Features of the global gold market

The world gold market in a broad sense covers the entire circulation system of this precious metal on a global scale - production, distribution, consumption. Sometimes this concept is also considered in a narrower sense - as a market mechanism that serves the purchase and sale of gold as a commodity at the national and international levels. At the same time, it should be borne in mind that when it comes to the main features and parameters of the gold markets, it usually means, firstly, the sale and purchase of cash metal in bullion form and, secondly, the wholesale methods of trading these bars. Accordingly, the features of trading in the so-called "paper gold" are analyzed within the framework of the activities of gold exchanges.

The peculiarities of the gold market are that, firstly, gold is used by virtually all states as an insurance and reserve fund. The registered state reserves of gold, concentrated in the Central Banks and the IMF reserves, today amount to more than 31,500 tons. A significant part of these reserves can be put up for sale. Secondly, the population has even larger amounts of gold (jewelry, coins, etc.). Some of this gold - at least in the form of scrap - also enters the market. As a result, the following picture emerges. The main share in the supply of gold falls on its mining. But production volumes have a significant inertia, respectively, the supply of mined gold from year to year has a relatively small variation - much less than the supply of scrap gold, the sale of gold by banks and investors.

Gold reserves in the state reserves of the countries of the world, tons (March 2016)

№	Country	gold reserve
1	USA	8133,5
2	Germany	3381,0
3	Italy	2451,8
4	France	2435,7
5	China	1797,5
6	Russia	1460,4
7	Switzerland	1040,0
8	Japan	765,2
9	Netherlands	612,5
10	India	557,7
11	Turkey	479,3
12	Taiwan	422,7
13	Portugal	382,5
14	Saudi Arabia	322,9
14	Great Britain	310,3
15	Lebanon	286,8
16	Spain	281,6
17	Austria	280,0
17	Venezuela	272,9
17	Kazakhstan	228,3
20	Belgium	227,5
	Other countries	1996,4
	Total	28126,4
	IMF reserves	2814,0
	European Central Bank	504,8
	Bank for International Settlements	108,0
	Accounted gold total	31553,2

The main consumer of cash gold is the jewelry industry, where demand is largely determined by the price of gold: the lower the price, the higher the demand. But this pattern is valid during periods of global economic recovery, and during periods of recession, demand in jewelry industry decreases even at relatively low prices.

There was the following curious situation. Gold miners, supplying the main volumes of gold to the world market, have relatively little ability to influence the price of goods by purely economic methods - by changing supply volumes with price changes. They have two options left. The first of these is to influence the policy of international banks in order to reduce and streamline the latter's volumes of regular gold sales. The second is to adapt to large fluctuations in prices, to be able to reduce unit costs in periods of falling prices in such a way as to ensure the profitability of production under these conditions.

Gold mining in the world

According to GFMS, by the end of 2003, the world's reserves of mined gold amounted to about 150.4 thousand tons. These stocks are distributed as follows:

• state central banks and international financial organizations - about 30 thousand tons;
• in jewelry - 79 thousand tons;
• products of the electronic industry and dentistry - 17 thousand tons;
• investment savings - 24 thousand tons.

By 2013, the world's reserves of mined gold, taking into account the volume of annual production of the metal, increased further and amounted to almost 180 thousand tons.

An analysis of global trends in the development of gold mining and exploration over the past 25 years shows that trends are actively manifesting both to increase and decrease gold production. The multiple increase in the market price of gold in the seventies dramatically affected the activity of its producers in most countries of the world community. It became profitable to process poor and difficult-to-dress ores; bring into operation off-balance reserves (previously considered unsuitable for production due to technical, technological and economic reasons); to resume the operation of previously abandoned and "mothballed" quarries and landfills, mines and shafts; process man-made dumps of many mining and processing plants containing a certain amount of metals (as associated components or incompletely extracted during primary processing).

Fundamental changes in the technology of metal extraction due to heap, heap with cyanidation and biological leaching in columns, the "coal in pulp" method, the improvement of other pyro- and hydrometallurgical methods (for example, autoclave concentration of refractory ores) have made the secondary processing of poor ores and preserved " tailings" of gold recovery plants with a gold content of 1.0-0.3 g/t or less.

The geographical structure of gold mining in the world has changed radically over the past three decades. Thus, in 1980, the total production of gold in Western countries was 944 tons, with South Africa producing 675 tons, or more than 70%. Already by 1990 there had been drastic changes. South Africa continued to be the world's largest producer, but its production fell to 605 tons (35% of the total output of gold in Western countries). At the same time, gold production in Western countries increased by 83% compared with 1980 - up to 1755 tons. Gold production increased rapidly in the USA - up to 294 tons (10 times higher than in 1980), in Australia - up to 244 tons (14 times), in Canada - up to 169 tons (almost 3.5 times). New large gold producers have emerged in the southwestern part of the Pacific Ocean - the Philippines, Papua New Guinea and Indonesia. Gold mining in Latin America grew rapidly. Significant shifts in the territorial structure of gold mining also took place during the 1990s.

Between 1993 and 2005, gold production increased: in Peru by almost 850%, in Indonesia by 368%, in China by 180%, in Mexico by more than 100%, in Mali gold production increased 10 times, gold mining industries were created in Argentina and the Kyrgyz Republic, and this is with only 8.7% growth in the world. At the same time, production in South Africa continued to decline, by more than 50% over ten years, and although in 2002, for the first time in 9 years, metal production increased by 1% compared to 2001, in 2003 gold production in this country fell again. In 2012, the volume of gold subsidiaries in South Africa amounted to only 172 tons.

