The global price of gold is officially set twice a day in USD at 10:30AM and 3:30PM London Time by the London Bullion Metals Association (LBMA) – a trade association of ~150 firms globally across the gold supply chain (mineres, refiners, traders).
How is the gold price in Indonesia determined?
Since the official price of gold is denominated in USD, the price of gold in other countries, including Indonesia, should be understood as the price of gold in USD multiplied by the current exchange rate.
Gold Price in IDR = Gold Price in USD x Exchange Rate
Global Supply and Demand for Gold
The price of gold, like any other good or asset, is determined by supply and demand. Whilst supply is relatively fixed because the quantity of gold on Earth is finite, and the ability to mine new gold is somewhat restricted, demand for gold comes from five main sources
- Jewelry: Gold is a primary component of most jewelry, such as rings and necklaces
- Coins and Bars: Gold is minted in the form of coins and bars, which are sold to gold dealers
- Technology: Gold is an excellent conductor of electricity and is used in applications such as high end wiring
- ETFs: ETFs purchase gold in response to investor demand. A Gold ETF will typically back each dollar invested with an equivalent amount of gold (less a management fee). Thus if investors purchase more of a gold ETF, the ETF must buy more gold. Likewise, when investors sell gold ETF, that ETF will sell its holding of gold.
- Central Bank: Central Banks purchase gold as part of their reserve assets since Gold tends to hold its value against depreciation of other currencies. Holding gold can allow a central bank to defend depreciation of its own currency, since a CB
The graph below shows how gold demand has changed since 2020
Gold saw inflows during the pandemic, amidst high uncertainty about the economic size and costs, fears of potential inflation, but investors started to move away from gold as fears of inflation have dissipated and reflation (how an economy can grow just after a recession) has been surprisingly successful, buoying asset classes such as equities over ‘safe haven’ assets such as gold.
The USD/IDR Exchange Rate
The Indonesian price of gold can be derived from the world price of gold multiplied by the exchange rate.
For example, if the world price of gold is USD $2000/ oz ($64.45/g) and the IDR/USD exchange rate is 14,500, then the price of gold in Indonesia should be 934.5 mio/g (i.e. $64.45/g x 14,500 IDR/USD)
In a perfect market, there should be no deviation from this price of gold. This is because if the Indonesian gold price was higher than this price, an arbitrage trade could be created. If Gold was trading higher at Rp 1,000 mio, an investor could buy gold in the world market and sell the gold in Indonesia and instantly make a profit. As more of this trade occurs, eventually the world price and Indonesian price will equalize.
In practice, the actual price of gold in IDR may differ from this because there is storage and distribution costs associated with this trade, and local laws regulate both the import and export of gold.