May 9, 2024

Bullion
– From French word bouillon (“boiling”)
– Gold, silver in the form of bars, ingots, or specialized (uncirculated) coins

Bullion banking
– Banking based on gold
– Uses fractional reserve system (15,000 times)
– Book money (non-allocated gold certificates – 1.5 million tonnes) is derived from base money (physical bullion – 100 tonnes).
– Around 35 bullion banks in the World
– Customers: central banks, precious metals brokers, financial institutions, investment funds, mining companies, precious metals refineries, precious metals mints, jewellery fabricators, bullion wholesalers, and industrial fabricators.

LBMA
– London Bullion Market Association (LBMA)
– Trades unallocated gold over the counter (OTC)
– Determines gold spot price
– Twice each business day, five members of The London Gold Market Fixing Ltd. meet to determine gold trading prices (“benchmarks”) – Sociét é Générale, Barclays, Deutsche Bank, HSBC, and Scotiabank
– 13 market makers – BNP Paribas, Citibank, Goldman Sachs International, HSBC, ICBC Standard Bank, JP Morgan Chase, Merrill Lynch International, Morgan Stanley & Co International, Société Générale, Standard Chartered Bank, The Bank of Nova Scotia – Scotia Mocatta, Toronto-Dominion Bank and UBS.
– 95% of Transactions in the London Precious Metals Markets are in Unallocated Metal

COMEX
– Commodity Exchange (COMEX)
– Run by Chicago Mercantile Exchange (CME)
– Operates in World Financial Center in Manhattan
– Trades cash-settled gold, silver, copper futures contracts
– Determines gold futures price
– Prices determined by free market
– Over 381,000 contracts per day
– Open for trading 24 hours a day
– Mostly used for hedging and are not typically delivered upon
– Less than 1% of the trades actually go to delivery
– COMEX does not supply precious metals

Exter Inverted Pyramid
– Created by John Exter
– Visualization of asset classes in terms of risk and size
– Gold is at base of all assests which has no counter-party risk nor credit risk
– Top of inverted pyramid is over $640 trillion in derivatives

Links:
The Secret World of Bullion Banking: Who Sets Gold Prices?
Bullion Banking
Wikipedia – Bullion
COMEX
Trading COMEX Gold and Silver
Bullion Banking Mechanics
Bullion Banking 101
John Exter’s Inverted Pyramid of Assets
The Exter Inverted Pyramid of Global Liquidity Credit risk, Liquidity and Gold
The looming derivative crisis