Since 2007, China has been the world's largest gold producer. In 2015, gold production in this country reached 490 tons. Australia is in second place - 300 tons in 2015. The volume of gold production in Russia in 2015 (third place) was 242 tons, followed by the United States (fourth place in the world) - 200 tons and Canada - 150 tons.

During the period of strong and prolonged (1996-2001) fall in gold prices, gold mining companies significantly reduced unit costs - both current and capital. This was achieved by reducing the volume of exploration work, closing unprofitable mines, introducing capital and labor-saving technologies, and accelerating the development of gold mining in countries with cheap labor. If in the 1980s the main increase in gold production abroad was provided by the USA, Australia and Canada, then since the mid-1990s, production in these countries has stabilized and then declined. At the same time, production in China, Indonesia, Peru, and Ghana was growing rapidly. All last years a merger of gold mining companies. Large companies have advantages in terms of fundraising opportunities, scientific and technological policy, and diversification of political and economic risks.

Structural shifts in recent years from more developed Western countries to countries with developing economies, the advantages of which are cheap labor, cheap electricity, etc. speaks of an increase in the competitive environment in the field of gold mining and production.

World gold consumption

The main gold consuming countries are clearly divided into two groups. On the one hand, this is a group of technically developed countries. They use gold relatively widely in various fields of technology and industry, as well as for the manufacture of jewelry. Among the countries leading in the use of gold for technical purposes: - Japan, USA and Germany. Here, gold acts as an indicator of the development of high technologies in the electronic and electrical, space, instrument-making industries, etc.

Another group of states are those countries in which the lion's share of gold, and sometimes its entire mass, is consumed only for the needs of the jewelry industry. Among them: in Europe - Italy, Portugal; in Southeast Asia - China, India and the countries of insular Asia (Indonesia, Malaysia); in the Middle East, Asia Minor and North Africa - Arab Emirates, Israel, Kuwait, Egypt.

Italy, the main jewelery producer in Europe, accounts for 15.6% of the gold used in the world jewelery industry; the main Asian producer of gold jewelry - India accounts for 15.2% of gold.

In Russia, 15-17 tons of gold is spent for technical needs (55-60% of the total amount of metal consumed in the country), and about 12 tons (40-45%) for the manufacture of jewelry. The share of Russia among gold consuming countries is about 1.0%. According to this indicator, Russia is on a par with such countries as Spain, Mexico, Brazil, Kuwait, etc.

As gold lost its monetary and savings functions, the structure of its consumption in the world by sectors of the economy began to change. More and more of this metal is now supplied to the needs of industry. Over the past 15 years, the global consumption of gold by the jewelry industry has doubled to about 3 thousand tons per year. Jewelry takes 85 percent. all sold gold. Moreover, more than 70 per cent. from the level of world consumption is accounted for by the countries of Asia and the Middle East, which traditionally love gold jewelry.

The demand for the yellow metal is also great from other industries. More than half of the corresponding volume is accounted for by the electronics industry (production of electrical, radio and video equipment), almost 20% is absorbed by prosthetics, the rest falls on a variety of industrial and household consumption - the manufacture of fabrics with gold threads, gilding clothing accessories, etc.

General structure of gold consumption in the world in 1970 - 2015, tons*
(data from the World Cold Council - www.gold.org)

	1970	1975	1980	1984	1994	1996	2005	2012	2015
Extraction from the bowels	1252,7	910,2	895,7	1058,5	2209,0	2284,0	2450,0	2613,0	3211,4
Application area:
Jewelry	1066	516	127	819	2604	2807	2709	1908	2398
Dentistry	58	63	64	51	52	55	62	40	19
Coins, medals	91	272	201	174	75	60	37	315	284
Electronics	89	66	89	122	192	207	273	303	264
Other consumption (incl. bars and ETFs)	62	57	66	53	200	348	646	1306	650
Total consumption	1366	974	547	1219	3361	3477	3727	4406	4193
Annual average price of gold, $US per 1 year	1,0	4,2	19,7	13,0	11,9	12,5	14,2	54,1	37,3

* - from 1970 to 1984 excluding the USSR and China.

The growth in demand from the industrial sector did a good service for gold - by balancing the market, it was able to contain a further fall in prices. But new nuances appeared, caused by the dependence of most sectors of the real sector of the economy on the global economic situation. Thus, during the monetary and financial crisis in Southeast Asia in 1998, global industrial demand for gold fell by almost 5%, with a particularly strong decline in consumption (by 8%) occurred in the electronics industry.

A similar situation was observed in 2001, when the world again entered a phase of economic recession. Then the demand for gold fell by 1.5%, especially in the form of precious jewelry. And everyone again started talking about the possibility of a new round of price reductions. Fears were not groundless - in 2001 the price on the world market of gold fell by 3%.

In early 2005, in the face of rising oil prices and a weakening dollar, jewelers decided to start buying up gold. In the first half of 2005, compared to the same period of the previous year, gold consumption by the jewelry industry increased by 17% to 1,411 tons. At the same time, in monetary terms, the world consumption of gold by jewelers increased by 24%, to $US 20.8 billion.

In general, world consumption of gold in the first half of 2005 increased by 21% in terms of tonnage (reaching 1,939 tons) and by 29% in dollar terms (to $US 26.4 billion).

