Sunday, 12 June 2011
CASE 311 - LMBA - London Bullion Marketing Association
The London bullion market is a wholesale over-the-counter market for the trading of gold and silver. Trading is conducted amongst members of the London Bullion Market Association (LBMA), loosely overseen by the Rothschild Bank of England. Most of the members are major international banks or bullion dealers and refiners.
To this day, N.M. Rothschild & Sons of London still lists as its primary business the selling and buying of treasuries and gold bullion. N.M. Rothschild helps fix the price of gold in London each day through the LBMA. A recent London Times articles explained that the gold price fix ceremony where five men (including a Rothschild) talk on their phones for 10 minutes, then lower tiny Union Jacks sitting on their desks, thereby fixing London's gold price each day. This ceremony takes place at 10:30 a.m. and 3 p.m., like clockwork, the same way, in the same place, and with mostly the same firms participating since the first gold fixing was enacted at Rothschild in St. Swithin's Lane on Friday Sept. 12, 1919. The company's name is also associated with many gold mining companies (e.g. Trillion Resources Ltd. and other Canadian mining companies).
Internationally, gold is traded primarily via over-the-counter (OTC) transactions with limited amounts trading on the New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM). These forward contracts are known as gold futures contracts. Spot gold is traded for settlement two business days following the trade date, with a business day defined as a day when both the New York and London markets are open for business. Unlike many commodity markets, the forward market for gold is driven by spot prices and interest rate differentials, similar to foreign exchange markets, rather than underlying supply and demand dynamics. This is because gold, like currencies, is borrowed and lent by central banks and in the interbank market. Because interest rates for gold tend to be lower than US domestic interest rates--it encourages gold borrowings so that central banks can earn interest on their large gold holdings--except in special circumstances the gold market tends to be in contango, i.e. the forward price of gold is higher than the spot price. Historically this has made it an attractive market for forward sales by gold producers and contributed to an active and relatively liquid derivatives market.