Trading and vaulting gold

Most central banks either purchase gold directly from bullion banks or else they buy domestic mine production or locally recycled gold. Banks buying gold bars will typically purchase in the global OTC market, the majority of which is settled via gold bars stored in London (“loco London”).

London Good Delivery bars form the basis of this market. Available from bullion banks, these bars must be at least 995 parts gold out of 1000 and weigh between 350 and 430 fine ounces. The bars must also meet other stringent conditions set by the London Bullion Market Association

The OTC market trades on a 24-hour continuous basis (spot gold settled on day T+2). Twice daily during London hours there is a fix which provides reference gold prices for that day’s trading. Either the morning (AM) or afternoon (PM) London fix forms the pricing basis for many long-term contracts. Market participants will usually refer to one or other of these prices when seeking a basis for valuation.

Central banks that buy their own local mine production will typically have the gold refined up to internationally acceptable standards (“London Good Delivery”) – if it is not already in that state – and will often ship the gold overseas for storage.

Vaulting gold overseas with another central bank or bullion bank is common practice, and can be done on an “allocated” or “unallocated” basis. In an allocated account, the gold is physically segregated from all other gold stored in the vault, the client has full title to the metal in the account and the client’s holdings are identified by bar number, size, fineness and weight. In an unallocated account the client has a general entitlement to a portion of a pool of gold, which allows the bullion bank to lease out the gold for a small yield.

The Federal Reserve Bank of New York and the Bank of England are the two largest custodians of gold stored on behalf of other central banks.