Why does the “Paper Gold” Price Track the Physical Gold Price?

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Why does the “Paper Gold” Price Track the Physical Gold Price?

It’s curious, isn’t it? So-called “paper gold” (a futures contract) has a price that is not only very close to physical gold, but it remains locked to it. This is despite the fact that “paper gold” is reviled in the gold community.

I am writing this on Sunday evening with little liquidity in the market, and yet spot gold (XAU) is 1665.80 and the December future (GC Z3) is 1674.40. There is a small positive spread, about 0.5%, between spot and future. This spread is remarkably consistent from day to day. If spot gold goes down 1.2% then the December future,and the other months as well, go down by almost exactly 1.2%.
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