1. Agents and instruments of the physical gold market

Physical gold is principally traded in the form of bullion, but official and imitation gold coins, medallions, and jewelry (especially that of low fabrication quality but of high gold content) are also actively traded. However, because gold must first be formed into bullion, and must later be transformed for these other markets, this study is concerned purely with the market for gold bullion. ^6/ Gold bullion is assumed to refer to gold that has been formed into bars, either in crude daré (80 percent fine) as treated at the mine site, or as defined by weight and greater fineness and authenticated by the stamp of a recognized refinery. Each of the major markets defines an acceptable measure of weight and fineness for “good delivery” in that market, with some variations. Weights range from 1 kilogram (32.151 troy ounces) to 400 ounces. When refined, gold bars generally consist of between 995 and 999 parts of gold per thousand (i.e., between 99.5 and 99.9 percent fine). ^7/

Bullion markets generally serve as a conduit between large gold suppliers (such as producers, refiners, and central banks) and smaller investors and fabricators. ^8/ The physical gold market is essentially a spot market, but it is complemented by the use of forward trading for the hedging of physical positions. ^9/ Trading is interoffice (or off-the-floor), with prices quoted by individual traders (except in the case of a fixing, when agents come together to agree on a price). Market participants comprise bullion dealers, who act as principals, adopting open positions in the market; brokers, who close their positions by either matching transactions for a commission or simultaneously buying and selling on a spread; and bullion bankers, who finance these transactions. However, many gold houses combine these functions. Also, dealers generally either have their own refining capacity or have it available to them.

Bullion dealers usually put a floor on the price offered to their suppliers from the mining industry, whether it is the spot price or some mutually agreed forward price, with the funds being made available to the mining company as refined gold is issued to the dealer’s account. These positions are normally hedged by the dealer through forward sales near the spot price or by short sales on the futures market, depending on the floor price offered. Forward sales, in turn, guarantee a price ceiling for the dealer’s customer, and the dealer may require that a margin be paid if the gold price drops prior to delivery. However, dealers and bullion banks also provide gold to their customers in the wholesale jewelry industry on consignment, whereby the jeweler buys the bullion content of the finished goods only when the goods are received from the fabricator and priced to retailers, rather than prior to fabrication. This allows jewelry wholesalers to avoid tying up capital during fabrication and to hedge their bullion transactions while guaranteeing a value added in fabrication.

Two of the main disadvantages of investing in and holding gold (as opposed to a financial instrument) are the significant storage and security costs involved and the fact that holding gold does not bear interest. For these reasons, many large-scale gold holders who do not wish to liquidate their stocks, but do want to make better financial use of them, arrange to relinquish them temporarily. In the interim, these erstwhile gold holders can use the funds secured in parting with their gold to acquire and hold interest-bearing instruments. One obvious method for accomplishing this is to sell gold on the spot market and then buy gold back on the same market at some time in the future. However, as such a strategy would be open to the possibility of an interim increase in the gold price, it is usually regarded as being too risky. Another strategy that can be undertaken in the physical gold market is to hedge against adverse price movements by making a spot sale and forward purchase simultaneously. In this case, the difference is that although one is protected from the possibility of a price rise prior to repurchase, one will not reap a windfall gain if prices fall.

Each of the strategies outlined above has the disadvantage that it involves relinquishing the ownership of gold stocks, albeit with the intention of replacing them. For those holders of gold, principally central banks, who may be constrained in their latitude to sell reserves but wan: to utilize their gold stocks without relinquishing ownership, a market in gold loans has developed since the mid-1980s. These loans involve a transfer of bullion to the borrower and earn a relatively low rate of interest for the lender, who is repaid in physical stocks over time at a predetermined maturity (usually of 4-6 years, with an initial grace period of l-2 years). The borrowers in this market are typically gold producers who immediately sell the gold they have acquired on the spot market and thereby gain the cash to finance production at a relatively low rate of interest while securing a natural hedge against any future reduction in gold prices. Producers have greater access to capital in this form because their ability to repay a loan denominated in terms of units of gold will not be diminished by adverse movements in the price of gold. Central banks and other lending institutions, which have a primary interest in having gold stocks returned and do not want to adopt an open position in the market, feel more secure in the knowledge that the quality of their physical loans is not affected b!; price movements in the spot market. This is because the bullion banks, which act as intermediaries in this market, take exactly offsetting long and short positions in terms of physical gold. ^10/ There is also a market in short-term loans in which bullion dealers sometimes obtain loans from bullion banks in order to cover the time interval between delivery to a market and an expected inflow from another source.

Some large-volume holders of gold, who have an interest in utilizing some of their stocks but whose direct participation in the spot market could have an adverse effect on prices, have chosen instead to engage in gold swaps. This type of transaction applies in particular to the U.S.S.R. and the South African Reserve Bank. Gold swaps involve the transfer of bullion to a dealer in exchange for currency, with an agreed forward price at which the gold will be repurchased when the swap comes due (usually 12-13 months). At that time, the swap can either be renewed or terminated (in which case the bullion is returned to the original owner) or the gold can be transferred to the bullion dealer and either added to the dealer’s reserve or sold on the spot market. While the net effect of this transaction is similar to a simultaneous spot sale and forward purchase of gold, the difference is that the counterparties on each side are the same, so that an inter-dealer market transaction is avoided, with no direct effect on the market. An implicit interest rate is charged because of the difference between the agreed spot and forward rates, but for this the gold holder is able to acquire cash against gold collateral.

The term “gold swap” has become synonymous with the type of transaction described above, but it may also be used to describe swaps of gold of different fineness or at a different location between dealers and others engaged in the market. Such swaps are relatively easy to effect, and they reduce significantly the transaction costs involved in meeting the different needs of customers and the requirements of markets. In particular, locoswaps allow gold that is physically situated in one market to be sold on another, with “delivery” being accomplished through a swap.

2. Paper gold instruments

Paper gold instruments represent claims to a specified quantity and fineness of gold. Transactions in these instruments are generally performed for speculative and hedging purposes, and they rarely involve the actual transfer of physical gold. On the New York Commodity Exchange (COMEX), for example, 8.4 million futures contracts of 100 ounces each were traded in 1986, but only 1.2 percent of the gold involved actually changed hands. ^11/ Nevertheless, these transactions represent an integral part of the gold market, especially because of gold’s role as an investment instrument.

1. Annual demand and supply

In theory, the annual supply to bullion markets should be equal to turnover and demand, but in practice it is impossible to estimate turnover and far less possible to estimate all of its sources of supply. For this reason, analysts have confined themselves to estimating sources of supply of new gold (conventionally measured as western world mine production and net sales from socialist countries) and have augmented this figure with estimates of major changes in the composition of existing gold stocks. The major estimable sources of stocks that have been retired from a prior use and returned to the free market in bullion form are sales of scrap metal and net sales from official gold holders. These figures have therefore been included in estimates of what will be termed net annual market supply.

