and how does it differ from gold?
Silver (Ag) is a precious metal that is also widely consumed industrially — in solar panels, electronics, medical devices, and electric vehicles. Compared to gold, silver has a smaller market, greater price volatility, and a much larger industrial demand share (roughly 50% of total demand vs. under 10% for gold).
What counts as a "precious metal"?
Traditionally precious metals include gold, silver, platinum, palladium, and the rest of the platinum group metals (PGMs: rhodium, ruthenium, iridium, osmium). They share characteristics of scarcity, high economic value, and resistance to corrosion. Gold and silver are sometimes called "monetary metals", while PGMs are largely industrial.
What are PGMs (platinum group metals)?
PGMs are six metals — platinum (Pt), palladium (Pd), rhodium (Rh), ruthenium (Ru), iridium (Ir), and osmium (Os) — that share similar chemical properties. Platinum and palladium are the most actively traded; both are critical for catalytic converters in vehicles, while platinum is also used in jewelry and hydrogen fuel cells.
What drives gold and silver prices?
Major drivers include: (1) real interest rates — gold tends to rise when real yields fall; (2) the U.S. dollar — typically inversely correlated with gold; (3) inflation expectations; (4) central bank buying; (5) ETF flows and speculative positioning (CFTC COT data); (6) geopolitical risk; and for silver, (7) industrial demand cycles.
2. Units, Purity & Pricing
What is a troy ounce?
The standard unit of weight for precious metals. 1 troy ounce (oz t) = 31.1035 grams ≈ 1.097 standard (avoirdupois) ounces. Spot prices are almost always quoted per troy ounce in U.S. dollars (e.g., XAU/USD).
What does "fineness" or "999.9" mean?
Fineness expresses the purity of a precious metal in parts per thousand. 999.9 (or "four nines") means 99.99% pure gold. London Good Delivery gold bars must be at least 995.0 fine; Shanghai Gold Exchange contracts like Au99.99 require 99.99% purity. Sterling silver is 925 (92.5% silver).
What is the "spot price"?
The spot price is the current market price for immediate delivery of a metal. It is set continuously in over-the-counter (OTC) trading and benchmarked twice daily in the LBMA Gold Price auction. Spot prices feed most retail and institutional pricing globally.
What is the bid-ask spread?
The bid is the highest price a buyer will pay; the ask (or offer) is the lowest price a seller will accept. The difference is the spread, a measure of liquidity and dealer margin. Tighter spreads usually indicate a more liquid market.
What is the gold/silver ratio?
The gold/silver ratio is simply the price of gold divided by the price of silver — how many ounces of silver it takes to buy one ounce of gold. Historically the ratio has ranged roughly from 30 to 100. Traders use it as a relative-value indicator between the two metals.
3. Trading Instruments
What is bullion?
Bullion refers to investment-grade physical precious metal in the form of bars, ingots, or coins, valued primarily by weight and purity rather than collectible numismatic value.
What are gold and silver futures?
Futures are standardized exchange-traded contracts to buy or sell a fixed amount of metal at a future date and price. The CME Group lists the most active contracts: GC (gold, 100 troy oz) and SI (silver, 5,000 troy oz). They are used for hedging and speculation, with daily settlement and margin requirements.
What is a gold or silver ETF?
A precious metals ETF (exchange-traded fund) holds physical bullion in a vault on behalf of investors and trades like a stock. Major examples: GLD and IAU (gold), SLV (silver). ETF flows — net creations and redemptions of shares — are a key gauge of investor demand.
What is the COT report?
The Commitments of Traders (COT) report is published weekly by the U.S. CFTC. It breaks down open interest in CME futures by category — Producer/Merchant, Swap Dealers, Managed Money, and Other Reportables — revealing how different participants are positioned in gold and silver.
What is the Shanghai Gold Exchange (SGE)?
The Shanghai Gold Exchange is mainland China's primary spot and deferred-settlement gold market. Major contracts include Au99.99 (spot, 99.99% pure), Au(T+D) (deferred settlement), and mAu(T+D) (mini contract). SGE prices are quoted in CNY per gram and reflect Chinese onshore demand.
What is the Shanghai Futures Exchange (SHFE)?
The Shanghai Futures Exchange lists China's standardized gold (au) and silver (ag) futures contracts. SHFE futures complement SGE spot/deferred trading and are widely used by Chinese institutions for hedging and price discovery.
What are LBMA and COMEX?
LBMA (London Bullion Market Association) oversees the global OTC spot market and sets the LBMA Gold and Silver Price benchmarks. COMEX is the CME-owned division where U.S. gold and silver futures trade.
4. Market Structure & Terms
What is contango and backwardation?
Contango is when futures prices are higher than the spot price (a normal condition reflecting storage, insurance, and financing costs). Backwardation is the reverse — futures below spot — and often signals tight physical supply or strong near-term demand.
What is open interest?
Open interest is the total number of outstanding (unclosed) futures contracts at the end of a trading day. Rising open interest combined with rising price suggests new buying conviction; falling open interest suggests position liquidation.
What are CME warehouse stocks?
CME warehouses report two inventory categories: registered (stock with a delivery warrant attached, eligible for futures delivery) and eligible (meets contract specs but is not warranted). Changes in registered vs. eligible inventory are watched as a signal of physical-market tightness.
What is contract rollover?
Most futures traders close out their position before expiry and "roll" into the next contract month to avoid physical delivery. The dominant (most-traded) contract month rolls periodically — for COMEX gold, the front-month active contracts are typically February, April, June, August, and December.
What is gold leasing and the GOFO rate?
Gold leasing is short-term lending of physical gold, traditionally between bullion banks. The Gold Forward Offered Rate (GOFO) was the historical interest-rate benchmark for swapping gold against U.S. dollars. Replacement benchmarks now serve a similar role.
5. Macro Benchmarks
What is the DXY (U.S. Dollar Index)?
The DXY measures the U.S. dollar against a basket of six major currencies (EUR, JPY, GBP, CAD, SEK, CHF). Because gold is priced in USD globally, a stronger dollar typically pressures gold prices and vice versa.
What are real yields and TIPS?
Real yields are nominal interest rates minus expected inflation. They are observable through Treasury Inflation-Protected Securities (TIPS), e.g., the 10-year TIPS yield. Gold pays no yield, so it tends to rally when real yields fall and weaken when they rise.
Why do central bank reserves matter?
Central banks have been net buyers of gold since 2010, accumulating over 1,000 tonnes per year recently. Their purchases reduce free float, support prices, and reflect long-term diversification away from the U.S. dollar. The World Gold Council publishes detailed quarterly reserve data.
Disclaimer
The information on this page is provided for general educational purposes only and is not investment, tax, or legal advice. Trading precious metals and derivatives involves substantial risk and is not suitable for every investor. Always consult a licensed professional before making investment decisions.