However, in the 1st quarter of 2006 the world consumption of gold decreased in physical volume by 16% to 835.7 tons as compared to the same period of 2005. The most significant decline - by 22%, to 534.8 tons - was noted in the jewelry industry. Investment demand for gold also decreased - by 6%, to 196.1 tons. In dollar terms, gold consumption in the 1st quarter increased by 9%, to 14.9 billion dollars, which, of course, is associated with an increase in prices. At the same time, the volume of supply in the gold market decreased by 15%, to 868.4 tons, compared with the data for the first quarter of last year. Moreover, contrary to the previous forecasts of analysts, the supply decreased not due to a drop in production levels - on the contrary, it increased by 5%, to 606.8 tons, but due to a decrease in the volume of gold sales by central banks by as much as 57%, to 116.3 tons. .

This means that in the current economic and political situation in the world, gold was used primarily as a financial instrument and insurance against other exchange risks - in particular, the weakening of the dollar and the instability of other world currencies. In this sense, oil, the price of which is now a key factor in determining the value of gold, was less used by the market as a purely commodity. As early as 2005-2006, jewelers, especially in Asia, were talking about their intention to replace gold with other metals, in particular palladium, which, although rising in price, was cheaper than gold - about $350 per ounce.

According to the results of 2006, the volume of gold consumption in China amounted to about 350 tons. Currently, China ranks third in the world in terms of gold consumption, second only to India and the United States. In 2005, the volume of gold consumption in the country for the first time exceeded 300 tons. In particular, the jewelry industry's need for it amounted to 241.4 tons, an increase of 7.7% compared to 2004. By 2012, the consumption of gold in the jewelry industry and medicine has declined slightly, while investment demand for the metal has reached unprecedented heights. This is explained by the high cost of the metal on the one hand and the instability of the economic situation in the world on the other hand (the global economic crisis of 2008 and 2009, as well as stagnation and recession in the countries of the European Union in 2012-2013). In general, the volume of gold consumption in the world by 2015 compared to 2005 increased by 12.5%.

Dynamics of world prices for gold

A few years later, after the abolition of the gold backing of the dollar in 1971, the dynamics of gold prices began to look the same as the dynamics of prices for non-ferrous metals: a cyclical nature, in which fast growth prices are replaced by their protracted fall.

Dynamics of average annual gold prices in London (cash contract market),
dollars per troy ounce

When analyzing the dynamics of gold prices over the past 20 years, the following picture emerges. The 80-90s of the last century for the world gold market were marked by a decrease in prices for this metal. The duration of the price decline can range from 2 (1984-1985) to 4-5 (1988-1992 and 1997-2001) years. The magnitude of the decline compared to the previously reached peak is slightly more than $100/tr. ounce: $424/tr. ounce in 1983 and $317.66/tr. an ounce in 1985; $477.95/tr. ounce in 1987 and $344.97/tr. an ounce in 1992; $389.08/tr. ounce in 1996 and $271.04/tr. an ounce in 2001. The last of the selected periods is characterized by the lowest prices and the maximum duration of the fall.

The fixation of London quotes at the $400 mark in January-February 1996 was very short-lived, after which the price of gold went down almost all the time, reaching on July 20, 1999, the lowest level in the last 20 years - $252.8 per troy ounce. Although prices rose slightly towards the end of 1999, the overall downward trend continued until April 2001, when the average monthly price was $260.5 per ounce. This is due to many factors, among which the main ones were three:

• high volumes of gold production, both primary and secondary;
• long-term growth of the dollar against almost all currencies of the world;
• sale of gold by the central banks of some countries from their reserves.

Under normal conditions, a fall in the price of a commodity entails an increase in demand (for gold, primarily in the jewelry industry), followed by a shortage of supply with a corresponding increase in prices. But the financial crisis of 1997 in Southeast Asia rather unexpectedly and significantly affected the gold market, keeping prices low. In this situation, the main factors influencing price changes - net sales of central banks' stocks and deinvestment faded into the background.

Over the past 10 years, the central banks of a number of Western countries have been major net sellers of gold. Partial sales of gold from state reserves were carried out by the Netherlands, Belgium, Austria, Canada, Australia, Great Britain, Switzerland. Applications by Switzerland, and then by Australia and Argentina, to join the ranks of reserve metal sellers accelerated the fall in prices for it in 1997. The publication of the plans of the British Treasury to sell 415 tons of gold at auction caused a collapse in London quotations in the summer of 1999. In an effort to reverse this trend, on September 26, 1999, 15 central banks in Europe (UK, Switzerland, Sweden, the European Central Bank (ECB) and 11 countries in the Eurozone) agreed that the parties to the agreement would not enter the market as a seller, except for the agreed sales, which over the next five years will not exceed 400 tons, after which the agreement will be revised. As a result, already at the end of September, the cost of a troy ounce of gold exceeded $300.

However, the rise in prices turned out to be short-lived, and in 2000 their gradual decline was again observed. Here the influence of several factors came together. First, the declared figure of sales - 400 tons - can be increased due to sales of gold by countries that have not acceded to the agreement. Secondly, the demand for jewelry, especially in the countries of Southeast Asia, was no longer growing at the same pace. And the consumption of gold in the electronic and electrical industries is quite stable, the change in gold prices does not affect its volumes.

The rise in the price of gold, which is currently taking place in the market, began after the terrorist attacks on September 11, 2001, when the US stock market collapsed. The day before the tragic events, a gold ounce cost $271, and a week later it was $293 per ounce. Since then, the quotes for gold as a whole have been steadily rising.

