The London bullion market is a wholesale

over-the-counter Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid prescr ...

market for the trading of gold and silver. Trading is conducted amongst members of the

London Bullion Market Association The London Bullion Market Association (now known simply as LBMA), 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 ...

(LBMA), loosely overseen by the

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 to act as the English Government's banker, and still one of the bankers for the Government of ...

. Most of the members are major international banks or

bullion 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 t ...

dealers and refiners. The physical characteristics of gold and silver bars used in settlement in market is described by the

Good Delivery 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 fort ...

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 primarily via

(OTC) transactions, with limited volume trading on the

New York Mercantile Exchange The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago. NYMEX is located at One North End Avenue in Brookfield Place in the Battery Park City section of Manhattan, New York City. T ...

(NYMEX) and

Tokyo Commodity Exchange Tokyo Commodity Exchange, also known as TOCOM, is Japan's largest and one of Asia's most prominent commodity futures exchanges. TOCOM operates electronic markets for precious metals, oil, rubber and soft commodities. It offers futures and options ...

(TOCOM) based on the LBMA price. Twice daily, at 10:30 AM and 3:00 PM (local time). the LBMA publishes the gold price in US dollars. These

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 on at the time of conclusion of the contract, making it a type of deriva ...

s are known as gold

futures contract In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...

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 market 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 investin ...

s, the forward market for gold is driven by

spot price In finance, a spot contract, spot transaction, or simply spot, is a contract of buying or selling a commodity, security or currency for immediate settlement (payment and delivery) on the spot date, which is normally two business days after the ...

s and

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...

differentials, similar to

foreign exchange market The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspec ...

s, rather than underlying

supply and demand In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...

dynamics. This is because gold, like currencies, is borrowed and lent by

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...

s 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 Contango is a situation where the futures price (or forward price) of a commodity is higher than the ''expected'' spot price of the contract at maturity. In a contango situation, arbitrageurs or speculators are "willing to pay more owfor a comm ...

, 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 A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

, such as

exchange-traded fund An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold from other owners throughout the ...

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 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. 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.Paul Mylchreest
Thunder Road Report
(PDF) GATA, p. 10; (15 October 2009). Retrieved 21 March 2010

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.Susanne Capano
A Guide to the London Precious Metals Markets
Published jointly by the LBMA and the London Platinum and Palladium Market (LPPM), p. 6 (August 2008). Retrieved 21 March 2010

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 2008Paul Mylchreest
Thunder Road Report
(PDF) GATA, p. 11 (15 October 2009). Retrieved 21 March 2010 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 run A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. In other words, it is when, in a fractional-reserve banking system (where banks no ...

this 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 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 Philip Klapwijk (born 1962) is an economist in precious metals commodities markets. After studies at the London School of Economics and the College of Europe in Bruges where he obtained degrees in economics, he started work as an analyst with Go ...

took the prize for most accurate forecaster for both gold and silver prices.2009 LBMA Forecast winners http://www.gfms.co.uk/Press%20Releases/2009%20Price%20Forecast%20Winners.pdf (PDF) (15 January 2010). Retrieved 29 August 2013

Other London markets

The London bullion market is distinct from the

London Metal Exchange The London Metal Exchange (LME) is a futures and forwards exchange with the world's largest market in standarised forward contracts, futures contracts and options on base metals. The exchange also offers contracts on ferrous metals and precious ...

(LME). The latter is the

futures exchange A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or f ...

with the world's largest market in options, and

s on base and other metals.

References

{{reflist, 30em

External links

LBMA
official website

Commodity markets in the United Kingdom Economy of London Precious metals Year of establishment missing Bullion dealers