The annual supply of new gold bullion from mining and net socialist sales has risen steadily during the 1980s. It is estimated to have averaged 1,718 tons per year in 1985-89. ^15/ South Africa still dominates gold production, and supplied an average of 37 percent of new gold in 1985-89. The U.S.S.R. is estimated to have been the second largest producer, supplying 18 percent, ^16/ and the United States supplied 9.5 percent. The inclusion of net official sales by central banks and other official institutions, which actually absorbed an average of 82 tons a year in 1985-89, and the supply of gold scrap from the melting of coins and jewelry, which averaged 363 tons a year, ^17/ brought the total net bullion supply to the private sector during 1985-89 to an average of 2,000 tons a year. ^18/

Net market demand is even more difficult to estimate. Of the 2,000 tons supplied, 1,770 tons are estimated to have been absorbed in fabrication during 1985-89, ^19/ and the remainder represents implied net private bar hoarding of 230 tons. Information on these residual flows for hoarding purposes is the most elusive. Estimates must rely on observed cross-border movements, but even these are generally not available for Europe and North America, ^20/ and market stocks in London and Zurich are not revealed. ^21/ Therefore, estimates of the geographical distribution of hoarding are limited to countries outside Europe and North America, with the residual assumed to have been hoarded in Europe or North America. During 1985-89, identified bar hoarding in the Far East averaged 273 tons a year; on the Indian subcontinent, 11 tons a year; in the Middle East, 24 tons a year; and in Latin America, 43 tons a year. This implies that an average of 121 tons a year were dishoarded from Europe and North America over the period.

The breakdown of net market demand and supply given here is used by market analysts to project likely developments in market fundamentals and prices. ^22/ However, behind this estimated breakdown of net market demand and supply from the different categories, there are a multitude of gross flows that have been netted out, in particular with regard to net private hoarding and dishoarding and net official transfers, and these must obviously have had an effect on day-to-day transactions in the market. Although it is not possible to estimate these transactions, it is possible to reclassify some of the component net gold flows outlined above in order to come closer to an estimate of gross flows and to illustrate better their effect on the market. Since 1989, Consolidated Gold Fields has estimated “gross annual bullion supply and demand” according to whether net investment flows have been negative or positive. This leads to a larger estimate of supply and demand because, for example, net official purchases (if they occur) will be added to demand rather than being subtracted from supply, while net official sales (if they occur) will still be added to supply. More precisely, the approach is to reclassify net flows to or from a particular category as either supply or demand in each year, depending on whether they constituted a net supply to, or demand from, the market. While the resulting figures are still broad estimates, their recategorization makes for a better representation of the positions adopted by certain sets of market participants in each year. On the basis of such a representation of the structure of the market, annual market demand and supply averaged 2,305 tons in 1985-89 (instead of 2,000 tons, according to the earlier definition). These gross estimates are illustrated in Chart 2 for the period 1968-89, and Table 1 details these estimates of market supply and demand for the period 1985-89.

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Gold Bullion: Supply And Demand, 1968 - 90

(In metric tone)

Citation: IMF Working Papers 1991, 120; 10.5089/9781451939590.001.A001

SOURCE: Gold Fields Mineral Services Ltd.. Gold (varioue yearn).

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Table 1.

Annual Bullion Supply and Demand, 1985-89

(In metric tons)

Source: Gold Fields Mineral Services Ltd., Gold (1990).

^1/Outside Europe and North America.

^2/Assumed to represent Europe and North America.

Table 1.

Annual Bullion Supply and Demand, 1985-89

(In metric tons)

		1985	1986	1987	1988	1989
Supply
	New mine production	1,236	1,296	1,383	1,551	1,653
	Scrap	304	474	407	328	304
	Socialist sales	210	402	303	263	296
	Official sales	—	—	—	—	225
	Bar dishoarding 1/	—	—	—	—	—
	Residual disinvestment 2/	175	—	—	468	246
Demand
	Fabrication	1,487	1,687	1,606	1,866	2,207
	Socialist purchases	—	—	—	—	—
	Official purchases	132	145	72	285	—
	Bar hoarding 1/	306	214	258	459	516
	Residual investment 2/	—	126	157	—	—
	Total supply or demand	1,925	2,172	2,093	2,610	2,723

Source: Gold Fields Mineral Services Ltd., Gold (1990).

^1/Outside Europe and North America.

^2/Assumed to represent Europe and North America.

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Table 1.

Annual Bullion Supply and Demand, 1985-89

(In metric tons)

		1985	1986	1987	1988	1989
Supply
	New mine production	1,236	1,296	1,383	1,551	1,653
	Scrap	304	474	407	328	304
	Socialist sales	210	402	303	263	296
	Official sales	—	—	—	—	225
	Bar dishoarding 1/	—	—	—	—	—
	Residual disinvestment 2/	175	—	—	468	246
Demand
	Fabrication	1,487	1,687	1,606	1,866	2,207
	Socialist purchases	—	—	—	—	—
	Official purchases	132	145	72	285	—
	Bar hoarding 1/	306	214	258	459	516
	Residual investment 2/	—	126	157	—	—
	Total supply or demand	1,925	2,172	2,093	2,610	2,723

Source: Gold Fields Mineral Services Ltd., Gold (1990).

^1/Outside Europe and North America.

^2/Assumed to represent Europe and North America.

2. Composition of existing stocks

In 1800, some 4,200 tons of gold were thought to have been above ground. and this stock is estimated to have quadrupled by 1941. By 1968, the stock had risen to almost 70,000 tons, of which 36,192 tons (or 52 percent) belonged to official monetary institutions, and at the end of 1989 estimated cumulative gold production was over 100,000 tons. ^23/ Of this total, over one third is still held by central banks and other official institutions (see Table 2). Similar (but smaller) proportions are attributable to jewelry and private holdings of bars and coins. At the end of 1989, the gold stock (excluding that lost or used in industry) was almost 50 times the annual supply of new gold from mines.

Table 2.

Distribution of Holdings of Cumulative World Gold Production, December 31, 1989

Sources: CPM Group, Precious Metals: Gold (1990. pp. 38-39); Green (1981); IMF, International Financial Statistics. November 1990; and Gold Fields Mineral Services Ltd., Gold (various years). Note: Figures are subject to revision if official data (e.g., U.S.S.R. reserves) become available or are revised.

Table 2.

Distribution of Holdings of Cumulative World Gold Production, December 31, 1989

Gold holdings			Metric tons	Percent of total
Central bank holdings			29.204	28.0
	United States		8,147
	Germany, Federal Republic of		2,960
	Switzerland		2,590
	France		2,546
	Italy		2,074
	Netherlands		1,367
	Belgium		941
	Japan		754
	Austria		640
	United Kingdom		591
	Other industrial countries		2,207
	Developing countries		4,387
Other official stocks			6.335	6,1
	International Monetary Fund		3,217
	European Monetary Cooperation Fund		2,912
	Bank for International Settlements		206
U.S.S.R. gold reserves			2,300	2.2
Jewelry and decorative gold			29,550	28.3
Private stocks			24,660	23,6
	Post-1968 coins		3,574
	Post-1968 bar hoarding
		Latin America	272
		Middle East	385
		India	155
		Far East	2,740
		Europe and United States	675
		Other	32
Pre-1968 bar hoarding
		France	5,000
		Other	11,827
Industrial or lost gold			12,300	11.8
	Total		104,350	10,00

Sources: CPM Group, Precious Metals: Gold (1990. pp. 38-39); Green (1981); IMF, International Financial Statistics. November 1990; and Gold Fields Mineral Services Ltd., Gold (various years). Note: Figures are subject to revision if official data (e.g., U.S.S.R. reserves) become available or are revised.