The reason for the increase in demand also lies in the deterioration of the geopolitical situation in the Middle East and the growing doubts among world business about the ability of the United States to resolve the Iraqi crisis using current methods. In the financial markets, there has been a significant increase in the tendency to buy up gold, which is seen as the most reliable shelter for capital during periods of serious international crises. The weak positions of the American currency also help the appreciation of gold. This position plays into the hands of gold miners, but jewelers expect a decrease in demand for jewelry made from this metal.

Global instability in the economy and politics led in the winter of 2002-2003 to a climax in the gold market for the entire period of the progressive growth of its price: it jumped from 320 to 385 dollars per ounce. This recovery began in December 2002 after a sharp appreciation of the euro against the US dollar. And also at the beginning of 2003, contrary to the expectations of a short-term correction in the price of gold, there was an even greater surge. The gold market was engulfed in excitement and a crazy mood for buying metal, fueled by the events around Iraq and North Korea.

The high price of gold had a noticeable effect on the scrap market: its sales increased by 14% in 2002 and reached 778 tons. The Middle East has made the greatest contribution to this. The main reason is the low rate of national currencies. For example, Egypt increased the sale of scrap due to the devaluation of the Egyptian pound in 2001. It has become profitable for the Middle East region to sell its gold for dollars and, by exchanging them for local currency, make big profits in weak national currencies. The supply from the official sector (central banks) has remained stable for the last 4 years: about 480-550 tons of gold. The higher level of sales (549 tons) in 2002 was due to the high price of gold.

The price dynamics in the gold market was largely associated with the long-term growth of the US dollar. Starting to grow from the middle of 1995, in the next 4 years it rose against the currencies of other countries by 20-40 percent or more. Since the world price of gold is fixed in US dollars, an increase in the exchange rate of this currency entails an increase in the price of the metal in the national currency of countries with a "non-dollar" economy, which ultimately leads to a decrease in demand for gold and an increase in its sales, and an excess of supply over demand - to lower market prices. Accordingly, the slowdown in the US economy, the weakening of the dollar, the decline in the NASDAQ stock market contributed to the increase in the price of gold in 2002.

Since May 2001, although prices have been volatile with frequent fluctuations and pullbacks, there has generally been an uptrend. Nonetheless, average price 2001 was the lowest in the last 23 years - 271 dollars per ounce.

But throughout 2002, which analysts dubbed the "year of gold", the upward trend continued with slight fluctuations: the average monthly metal price on the London market increased from $281.51 in January to $332.61 in December (by 15.4%). The average annual price was $310, which is 14.4% higher than in 2001.

The fundamental reasons for such a rise in the price of gold are the weakening of the American economy and political instability in the world, which intensified after the terrorist attacks in the United States on September 11, 2001. Turmoil in the financial and stock markets of the world caused a reassessment of the value of gold as an instrument that insures risks. Deterioration financial position of a number of companies (the bankruptcy of Enron, WoldCom, etc.), the sluggish situation in the corporate securities markets forced investors to increase their gold reserves.

In 2005-2006, there was a further and very significant increase in gold prices on world markets. Thus, in the 1st quarter of 2006, gold quotes rose by 24%, and the maximum price was fixed on May 12, 2006 - $725 per ounce, i.e. growth since the beginning of 2006 has reached almost 40%.

In 2012, gold prices reached their peak - 1684 dollars per ounce on average for the year, which was explained, first of all, by the strong demand for the metal from investors. In 2013, gold prices slightly decreased, but remained at a very high level - about $1,500 per ounce. In 2015, the average gold price was $1,160.1 per ounce. In 2016, gold prices began to rise and rose above $1,300 per ounce.

As you can see, gold is not going to lose its position as one of the leading financial instruments, although formally the yellow metal has not been synonymous with money for more than thirty years: after the abolition of the gold standard in 1971, no currency is associated with the price of gold, and settlements between states are carried out in the form more modern than physically moving bars from one vault to another. But the gold reserves of states remain an essential factor in its power. This becomes especially noticeable in times of economic instability: even a not too deep crisis inevitably entails an increase in gold prices. If we also take into account that the volume of world gold production is falling, and the demand for the precious metal, on the contrary, should grow (not only from financial institutions, but also from the aviation, space, jewelry industries, as well as medicine), it is easy to conclude that gold mining is still a profitable and socially significant business.

The following article is written in the format of questions and answers. Through this approach, the article raises important questions about pricing in the gold markets and aims to explain that the price of gold is determined by paper gold markets.

General Manager (CEO) Bullion Star Torgny Persson and precious metals analyst Ronan Manly are of the opinion that, due to the structure of modern gold markets, the international price of gold is set mainly by trading activity in the paper gold markets.

Q: The international price of gold is constantly cited in the financial media along with other major financial indicators. What is the international price of gold?

Usually, the international gold price is understood as the price in US dollars per troy ounce on the 24-hour global wholesale gold market (XAU/USD). Gold trades around the world continuously throughout the business week, creating a continuum of international gold price quotes from Sunday evening to Friday evening New York time. Depending on the context, the international gold price can be understood as the quotation of the gold spot market, for example, London, or the price of gold futures contracts of the next delivery month (front month) on the US Commodity Exchange (COMEX)). Contracts in the next month of delivery are usually characterized by the highest trading volume and activity.

Sometimes the international gold price can also be understood as the LBMA Gold Price reference price, determined during the daily London auctions (morning and afternoon). The LBMA is the London Bullion Market Association.

