Gold - Part Two

Trading

Part one  |  Part two

Gold is traded on the international financial markets in the form of both physical gold and financial gold.  The first case concerns the trading of gold bullion and bars of standard weights and qualities, while the term financial gold or paper gold refers to instruments conceived by the financial market in reference to gold, such as for example futures and certificates.

London

The most important physical market in terms of volumes traded and international prestige is the London market, created in 1919.  In September of that year at the offices of Rothschild & Sons the first fixing emerged from the meeting attended by the City’s five most important brokers: N.M. Rothschild & Sons, Mocatta & Goldsmid, Johnson Matthey, Samuel Montegu & Co. and Sharps Pixley. Still today the representatives of these firms meet every day in Rothschild’s Fixing Room at 10.30 a.m. and 3.00 p.m. and establish a price.  For all traders in the world, regardless of the location where trading physically takes place, this represents the undisputable official price.

1987 saw the birth of the London Bullion Market Association (L.B.M.A.) which drew up an official list of acceptable refiners, whose trademark appears on bullion bars that meet the “Good Delivery” specification and which guarantees the quality of gold throughout the world.

Zurich

In the early 1950’s, when the “gold standard” was in full operation, Switzerland, thanks to the absence of import and export barriers, became a major European exchange location for the yellow metal. The market was developed by the Zurich Gold Pool, a consortium formed by the Union Bank of Switzerland (UBS), the Swiss Bank Corporation (SBC) and Credit Suisse.  Despite its importance, this financial market has never established its own rules and uses and accepts the English rules.

Hong Kong

This is the oldest bullion market, having been founded in 1910.  The particular characteristic of Hong Kong is that even during the period of the “Gold Standard”, when the price of gold was fixed, here the prices of the yellow metal were already subject to the fluctuations dictated by the laws of supply and demand.  The boom of this market took place in 1974, when, at the time of the collapse of the exchange system based on the gold parity, government restrictions on imports were lifted.  It is the primary physical market in the Far East and has considerable importance also in view of its trading hours: it is open when the London and New York markets are closed and is the only market which also operates on Saturdays.  Even after the transfer of the former British colony to the People’s Republic of China, the trading of gold has continued to take place within the historical Kam Ngam premises of the Chinese Gold and Silver Exchange Society; the main traders are the large oriental banks.

Singapore

The Singapore gold market was officially created on 1 April 1969.  The volumes traded are lower than those traded on the other markets and this market serves above all as a link between the other Far East countries and London.  On the other hand, the Gold Exchange of Singapore, which was set up in 1978, is very important as regards the trading of derivatives in Asia.

New York

The New York market for physical gold, as a result of prohibition, was the last to be created.  In the United States private possession of gold – except for jewellery and numismatic collections – was illegal from 1933 until 1974.  The restrictions on the possibility for private parties to hold gold were only lifted in January 1975: the market was then liberalised and thus began to heavily expand.  The main traders are currently: J. Aron & Co., Mocatta Metals Corporation, Phillipp Brothers, the National Bank of New York and Sharp Pixley.

The financial gold markets:

As from 1970 – hence already prior to the official end of the veto on private ownership of physical gold in the USA – several paper gold markets developed.  These reached maximum growth half-way through the 1980’s, when gold achieved a perhaps even greater importance in asset allocation strategies than at present. In 1972, the Winnipeg Commodity Exchange created the first gold future and subsequently also the first option contract.  Despite this historical record, the most important market overall for derivatives based on the precious metal is the New York Commodity Exchange (Comex) where notable trading levels are achieved.

The Sydney Futures Exchange began trading Comex futures from 1986: consequently, given the time difference these derivative products can be traded day and night.  Another important market is the Tokyo Commodity Exchange (TOCOM), which began operating in 1982.

Paper gold has become more and more important in recent years, surpassing the traditional image of the yellow metal exclusively as a shelter-good.  From a financial standpoint gold has become a real asset for the purpose of portfolio diversification and with a minimum of capital investors can operate without the additional costs for deposit and insurance expenses applicable in the case of physical gold.  Moreover gold derivatives are also used by manufacturing firms to hedge against raw material price fluctuations: the metal is widely used in electronics for its superconductor properties and oxidation resistance.