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Table 2.

Distribution of Holdings of Cumulative World Gold Production, December 31, 1989

Gold holdings			Metric tons	Percent of total
Central bank holdings			29.204	28.0
	United States		8,147
	Germany, Federal Republic of		2,960
	Switzerland		2,590
	France		2,546
	Italy		2,074
	Netherlands		1,367
	Belgium		941
	Japan		754
	Austria		640
	United Kingdom		591
	Other industrial countries		2,207
	Developing countries		4,387
Other official stocks			6.335	6,1
	International Monetary Fund		3,217
	European Monetary Cooperation Fund		2,912
	Bank for International Settlements		206
U.S.S.R. gold reserves			2,300	2.2
Jewelry and decorative gold			29,550	28.3
Private stocks			24,660	23,6
	Post-1968 coins		3,574
	Post-1968 bar hoarding
		Latin America	272
		Middle East	385
		India	155
		Far East	2,740
		Europe and United States	675
		Other	32
Pre-1968 bar hoarding
		France	5,000
		Other	11,827
Industrial or lost gold			12,300	11.8
	Total		104,350	10,00

Sources: CPM Group, Precious Metals: Gold (1990. pp. 38-39); Green (1981); IMF, International Financial Statistics. November 1990; and Gold Fields Mineral Services Ltd., Gold (various years). Note: Figures are subject to revision if official data (e.g., U.S.S.R. reserves) become available or are revised.

Most official gold is stored in the United States, with some 10,000 tons placed at the Federal Reserve Bank of New York by foreign and international institutions. The U.S. gold reserves of 8,147 tons are stored at Fort Knox in Kentucky and West Point in New York. At a market price of $350 per ounce, total official gold holdings would be worth $400 billion, but about half of these institutions value their gold holdings at some historic price far below the market price. ^24/ Central bank holdings alone would be worth some $330 billion at $350 per ounce. and, even though the official role of gold in the world’s monetary system has ended, gold reserves are still an important component of international reserves. At the end of 1989, gold reserves at market prices accounted for 33 percent of the value of total central bank reserves, and this proportion had actually increased slightly since 1971 (when it was 32 percent), having reached an interim peak of 58 percent at the end of 1980. ^25/ Clearly, central banks still have a large role to play in the gold market, even if it is a passive one.

The U.S.S.R. has long maintained absolute secrecy regarding its annual gold production, stocks, and sales to the West. ^26/ In 1935, the Soviet Government announced that gold output for the year totaled 150 tons and that reserves amounted to 745 tons. ^27/ The next official announcement was made on February 22, 1991, when it was revealed that the U.S.S.R. placed 234 tons of gold on the market in 1990 to pay for food imports. ^28/ Precious Metals: Gold (CPM Groups, 1990) provides estimates of Soviet production, sales, and implied reserve accumulation since 1950, and it is on the basis of such estimates that reserves at the end of 1989 were placed at some 2,300 tons. This estimate appears to have been generally acceptable to industry analysts, but the range (including possible error) was put at 2,000-2,500 tons. It is likely that a large part of the total was held outside Gosbank. These estimates may be compared with recent unofficial information from the U.S.S.R. Soviet economist Grigory Yavlinsky has maintained that the U.S.S.R. had a total of 390 tons of gold in October 1991, of which 150 tons had been swapped. He has also said that 700 tons had been exported since the end of 1989. ^29/ Former Prime Minister Nikolai Ryzhkov has stated that the gold reserve was 784 tons at the end of 1989, and sold 250 tons during 1990, ^30/ and a current Gosbank official, Alesander Doumnov, has stated that Gosbank had 375 tons in reserve in mid-1991. ^31/ It is not clear whether Yavlinsky was referring to total stocks, or to a second reserve held outside Gosbank, perhaps at the Finance Ministry. Because these recent announcements have not been sufficiently clear as regards gold held outside Gosbank, a number of market analysts now believe that total U.S.S.R. reserves as of mid-1991 are in the range of 1,000-2,000 tons. ^32/

Bar hoarding since 1968 has been estimated by Gold Fields Mineral Services ^33/ but it is advisable to bear in mind that European and North American accumulation has been compiled as the residual demand in each year and may not be very accurate. Bar hoarding prior to 1968 is not very well identified, but French individuals are generally considered to have accumulated 5,000 tons in the inter-war years and immediately after. Altogether, some 50 percent of the gold stock is in private hands and (at least theoretically) is available to enter the market in response to price changes. It is, however, difficult to provide a systematic analysis of the manner in which stocks respond to price increases because, as noted earlier, many gold movements are netted out in the data. Timothy Green (1981) of Gold Fields Mineral Services cites a number of instances in which dishoarding has occurred, including the time when a sterling devaluation of 50 percent in 1932 initiated dishoarding from India that was equal to total South African production for that year. The most recent episode occurred in response to the price increases of late 1979 and 1980. The doubling in the average annual price of gold at that time ostensibly caused a reduction in hoarding outside of Europe and North America by 168 tons from 1978, while hoarding in Europe and North America increased by 154 tons. This effect indicates the market forces that prevailed, with speculative demand in the major markets attracting external stocks, but the implied net aggregate dishoarding of only 14 tons completely disguises the extent of the shifts in existing stocks. To a large extent, aggregate stock equilibrium was adjusted through the redirection of annual supply.

Gold use from all sources in the fabrication of carat jewelry fell sharply in 1980, falling to 128 tons from 728 tons in 1979 (and 1,004 tons in 1978). Total fabrication demand in the noncommunist world fell by 780 tons to 540 tons, but this drop in demand was more than offset by a fall in supply caused by both a reduction in net socialist sales and a switch to net official purchases amounting to 883 tons. However, there was a large increase in the supply of gold from scrap. Although exact data are not available, the flow of gold from jewelry to speculative holdings through the scrap market has been vividly described by Green (1981), after prices peaked on January 19, 1980. Initially, the loco-London price gained a substantial premium (in some cases, 40 percent) over small local markets (principally in the Middle East and Far East). Then, according to Green (1981, page 28), “within a very few days a wave of reselling of jewelry and coin on an unprecedented scale developed.” Green continues (page 29):

The scale of individual dishoarding was often substantial. I was in the Kuwait souk the day gold hit $850. The street of gold shops was under siege. Perhaps two or three thousand people milled around, fighting their way into the overcrowded shops with cigar boxes and biscuit tins crammed with bangles and necklaces. The goldsmiths weighed the ornaments—often two or three kilos from one woman [worth $50,000-$75,000]—and paid cash. Those ornaments were melted down in a nearby basement and the rough gold bars air-freighted to London and Zurich the same night.

Green also estimates that some 200 tons of gold returned to the main markets (London and Zurich) in early 1980, while an additional 100 tons returned to subsidiary markets (such as Hong Kong) and eliminated the need for buying from Europe to meet investment demand there. ^34/ The main impediments to further flows, on the other hand, were a cash shortage in the subsidiary markets and constraints on the capacity to refine scrap to loco-Europe quality once it had arrived there. By late March 1980 the price of gold had fallen to $474 an ounce.