Thus, "international gold price" can mean the spot, futures, or reference price of gold, but all three should be approximately equal over comparable periods of time.

Q: Where does this international gold price come from?

Latest empirical research showed that the price of gold is dictated by trading in the London Over the Counter (OTC) spot gold market and trading in gold futures on the COMEX, and that the "international price of gold" is determined by a combination of London OTC gold prices and gold futures prices on the COMEX. See article Hauptfleisch, Putniņš and Lucy (Hauptfleisch, Putniņš, and Lucy « Who sets the price of gold? London or New York?» ( Who sets the price of gold? London or New York) (2015).

As a general rule, the higher the trading volume and liquidity in the market for an asset, the more that market influences the price of that asset. The global gold market is no exception. Most of the world's gold trading volume takes place in the London OTC and New York trading floors: in 2015, 78% of the world's gold trade was in the London OTC spot market, and another 8% in COMEX (see Hauptfleisch, Putniņš, and Lucy (2015)).

Based on the London Gold Clearing statistics for 2016, the total trading volume in the London OTC gold market this year was equivalent to at least 1.5 million tons of gold, and the trading volume of 100 ounce gold futures contracts on COMEX reached 57.5 million contracts, which is equivalent to 179,000 tons of gold. Thus, the volume of trading in gold on the London OTC market in 2016 was approximately 8.4 times the volume of trading in 100-ounce gold futures contracts on COMEX.

Trading in unallocated LBMA gold, 1.5 Mt in 2016

Annual trading in unallocated LBMA gold: 1,500,000 t

Bullion bank reservesLBMA: 100 t

Annual trade in undistributed gold is 15,000 times the physical reserves

However, the aforementioned academic study found that, despite lower trading volumes, COMEX has a more significant impact on price determination than the London OTC market. The reason is most likely a combination of factors such as the availability of COMEX and b about Longer duration of trading sessions due to the use of the GLOBEX platform, b about Greater transparency in futures trading compared to OTC trading and lower transaction costs and ease of leverage on COMEX. The London OTC Gold Market has trading sessions only during the London business day, there are barriers to entry as it is an opaque wholesale market with no central clearing and the trading spread is dictated by a small number of market makers, LBMA bullion banks and a few London commodities brokers .

Most importantly, however, in the case of both the London OTC market and the COMEX, trading statistics are many times the size of the underlying physical gold markets in London and New York.

Question: And yet, the physical or paper gold market determines the international price of gold?

The international price of gold is entirely determined by the paper, i.e., non-physical gold markets. Both the London OTC Gold Market and the COMEX are paper markets in their structure. The demand and supply of physical gold play no role in determining the price of gold in these markets. Physical gold transactions in all other markets simply inherit the price found in those paper markets.

The London OTC market mainly trades cash-settled synthetic retained gold, with no physical delivery of gold. Such transactions have little to do with any underlying gold reserves, as they are de facto gold derivative positions. By definition, unallocated gold positions are simply a series of claims against bullion banks where the holder is an unsecured creditor of the bank, and the bank assumes a debt obligation to pay that holder a certain amount of gold. The holder, in turn, assumes the credit risk of the bullion bank. Thus, the London OTC gold market is just a platform for trading gold loans.

Bullion banks in the London OTC market also use fractional reserve trading in gold to create large amounts of paper gold out of thin air (similar to commercial lending) where trading is leveraged and non-transparent, and this paper gold is only partially backed by physical gold. Such "gold", in fact, is synthetic. For more on fractional backed gold trading, see the Gold University article Bullion Star « Bullion banking mechanisms» ( Bullionbankingmechanics).

Since gold futures are traded on COMEX and synthetic unallocated gold is traded in London, both gold markets essentially trade gold derivatives, or paper gold instruments, which means that the international price of gold is determined in these paper gold markets.

All other gold trading venues other than the London OTC gold market and COMEX primarily use prices set by the paper gold markets in London and New York. These include physical gold markets around the world that use the international gold price for their domestic pricing.

Question: Could you explain a little more about the structure of the London OTC market andCOMEX.

By definition, futures trading is trading in derivatives, i.e., securities whose value derives from, but differs from, the underlying asset. COMEX gold futures contracts are derivatives of gold. Registered gold reserves on COMEX are relatively low, very little physical gold is supplied to COMEX, and even less physical gold is withdrawn from COMEX-authorized gold vaults. In addition, there is significant leverage in gold trading on the COMEX. Hauptfleisch, Putniņš, and Lucey (2015) write that “ such transactions [onCOMEX] disproportionately affect pricing". Note that the COMEX gold futures market operates around the clock, but the highest liquidity is observed in the US trading session.

As far as the London OTC gold market is concerned, almost all of the trading volume here is trading in unallocated gold, which boils down, as mentioned above, to the payment claims of position holders to bullion banks for a certain amount of gold. Satisfaction of such requirements is very rare. Basically transactions in the London over-the-counter gold market are limited to cash settlements. Traders, speculators and investors in unallocated gold positions almost never receive a delivery of physical gold.

According to Dentons: « The reality of trading in unallocated bars is that buyers and sellers rarely plan for physical delivery. Unallocated bars are used as "synthetic" gold reserves, which are priced based on the London Gold Fixing».

