You might be surprised to learn that the gold prices you see listed in newspapers and on television are not actually available to you as a private investor. Those prices are extended only to members of the Professional Gold Trade, which is a group comprised of bullion banks, dealers, gold refiners and government agencies.
These professional gold traders deal only in ‘good delivery bars’, which are gold bars certified to be at least 99.5% pure gold, according to specifications set forth by the London Bullion Market Association. The people who assay and certify gold bars for their purity are refiners in Zurich, New York City and London.
The London Bullion Market Association
The London Bullion Market Association (LBMA) is a trade association of professional gold traders representing the bulk of the over-the-counter (OTC) market for gold, which is far greater in comparison to the gold traded on stock exchanges internationally. The association has more than 120 members from 20 different countries, and acts as coordinator of all gold trading activities in the London bullion market on behalf of its members, serves as the point of contact with all regulatory bodies in the bullion market, and generates documentation as needed relative to its member activities.
The LBMA also holds the rights for establishing gold prices all around the world, which it does twice each business day in dollars, euros and pounds sterling. Gold auctions are held twice daily at the same time, and the bulk of all trade in gold bullion occurs here in over-the-counter fashion. All gold traded at these auctions must meet good delivery certification, and all LBMA-gold bars are guaranteed to be at least 99.5% pure.
The LBMA is very important to American gold investors and investors all around the world because it sets the specifications for Good Delivery bars of gold and will not allow gold to be traded among members unless it meets those specifications for purity. In fact, no gold refiner can even be listed on the Good Delivery List unless sanctioned by the LBMA.
The de facto standard for gold bars is thus tied to the Good Delivery List, since only bars produced by refiners on that list are guaranteed to be pure and can claim to be LBMA-approved bullion. Any purchase of gold bars that were produced by refiners not on the Good Delivery List can be a risky venture, since quality and purity have no recognized sanction.
Elements of the London OTC Market
There are five distinct functions of the London OTC bullion market, and these are associated with the transactions between any two members of the LBMA.
- First, all bullion transactions conducted are cleared through the London Precious Metals Clearing organization.
- The second function allows for physical gold to be vaulted and maintained by seven LBMA members, who act as ‘gatekeepers’ of the market.
- The third function is to establish and maintain the Good Delivery List, so that refiners are held to high standards of purity and quality.
- Fourth, the setting of prices through the ICE Benchmark Association (IBA) establishes the global standard for gold prices.
- Lastly the market provides for both allocated and unallocated accounts, which refer to specific and non-specific entitlement to actual gold bars.
There are other gold trading centers in the world of course, but the vast majority of international bullion trading occurs in London, England, so investors around the globe look for LBMA-approved gold bullion when in the market.