3. Annual supply to bullion markets

As a rule, the organizers of the physical gold markets do not reveal information on turnover or on the volume that moves through the market on an annual basis, in order to protect the confidentiality of transactions by individual customers. However, some information can be gleaned from the trade figures of the countries involved. Although all physical gold flows through a particular country are not actually transacted on local markets, ^35/ such an assumption seems a reasonable approximation. In fact, the reluctance on the part of Switzerland and the United Kingdom to provide detailed trade figures may be an indication that these statistics would be of use in determining the flows of gold to the market.

Table 3 provides estimates of the size of physical gold flows from the gross annual gold supply through the various physical gold markets in 1989. The figures on new gold and scrap are very reliable ^36/ and these have been combined with estimates of official sales and residual disinvestment in Europe and North America in order to conform to the definition of supply offered in subsection 1 above (and used in Table 1). The estimated breakdown of residual disinvestment has been based on rough calculations of total demand in the United Kingdom, the United States, and Switzerland, ^37/ with “Other Europe” treated as the ultimate residual. An attempt is then made to trace the total supply (2,723 tons) through the various bullion markets and ultimately to total demand which, in accordance with section 1 above, comprises fabrication demand and identified bar hoarding outside Europe and North America. Table 3, in particular cols. (3) and (ll), has been constructed by attempting to make estimates of unknown flows conform to the available information, and by filling any remaining gaps on the basis of anecdotal evidence on flow trends or available proxies. Thus, it should be regarded as reflecting some errors and omissions. ^38/ The general approach has been to leave as few residual values as possible and to estimate these on the basis that the total in the relevant column must either conform to the total in another (as with clos. (4 and 5) and (6 and 7)) or sum to zero (as in cols. (10 and 11)). There is often more than one residual for a particular row or column, but because the data must be consistent for the rows as well as the columns, it was possible to reduce their number significantly. For example, if an item is one of two unknowns in a particular column, but is the only unknown for a row, its identification from the row will also identify the other unknown in the column.

Table 3.

Estimated Composition of Supply and Demand in World Bullion Markers. 1989

(In metric tons)

Sources for colums: (l-2) Gold Fields Kineral Services. Gold (1990). (3) The aggregate figure is a residual, representing implied disinvestmencs in Gold Fields Mineral Services, Gold (1990). The breakdown is based on U.K. and Swiss trade data. as supplaented by estimates in Montagu (1990). with “Other Europe” demand as the residual. (4) For the United Kingdom, see Table 4. Switzerland is assumed to eccepc residual Latin American supplies (after the United States and Canada), and most of orher Africa, Europe, Asia. Oceania. and the Niddle East. All Australian figures are from CPM Croup, precious Metals: Gold (1990). Estimates for the Far East assume that: supplies from the United Kingdom and Switzerland (col. 5) are equal and distributed according to local market size. (5) United Kingdan (see Table 4) is assumed to be destined for Far East. and Switzerland is assumed to be equal to that for the United Kingdom; Latin America is assumed to export, for refining, everything but local Brazilian demand. Others have limited refining capacity and export indigenous supplies. (6) For United Kingdom, see Table 4: Switzerland is the residual import figure (from Table 5) after the entry in col. (4). (7) South Africa and the socialist countries export gold in well-refined form; Canada and the United States are residual estimates. For Australia, see col. (4) sources. (8) Gold Fields Mineral Services (1990). Net official sales of all corrntries are here assumed to have been carried out in London. (9) Derived as cols. 1+2+3+4+6+8-5-7. (10-11) Hong Kong and Singapore are residuals but conform to net flows, in Hontagu and Company (1990). Other figures are estimated. so that, when combined with col. (9). they conform to local market demand. (12) Equal to cols. 9+10+11; also equal to cols. 13+14. (13-14) Gold Fields Mineral Sevices, Gold (1990).

^1/New gold is defined as newly mined gold and net sales from the U.S.S.R. and other socialist countries.

^2/Unrefined gold is here defined as gold not conforming to Loco-London standards of fineness or bar weight.

^3/Loco-London weight and fineness; may be transformed at destination.

^4/Primary market supply signifies gold that has first come to market; secondary market supply signifies gold that is resold on a secondary market.

^5/Net imports differ from secondary market supplies because they are not resold at destination.

^6/Identified bar hoarding, except in Europe and North America where it is assumed to be the residual supply (in col. 3).

Table 3.

Estimated Composition of Supply and Demand in World Bullion Markers. 1989

(In metric tons)

					Unrefined 2/		Loco-London 3/			Market Supply 4/
Region		New gold 1/ (1)	Scrap gold (2)	Residual disinvestment (3)	In (4)	Out (5)	In (6)	Out (7)	Official sales (8)	Primary (9)	Secondary (10)	Net imports 5/ (11)	Local Supply equal to local demand (12)	Fabrication demand (13)	Bar hoarding 6/ (14)
South Africa		608	—	—	—	—	—	608	—	—	—	13	13	13	6-
Other Africa		67	4	—	—	71	—	—	—	—	—	31	31	31	—
U.S.S.R.		280	—	—	—	—	—	280	—	—	—	—	—	—	—
Other socialist countries		16	—	—	—	—	—	16	—	—	—	—	—	—	—
Switzerland		—	2	108	230	200	782	—	—	922	–247	–633	42	42	—
United Kingdan		1	4	–4	12	203	621	—	225	656	–237	–378	41	41	—
Other Europe		20	23	129	—	23	—	129	—	20	10	533	563	563	—
United States		259	42	13	160	—	29	55	—	448	–63	–184	201	201	—
Canada		158	5	—	61	—	—	177	—	47	—	—	47	47	—
Latin America		229	35	—	—	164	—	—	—	100	—	55	155	61	94
Autralia		197	—	—	7	5	—	167	—	32	—	–17	15	15	—
Other Oceanle		43	—	—	—	43	—	—	—	—	—	—	—	—	—
Japan		11	13	—	100	—	—	—	—	124	51	142	317	198	119
Hong Kong		—	3	—	203	—	—	—	—	206	220	–330	96	66	30
Singapore		—	3	—	100	—	—	—	—	103	127	–202	28	23	5
Other Asia		60	26	—	—	80	—	—	—	6	20	569	595	379	216
India subcontinent		—	59	—	—	—	—	—	—	59	10	201	270	261	9
Middle East		—	84	—	—	84	—	—	—	—	109	200	309	265	44
	Total	1,949	303	246	873	873	1,432	1,432	225	2,723	0	0	2,723	2,206	517

Sources for colums: (l-2) Gold Fields Kineral Services. Gold (1990). (3) The aggregate figure is a residual, representing implied disinvestmencs in Gold Fields Mineral Services, Gold (1990). The breakdown is based on U.K. and Swiss trade data. as supplaented by estimates in Montagu (1990). with “Other Europe” demand as the residual. (4) For the United Kingdom, see Table 4. Switzerland is assumed to eccepc residual Latin American supplies (after the United States and Canada), and most of orher Africa, Europe, Asia. Oceania. and the Niddle East. All Australian figures are from CPM Croup, precious Metals: Gold (1990). Estimates for the Far East assume that: supplies from the United Kingdom and Switzerland (col. 5) are equal and distributed according to local market size. (5) United Kingdan (see Table 4) is assumed to be destined for Far East. and Switzerland is assumed to be equal to that for the United Kingdom; Latin America is assumed to export, for refining, everything but local Brazilian demand. Others have limited refining capacity and export indigenous supplies. (6) For United Kingdom, see Table 4: Switzerland is the residual import figure (from Table 5) after the entry in col. (4). (7) South Africa and the socialist countries export gold in well-refined form; Canada and the United States are residual estimates. For Australia, see col. (4) sources. (8) Gold Fields Mineral Services (1990). Net official sales of all corrntries are here assumed to have been carried out in London. (9) Derived as cols. 1+2+3+4+6+8-5-7. (10-11) Hong Kong and Singapore are residuals but conform to net flows, in Hontagu and Company (1990). Other figures are estimated. so that, when combined with col. (9). they conform to local market demand. (12) Equal to cols. 9+10+11; also equal to cols. 13+14. (13-14) Gold Fields Mineral Sevices, Gold (1990).

