What markets does gold find
The global professional gold market can be divided into two industries:
- Derivatives (gold futures and gold options): A promise to buy or sell gold in the future is bought or sold;
- Physical, real gold: The physical precious metal is traded on these markets and delivered either immediately or after two working days.
Tokyo and New York are the two main markets for gold futures and gold options, but trading in physical gold - the actual precious metal - takes place in Hong Kong, Zurich and London, with London being the largest market among the three.
Gold Market: London Dealing
Geographically located between Asia and New York, London has the advantage of being available to both of these markets during opening hours. A large part of the 10 tons of gold that is produced every day by the world's largest gold mining companies is traded on the London gold market.
The daily trading volume traded and cleared by members of the London Bullion Market Association (LBMA) continues to be between 50% and 100% greater. According to data from the LBMA, its members' annual sales in the London gold market are worth $ 152 million. In terms of volume, annual sales have grown over 6% since 2002, even though the price of gold has doubled.
The actual gold trading volume in the London gold market, however, is closer to three to five times more than the LBMA reports: up to $ 760 million in the past 12 months, according to the IFSL consultancy. Why? Because many gold market deals are 'netted' before the final statistics are compiled (see: IFSL data).
The real volume of physical gold that is traded in London could thus exceed the amount of gold bars by 4 to 10 times that enter the London market every day.
Why can no one really be sure how big the London market really is? Most of the dealings are given by telephone. There is no central exchange like the NYSE or the London Stock Exchange, and there is no official supervisory authority that controls it, like the CFTC for futures in the USA.
Gold market: how easily do you get the best price?
Private investors can trade directly on the gold market for futures through their broker, thereby buying and selling futures and gold options. This route to the gold market enables you to trade via a margin account and thus optimize your business - but you also have to accept the associated risks.
Trading fees in the gold futures market can be very high, using up over 1% of total positions if investors have the futures for more than 12 months.
However, investors looking to buy or sell physical gold would expect lower fees. However, it is almost impossible for private investors to gain access to the professional gold market through a broker. Why?
The most widely and most easily traded form of physical gold is the London Good Delivery bars. These gold bars are readily accepted by professional gold brokers - hence their name. The transport is made without any doubts or questions when the bars have their "Good Delivery" status.
Most Good Delivery gold bars on the London market weigh around 400 ounces (12.4 kilos). At today's prices, each bullion is worth over 350,000 euros, or around 500,000 in US dollars.
Members of the London Bullion Market Association (LBMA) are reluctant to trade gold under $ 500,000.
Security through storage in high security vaults
Apart from the problem of business volumes, one immediately encounters the problem of establishing the necessary business relationships in the professional gold market.
Even if you are looking to buy large amounts of gold, very few brokers are willing or even able to open an account for you. There are certain logistical, legal, and business barriers that you must overcome before you do this.
From a logistical point of view, the problem arises as to where you want to store your purchased gold. Good Delivery gold bars must be continuously stored or kept in high security vaults in order to maintain their valuable 'Good Delivery' status. These safes, which are managed by professional safe keepers, must be recognized by the London Bullion Market Association (LMBA), of which the safes are members of the LBMA. If you remove your gold from the approved vault system, it will automatically lose its 'Good Delivery' status - and a large part of its value will be lost with it.
The legal regulations are another topic. Governments have imposed enormous obligations on all firms and businesses involved in finance. This makes it much more difficult for gold dealers and gold brokers to do business with private (i.e. non-institutional) investors than with other financial houses.
Banks and large mutual funds are considered (rightly or wrongly) more capable of nurturing and defending their own interests. And often well-intentioned financial services laws have made it harder for private investors to enjoy the benefits of the professional gold market - benefits like better prices and a very active and liquid market.
Opportunities for private investors
Because of these logisical and legal restrictions, private clients are nowhere near as attractive to gold brokers as other institutional clients. A professional broker could make a few hundreds of dollars to trade with you, but because of the cost of opening your account - plus the potential risks of private clients and all the administrative work - many think it is not worth it.
However, like you, can private investors get direct access to a safe and affordable gold investment through BullionVault? Read more about it here.
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