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Appendix I

Trading Gold & Silver In London On The LBMA

An OTC Market

Members of the London bullion market typically trade with each other and with their clients on a principal-to-principal basis. All risks, including those of credit, are between the two parties to a transaction. This is known as an “Over the Counter” (OTC) market, as opposed to an exchange-traded environment. Unlike a futures exchange, where trading is based around standard contract units, settlement dates and delivery specifications, the OTC market allows flexibility. It also provides confidentiality, as transactions are conducted solely between the two principals involved.

Allocated Accounts

These accounts are opened when a customer requires metal to be physically segregated and needs a detailed list of weights and assays. The client has full title to the metal in the account, with the dealer holding it on the client's behalf as a custodian.

Unallocated Accounts

An account where specific bars are not set aside and the customer has a general entitlement to the metal. It is the most convenient, cheapest and most commonly used method of holding metal. The units of these accounts are one fine ounce of gold and one ounce of silver based upon a .995 LGD (London Good Delivery) gold bar and a .999 fine LGD silver bar respectively. Transactions may be settled by credits or debits to the account while the balance represents the indebtedness between the two parties.
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The LBMA is a small market in terms of transacting participants, but since it operates as an OTC market, the transaction levels on the LBMA dwarf those of any other physical gold market in the world. Note the IMF statement earlier that nearly all loans and swaps involve unallocated gold (i.e. not audited).

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