London bullion market

Last updated

The London bullion market is a wholesale over-the-counter market for the trading of gold, silver, platinum and palladium. Trading is conducted amongst members of the London Bullion Market Association (LBMA), tightly overseen by the Bank of England. Most of the members are major international banks or bullion dealers and refiners.

Contents

The physical characteristics of gold and silver bars used in settlement in market is described by the Good Delivery specification which is a set of rules issued by the LBMA. It also puts forth requirements for listing on the LBMA Good Delivery List of approved refineries.

Gold trading

Internationally, gold is traded via over-the-counter (OTC) transactions, with trading on the New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM).

Twice daily, at 10:30 AM and 3:00 PM (local time). the LBMA publishes the gold price in US dollars. [1] These forward contracts are known as gold futures contracts. Spot gold is traded for settlement two business days following the trade date, with a business day defined as a day when both the New York and London markets are open for business.

Unlike many commodity markets, the forward market for gold is driven by spot prices and interest rate differentials, similar to foreign exchange markets, rather than underlying supply and demand dynamics. This is because gold, like currencies, is borrowed and lent by central banks in the interbank market. Interest rates for gold tend to be lower than US domestic interest rates. This encourages gold borrowings so that central banks can earn interest on large gold holdings. Except in special circumstances the gold market tends to be in positive contango, i.e. the forward price of gold is higher than the spot price. Historically this has made it an attractive market for forward sales by gold producers and contributed to an active and relatively liquid derivatives market.[ citation needed ]

Market size

The bulk of global trading in gold and silver is conducted on the over-the-counter (OTC) market. London is by far the largest global centre for OTC transactions followed by New York, Zurich, and Tokyo. Exchange-based trading has grown in recent years with Comex in New York and Tocom in Tokyo generating most of the activity. Gold is also traded in forms of securities, such as exchange-traded funds (ETFs), on the London, New York, Johannesburg, and Australian stock exchanges.

Although the physical market for gold and silver is distributed globally, most wholesale OTC trades are cleared through London. The average daily volume of gold and silver cleared at the LBMA auctions in May 2019 was 18.6 million troy ounces (2965 transfers, worth $23.9 billion) and 211.8 million troy ounces (978 transfers, worth $3.1 billion) respectively. [2]

The Gold Anti-Trust Action Committee has claimed that clearing data substantially understates the true amount of gold traded due to the netting of trades in the calculation of Clearing Statistics. [3] [4]

Account types

Allocated accounts

Allocated accounts are accounts held by dealers in clients' names on which are maintained balances of uniquely identifiable bars, plates or ingots of metal 'allocated' to a specific customer and segregated from other metal held in the vault. The client has full title to this metal with the dealer holding it on the client's behalf as custodian. To avoid any doubt, metal in an allocated account does not form part of a precious metal dealer's assets. [5]

Unallocated accounts

Unallocated accounts represent the most popular way of trading, settling and holding gold, silver, platinum and palladium. Transactions may be settled by credits or debits to the account while the balance represents the indebtedness between the two parties. Credit balances on the account do not entitle the creditor to specific bars of gold or silver or plates or ingots of platinum or palladium but are backed by the general stock of the precious metal dealer with whom the account is held. The client in this scenario is an unsecured creditor. [5]

Unallocated risks

The total quantity of unallocated gold is estimated to be 15,000 tonnes at the end of 2008 [6] which supports the 2,134 tonnes on average of spot gold trade through London every day representing 14.2% of the pool. This compares to average daily turnover in UK equities of between 0.34% and 0.63% for the 12 months ending September 2009. [6] While members of the LBMA provide no information on the backing for unallocated gold the improbably high turnover is suggestive they are operating a fractional reserve system where unallocated accounts are only partially backed by physical gold. Similarly to a bank run this makes LBMA unallocated gold accounts susceptible to loss if a sufficient number of market participants request delivery of physical bullion.[ citation needed ]

Membership

LBMA accepts memberships from companies that deal with business closely related to gold or silver bullion in the London market. Members pay between £5,000 and £12,000 annually depending on membership type. [7] LBMA members come from Australia, Belgium, Canada, China, Germany, Hong Kong, India, Italy, Japan, Kazakhstan, Luxembourg, Mexico, Netherlands, Poland, Russian Federation, South Africa, Switzerland, Taiwan, Turkey, United Arab Emirates, United States, and Uzbekistan. [8] A full membership in the LBMA enables members to expand operations internationally, like it did for VTB Bank, for example. VTB, a Russian-based bank, joined in 2015 as the first full member from Russia and was able to begin expanding into Asian emerging markets as a result. [9]

LBMA forecast

Each year the LBMA forecast gathers the opinions of selected bankers, traders and analysts who follow the precious metals markets with their forecasts for the high, low and average dollar fixing price per troy ounce for gold, silver, platinum and palladium. The aim of the LBMA forecast is to predict the average, high and low price for each metal as accurately as possible. The prediction closest to the average price wins. In the event of a tie, the forecast range is taken into account. In the 2009 LBMA forecast, Philip Klapwijk took the prize for most accurate forecaster for both gold and silver prices. [10]

Other London markets

The London bullion market is distinct from the London Metal Exchange (LME). The latter is the futures exchange with the world's largest market in options and futures contracts on base and other metals.