While the LBMA does not publish gold trading volumes on a regular basis, it has published a survey of gold trading in the first quarter of 2011, which shows that in the first quarter of 2011, 10.9 billion ounces of gold (340,000 tons) were traded on the London OTC gold market. In the same period, clearing in the London OTC market was 1.18 billion ounces of gold (36,700 tonnes). That is, the ratio of trading turnover to clearing is 10:1. In the absence of live trading data for the London OTC gold market, the same approximate ratio of 10:1 can be applied to the daily London gold market clearing statistics, which are published monthly and are always extraordinarily high.

For example, average daily the volume of clearing in the London gold market in January 2017 amounted to 20.5 million ounces (638 tons). If a ratio of 10:1 is applied, then the volume trade gold will be 6,380 tons in a day, or 1.6 million tons per year.

With only about 6,500 tons of gold held in London - mostly static reserves of central banks, ETFs and other holders - the trading activity of the London OTC market is completely unrelated to underlying physical gold reserves. Moreover, only about 190,000 tons of gold have been mined throughout history; of these, it is estimated that half is stored as jewelry. Thus, the 6,500 tonnes of gold traded daily on the London OTC gold market is not related to the physical gold market in any way, however, this trading activity affects the determination of the world price of gold and the prices of transactions and transactions with physical bars.

Significantly, according to the LBMA bullion bankers who initiated the publication of London gold clearing statistics, in particular the former chairman LMPCL Peter Fave (PeterFava) and Peter Smith (PeterSmith) from JPMorgan, LBMA gold clearing statistics include trading activity such as " speculative forward rates on the price of gold with financial leverage (leverage)" and " spot price disclosure of investment funds through unallocated positions' - i.e. the usual bets on the price of gold. See the article " Air Clearing: Trends and Impacts of London Clearing Statistics» ( clearingtheAirDiscussingTrendsandInfluencesonLondonclearingStatistics) from the log LBMAAlchemist, number 32 (October 2003).

In fact, trading activity in the London gold market is mainly represented by huge reserves of artificial, synthetic gold, where the price of gold is determined not by physical, but by paper trading. Synthetic gold is created out of nothing, like a simple accounting entry, and formalized as a monetary transaction between the parties to the contract. In such a transaction, there is no purchase of physical gold or margin requirements for gold. Thus, synthetic "paper" gold absorbs the demand that would otherwise be in the limited reserves of physical gold, and therefore the price of gold does not represent this demand, since demand is shifted from physical gold to synthetic.

Similarly, if an entity trades on the COMEX platform in futures contracts for millions of ounces of gold, it is not necessary for the entity to have physical gold, but such a transaction directly affects the international price of gold. The international price of gold is used in many physical gold transactions around the world, which means that this is a very real impact.

While gold clearing volumes and LBMA market surveys provide some useful inputs for calculating London gold trading volumes, very little is known about how much physical gold is actually traded on the London gold market. This is due to the fact that. There are no reports of trading in the London OTC gold market, nor physical gold positions, nor payment obligations for unallocated gold of LBMA bullion banks, nor how much total physical gold these banks have to support their system of trading in unallocated gold with partial security. However, trading in physical gold is, by definition, a very small percentage of the average daily trading volumes on the London OTC gold market. For more information on how the London gold market works, see the infographic Bullion Star « London gold market» ( LondonGoldmarket).

Although one of the three components of the London gold clearing statistics is listed as " physical transfers and deliveries by clearing members LMPCL”, LBMA does not consider it necessary to publish the details of these 3 components. This secrecy is yet another example of how bullion banks and central banks keep the global gold market in the dark about the size of the supply of physical gold.

Question: How do local gold markets around the world use the international gold price?

Local gold markets around the world are guided by the international gold price and typically quote their local gold prices in comparison to the international price.

In the physical gold market, the price of gold coins and bars is determined by a combination of the spot price and the hype. Agio is the portion of the price above the face value of the precious metal contained in a coin or bar. Because the physical gold market is a price taker, its spot prices are determined by the international price of gold.

Thus, the SGE is a natural candidate for a leading role in determining the price of real physical gold, provided that physical gold markets become independent of paper markets and physical gold demand and supply become natural determinants of the international price of gold.

Auction LBMA Gold price

Question: What is the roleLBMAGoldprice?

Unsurprisingly, LBMA auctions also trade unallocated gold, which means that auction trading and settlement are not linked to the physical gold markets. Daily trading volumes usually reach only the equivalent of 1-2 tons of unallocated gold and rarely exceed 3 tons. Thus, in addition to the fact that thousands of gold traders from around the world are not admitted to LBMA auctions, trading volumes of auctions are negligible in comparison with the world market gold, which means that the benchmark price is not a reliable indicator for the global gold market.

However, the LBMA Gold Price benchmark is very influential in the gold world and is widely used to value gold-backed ETFs such as SPDRGoldTrust and iSharesGoldTrust. In addition, it is often used as a price point when buying physical gold from refiners and suppliers. LBMA Gold Price is also widely used to value financial instruments such as ISDA gold interest rate swaps, gold options and other gold derivatives, and is even used by futures exchanges to value their futures contracts such as FGLD gold futures contracts of the Malaysia Derivatives Exchange. .

Thus, this reference price, determined by an auction controlled by several bullion banks under the auspices of the LBMA, is based on synthetic gold trading, but is widely used throughout the world in countless gold contracts, physical gold markets and gold retail markets.

