Saturday, January 6, 2018

Paper gold trading days numbered

Gold prices are going to rise this year, predict some analysts. Many in gold say the price of the precious metal is artificially curbed because of the paper gold trading on Western exchanges. The total trading volume in the London Over-the-Counter (OTC) gold market is estimated at the equivalent of 1.5 million tons of gold. Only 180,000 tons of gold have ever actually been mined.
So where does the international gold price come from? There is no clear answer, but recent research shows gold prices are derived from London Over-the-Counter (OTC) spot gold market trading and COMEX gold futures trading. It means international gold prices are set by the paper gold market, and not by physical gold market. This means that supply and demand for physical gold plays no role in setting the gold price in COMEX and London OTC market. The London OTC market predominantly involves trading of synthetic unallocated gold, meaning trades are cash settled. COMEX is a derivative market, where gold is traded in futures and 99.95 per cent of trades are settled in cash.
Only one out of 2500 gold futures contracts is settled in delivery. If the buyer in COMEX exercises his right to buy physical gold, the seller can fulfill the obligation without delivering actual gold. Sellers can short without any fear of actually delivering gold. One can sell $1 billion of gold by paying just $50 million into a margin amount. In essence, an entity can dump gold futures contracts in COMEX without having to hold any physical gold.

On June 26, gold price fell 1 per cent from $1,254 per ounce to $1,242 in a matter of seconds. Trading volume was 1.8 million ounce of gold, which is equivalent to nearly 59 tonnes, about 2 per cent of entire gold mining production of the world in a year.