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There are at least bullion banks active in the global gold market, with most of these entities being members of trade association the London Bullion Market Association LBMA. Nearly all gold trading in the London Gold Market is in the form of unallocated account trading and physical delivery of gold at settlement rarely takes place. This appreciation also helps highlight the major concerns which modern bullion banking poses. The term bullion bank can be applied to banks which are involved in some or all of the following activities in the precious metals markets: trading, clearing, vaulting, physical metal distribution, risk management, intermediating between metal lenders and borrowers, mine finance and hedging, financing fabricators, providing consignment stocks, generating precious metals market research.
This list is not exhaustive. Most bullion bank activities are carried out from within the commodities or foreign exchange arm of an investment bank, as well as the corporate finance divisions of the same banks.
The bullion banking fractional reserve system also supports highly leveraged trading. Conversely, its assets are the money it loans out or invests. A commercial bank will also keep a fraction of its deposits in reserve to pay liabilities which come due, such as customers withdrawing funds from their bank accounts. Hence the name fractional-reserve banking. The cash deposited into a bank by depositors is not the same cash that they receive back, just an equivalent amount.
Nowadays, regular banks also create money out of thin air on the asset side of their balance sheets when they engage in lending. This activity of lending actually brings new money into existence. The key point here is that modern-day bullion banking system operates in the same way as regular fractional reserve banking operates, the only difference being that contemporary bullion banking brings large amounts of paper gold into existence.
CPM reiterates that the mechanics used in bullion banking are similar to regular banking, and that bullion banking employs:. Banks treat their metal deposits in much the same way as they do deposits denominated in money, as the reserve asset against which they lend additional money to borrowers. In contemporary bullion banking, the amount of gold circulating in the bullion banking system is not fully backed by physical gold. The lack of data divulged by the LBMA and its regulators makes complete analysis difficult.
The only way there can be an increase credit or decrease debit in the account holding is through physical movement, an allocation of gold bars, or alternatively a book-keeping movement between two allocated accounts. In the London Gold Market, allocated precious metals accounts are bi-lateral agreements between two parties.
The agreements are officially called allocated account agreements and there is actually a template contract for such agreements on the LPMCL website, drawn up by legal firm Clifford Chance . The bullion bank in turn has a liability to the customer for the same amount of gold. Transactions through LBMA unallocated gold accounts are represented by book-keeping credit and debit entries to the account.
There are other definitions of unallocated outside the LBMA system in which an unallocated account balance means that the account contains a fine ounce balance of gold which is fully backed 1-for-1 by an equivalent quantity of gold. This gold would be held within a larger pooled holding. Such a definition of unallocated might be used, for example, is the physical gold storage industry.
Unfortunately, the LBMA system has perverted the use of the word unallocated. There are no specific gold bars set aside for the customer. The gold backing the account, if there is any, is owned by the bank, not the customer. Such gold is general inventory gold of the bank, analogous to a commercial bank keeping a fraction of cash on hand to pay customers who wish to withdraw cash from a bank branch or ATM. Similarly, in bullion banking, the unallocated account balances recorded by banks against which customers hold claims for gold are only fractionally-backed.
As to what fractional ratio is backing the LBMA unallocated account system is unclear since neither the banks nor the LBMA nor the regulators ever publish such figures. But the ratio of unallocated balances to allocated gold backing such balances might be anywhere between and Importantly, in the LBMA system, an unallocated account balance of paper gold can also be created by a bank purely as a book-keeping entry.
Under such a scenario, a customer approaches a bullion bank requesting to purchase unallocated gold within the LBMA system as a means of achieving exposure to the gold price, e. The bank may hedge its liability to the customer by creating a long position for unallocated gold via the loco London OTC market, but this just means another bullion bank takes the other side of the trade, and so on along the chain.
The only fee a customer is charged when holding an unallocated gold account is an account maintenance fee, just like a checking account or savings account fee in a branch bank. This memorandum stated that:. This HMRC view in itself shows the true nature of an unallocated gold account since its essentially equivalent to a checking or savings accounts at a bank. Therefore a customer holding gold in an unallocated account as a store of value or as a safe haven is actual holding nothing of the sort since the holding is merely a claim on a bank that is engaged in fractional-reserve banking.
This process, and the legal rights and obligations of the involved parties, is virtually identical to a regular bank account where cash is deposited. A depositor of physical gold into an unallocated account with a bullion bank therefore loses ownership of that gold in return for a mere claim on fractionally reserved gold. There is one more critical concept in bullion banking. The standard for the metal that an unallocated balance represents is theoretically defined as fine gold in London Good Delivery Bar format.
However, nothing is actually delivered under unallocated trading, i. The transfer is merely a book entry. There are at least 35 bullion banks active in the global gold market, and arguably more depending on how one defines an active and important bullion bank. The LBMA membership system  is useful in classifying these banks.
First there are the 13 market making members of the LBMA. Commerzbank claims to be one of the top 3 bullion banks in the world. Precious Metals Inc. Another notable departure some years earlier in was the legendary N. With the evolution of the Chinese gold market, a number of Chinese banks can also be classified as bullion banks.
The customer bases of these bullion banks includes central banks, precious metals brokers, other financial institutions, investment funds, mining companies, precious metals refineries, precious metals mints, jewellery fabricators, bullion wholesalers, and industrial fabricators. Unallocated gold, silver, platinum and palladium accounts are not just a niche area of bullion banking or an abstract concept.