This reference price, determined in London, is used even by central banks in large transactions with gold, as well as in their independent bilateral transactions. For example, when the Swiss National Bank used the Bank for International Settlements (BIS) trading floor in the early 2000s to sell hundreds of tons of physical gold, the prices used in the transactions were based on the London Gold Fixing price. Another example is that in 2010 the so-called "market" sales of gold by the IMF were carried out by an agent who also focused on the price of the London gold fixing. The very same London gold fixing, which is now being investigated in a class action lawsuit in New York.

Significantly, the benchmark price, controlled by the London Bullion Bank Cartel, which is opaque and subject to a class-action suit for gold price manipulation, was used to price large transactions in physical gold. The question to be asked is: how adequate was this benchmark price, and to what extent did it represent the global physical gold market?

Q: What about the times when London and US/New York are not trading? Will the influence of other markets, such as TOCOMin Japan orMCXin India?

Generally, higher trading volume means more about greater liquidity, which influences the price determination. However, due to the integration of financial markets, price information moves quickly from market to market due to parallel trading. Futures markets such as Japan's TOCOM or India's MCX influence the price of gold, especially when the larger markets are not trading, but due to the less liquidity of these venues, futures price analysis has shown that COMEX is the leader. These are the results of a study by Bangkok University financiers led by Rapisorn Fuangkasem (RapeesornFuangkasem) .

Question: How does gold lending affect the price of gold?

The center of the gold lending market is London, or rather the Bank of England. This is where central banks and commercial bullion banks conduct top-secret gold lending and gold swap transactions that increase available gold reserves. Bullion banks evasively refer to this as providing liquidity, but in fact these transactions contribute to an oversupply in the gold market. Very few details about gold lending market transactions are available to the public. If the details of gold lending transactions were known to the entire market, this would directly affect the price of gold. But they are not available. Thus, the secrecy surrounding central bank gold lending transactions makes this market informationally inefficient. And when a market is informationally inefficient, its prices do not necessarily reflect its non-public information.

Similarly, central bank reports do not separate gold loans and swaps from gold reserves. In the twisted world of central bank accounting policies, spot gold and gold loans and swaps are listed on central bank balance sheets under a single item, Gold and Gold Receivables. Thus, the real state of the gold reserves of central banks involved in gold lending or gold swaps is unclear.

Gold lending also provides bullion banks with physical gold for leveraged and fractional-collateralized trading and banking, primarily in London, where the international spot price of gold is primarily determined. Thus, gold lending, the use of leverage and fractional collateral in gold trading, and insufficient reporting by central banks of the real state of their gold reserves could potentially have a negative impact on the price of gold as determined on the London gold market.

The Essence of Central Bank Gold Lending Through Bullion Banks

Central banks provide bullion banks with gold in exchange for a payment demand (gold deposit) at a modest interest rate of 1% per year. Bullion banks sell this gold on the market.

The bullion banks then refinance short-term gold deposits with the central bank.

The Central Bank lends gold to Bullion Bank A on a short-term basis: term deposit

Bank A

Bullion bank A sells central bank gold on the market

Market

Bullion Bank A pays interest to the Central Bank and retains the obligation to repay the principal of the loan

central bank

When the term of the short-term gold deposit expires, the Central Bank issues a deposit to the Bullion BankB. Bullion Bank A is out of the equation.

BankB

This rollover of short-term deposits at the central bank can take years: the same gold can be provided to many bullion banks

The gold is gone and the central bank is left with a claim on the bullion bank holding the gold deposit.

When a central bank lends gold, it loses ownership of it in exchange for a demand for gold. In such a case, the central bank is the unsecured creditor of the bullion bank.

Question: If the price of gold is now determined by paper gold markets, then under what conditions will physical markets be able to determine the price of gold?

There are two types of gold markets. On the one hand, the COMEX gold futures market and the London OTC unallocated gold market, with high leverage and the creation of gold reserves from nothing. On the other hand, physical gold markets borrow gold prices from these paper markets. Currently, physical gold markets do not affect the international price of gold.

The transition of dominance in determining the price of gold from paper markets to physical markets is possible only through the separation of the prices of physical gold and the prices of paper gold. Such a separation is possible in case of a change in trading behavior in the paper markets and/or with a sharp emphasis and asymmetry in the balance of supply and demand in the physical gold market.

The change in trading behavior in the paper gold markets refers to an increase in the frequency of paper gold payment claims (unallocated positions or gold futures positions) being converted into physical reserves, either directly using conversion rights or indirectly by selling paper gold and buying physical gold with the proceeds. gold. Many of these paper claims are held by institutional and wholesale market customers. Increasing the margin of paper gold holders requiring direct conversion of their paper payment claims into physical gold is likely to make such conversion impossible as exchange and market regulators and administrators may mandate cash settlement of futures and unallocated positions.

The indirect option is to sell paper gold and then buy in the physical gold market in the physical gold market from dealers such as Bullion Star. Such a move to physical gold would raise the demand for physical gold to the extent that it could exceed the supply of available gold. At the same time, the international price of gold will fall due to selling pressure in the paper gold markets, which will lead to a decoupling of the price of paper and physical gold and increase the riskiness of holding paper claims for gold for an extended period of time.

A trigger that could shift interest from paper gold to physical gold could be the realization by a critical mass of paper gold holders that physical gold reserves are limited, while paper gold claims are only partially backed at best. The recognition of this reality will be a self-fulfilling prophecy, inciting more and more holders of paper claims for gold to convert them into physical gold.

