London bullion market
Encyclopedia
The London bullion market is a wholesale over-the-counter
market for the trading of gold
and silver
. Trading is conducted amongst members of the London Bullion Market Association (LBMA), loosely overseen by the Bank of England
. Most of the members are major international banks or bullion dealers and refiners.
(OTC) transactions with limited amounts trading on the New York Mercantile Exchange
(NYMEX) and Tokyo Commodity Exchange
(TOCOM). These forward contract
s are known as gold futures contract
s. 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 price
s 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 bank
s and in the interbank market. Because interest rates for gold tend to be lower than US domestic interest rates--it encourages gold borrowings so that central banks can earn interest on their large gold holdings--except in special circumstances the gold market tends to be in 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.
s (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 London Bullion Market Association (LBMA) in November 2008 was 18.3 million ounces (worth $13.9 billion) and 107.6 million ounces (worth $1.1 billion) respectively. This means that an amount equal to the annual gold mine production was cleared at the LBMA every 4.4 days, and to the annual silver production every 6.2 days.. The Gold Anti-Trust Action Committee
claims that clearing data substantially understates the true amount of gold traded, due to the netting of trades in the calculation of Clearing Statistics.
They claim the LBMA market is $5.4 trillion a year.
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.
this makes LBMA unallocated gold accounts susceptible to loss if a sufficient number of market participants request delivery of physical bullion.
(LME). The latter is the futures exchange
with the world's largest market in option
s, and futures contract
s on base
and other metals.
Over-the-counter (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
market for the trading of gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
and silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...
. Trading is conducted amongst members of the London Bullion Market Association (LBMA), loosely overseen by the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
. Most of the members are major international banks or bullion dealers and refiners.
Gold trading
Internationally, gold is traded primarily via over-the-counterOver-the-counter (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
(OTC) transactions with limited amounts trading on the New York Mercantile Exchange
New York Mercantile Exchange
The New York Mercantile Exchange is the world's largest physical commodity futures exchange. It is located at One North End Avenue in the World Financial Center in the Battery Park City section of Manhattan, New York City...
(NYMEX) and Tokyo Commodity Exchange
Tokyo Commodity Exchange
The Tokyo Commodity Exchange is a non-profit organization, and regulates trading of futures contracts and option products of all commodities in Japan...
(TOCOM). These forward contract
Forward contract
In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. It costs nothing to enter a...
s are known as gold futures contract
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
s. 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 price
Spot price
The spot price or spot rate of a commodity, a security or a currency is the price that is quoted for immediate settlement . Spot settlement is normally one or two business days from trade date...
s and interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
differentials, similar to foreign exchange
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
markets, rather than underlying supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
dynamics. This is because gold, like currencies, is borrowed and lent by central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s and in the interbank market. Because interest rates for gold tend to be lower than US domestic interest rates--it encourages gold borrowings so that central banks can earn interest on their large gold holdings--except in special circumstances the gold market tends to be in contango
Contango
Contango is the market condition wherein the price of a forward or futures contract is trading above the expected spot price at contract maturity. The resulting futures or forward curve would typically be upward sloping , since contracts for further dates would typically trade at even higher prices...
, 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 of securities, such as exchange-traded fundExchange-traded fund
An exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE...
s (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 London Bullion Market Association (LBMA) in November 2008 was 18.3 million ounces (worth $13.9 billion) and 107.6 million ounces (worth $1.1 billion) respectively. This means that an amount equal to the annual gold mine production was cleared at the LBMA every 4.4 days, and to the annual silver production every 6.2 days.. The Gold Anti-Trust Action Committee
Gold Anti-Trust Action Committee
The Gold Anti-Trust Action Committee is an organization dedicated to investigating and proving its allegation that the quantity of gold held and traded by the world's central banks, international bullion banks and futures exchanges is significantly overstated and that a scheme analogous to the...
claims that clearing data substantially understates the true amount of gold traded, due to the netting of trades in the calculation of Clearing Statistics.
They claim the LBMA market is $5.4 trillion a year.
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 fromother 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 2008 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. 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 runBank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
this makes LBMA unallocated gold accounts susceptible to loss if a sufficient number of market participants request delivery of physical bullion.
Other London markets
The London bullion market is distinct from the London Metal ExchangeLondon Metal Exchange
The London Metal Exchange is the futures exchange with the world's largest market in options, and futures contracts on base and other metals. As the LME offers contracts with daily expiry dates of up to three months from trade date, along with longer-dated contracts up to 123 months, it also...
(LME). The latter is the futures exchange
Futures exchange
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of...
with the world's largest market in option
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
s, and futures contract
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
s on base
Base metal
In chemistry, the term base metal is used informally to refer to a metal that oxidizes or corrodes relatively easily, and reacts variably with diluted hydrochloric acid to form hydrogen. Examples include iron, nickel, lead and zinc...
and other metals.
External links
- LBMA official website
- London Gold Market FAQs