See also

Related Research Articles

<span class="mw-page-title-main">Palladium</span> Chemical element, symbol Pd and atomic number 46

Palladium is a chemical element with the symbol Pd and atomic number 46. It is a rare and lustrous silvery-white metal discovered in 1803 by the English chemist William Hyde Wollaston. He named it after the asteroid Pallas, which was itself named after the epithet of the Greek goddess Athena, acquired by her when she slew Pallas. Palladium, platinum, rhodium, ruthenium, iridium and osmium form a group of elements referred to as the platinum group metals (PGMs). They have similar chemical properties, but palladium has the lowest melting point and is the least dense of them.

<span class="mw-page-title-main">Commodity market</span> Physical or virtual transactions of buying and selling involving raw or primary commodities

A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management.

<span class="mw-page-title-main">Precious metal</span> Rare, naturally occurring metallic chemical element of high economic and cultural value

Precious metals are rare, naturally occurring metallic chemical elements of high economic value. Chemically, the precious metals tend to be less reactive than most elements. They are usually ductile and have a high lustre. Historically, precious metals were important as currency but are now regarded mainly as investment and industrial raw materials. Gold, silver, platinum, and palladium each have an ISO 4217 currency code.

<span class="mw-page-title-main">Bullion</span> Gold, silver, or other precious metals in the form of bars or ingots

Bullion is non-ferrous metal that has been refined to a high standard of elemental purity. The term is ordinarily applied to bulk metal used in the production of coins and especially to precious metals such as gold and silver. It comes from the Anglo-Norman term for a melting-house where metal was refined, and earlier from French bouillon, "boiling". Although precious metal bullion is no longer used to make coins for general circulation, it continues to be held as an investment with a reputation for stability in periods of economic uncertainty. To assess the purity of gold bullion, the centuries-old technique of fire assay is still employed, together with modern spectroscopic instrumentation, to accurately determine its quality.

The London Gold Fixing is the setting of the price of gold that takes place via a dedicated conference line. It was formerly held on the London premises of Nathan Mayer Rothschild & Sons by the members of The London Gold Market Fixing Ltd.

A bullion coin is a coin struck from highly refined precious metal (bullion) and kept as a store of value or an investment rather than used in day-to-day commerce. A bullion coin is distinguished by its weight and fineness on the coin. Unlike rounds, bullion coins are minted by government mints and have a legal tender face value. Bullion coins can have fineness ranging from 91.9% to 99.99% purity.

<span class="mw-page-title-main">Gold as an investment</span> Investment in gold

Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a way of diversifying risk, especially through the use of futures contracts and derivatives. The gold market is subject to speculation and volatility as are other markets. Compared to other precious metals used for investment, gold has been the most effective safe haven across a number of countries.

<span class="mw-page-title-main">Gold bar</span> Quantity of refined metallic gold

A gold bar, also called gold bullion or gold ingot, is a quantity of refined metallic gold of any shape that is made by a bar producer meeting standard conditions of manufacture, labeling, and record keeping. Larger gold bars that are produced by pouring the molten metal into molds are called ingots. Smaller bars may be manufactured by minting or stamping from appropriately rolled gold sheets. The standard gold bar held as gold reserves by central banks and traded among bullion dealers is the 400-troy-ounce Good Delivery gold bar. The kilobar, which is 1,000 grams in mass, and a 100 troy ounce gold bar are the bars that are more manageable and are used extensively for trading and investment. The premium on these bars when traded is very low over the spot value of the gold, making it ideal for small transfers between banks and traders. Most kilobars are flat, although some investors, particularly in Europe, prefer the brick shape.

<span class="mw-page-title-main">Silver as an investment</span> Precious metal as a store of value

Silver may be used as an investment like other precious metals. It has been regarded as a form of money and store of value for more than 4,000 years, although it lost its role as legal tender in developed countries when the use of the silver standard came to an end in 1935. Some countries mint bullion and collector coins, however, such as the American Silver Eagle with nominal face values. In 2009, the main demand for silver was for industrial applications (40%), jewellery, bullion coins, and exchange-traded products. In 2011, the global silver reserves amounted to 530,000 tonnes.

GFMS are research and consultancy company for the precious metal markets. Since 2011 they have been part of Thomson Reuters. As well as other commodities, they research gold, silver, platinum, palladium, and copper trading.

