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London Bullion Market Research Team | Posted On Monday, February 09,2009, 04:01 AM

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London Bullion Market



What is the London Bullion Market?

The London bullion market is completely different from, but often confused with the London Metal Exchange. Only base metals are traded at the London Metal Exchange (LME), while gold and silver are traded by members of the London Bullion Market Association (LBMA), freely overseen by the Bank of England. Most of the members are major international banks or bullion dealers and refiners. Five members of the LBMA meet twice daily to "fix" the gold price in a process called as the London Gold Fixing.

Gold is traded mainly over-the-counter (OTC) with limited amounts trading on the New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM). These forward contracts are called as Gold futures contracts. Spot gold is traded for settlement two business days following the trade date, with a business day known as a day when both New York and London are open for business. Contrasting many commodity markets, the forward market for gold is driven by spot prices and interest rate differentials (similar to foreign exchange forward markets) rather than underlying supply and demand dynamics. This is because gold, such as currencies, is borrowed and lent by central banks and in the interbank market. Because interest rates for gold tend to be lower than the US domestic interest rates (to encourage gold borrowings so that central banks can earn interest on their large gold holdings), except in exceptional circumstances the gold market tends to be in contango (i.e. the forward price of gold is higher than that of the spot price). This has historically made it a striking market for forward sales by gold producers and contributed to an active and relatively liquid derivatives market.

Size of the market

The mass of global trading in gold and silver takes place on the over-the-counter (OTC) market. London is by far the prime global centre for OTC transactions followed by New York, Zurich and Tokyo. Exchange-traded trading has developed in recent years with COMEX in New York and TOCOM in Tokyo generating most of the activity. Gold is traded as a security on the London, New York, Johannesburg and Australian Stock Exchanges.

Although the physical market for gold and silver is distributed internationally, most wholesale OTC trades are cleared through London. The average daily quantity of gold and silver cleared at the London Bullion Market Association (LBMA) in December 2004 was 15.4 million ounces (480,000 kg, worth $6.8 billion) and 102.2 million ounces (3,180,000 kg, worth $730 million) respectively. This means that a sum equal to the annual gold mine production was cleared at the LBMA every 5.4 days, and to the annual silver production every 5.8 days.

Digital metal currencies

In the Information Age an entire new level of currency has developed centered around gold. For e.g.,, GoldMoney has created the goldgram. A goldgram in the online GoldMoney database may be transferred between user's accounts and is backed by a gram of gold held in vaults throughout the globe that meet the London bullion market (LBMA) standards. The bullion is insured by Lloyd's of London and audited by Deloitte & Touche. As a result, many of the risks to using gold as a currency in daily transaction have been eradicated. While the digital gold currencies have not acquired widespread adoption they are awfully efficient and may become a dominant currency in the future.

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