Precious metals
1. Over the counter trading
An 'Over The Counter' or OTC, market means that members of a market trade with each other and their clients on a principal-to-principal basis, which means that all risks, including those of credit, are between the two parties to a transaction. This is different from an exchange traded environment.
While transactions between members tend to be in standard dealing amounts, when dealing with clients, a dealer will provide a tailor-made service, offering quotes in variable quantities, qualities and types of precious metals as well as for various value dates and delivery destinations.
For example, the London precious metal markets are wholesale markets, where minimum traded amounts for clients are generally 1,000 ounces of gold, 50,000 ounces of silver, 1,000 ounces for both platinum and palladium when traded in the telephone market or 500 ounces for each when traded in the electronic market.
Unlike a futures exchange, where trading is based around standard contract units, settlement dates and delivery specifications, the OTC market allows flexibility. It also provides confidentiality as transactions are conducted solely between the two principals involved.
2. What is Loco London?
Loco London is a concept that represents the basis for international trading and settlement in gold and silver. In the second half of the nineteenth century, London developed as the center through which gold from the mines of California, South Africa and Australia was refined and then sold. With this as a business base, and supported by the increasing acceptance of the London Good Delivery List, London bullion dealing houses established global client relationships. These clients opened bullion accounts with individual London trading houses. Soon, these "loco London" accounts, while used to settle transactions between the bullion dealer and client, were also used to settle transactions with other parties by transfers of bullion in London.
As a result, the loco London price has become the common denominator among dealers around the world. The settlement process can be likened to that in the international foreign exchange markets, where settlement is effected by debits and credits over currency nostro accounts in the relevant banking systems.
Nearly all global OTC gold and silver trading is cleared through the London bullion market clearing system.
3. Trading units
For gold, this is one fine troy ounce and for silver, platinum and palladium, on troy ounce. The difference is that in the case of gold, the unit represents pure gold, irrespective of the purity of a particular bar. For silver, platinum and palladium, it represents one ounce of material, of which a minimum of 999 parts in every 1,000 will be silver and 999.5 parts in every 1,000 will be platinum or palladium.
Fineness is a measure of the proportion of gold or silver in a bullion bar or platinum or palladium in a plate or ingot, and is expressed in terms of the fine metal content in parts per 1,000. It defines the purity of a gold or silver bar or platinum and palladium plate or ingot.
Assaying is the process oby which fineness is determined. The purity of silver, platinum and palladium articles is often quoted in the form of fineness. For example, sterling silver is 925 fine. The fineness of gold jewelry is usually expressed in carats (parts of fine gold per 24). Eighteen-carat jewelry is therefore 750 fine in bullion market terms.
4. Troy ounce
Troy ounces are the traditional unit of weight used for precious metals. The term derives from the French town of Troyes, where this unit was first used in the Middle Ages. One troy ounce is equal to 1.0971428 ounces avoirdupois. In the bullion market, all references to ounces mean troy ounces.
5. Currency unit
The market is generally quoted in US dollars per ounce.
6. Settlement and delivery
The basis for settlement of the loco London bullion quotation is delivery of a standard London Good Delivery bar at the London vault designated by the dealer who made the sale. For platinum or palladium the basis for settlement is delivery of a standard Good Delivery plate or ingot at the London or Zurich vault designated by the dealer who made the sale.
While currency settlement or payment for a transaction will generally be in US dollars over a dollar account in New York, delivery of metal against transactions in gold, silver, platinum and palladium are in practice made in a number of ways. These include physical delivery at the vault of the dealer or elsewhere, by credit to an allocated account or through the London Bullion Clearing or the London / Zurich Clearing to the unallocated account of any third party.
7. Allocated accounts
Allocated accounts are 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 deal 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. Insurance for allocated metal can be arranged by the client or by the precious metal dealer.
Clients' holdings will be identified in a weight list of bars, plates or ingots showing the unique bar, plate or ingot number, gross weight, the assay or fineness of each bar, plate or ingot and, in the case of gold, the fine weight.
8. Unallocated accounts
These represent the most straightforward and therefore the most popular way of trading, settling and holding gold, silver, platinum and palladium. The units of these accounts are one fine troy ounce of gold and one troy ounce of silver, platinum or palladium.
These transactions may be settled by credits or debits to the account while the balance represents the indebtedness between the two parties. Should the client wish to receive the actual metal, this is done by 'allocating' specific bars, plates or ingots or equivalent precious metal product, the metal content of which is debited from the unallocated account.
Market convention is that precious metal may be allocated on the day on which it is called for, with physical metal generally available for collection within two days.
9. references
A Guide to the London Precious Metals Markets, http://www.lbma.org.uk/assets/OTCguide20081117.pdf
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