^1/New gold is defined as newly mined gold and net sales from the U.S.S.R. and other socialist countries.

^2/Unrefined gold is here defined as gold not conforming to Loco-London standards of fineness or bar weight.

^3/Loco-London weight and fineness; may be transformed at destination.

^4/Primary market supply signifies gold that has first come to market; secondary market supply signifies gold that is resold on a secondary market.

^5/Net imports differ from secondary market supplies because they are not resold at destination.

^6/Identified bar hoarding, except in Europe and North America where it is assumed to be the residual supply (in col. 3).

View Table

Table 3.

Estimated Composition of Supply and Demand in World Bullion Markers. 1989

(In metric tons)

					Unrefined 2/		Loco-London 3/			Market Supply 4/
Region		New gold 1/ (1)	Scrap gold (2)	Residual disinvestment (3)	In (4)	Out (5)	In (6)	Out (7)	Official sales (8)	Primary (9)	Secondary (10)	Net imports 5/ (11)	Local Supply equal to local demand (12)	Fabrication demand (13)	Bar hoarding 6/ (14)
South Africa		608	—	—	—	—	—	608	—	—	—	13	13	13	6-
Other Africa		67	4	—	—	71	—	—	—	—	—	31	31	31	—
U.S.S.R.		280	—	—	—	—	—	280	—	—	—	—	—	—	—
Other socialist countries		16	—	—	—	—	—	16	—	—	—	—	—	—	—
Switzerland		—	2	108	230	200	782	—	—	922	–247	–633	42	42	—
United Kingdan		1	4	–4	12	203	621	—	225	656	–237	–378	41	41	—
Other Europe		20	23	129	—	23	—	129	—	20	10	533	563	563	—
United States		259	42	13	160	—	29	55	—	448	–63	–184	201	201	—
Canada		158	5	—	61	—	—	177	—	47	—	—	47	47	—
Latin America		229	35	—	—	164	—	—	—	100	—	55	155	61	94
Autralia		197	—	—	7	5	—	167	—	32	—	–17	15	15	—
Other Oceanle		43	—	—	—	43	—	—	—	—	—	—	—	—	—
Japan		11	13	—	100	—	—	—	—	124	51	142	317	198	119
Hong Kong		—	3	—	203	—	—	—	—	206	220	–330	96	66	30
Singapore		—	3	—	100	—	—	—	—	103	127	–202	28	23	5
Other Asia		60	26	—	—	80	—	—	—	6	20	569	595	379	216
India subcontinent		—	59	—	—	—	—	—	—	59	10	201	270	261	9
Middle East		—	84	—	—	84	—	—	—	—	109	200	309	265	44
	Total	1,949	303	246	873	873	1,432	1,432	225	2,723	0	0	2,723	2,206	517

Sources for colums: (l-2) Gold Fields Kineral Services. Gold (1990). (3) The aggregate figure is a residual, representing implied disinvestmencs in Gold Fields Mineral Services, Gold (1990). The breakdown is based on U.K. and Swiss trade data. as supplaented by estimates in Montagu (1990). with “Other Europe” demand as the residual. (4) For the United Kingdom, see Table 4. Switzerland is assumed to eccepc residual Latin American supplies (after the United States and Canada), and most of orher Africa, Europe, Asia. Oceania. and the Niddle East. All Australian figures are from CPM Croup, precious Metals: Gold (1990). Estimates for the Far East assume that: supplies from the United Kingdom and Switzerland (col. 5) are equal and distributed according to local market size. (5) United Kingdan (see Table 4) is assumed to be destined for Far East. and Switzerland is assumed to be equal to that for the United Kingdom; Latin America is assumed to export, for refining, everything but local Brazilian demand. Others have limited refining capacity and export indigenous supplies. (6) For United Kingdom, see Table 4: Switzerland is the residual import figure (from Table 5) after the entry in col. (4). (7) South Africa and the socialist countries export gold in well-refined form; Canada and the United States are residual estimates. For Australia, see col. (4) sources. (8) Gold Fields Mineral Services (1990). Net official sales of all corrntries are here assumed to have been carried out in London. (9) Derived as cols. 1+2+3+4+6+8-5-7. (10-11) Hong Kong and Singapore are residuals but conform to net flows, in Hontagu and Company (1990). Other figures are estimated. so that, when combined with col. (9). they conform to local market demand. (12) Equal to cols. 9+10+11; also equal to cols. 13+14. (13-14) Gold Fields Mineral Sevices, Gold (1990).

^1/New gold is defined as newly mined gold and net sales from the U.S.S.R. and other socialist countries.

^2/Unrefined gold is here defined as gold not conforming to Loco-London standards of fineness or bar weight.

^3/Loco-London weight and fineness; may be transformed at destination.

^4/Primary market supply signifies gold that has first come to market; secondary market supply signifies gold that is resold on a secondary market.

^5/Net imports differ from secondary market supplies because they are not resold at destination.

^6/Identified bar hoarding, except in Europe and North America where it is assumed to be the residual supply (in col. 3).

The breakdown of supply has been supplemented with a distinction between refined and unrefined gold (clos. 4-7). “Refined gold” is taken to be gold conforming to loco-London delivery standards of fineness and weight, with “unrefined gold” referring to gold in other forms. The estimates have been derived to conform to official import data for the United Kingdom in particular, but in most cases they reflect the extent to which gold is thought to have been exported in mine-treated form (80 percent fine) or refined (above 999 fine) by the producer countries. However, the estimates should not be taken as an indication of the extent of refining operations in recipient countries because imports of refined gold can be further smelted at their destinations. ^39/ This tenuous distinction is made simply as an aid in tracing overall bullion flows. The distinction between the primary and the secondary market supply should also be treated with caution, as some gold flows to more than two markets, while other flows between markets are netted out, Again, however, this distinction provides a valuable check on the aggregate figures, because some information is available on the extent to which individual secondary markets are supplied by the primary markets. In assessing the total size of the flows through the various markets, the sum of the positive figures in clos. 9 and 10 should be used. Thus, for example, U.S. markets are estimated to have handled 448 tons (from col. 9), while “other European” markets handled 30 tons (the sum of clos. 9 and 10). Of course, combined market supply (3,270 tons), which double counts (547 tons of) gold that was sold through two different markets before reaching its final destination, will be greater than ultimate demand and supply (2,723 tons). “Net imports” are differentiated from secondary market supply in that they are assumed not to be resold at their destination but are imported directly by the ultimate buyer from a market abroad.

