23 September 2014

Commodity Corner

Guy Weatherall - Rule Financial

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Know your assay from your elbow...

08 August 2011  |  3111 views  |  2

Gold is heading north again this morning.  As the dollar weakens and there is a flight to safe-haven “hard” assets, gold has broken through the USD 1,700/oz barrier and continues to rise.  Last week precious metals ETFs saw major capital inflows with the biggest – the SPDR Gold Trust – attracting $1.2 bn last week (and $3.7 of inflows over the last 4 weeks).  

A lot of precious metal trading used to be on an unallocated basis, which means that you could trade ounces of gold just like dollars in a bank account but that if the bank that held your account went belly up you were just another unsecured creditor in the queue.  Now much more trading (such as the metal behind the physically-backed precious metal ETFs) is on an allocated basis ie you know which specific gold bar is yours in the vault.  Running an allocated account comes at a higher cost but you don’t run the credit risk.  This is putting a greater emphasis on the ability to handle the physical aspects of the gold market for the key players.

I know a number of banks are looking to cash in on all of this interest in the gold market by providing precious metal products and services to their clients allowing them to access the gold “safe haven”, and I expect more to follow.  The physical bullion market (as with any physical commodity market) is not a place for the inexperienced, so expect a further uptick in demand for risk, operations and technology staff who know their assay from their elbow...

TagsRisk & regulationWholesale banking

Comments: (3)

Roy McPherson - Macroy Consulting - Maldon | 08 August, 2011, 14:17

The pendulum swings again. I enjoyed working in the precious metals market during its last boom when the big foreign banks Credit Suisse, UBS, JP Morgan and Deutsche decided they wanted to play with the London pm clearers. Then they got bored with the whole thing and most closed down their PM operations.

Guy Weatherall - Rule Financial - London | 08 August, 2011, 14:27

Well JP Morgan (along with HSBC) still dominate London PM clearing.  UBS closed down commodities - apart from its PM clearing operation which is based in Zurich.  Deutsche is still very much in the London PM clearing game. 

Clearing of OTC gold through London is increasing - from Apr10 to Apr 11 (the last stats available from the LBMA) it has increased 81% from 18.3 to 33.1 million ounces. (OK LBMA OTC bullion is unallocated metal but gives an idea of the trends...)

Roy McPherson - Macroy Consulting - Maldon | 08 August, 2011, 14:39

When I came into the market it was still dominated by the London clearers NMRothschild, Mocatta, Samuel Montague, Sharps Pixley and Johnson Matthey. Credit Suisse and JPMC were the main ones to ruffle the old order and as credit ratings played a larger part began to dominate the market. Most of the original houses were bought up by bigger names. Two of the biggest OTC players at the time were Drexel and FNBB.  

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Guy Weatherall

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Rule Financial

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