Commodity Online
LONDON: When gold and silver trading posted record activity in 2008, credit must go to London’s OTC market where bulk of the trading in both the commodities take place. Although the physical market for gold and silver is distributed globally, most whole sale OTC trades are cleared through London, according to a report by International Financial Services Ltd( IFSL), London.
The average daily volume of gold and silver cleared at the London Bullion Market Association (LBMA) in November 2008 was 18.3m ounces (worth $13.9bn) and 107.6m ounces ($1.1bn) 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.
IFSL estimates that the market value of above-ground gold stocks totalled over $4.5 trillion at the end of 2008 with turnover of $20.2 trillion during the year. The value of turnover increased 50% in 2008 (20% in moz), and more than tripled (up 52% in moz) on three years earlier. Around three-quarters of gold trading was conducted on OTC markets, and the remainder on exchanges.
Because the minimum lot size of trading is typically high, the OTC market is dominated by institutional investors and gold market professionals. The OTC market trades 24 hours per day and has no formal structure and no central meeting place. Business is mainly conducted by telephone or through electronic dealing systems. The global centre for such trading is London.
Other large OTC markets include New York, Zurich, Tokyo, Sydney and Hong Kong. Some OTC business in kilogram and smaller bars for jewellery manufacture and personal investment is conducted in several other cities in Asia and the Middle East
Reported LBMA turnover in both gold and silver has risen sharply in recent years due to increased investor interest in precious metals, and in the past yeardue to the global credit crisis and the “safe-haven” appeal of precious metals.
In the decade up to 2002, turnover in gold and silver was generally on a downward trend partly due to a fall in proprietary trading by central banks and producer hedging. Reported volumes significantly understate actual volume of London market turnover which is probably three to five times the reported turnover because transactions are increasingly netted out and cleared without appearing in the statistics. Because most gold is traded through London, LBMA clearing figures represent the result of worldwide gold trading.
It is estimated that around three-quarters of gold and a half of silver transactions
originate from outside the UK.Notional amounts outstanding of OTC derivatives gold contracts totaled $649bn in June 2008, up 9% on end-2007. Gold futures and options traded on the OTC market have increased markedly over the past decade and
nearly tripled between 2001 and 2008.
London has the largest market in the world for gold and silver trading, and the
one with the longest history. OTC gold and silver transactions around the world, particularly those of central banks and mining companies, are conducted through the "Loco London" market in which the two metals are traded for delivery in London. The London bullion market is a wholesale market, where minimum traded amounts for clients are generally 1,000 ounces of gold and 50,000 ounces of silver.
Other centres which typically trade gold and silver “Loco London” include: in Asia, Hong Kong, Tokyo, Sydney and Singapore; in Europe, Zurich and Frankfurt; and in the US, New York. This market does not require physical delivery and trades can be conducted on a deferred basis in which delivery is postponed until positions are liquidated. The “Loco London” market serves various purposes including hedging, investment and speculation.