It is likely that the majority of South African gold exports still arrive in Switzerland, with the remainder going to the United Kingdom. Some 50 percent went to the United Kingdom in 1976 and 1977, the last years for which detailed import figures are available for that country, but this proportion is probably somewhat lower now. The remaining gold imports into the United Kingdom probably originated in large part from other African countries, China, the United States, Canada, and Latin America. Switzerland probably shared imports from Latin America (as well as from South Africa and other African countries), but it is thought to have received most sales from the U.S.S.R. Prior to 1965, gold sales from the U.S.S.R. were channeled through the Moscow Narodny Bank in London and, to a lesser extent, the Banque Commerciale pour 1’Europe du Nord in Paris. ^40/ The Wozchod Handelsbank was established as a dealer in Zurich in 1966. Reflecting the increasing sophistication of its gold policy, this bank both bought and sold gold on behalf of the Soviet Government throughout the 1970s and early 1980s. However, the bank failed in 1985, with forward trading losses estimated at SW F 400 million to SW F 700 million, and its gold trading operations reverted to the Bank for Foreign Trade in Moscow. Switzerland is still thought to be the destination of most gold sales from the U.S.S.R., although data on these flows are not available. ^41/ The Bank for Foreign Trade is well known to practice sophisticated marketing techniques. It both buys and sells (in order to camouflage its net position) and has also been involved in forward selling and other hedging techniques. It has been very active in the market for gold swaps in particular, because this practice allows it to temporarily accumulate foreign currency without causing large quantities of gold to come to market and thus depress prices.

It is difficult to estimate the relative importance of various gold trading and conversion activities in the primary markets, but of the estimated 922 tons that flowed through Switzerland in 1989, some 330 tons are estimated by market analysts to have been refined there, whereas 43 tons are known to have been used in fabrication. Of the remaining 550 tons, some 350 tons are considered to have been subject to some form of upgrading, even if this only amounted to recasting and stamping. Thus, about 60 percent of gold imports eventually moved out of Switzerland unchanged or slightly upgraded, while 35 percent of gold imports were refined in Switzerland. Estimates of the value added from refining range from 0.25 percent to 0.50 percent of the total value of the gold involved, depending on the extent of refining and the price of gold. An estimated 50 percent of gold flows through the United Kingdom are upgraded or recast. Switzerland is thought to provide about 40 percent of the supplies to the secondary markets of the Middle East and Far East, while the United Kingdom is estimated to supply 25 percent. Estimates of market size in these regions are based on import and export figures.

Based on this approach to estimating market flows, the combined market supply was 3,270 tons in 1989. ^42/ Of this total, Zurich accounted for 922 tons and 656 tons moved through London. New York (448 tons) and Hong Kong (426 tons) were the next largest markets, with Singapore (230 tons) and Tokyo (175 tons) also playing a significant role. The remaining 413 tons were shared among the regional markets. The relative significance of these markets is to some extent an artifact of their historical evolution but increasingly results from their geographical significance and the manner in which they operate. The evolution of the world gold market is described in Section IV, which also describes in detail the operation and function of each market. This description should aid in understanding the underlying structure of Table 3.

1. London bullion market and gold fixings

There are 14 market making members (i.e., dealers) on the London bullion market, which is the largest number in any one trading center for physical gold, and these include the five dealers participating at the twice-daily fixing. ^50/ The market has been supervised since 1986 by the Bank of England, in consultation with the London Bullion Market Association (LBMA) which was formed in 1987 and has 52 ordinary members (brokers and bankers) in addition to the market makers. The Physical Committee of the LBMA maintains a list of acceptable melters and assayers (i.e., refiners) whose stamp must appear on any bar that is considered “good delivery” in London. Good delivery bars must be at least 995 fine and must weigh 400 ounces. Spot quotations are for loco-London good delivery, but the bars are often delivered to, and stored in, the vault of a Swiss bank. Delivery and payment must be made within two working days.

Official London market hours are 9 a.m. to 5 p.m., but dealers will usually trade informally from 7:15 a.m. to 7:15 p.m. Of course, dealers and brokers constantly monitor one another’s bid and offer prices, so that deviations in price are quickly arbitraged away, but the market is actually cleared at a single price at the price fixings. ^51/ Representatives from each of the five London bullion houses meet in closed session at Rothschild’s Fixing Room at 10:30 a.m. and 3 p.m. each day. Rothchild’s representative chairs the meeting and begins by suggesting a starting price. Each of the participants is linked to his trading room by telephone, over which he is advised as to whether the firm is a net buyer or seller at that price. The decision is communicated to the chairman, who tries to match the positions. The price is altered until each dealer is satisfied (and has signaled this by lowering a small British flag on his desk), and the fix is then declared. It is worth noting that because each of the dealers communicates a net position, the volume of gold transacted at the fix is impossible to determine. However, it is well known that a large proportion of the London market’s daily volume (estimated at 100-200 tons) is transacted at the fix and that the London fix provides the world’s most liquid environment in which to place large orders.

2. Zurich gold pool and gold price

Even though Switzerland has no indigenous gold supplies, it has retained its dominance in trading of physical gold by providing specialized banking and ancillary gold services in an essentially unregulated and confidential environment. ^52/ The members of the Zurich Gold Pool dominate the market by providing virtually all of its supplies of new gold and by operating large refineries, but many smaller banks and finance houses are also engaged in the refinement, upgrading, transportation, and brokering of gold from producer to investor or consumer. Refined gold may be returned to the producer or forwarded to a specified market without transfer of ownership to the finance house, or it may be bought for later sale to consumers or investors. Most of the contracts written in Zurich are for actual delivery, but finance houses also provide gold storage facilities for investors who do not wish to receive the physical gold. In addition, the Swiss banks operate two types of gold bullion accounts: (1) custodial accounts offering title to the account holder, in which case the gold is beyond the reach of creditors if the bank fails, and (2) claim accounts, which are the only accounts offered by the members of the Zurich Gold Pool, that never transfer title. The loco-Zurich bullion specification is the same as for the London market, and this allows gold which is situated in Zurich to be quoted loco-London, and vice versa. Delivery and payment are made within two working days, and hours are bankers’ hours (9:30 a.m. to noon and 2 p.m. to 4 p.m.).

The Zurich gold market has no formal organizational structure. Except for the members of the Gold Pool, dealers quote bid and ask positions independently from one another (but in close competition). Prices are usually quoted in U.S. dollars, but they are quoted in most other currencies on request. The Gold Pool exists on the basis of an informal agreement among the three large banks (still the original members) and is free of official regulation. Each participant in the Pool trades independently from its own stock of gold. ^53/ Although the Pool consists of a combination of these stocks, no gold is vested in the Pool itself. Instead, the Pool operates as a mix between a consortium of dealers and a clearing system, Each member combines its external dealings into lots of 250 kilos (0.25 tons) and offsets them through an opposite transaction between it and the Pool. External sales are bought from the Pool; external purchases are sold to the Pool. In effect, the members “commit themselves to go long or short for the Pool's account, subject to certain (undisclosed) limits.” ^54/ The positions of the individual banks are not disclosed to one another, thereby keeping secret the source of any large order, and a joint clearing system totals the anonymous positions of the banks and sets a price each day “according to changes in these positions.” ^55/ This jointly fixed price is regarded as the official Zurich price and is binding for Pool members. It also provides a guideline for the other banks that are active in the market. A net excess demand by (supply from) the market is then met (absorbed) in equal proportions from (into) the members’ own stocks. In 1982, the Gold Pool established PREMEX AG as a high-technology market intermediary that acts on behalf of other dealers on a commission basis.

