How Gold Prices Work: A Guide to XAU Market Structure

Gold is one of the most traded assets in the world, but its pricing is often misunderstood. Unlike equities, which trade on centralized exchanges with a single quoted price, gold trades across multiple venues with different settlement terms, contract specifications, and participant bases.

This guide explains how gold price discovery actually works—from the London benchmarks to New York futures to bilateral OTC trading—and what it means for institutions and developers working with gold market data.

The Three Layers of Gold Price Discovery

Gold prices emerge from three interconnected market layers, each serving a distinct function.

LBMA: The Benchmark for Physical Gold

The London Bullion Market Association runs twice-daily electronic auctions at 10:30 AM and 3:00 PM London time. Fifteen participating banks submit buy and sell orders, and the auction finds a clearing price where supply meets demand.

This price—known as the LBMA Gold Price—serves as the global reference for physical gold settlement. It anchors custody reporting, audit processes, and contractual settlement for physical bullion worldwide.

The LBMA also sets the standard for "Good Delivery" bars: 350-430 troy ounces at minimum .995 purity. These specifications define what qualifies as institutional-grade physical gold.

COMEX: The Futures Engine

COMEX, part of CME Group, is the world's most liquid gold futures market. It processes approximately 27 million ounces in daily volume through standardized 100-ounce contracts at .995 fineness.

Futures markets absorb macroeconomic information faster than physical markets. Interest rate decisions, inflation data, and geopolitical developments hit COMEX first, with prices adjusting in milliseconds.

Most COMEX contracts settle in cash rather than physical delivery. This makes the market highly liquid but also means COMEX prices reflect financial positioning as much as physical supply and demand.

OTC: Where Physical Demand Shows Up

The over-the-counter market handles approximately $150 billion in daily bilateral trading volume. Unlike the standardized contracts on COMEX, OTC trades are negotiated directly between counterparties with custom settlement terms.

OTC prices reflect real physical demand: regional premiums, delivery logistics, and counterparty credit considerations. When central banks accumulate gold or jewelry demand spikes in Asia, the signal often appears in OTC spreads before it shows up in benchmark prices.

How These Markets Stay Connected

Arbitrage keeps prices aligned across venues. When COMEX futures diverge too far from LBMA spot, traders step in to capture the spread. The typical COMEX-LBMA spread runs around $3.84 per ounce—narrow enough to indicate efficient markets, but persistent enough to reflect real differences in settlement and delivery terms.

This spread also reflects the cost of carrying gold: storage, insurance, and financing. Under normal conditions, futures trade above spot (contango) because holders must be compensated for these costs. When spot trades above futures (backwardation), it signals tight physical supply or urgent demand. Until 2009, gold had only been in backwardation for eight total days in its modern trading history.

What Moves Gold Prices?

Gold responds to a specific set of macroeconomic drivers:

Interest rates affect the carry cost of holding gold. Higher rates typically push futures into steeper contango, while rate cuts are often bullish for spot prices.

USD strength has an inverse relationship with gold. A strong dollar makes gold more expensive in other currencies, dampening demand.

Real yields (nominal rates minus inflation) historically correlate with gold performance. Negative real yields make non-yielding assets like gold more attractive.

Central bank demand provides a structural floor. Central banks have purchased over 1,000 tonnes annually in recent years, representing steady institutional accumulation.

Geopolitical risk triggers flight-to-safety flows. Gold's role as a store of value outside the banking system makes it a hedge against systemic uncertainty.

Why Market Structure Matters for Gold Data

Gold's multi-venue structure creates complexity for anyone building with gold prices. A single data source—one exchange API or one benchmark—captures only a partial view of the market.

This matters for several use cases:

Collateral valuation requires prices that reflect actual liquidation conditions, not just a benchmark quote.

Risk models need to account for spread dynamics between physical and paper markets.

Settlement and clearing may reference different benchmarks depending on jurisdiction and contract terms.

Trading applications require latency and update frequency that matches the speed of futures markets.

How Pyth Prices Gold

Pyth's XAU/USD feed aggregates prices from institutional publishers with direct access to LBMA, COMEX, and OTC markets. Publishers include trading desks, market makers, and financial institutions that actively trade gold across venues.

Each publisher submits both a price with Pyth's aggregation methodology combines these inputs to produce a single price that updates every 50 milliseconds.

This architecture reflects gold's actual market structure: multiple venues, multiple price points, aggregated into a single feed with transparent methodology.

Pyth Pro delivers institutional-grade market data across equities, FX, commodities, and crypto — sourced directly from the firms that move markets.

Explore Pyth's XAU/USD feed and broader coverage by booking a demo with an authorized distributor here.

Disclaimer

This post is for informational and educational purposes only and does not constitute financial, investment, or professional advice. Market structure descriptions and figures are provided for general context and may not reflect current conditions. References to specific venues or products are illustrative and do not constitute an endorsement or warranty. Readers should conduct their own due diligence and consult qualified professionals before making any financial decisions.