How and Where Precious Metals Are Traded
Review the marketplaces where precious metals are traded around the world.
Precious metals have always been used as means of exchange between traders and as a store of wealth, with gold being the metal most commonly used for this purpose. Today there are many ways to invest and trade in gold and other precious metals.
Precious Metals Bars
Investing directly in gold bars is a popular way to access these markets. Bars come in many sizes to suit the needs of the investor. One of the largest markets for gold bars is organized in London. Here the standard size of bar is 400 troy ounces, which is referred to in the market as a large bar. Other bar sizes frequently used around the world include 100 troy ounces, 1 kilogram and 5 tael. The standard size for silver bars in the London market is 1,000 troy ounces. For platinum and palladium, the acceptable size in the London market is between 1 and 6 kilograms.
Taking direct ownership of precious metals often involves the use of specialist vaulting and custody arrangements, secure transportation and insurance coverage. In addition to direct investment, the London market has also developed a system of indirect investment.
Precious metals can be bought on an unallocated basis through a bank or intermediary. The bank retains control of the metal whilst the buyer holds the metal on account. Owning metal on an unallocated basis introduces an element of counterparty risk, but provides for a more straight-forward mechanism for completing transactions: trades are completed by the banks moving balances between account.
The London markets for precious metals are organized on a private, over-the-counter basis, without a central exchange coordinating trading. In a number of other locations around the world, exchanges have developed to provide trading facilities in metal. One of the most active of these is the Shanghai Gold Exchange, which provides a centralized spot market for gold and silver bars.
In addition to bars, investors looking for a direct investment in physical gold and silver can also buy coins. Many countries mint coins from gold and silver, and there are many private markets and agencies that support this form of investment.
Another popular way to invest in precious metal is through a mutual fund or an exchange traded fund. This is an indirect form of investment, where investors place their assets into a fund and in turn the fund invests in metal. The fund charges a management fee to cover its costs. With an exchange-traded fund, equity in the fund is traded on a stock exchange, with the most active of these funds being listed in New York and London.
Technology is widely used in the trading arrangements for all these products. A new development that is emerging is the is use of blockchain technology to support the ownership and the efficient transfer of precious metal.
Trading Precious Metals
It is difficult to make an accurate assessment of the amount of precious metal that is traded in these markets, as many trades are in private markets that do not report transaction information.
Data for the London market shows that on average over 19 million ounces of gold and 170 million ounces of silver are transferred every day, with the amount traded likely to be a multiple of this. Volumes on the Shanghai Gold Exchange show an average daily trading volume of over 6 million ounces of gold and 140 million ounces of silver. Trading in the shares of the largest exchange-traded fund for gold can be equated to approximately 1 million ounces of gold per day. It is clear that the amount of precious metal traded on the world’s markets is many times the amount produced from mining and recycling activities.
In the middle part of the twentieth century, the U.S. dollar was convertible into gold at a fixed official fixed rate of $35 per ounce, as part of the Bretton Woods system. This convertibility ended in 1971, and the price of gold became subject to the forces of supply and demand. As a consequence, the need for risk management tools developed. Coinciding with a change in U.S. law that had previously barred private ownership of gold, COMEX launched its Gold futures contract in 1974. The COMEX Silver futures contract had been available since 1933. Platinum futures were launched on NYMEX in 1956, and Palladium futures launched in 1968. Precious metals futures are also available on a number of other exchanges, most notably in Asia, such as the Shanghai Futures Exchange and the Tokyo Commodity Exchange.
Futures contracts provide a mechanism to manage exposure to the underlying market. In the precious metal markets, the futures contracts offered by COMEX, NYMEX and others are a part of the wider global market for precious metals. They provide transparency and price discovery to the market. Options contracts on precious metal and precious metal futures are also offered by exchanges. Options contracts add to the range of trading and hedging strategies that can be employed by an investor.
Volume (2016) in COMEX Gold futures contracts averages the equivalent of 22 million ounces per day. Each contract is for 100 ounces of gold, and is for delivery at specified time in the future. Each COMEX Silver futures contract is for 5,000 ounces of silver. Its traded volume is equivalent to over 350 million ounces per day on average. The NYMEX Platinum contract is for 50 ounces of platinum, and the NYMEX Palladium contract is for 100 ounces of palladium. Together these two contracts trade in excess of 1.25 million ounces of metal per day.
In conclusion, the world’s precious metals markets consist of a wide range of products to invest in, and tools to assist in managing the risks associated with these investments, and the financial risks of dealing in the physical supply chain.
Peter Knight Advisor