The Swiss authorities do not publish statistics on the sources and destinations of gold flows through Switzerland. However, the principal export destinations for loco-Zurich gold are thought to be the Italian jewelry industry which used 360 tons in 1989, and other fabrication centers in Europe (excluding the United Kingdom) which used 200 tons and in the Middle East and Far East, where Switzerland supplied some 38 percent (350 tons) of total demand in 1989.

3. Hong Kong bullion market and price fixing

The Hong Kong gold market began operation informally in 1910 and has expanded rapidly since January 1974, when government restrictions on the importation of bullion were lifted. ^56/ It is now the principal distribution and clearing center for the Far East. Furthermore, when the New York market has closed and the London and Zurich markets have not yet opened, Hong Kong is the only significant physical gold market available to Middle Eastern and Far Eastern traders. Accordingly, Europe’s opening quotations are based on Hong Kong prices. Hong Kong is estimated to have imported 430 tons of gold in 1989, of which 330 tons were re-exported to other countries in the region in bullion form and 65 tons were used in the fabrication of jewelry destined for mainland China. ^57/ The main export destination is thought to have been Taiwan, which is estimated to have absorbed 240 tons from all sources in 1989, but Thailand, China, and the Indian subcontinent are also substantial customers.

Trading is between principals and takes place at the Kam Dgan, which is the Chinese Gold and Silver Society, at 1218 Mercer Street, Hong Kong. The exchange has a fixed number of 195 members, all of whom must be Chinese, and it also includes a “bullion group” of 33 members who smelt and manufacture standard bars. Trading hours are 9:30 a.m. to 12:30 p.m. and 2 p.m. to 4 p.m. on weekdays, and l0:30 a.m. to noon on Saturday. ^58/ There are two types of contracts traded on the Hong Kong spot market: loco-Hong Kong and loco-London. Both operate as undated futures contracts, with all trades made for an unspecified forward date (i.e., contracts are open ended). Neither party is under obligation to settle the contract (i.e., to make or take delivery) on any particular date, and traders may roll the contracts over indefinitely, on a daily basis, subject to provision and maintenance of a margin requirement, which is assessed with respect to market conditions. ^59/ Although some loco-Hong Kong contracts are actually completed, most positions (and all loco-London contracts) are eventually canceled by an equal offsetting transaction between the parties involved.

4. New York bullion market

The physical gold market in New York developed after the lifting of U.S. restrictions on holding gold in 1975. ^60/ Investors and speculators became interested principally in trading in coins (especially South African Krugerrands) and derivative gold instruments. Except for some interest in the South and West, bullion never became a major target of investment funds. However, the United States was considered in 1989 to be the third largest producer of mined gold in the world, having produced 259 tons in that year, and the New York bullion market serves as a conduit between this mined gold and the U.S. gold fabrication industry, which is also the third largest in the world (after Italy and India). The U.S. fabrication industry used 201 tons of gold in 1989, including an estimated 35 tons of scrap. In total, some 220 tons of new gold, including coins, are estimated to have been demanded in the United States in 1989. ^61/

The New York bullion market has no formal structure and no open-outcry meeting place. It consists of a number of market makers who operate an over-the-counter bullion trade. ^62/ Any quantity can be traded, but most transactions are in multiples of 100 ounces and the most common units are 400-ounce and 100-ounce bars of 999 fine (i.e., American gold). Trading is not restricted to any exchange hours, and delivery can be made on any date mutually agreed upon, with payment due on receipt.

5. Singapore bullion market

The Singapore bullion market serves principally as an entrepôt between London and other countries in the Far East (in particular, Indonesia). ^63/ Of the 227 tons imported by Singapore in 1989, it is estimated that only 28 tons were retained to satisfy domestic demand. ^64/ The market, which was formed in 1969, has no formal organizational structure and no open-outcry meeting place. It is primarily made up of brokers who charge an over-the-counter premium on the price quoted (on an overnight basis) by their European consignors. However, some of the larger bullion houses do act as principals, taking positions on their own account, and most of the large overseas gold houses are well represented. ^65/

Gold bars of many sizes are traded, but the most popular unit is the kilobar (32.151 ounces) of 999 fineness, and all physical gold is traded loco-Singapore and in Singapore dollars. Settlement is effected by full payment of cash on delivery, which is usually within a week of the date of contract. An undated futures market also operates in Singapore, trading loco-London and loco-Hong Kong paper gold on a rollover basis, and this procedure permits margin speculation on overseas spot prices, with interest on outstanding balances being charged daily on the basis of LIBOR. Banks have also developed gold certificates and gold savings passbook programs that are denominated and accumulated in units as small as a gram.

6. Other bullion markets

7. Markets in derivative physical instruments

1. Futures and options exchanges

The first gold futures contract was launched at the Winnipeg Commodity Exchange in 1972. Soon after, when the 33-year-old ban on the purchase and holding of gold by U.S. residents was lifted on December 31, 1974, five exchanges (two in New York and three in Chicago) began to trade gold futures in the United States. ^81/ The Commodity Exchange of New York (COMEX) has since come to dominate the market in gold futures almost completely (see Table 6). Trading in gold futures reached a climax in 1981, with volume equivalent to 46,000 tons (almost 44 times the supply of new gold in that year), but this figure has since been reduced to about 34,000 tons annually (17 times the supply of new gold in 1989). Futures exchanges have been opened in many other countries, including the United Kingdom and Switzerland, but few are still active. A notable exception to this is the Tokyo Commodity Exchange for Industry (TOCOM), which began trading in 1982 and has had a steady growth in volume since then. The only other active contracts are at the Chicago Board of Trade (CBOT), the Mid-America Commodity Exchange, and the Hong Kong Futures Exchange.

The first gold options contract was also launched by the Winnipeg Commodity Exchange. Once again, it was surpassed by COMEX when it launched its own options contract in October 1982. The only other large volume options contract since 1986 has traded in Sao Paulo, Brazil. The volume of options trading (at COMEX and Sao Paulo) has increased over the years, with the equivalent of 4,460 tons in 1984 and a record 6,790 tons in 1989. The only other active options contract is traded on the Mid-America Commodity Exchange.

When combined, futures and options contracts traded on the exchanges were equivalent to a total of 40,836 tons in 1989 (21 times the supply of new gold), with COMEX accounting for almost 90 percent (see Table 6). This is equivalent to a world volume of about 160 tons per trading day. While this appears to be a large volume and is probably somewhat comparable to daily physical volume in London, less than 1 percent of the contracts are delivered. Year-end stocks in registered warehouses of COMEX and TOCOM at the end of 1989 held only 10 percent of the open interest contracts and 0.25 percent of the annual volume (see Table 6). The importance of paper gold does not derive from the volume of physical gold turned over, however, but from the highly leveraged manner in which speculators can hold substantial positions.

Table 6.