<span class="mw-page-title-main">London Bullion Market Association</span> Trade association for precious metals

The London Bullion Market Association, established in 1987, is the international trade association representing the global Over The Counter (OTC) bullion market, and defines itself as "the global authority on precious metals". It has a membership of approximately 150 firms globally, including traders, refiners, producers, miners, fabricators, as well as those providing storage and secure carrier services.

<span class="mw-page-title-main">Platinum as an investment</span>

Platinum as an investment is often compared in financial history to gold and silver, which were both known to be used as money in ancient civilizations. Experts posit that platinum is about 15–20 times scarcer than gold and approximately 60–100 times scarcer than silver, on the basis of annual mine production. Since 2014, platinum prices have fallen lower than gold. Approximately 75% of global platinum is mined in South Africa.

<span class="mw-page-title-main">Philip Klapwijk</span> Precious metals economist

Philip Klapwijk is an economist in precious metals commodities markets.

<span class="mw-page-title-main">Good Delivery</span>

The Good Delivery specification is a set of rules issued by the London Bullion Market Association (LBMA) describing the physical characteristics of gold and silver bars used in settlement in the wholesale London bullion market. It also puts forth requirements for listing on the LBMA Good Delivery List of approved refineries.

Silver exchange-traded products are exchange-traded funds (ETFs), exchange-traded notes (ETNs) and closed-end funds (CEFs) that aim to track the price of silver. Silver exchange-traded products are traded on the major stock exchanges including the London and New York Stock Exchanges. The U.S Geological Survey cites the emergence of silver ETFs as a significant factor in the 2007-2011 price rise of silver. As of September 2011, the largest of these funds holds the equivalent of over one third of the world's total annual silver production.

MKS (Switzerland) SA is a trader of precious metals. Based in Geneva, the group employs approximately 1,000 workers. MKS is an associate of the London Bullion Market Association (LBMA), and its subsidiary PAMP has been on the LBMA’s Gold List, widely recognised in the financial services industry as the indicator of quality, since 1987.

<span class="mw-page-title-main">Vaulted gold</span>

Vaulted gold denotes gold bullion stored in bank vaults. Buyers of vaulted gold obtain outright ownership of the physical gold which is held for them in a vault. This is unlike structured gold products such as Gold based exchange traded funds (ETFs) which only reflect the price of gold while the investor has no ownership of the gold.

A gold IRA or precious metals IRA is an Individual Retirement Account in which physical gold or other approved precious metals are held in custody for the benefit of the IRA account owner. It functions the same as a regular IRA, only instead of holding paper assets, it holds physical bullion coins or bars. Precious metals IRAs are usually self-directed IRAs, a type of IRA where the custodian allows more diverse investments to be held in the account.

PAMP SA is an independently operated precious metals refining and fabricating company and member of the MKS Group. It was established in 1977 in Ticino, Switzerland.

The London Platinum and Palladium Market (LPPM) is an over-the-counter trading centre for platinum and palladium and a commodity trading association. London has always been a centre for the research in and development of most of the platinum group metals. Trade was established in the early 20th century, typically by existing dealers of gold and silver. The LPPM has been involved in fixing the world market prices of platinum and palladium since 1989.

References

  1. ↑ "Science Engineering & Sustainability: Gold price historical chart: Peak gold price". Science Engineering & Sustainability. Retrieved 4 May 2019.
  2. ↑ "LBMA - Clearing Statistics". www.lbma.org.uk. Retrieved 2 July 2019.
  3. ↑ Paul Mylchreest, Thunder Road Report (PDF) GATA, p. 10; (15 October 2009). Retrieved 21 March 2010
  4. ↑ Eric King, Interview with Andrew Maguire and GATA board member Adrian Douglas Archived 15 June 2011 at the Wayback Machine King World News (30 March 2010). Retrieved 6 May 2011
  5. 1 2 Susanne Capano, A Guide to the London Precious Metals Markets Archived 16 July 2011 at the Wayback Machine Published jointly by the LBMA and the London Platinum and Palladium Market (LPPM), p. 6 (August 2008). Retrieved 21 March 2010
  6. 1 2 Paul Mylchreest, Thunder Road Report (PDF) GATA, p. 11 (15 October 2009). Retrieved 21 March 2010
  7. ↑ "LBMA – FAQs". The London Bullion Market Association. Retrieved 2 April 2015.
  8. ↑ "LBMA – Membership". The London Bullion Market Association. Retrieved 2 April 2015.
  9. ↑ Cedricks, Rob, ed. (1 April 2015). "VTB is first Russian bank to enter LBMA". CISTran Finance. Chicago, Illinois. Retrieved 2 April 2015.
  10. ↑ 2009 LBMA Forecast winners http://www.gfms.co.uk/Press%20Releases/2009%20Price%20Forecast%20Winners.pdf (PDF) (15 January 2010). Retrieved 29 August 2013
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.