EDITORIAL PAGE — London’s hot bullion market

London has served as a major crossroads of bullion trading for more than three centuries.

The oldest member of the market, the Mocatta Group, traces its history back to 1671. The Bank of England, which celebrated its tercentenary in 1994, has always had close links with the group, and today is widely regarded as the most expert of central banks in gold. Indeed, it acts on behalf of many other central banks.

Not content with that historic image, London is engaged in a series of initiatives to bolster its worldwide reputation as a trading forum, clearing house and arbiter of acceptable “good delivery” gold and silver.

“We’re aiming to raise the profile of London as the marketplace for precious metal dealing,” says Chris Elston, a former senior official at the Bank of England, who has been appointed the first chief executive of the London Bullion Market Association (LBMA), to which all traders belong. The LBMA, originally formed in 1987 to provide a formal framework for the market, under the watchful eye of the Bank of England as regulator, now has 63 members, including 16 from the U.S. and four from Canada.

Standard spot dealing amounts between these market-makers are 5,000 oz. in gold and 100,000 oz. in silver. On forwards, subject to credit limits, the market-makers quote for at least 32,000 oz. for gold swaps versus US dollars, and for at least 1 million oz. for silver.

The basic gold unit is the 400-oz. London Good Delivery bar of at least 995.0 fine, or the 1,000-oz. London Good Delivery silver bar. The London Good Delivery status represents the standard measure of quality in gold and silver set by the LBMA, which gives that accolade for gold on its current list to 56 refiners in 26 countries, while also recognizing continued Good Delivery acceptance for 32 former smelters and assayers. For silver, 69 refiners in 27 countries are recognized. The broad international membership of the LBMA is also reflected in the “famous five” of its members, who meet twice each working day. The “famous five” now include, besides N.M. Rothschild & Sons (who provides the Chairman), Midland Bank (formerly Samuel Montagu) and the Mocatta Group (now part of Standard Chartered Bank), Deutsche Bank Sharps Pixley and Republic Bank of New York.

Terry Smeeton, head of gold and foreign exchange at the Bank of England, revealed that a 1994 study by the bank showed that turnover just for spot and forward business in gold by the 14 market-making members of the LBMA was 7.5 million oz. daily. These and other London transactions are cleared through the London Bullion Clearing system, which is really the heart of the market.

Moreover, through another initiative of the LBMA, an International Bullion Master Agreement (IBMA) was signed in 1994 to provide standard documentation for all bullion transactions within the terms recommended by the Bank of England. Since October 1994, all spot, forward and option deals transacted in the London Bullion Market have been governed by the IBMA, which provides a common set of terms, together with netting arrangements for bullion transactions, thus clarifying and reducing counter-party risks.

Details of the LBMA’s current activities have also been spelled out in a new booklet, London Bullion Market, published last year. Equally important is a new quarterly magazine, The Alchemist, which provides articles on bullion market topics by traders, analysts and bankers.

The positive approach, as London brushes up its image, was summed up by Eddie George, Governor of the Bank of England, in his introduction to the LBMA’s new booklet: “While there have been challenges to London’s dominant position over the years, it continues, to this day, to be the most truly international centre, with participation from all the world’s leading bullion market-players.”

— From “Gold News,” the newsletter of The Gold Institute in Washington, D.C..