Active Gold Futures and Options Contracts in 1989

Sources: Gold Fields Mineral Services (1990), Montagu & Co. (1990), CPM Group (1990), and Shearson Lehman Hutton (1990).

Table 6.

Active Gold Futures and Options Contracts in 1989

I. Exchange and contract size				Number of contracts traded	Gold volume	Open interest	Warehouse stocks
					(In metric tons)
New York Commodity Exchange					36.118	469	70
	Futures: 100 ounces			9,988,577	31,068	&	&
		Including Sydney		225	1	&	&
	Options: 100 ounces			1,623,207	5,049	&	&
Chicago Board of Trade					256	2	2
	Futures: 1 kilogram			27,994	28	&	&
			100 ounces	73,362	228	&	&
Mid-America Commodity Exchange					32	—	—
	Futures: 100 ounces			9,698	30	&	&
	Options: 33.2 ounces			1,631	2	&	&
Tokyo Commodity Exchange
	Futures: 1 kilogram			2,686,684	2,687	410	18
Hong Kong Futures Exchange
	Futures: 100 ounces			1,122	5	—	—
Bolsa de Mercadorios, São Paulo
	Options: 250 grammes			6,953,149	1,738	—	—
		Total tonnage			40,836
II. Volume, stocks, and open interest						(Percent)
New York and Tokyo Exchanges
		Year-end open interest as percentage of volume				2.27
		Year-end stocks as percentage of open interest				10.01
		Year-end stocks as percentage of volume				0.23

Sources: Gold Fields Mineral Services (1990), Montagu & Co. (1990), CPM Group (1990), and Shearson Lehman Hutton (1990).

View Table

Table 6.

Active Gold Futures and Options Contracts in 1989

I. Exchange and contract size				Number of contracts traded	Gold volume	Open interest	Warehouse stocks
					(In metric tons)
New York Commodity Exchange					36.118	469	70
	Futures: 100 ounces			9,988,577	31,068	&	&
		Including Sydney		225	1	&	&
	Options: 100 ounces			1,623,207	5,049	&	&
Chicago Board of Trade					256	2	2
	Futures: 1 kilogram			27,994	28	&	&
			100 ounces	73,362	228	&	&
Mid-America Commodity Exchange					32	—	—
	Futures: 100 ounces			9,698	30	&	&
	Options: 33.2 ounces			1,631	2	&	&
Tokyo Commodity Exchange
	Futures: 1 kilogram			2,686,684	2,687	410	18
Hong Kong Futures Exchange
	Futures: 100 ounces			1,122	5	—	—
Bolsa de Mercadorios, São Paulo
	Options: 250 grammes			6,953,149	1,738	—	—
		Total tonnage			40,836
II. Volume, stocks, and open interest						(Percent)
New York and Tokyo Exchanges
		Year-end open interest as percentage of volume				2.27
		Year-end stocks as percentage of open interest				10.01
		Year-end stocks as percentage of volume				0.23

Sources: Gold Fields Mineral Services (1990), Montagu & Co. (1990), CPM Group (1990), and Shearson Lehman Hutton (1990).

b. Other exchanges

Table 6 summarizes the relative importance of the contracts actively traded in 1989, and it is clear that all other exchanges are subsidiary in importance to COMEX. Table 7 outlines the trading hours on these exchanges, together with the tick sizes and traded months for the various contracts. Beyond these differences, however, each of the exchanges operates in a similar manner to COMEX, and the above explanation of market mechanisms can be applied to them also.

Table 7.

Tick Sizes and Contracts Traded on Paper Gold Exchanges

Sources: Sarnoff (1987) and Shearson Lehman Hutton (1990).

Table 7.

Tick Sizes and Contracts Traded on Paper Gold Exchanges

	Exchange and contract size		Tick size	Exchange hours and months traded
New York Commodity Exchange				9 a.m. - 2:30 p.m.
	Including Sydney
Futures: 100 ounces			US$0.l0/oz	Spot+ 2 next + even months
Options: 100 ounces			US$0.l0/oz	Spot + 2 next + even months
Chicago Board of Trade				8 a.m. - 1:40 p.m.
	Futures:1 kilogram		US$3.22/kg	Spot + 2 next + even months
		100 ounces	US$o.l0/oz	Spot + 2 next + even months
Mid-America Commodity Exchange				8 a.m. - 1:40 p.m.
	Futures: 100 ounces		US$0.l0/oz	All months
	Options: 33.2 ounces		US&0.l0/oz	Even months
Tokyo Commodity Exchange				Six sessions: (9:10 a.m., 10:30 a.m.; 11:30 a.m.; 1:10 p.m.; 2:3 p.m.; and 3:45 p.m.)
	Futures: 1 kilogram		V1/g	Spot + next + even months
Hong Kong Futures Exchange				9 a.m. - noon and 2:30-5:30 p.m.
	Futures: 100 ounces		US$0.l0/oz	Spot + 2 next + even months
Bolsa de Mercadorios, Sao Paulo				11 a.m. - 4:30 p.m.
	Options: 250 grams		CrO.lO/g	Even months

Sources: Sarnoff (1987) and Shearson Lehman Hutton (1990).

View Table

Table 7.

Tick Sizes and Contracts Traded on Paper Gold Exchanges

	Exchange and contract size		Tick size	Exchange hours and months traded
New York Commodity Exchange				9 a.m. - 2:30 p.m.
	Including Sydney
Futures: 100 ounces			US$0.l0/oz	Spot+ 2 next + even months
Options: 100 ounces			US$0.l0/oz	Spot + 2 next + even months
Chicago Board of Trade				8 a.m. - 1:40 p.m.
	Futures:1 kilogram		US$3.22/kg	Spot + 2 next + even months
		100 ounces	US$o.l0/oz	Spot + 2 next + even months
Mid-America Commodity Exchange				8 a.m. - 1:40 p.m.
	Futures: 100 ounces		US$0.l0/oz	All months
	Options: 33.2 ounces		US&0.l0/oz	Even months
Tokyo Commodity Exchange				Six sessions: (9:10 a.m., 10:30 a.m.; 11:30 a.m.; 1:10 p.m.; 2:3 p.m.; and 3:45 p.m.)
	Futures: 1 kilogram		V1/g	Spot + next + even months
Hong Kong Futures Exchange				9 a.m. - noon and 2:30-5:30 p.m.
	Futures: 100 ounces		US$0.l0/oz	Spot + 2 next + even months
Bolsa de Mercadorios, Sao Paulo				11 a.m. - 4:30 p.m.
	Options: 250 grams		CrO.lO/g	Even months

Sources: Sarnoff (1987) and Shearson Lehman Hutton (1990).

2. Over-the-counter options and “exchange for physical” transactions

Futures positions and options may also be obtained off the exchange, but in this case they are less liquid. In the United States, over-the-counter (or dealer) options are offered by dealers approved by the Commodity Futures Trading Commission. Dealers quote options based on prevailing rates on the exchange, but they can be flexible in the description of the contract. Through an “exchange-for-physical” (EFP) transaction, a client may adopt a futures position when the exchange is not operating; the bullion house then acts as counterparty and adopts the risk involved until it is able to offset the position when the exchange opens. Alternatively, the position may be closed with a resting (i.e., an offsetting) EFP order before the exchange reopens.