London bullion market

TheLondon bullion marketis a wholesaleover-the-countermarket for the trading of gold, silver, platinum and palladium. Trading is conducted amongst members of theLondon Bullion Market Association(LBMA), tightly overseen by theBank of England.Most of the members are major international banks orbulliondealers and refiners.

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

Gold trading

Internationally, gold is traded viaover-the-counter(OTC) transactions, with trading on theNew York Mercantile Exchange(NYMEX) andTokyo Commodity Exchange(TOCOM).

Twice daily, at 10:30 AM and 3:00 PM (local time). the LBMA publishes the gold price in US dollars.Theseforward contractsare known as goldfutures 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 manycommodity markets,the forward market for gold is driven byspot pricesandinterest ratedifferentials, similar toforeign exchange markets,rather than underlyingsupply and demanddynamics. This is because gold, like currencies, is borrowed and lent bycentral banksin 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 positivecontango,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.

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 ofsecurities,such asexchange-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.

TheGold Anti-Trust Action Committeehas claimed that clearing data substantially understates the true amount of gold traded due to the netting of trades in the calculation of Clearing Statistics.

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.

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.

Unallocated risks

The total quantity of unallocated gold is estimated to be 15,000 tonnes at the end of 2008which 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.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 abank runthis makes LBMA unallocated gold accounts susceptible to loss if a sufficient number of market participants request delivery of physical bullion.

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.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.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.

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 fi xing 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 Klapwijktook the prize for most accurate forecaster for both gold and silver prices.

Other London markets

The London bullion market is distinct from theLondon Metal Exchange(LME). The latter is thefutures exchangewith the world's largest market inoptionsandfutures contractsonbaseand other metals.

See also

• Gold as an investment
• Silver as an investment
• Bullion
• London Platinum and Palladium Market
• Good Delivery

External links

• LBMAofficial website
• London Gold Market FAQs