One Thing. Many Prices.

Gold is gold. An ounce of it is 31.1035 grams of the same element wher­ever it is. And yet on any given morning there are a dozen prices for an ounce of gold, all of them pub­lished, all of them correct, and no two quite the same.

There is the London price, for metal held in the vaults of the London bullion market. There is the price of a gold future in New York, for a hundred ounces deliv­ered to an approved depos­i­tory in a named month. There is the price of a share in a gold fund, a coin at a dealer, a token on a blockchain, and gold in Shanghai, quoted in yuan per gram. The natural reac­tion is to see arbi­trage every­where: surely some­body should buy the cheap one and sell the dear one until they meet.

Sometimes some­body does. Mostly they were never meant to meet. The metal is the same; the con­tract around it differs, and a price is always the price of a con­tract.

Two tokens, one ounce each

Consider two tokens that each rep­re­sent one fine troy ounce of gold. PAX Gold is issued by Paxos, which says each token is backed by an ounce of London Good Delivery gold in allo­cated storage. Tether Gold is issued by TG Commodities, a company related to Tether, which says each token is backed by an ounce held in a Swiss vault. When we checked both, in the same update of the same price service, they were several dollars apart. The figures are on page 50, marked as another second: we mea­sured them hours after this issue's frozen second, and gold tokens are not in our own capture.

Same metal, same weight, a few dollars apart. Neither number is wrong. One token is a claim on a company reg­u­lated in New York holding gold in London. The other is a claim on a dif­fer­ent company holding gold in Switzerland. The dif­fer­ence in price is the market's view of the dif­fer­ence in those claims, plus the dif­fer­ence in who trades each token and where.

What you are actu­ally buying

Every instru­ment that gives you gold expo­sure also gives you some other things, and each of those things has a price. Page 49 sets them out. Time is one: a future for deliv­ery in December is priced above gold today by roughly the cost of financ­ing and storing the metal until then, which is why futures in normal markets trade above spot. Location is another: gold in a London vault is worth more to a jew­eller in Mumbai than gold that must be flown there, refined into another bar size and cleared through customs.

Custody matters. Unallocated gold in a London account is a claim against the bank that holds it; if the bank fails, you are a cred­i­tor. Allocated gold is spe­cific num­bered bars that are yours. Credit matters for the same reason, and so does liq­uid­ity: the most traded instru­ment usually has the tight­est spread, and people pay for the ability to get out quickly.

Settlement matters. Spot gold in London settles two busi­ness days after the trade. A token settles in minutes on a blockchain but may take days to redeem for metal, subject to minimum sizes. A fund share settles like a share. And some instru­ments carry options. A holder of a futures con­tract can choose to take deliv­ery, and a large enough token holder can choose to redeem; smaller holders cannot, and that missing choice is part of what they are paying for.

The fund that slowly owns less

When SPDR Gold Shares launched in 2004, each share rep­re­sented one tenth of an ounce. The fund charges a yearly fee of 0.40%, and it pays that fee by selling a little gold. So each year every share rep­re­sents slightly less metal than the year before. The dif­fer­ence is small in any one year and not small over twenty. A share of the fund and a tenth of an ounce of gold were the same thing on the first day and have been drift­ing apart ever since, pre­cisely as the prospec­tus says they will.

Gold with a pass­port

Location can become a price on its own. The Shanghai Gold Exchange quotes gold in yuan, and China con­trols how much gold can be imported. When domes­tic demand runs hot and imports cannot keep up, Shanghai gold trades at a premium to London con­verted at the exchange rate, some­times a large one. No arbi­trageur will erase it by lunch. It is the price of the border.

Coins at a dealer sit at the other end. A one-ounce bullion coin sells above the value of its metal, because some­body had to mint it, ship it, insure it and hold it in a shop, and because a dealer buys it back from you below the price they sell it at. Small buyers pay for small­ness.

Time has a price in gold too

The dif­fer­ence between a gold future and gold today is usually small and pos­i­tive, and it has a name: the cost of carry. Somebody who buys metal now and sells a future against it must finance the pur­chase and pay for storage and insur­ance until deliv­ery. The future is priced so that doing so earns roughly nothing extra. When inter­est rates rise, the gap between spot and futures widens, because car­ry­ing the metal costs more. When it inverts and futures trade below spot, some­body is paying a great deal to have gold now rather than later, which is itself a piece of news.

A token has its own version. PAX Gold and Tether Gold can trade con­tin­u­ously, includ­ing at week­ends when the London market is shut, so for two days a week their prices are among the few live gold prices in the world. They are also, during those hours, prices with no market in the metal behind them to arbi­trage against. Their weekend prices are a view about Monday.

Not every gap is free money

None of this means the prices of related instru­ments drift wher­ever they like. The links are real and they are enforced by people who make their living from them. If a gold fund trades far enough above the value of its metal, autho­rised par­tic­i­pants create new shares by deliv­er­ing gold and sell them. If a future trades too far above spot plus the cost of carry, someone buys the metal, sells the future and deliv­ers. The gaps close to roughly the cost of doing that, and no further.

That resid­ual gap is the most infor­ma­tive number of all. It is the price, set by a market, of the spe­cific rights and fric­tions that sep­a­rate one kind of ounce from another.

An ounce is an ounce. The con­tracts around it never are, and the price tells you so, if you read what it is the price of.