How The Gold Industry Functions:
A select few nations—China, South Africa, the United States, Australia, Russia, Canada, Peru, and Indonesia—produce the majority of the world's gold. A dore bar, or raw gold, is created at gold mines. These bars generally contain roughly 80% pure gold. The gold is then transported to a refinery, where it is transformed into gold of various types and degrees of purity.
The London Good Delivery bars are maybe the most often made gold bars. According to LBMA regulations, these bars—the gold standard of the gold industry—must be at least 99.5 percent pure gold, weigh between 350 and 430 ounces (the majority are around 400 ounces), and be inscribed with a special serial number, the fineness, and the refiner's seal.
Who Can Produce These Bars?
Only refiners that the LBMA has authorized. They are required to maintain top-notch manufacturing and laboratory facilities, and these refineries on the good delivery list are actively monitored. These are often the sole bars that bullion institutions use for vaulting and storage.
The mining business will probably control the gold up to this stage, however sometimes a gold bullion bank may fund the mine's operations as well. Ownership of the gold is often transferred to gold bullion banks once it has been processed.
What Follows After That?
Wherever gold may be required, it will often be carried by aircraft to a bank vault in another nation, such the United States, the United Kingdom, Dubai, India, China, and Australia.
The Function of Gold Banks:
The intermediary in the gold market is the bullion banks. Although gold is produced by miners, it may not always be available when buyers wish to purchase the commodity. Therefore, the banks serve as a form of clearing house; producers may sell to the bank when they desire to do so. Customers may purchase from the bank whenever they wish to.
A bullion bank functions similarly to a typical bank in many ways. The entire wholesale gold market is serviced by them, including large miners, large users like the jeweler and industrial industries, central banks, and significant investors like ETFs. The main consumer markets, including China, India, the Middle East, and Turkey, get enormous quantities of wholesale metal from them.
They provide services like finance and metal delivery, for instance. Gold bullion banks may thus advance the metal for an Indian company if they are producing a product, say, in Turkey or Switzerland.
Spot trading, forwards, options, vaulting, and other sorts of trading services are also offered by the bullion banks.
Deciding on A Gold Price:
Supply and demand affect the price of gold. There are several gold markets, not just one. The crucial ones are as follows:
There are OTC markets in other cities as well, including New York, Dubai, and even Turkey, but London is the main OTC market where the "spot" or cash price of gold is set. A large portion of gold trading takes place on gold trading desks all around the globe in the over-the-counter market.
Why are these desks used?
They make trading easier. On behalf of their customers (miners, central banks, ETFs, jewellery and industrial manufacturers, etc.), they trade gold, but they also sometimes do it for their own accounts. Additionally, some customers desire to lease or borrow the actual metal.
The London fix,
which serves as the major benchmark price for gold, and the gold futures market, the biggest of which is in the United States. The fixing's main goal is to provide a marketable benchmark price.
The London fix's mechanism:
Every day, there are two "fixings": a morning fix at 10:30 and a PM fix at 3 o'clock. The five members of the fixing are HSBC, Deutsche Bank, Barclay's, Societe Generale, and ScotiaMocatta, and the fixing is really a corporation named the London Gold Fixing Limited.
Each fixing member has a connection to other dealers, and there is a chairman. Like a pyramid structure, the chairman sets the price, the five members communicate it to their customers, who then communicate it to other parties who may be interested.
So a client can say, for instance, "I'd like to purchase 10 bars at this price, but I won't buy 10 bars at this price; or I'd want to sell 10 bars or 20 bars at this price." Therefore, every consumer farther down the pyramid has the chance to complete a transaction at every stage of the price-fixing process, up until the chairman announces the price to be set.
At some point, each of the five fixing members states whether he is a buyer, seller, or has no interest. The chairman will ask each member to declare the number of bars they want to sell or buy based on the buying and selling interest of their clients, once the members have reached a point where there is some equilibrium between buyers and sellers, the chairman will declare the price "fixed."
From Repair To Customer:
Why even have a fixing?
It offers a baseline price that may be traded. If gold is a component of a portfolio, you must have a method for valuing such assets. Because it is open, transparent, and marketable, the fixing, which is a price at which buyers and sellers are matched at a certain time of day, serves as a highly reliable benchmark price.
Why doesn't gold trade at dramatically disparate prices when there are many distinct gold values across the world?
Because gold is often purchased and sold by arbitrageurs (typically on gold trading desks).
How is it delivered to the customer?
About half of the world's gold production is used to make jewelry, despite the fact that most of it is vaulted (kept for investors like ETFs or central banks).
Consider India, which is the world's greatest consumer of gold. In the Indian market, a bank would normally be a wholesaler. They will communicate with a bullion bank and state things like, "I would need 2 tons of one-kilogram gold bars with a purity level of 99.5." If the bullion bank has gold of such weight and purity, they may send it to the Indian bank. They can send the gold they have to a refinery that can refine it to the specifications the bank requires, and then ship it from the refinery to the bank in India if they do not immediately have that type of gold available but do have it in another form (different size bars or different purity level). The gold will then often be sent by the bank to a significant jewelry maker (often on consignment).
Leasing is utilized for a lot of the gold used in jewelry. Users borrow gold to reduce their exposure to the possibility of a decline in gold prices. The bank retains ownership of the gold, and they pay a charge to borrow it. When a completed product is created, ownership is transferred.