This LBMA unallocated accounts and positions system is at the heart of the bullion banking fractional reserve system and nearly all of the activities that bullion banks are involved in. Many legitimate transactions involving precious metals miners, refiners and their clients use metal balance accounts where a quantity of precious metal in fine ounces transfers ownership between a mine and a refiner or a refiner and a bullion bank.
Locations swaps facilitated by bullion banks in which refineries and their customers swap precious metals held in two locations to save on transport costs would also be legitimate uses for metal balance accounts. These balances are actually backed up fully by physical metal and are a convenient way for precious metals to be passed along the supply chain.
However, the growth and proliferation of the London-based fractionally-backed unallocated precious metals trading, which is often leveraged, is a problem, and has little to do with the legitimate processing of precious metals from mine to user. A quick run through these activities provides a flavour of the scope of activities bullion banks are engaged in within trading, clearing and lending of gold and other precious metals.
Bullion Bank activities within gold and silver trading include market-making in the OTC wholesale gold and silver markets in spot immediate delivery , forwards future delivery and option products, as well as in trading gold and silver futures on futures exchanges. Trading also extends to participating directly in the LBMA Gold and Silver price auctions, an activity which also generates widely used pricing benchmarks. Bullion banks also create interest rates swaps, barrier options and structured notes linked to the precious metals, and offer clients exposure to precious metals prices through speculative and often leveraged forward trading.
The same banks also often act as Authorised Participants for the creation and redemption of baskets of securities for the large gold-backed Exchange Traded Funds ETFs , and they often also act as market makers for these products. All of this trading makes use of and settles in the unallocated paper gold system. Trade clearing is the process of netting all trades and then processing the required transfers to reflect the trades between all participants.
Scotiabank and UBS do not. Bullion banks are at the heart of what is generally referred to as the gold lending market but which could equally be called the gold borrowing market. The Gold Lending Market is centred in London and is driven by the interplay of central banks, which lend their gold reserves to generate a small amount of interest, and bullion banks, which borrow this gold. Bullion banks then either sell the gold, lend it on to mining companies, allocate it to ETFs, use it as part of their general gold inventory to back up their trading activities and investment product creation initiatives, or use it to pay back gold obligations to customers who want to convert unallocated gold into allocated gold.
Central banks generally lend their gold in the first instance for a short period of time, e. When these gold deposits roll and get placed out with another bullion bank, the only change that happens is that Bullion Bank B takes over the obligation from Bullion Bank A to pay interest on the lent gold, but crucially, by taking over that liability, Bullion Bank B can then record that it has an asset of that amount of gold an unallocated position , and it can trade that position or transfer it to another party.
Gold swaps are a similar product to gold loans in which central banks swap physical gold for currency funding, such as for US Dollar funding. Bullion banks provide a number of services for mining companies such as lending gold to those mining companies which then repay this gold in the future out of their future gold production.
Some global bullion banks are involved in physical precious metals distribution and logistics, for example, importing gold into China using a Chinese government issued license HSBC, ANZ, and Standard Chartered , supplying physical precious metals into markets such as India Scotiabank , and offering consignment stocks to wholesalers and fabricators in markets such as Dubai, Turkey and Thailand JP Morgan.
Bullion banks also execute location swaps for their customers where metal in one location is swapped for metal in another location to save on transport costs. When investors purchase bullion they can begin to trade gold and silver in the bullion exchange to incur profits. The bullion market is open 24 hours a day and is primarily an over-the-counter market with most trading based in London. The bulk of global trading is done on the over-the-counter market with London being the largest global center for OTC transactions followed by New York, Zurich and Tokyo.
Transactions in the bullion exchange are normally conducted electronically or by phone. Investors can trade gold and silver in forms other than bullion such as exchange-traded funds, futures, options and mutual funds which can be flexible options. Exchange-traded funds can be traded in the London, New York, Johannesburg and Australian stock exchanges. Bullion trading is mainly conducted amongst members of the London Bullion Market Association which is loosely overseen by the Bank of England.
Most of the wholesale over-the-counter trades of bullion are cleared by the LBMA although the physical market for gold and silver is distributed globally. In the average daily volume of gold and silver cleared in London was Trading gold and silver bullion is so popular mainly because these are precious metals that will always have a certain value in spite of economic circumstances.
The price of gold can rise or fall depending on a number of factors and traders must learn to predict the changing price based on certain indications such as unemployment figures. Gold and silver are considered to be a recession-proof investment by people who buy and sell commodities because they are rare and have always had value for thousands of years.
As worldwide currency prices start to dwindle, the value of gold begins to increase. It is in unstable times that trading gold can be the most profitable compared to other types of investments and exchanges. In a volatile financial climate, the stock market and other financial markets can be bad investments and result in losses. The bullion market remains profitable in times of economic difficulty because there is a finite amount of gold in the world and it remains valuable for all time.
When other financial markets are at their most vulnerable people begin trading in gold and experiencing the benefits of exchanging in the bullion market. Traders in the bullion exchange follow certain guidelines to get the most profit and value out of their gold and silver.
For more information, please refer to the Company's MD&A included in this The two principal uses of gold are bullion investment and product fabrication. Commission staff in collaboration with the wholesale electric and gas quadrants John C. Dugan (Director, Comptroller of the Currency), that Corporation. Date of fiscal year end: October Date of reporting period: January 31, Form N-Q is to be used by management investment companies, other than small.