The modern physical gold markets have seen a steady movement of physical gold from West to East in the past few years, associated with huge demand for physical gold coming from China, India and most other Asian countries. While physical gold flows are dynamic and can reverse from destinations such as Hong Kong, Turkey, Dubai and Thailand, the same cannot be said for China and, to a large extent, India, where imported gold is not returned. Since 2001, India has imported over 11,000 tons of gold and China 7,200 tons.

As more gold is sent to places like China and India in quantities greater than annual production, there is less gold left in above-ground storage to cover the supply gap. Gold seems to be slowly disappearing from the banks. In addition, there is very little gold left in the London gold market that is not held in central bank gold reserves or ETFs. Furthermore, if paper gold holders choose to convert their paper payment claims into physical gold in the future, this could catalyze an even greater oversupply in the physical gold market.

In the scenario of the destruction of the paper gold market, ownership of physical distributed and segregated gold, that is, physical gold that is free from conflicting rights and claims and is not subject to loan or swap, is paramount. Already today, the paper gold market is a gigantic, dangerously inflated bubble, where a huge number of payment claims are backed by very small reserves of physical gold. The unstable nature of such a bubble suggests that it is a matter of time before it bursts. In such a scenario, owning physical gold is the only thing that can protect against the collapse of the financial system and the destruction of the gold fractional banking system.

Note:

Bullion Star supports freedom of speech and expression. We also believe that open discussion helps improve analysis and research. Diversity of opinion and thoughtful ideas are welcome on our blogging platform. The discussion is especially important when it comes to the gold market, which is often opaque and shrouded in secrecy deliberately created by its participants - powerful bullion banks and central banks.

Analyst Bullion Star in the field of precious metals Kus Jansen (KoosJansen) takes a different view and believes that although paper markets may have a short-term impact on the price, in the long term, the physical gold market has a significant impact on the formation of the price of gold. Due to medical leave, Kus was not involved in writing this article, but he summarized his views as follows:

« Thanks to my research in recent years, my opinion has changed from "gold price is completely determined in the paper markets" to "the physical market is more powerful in the long run, and the paper market is more powerful in the short term." This is my current position. In order to contain the price for many years and decades, central banks need reserves of physical gold, otherwise the price of paper and physical gold will not match. Probably a combination of paper and physical schemes».

Kus Jansen will later present his views by posting answers to the same or similar questions on the website. Bullion Star.

Gold trading between the countries of the world is carried out on the gold markets, i.e. special centers where regular purchase and sale is carried out at a market price for industrial and domestic consumption, hoarding, speculative operations, risk insurance, and the purchase of foreign currency for international settlements.

Now there are more than 50 gold markets:

in Western Europe - II markets, the largest of which are located in London, Zurich, Paris, Geneva and Frankfurt;

in Asia - 19 markets, the busiest - in Tokyo and Beirut, Hong Kong;

in America - 14 markets, of which 5 - in the USA;

in Africa - 8 markets.

Organizationally, such centers are based on banking consortiums that are authorized to carry out transactions with gold. Their duties include the concentration of applications and the implementation of intermediary operations between sellers and buyers.

Depending on the degree of government regulation, gold markets are divided into four main categories:

1) world - in London, Zurich, Frankfurt, Chicago, Hong Kong, etc.;

2) domestic free - in Milan, Paris, Rio de Janeiro;

3) locally controlled - in Athens, Cairo;

4) "black" markets - in Bombay.

Global and domestic free markets mediate between sellers and buyers, making both cash transactions in gold and structured futures transactions. Local markets are suppliers of gold mainly to local consumers.

The source of gold supply in international markets is the development of existing and new deposits. The main gold-mining powers are South Africa, the USA, Canada, the CIS states, and Australia. Annual gold production in the West in some years reaches from 1000 to 1800 tons.

London gold market.

The oldest gold market with rich traditions is London.

In its present form, this market has existed since 1919. Its main private player remains the same as before, the "club" of firms - the London Gold Brokers (London Bullion Brokers), they include:

"N. N.M. Rotshild and Sons, Samuel Montague, Republic Mays London, Standard Chartered Bank, Mocatta Group Group), Deutsche Shaips Picksley.

The London gold market has long played a dominant role in shaping the supply of gold on the market, it has always had a close relationship with the Bank of England, which not only performed the function of supervision, but also acted as an agent of the Government of South Africa and an intermediary for the gold pool banks (central banks of European countries).

It was on the London gold market that the fixing procedure was formed, which has been carried out since 1919 twice a day. Fixings are open in nature, i.e. fixing participants (representatives of the named companies), constantly keeping in touch with their clients by phone, telefax, Reuters dealing system and other modern means of telecommunications, tell them the prices that are offered at the auction , and clients, based on the compliance of the price with their interests, at any time can change the amount of metal in their instructions (orders) and even withdraw them.

Brokers match their available this moment orders to buy and sell metal and find the price at which the amount of gold offered for sale will be equal to the amount of metal in buy orders. As soon as the balance of supply and demand is established, the price is fixed and all transactions submitted for fixing are made at this single price. At the same time, buyers are charged a commission of 20-25 cents per ounce of gold, and sellers are paid a premium of 5-10 cents per troy ounce.

The prices of the London market are considered the most representative and are used as a reference base for various kinds of calculations, comparisons, and are included in long-term contracts.

The objects of trading at the fixing are standardized bars (“good-delivery bars”), i.e. having certain characteristics:

minimum....................... 350

maximum....................... 430

Purity, parts (for gold purity 1000) ...... 995

Each ingot must have a serial number, a mark on the sample (purity), a manufacturer's stamp.*

For quite a long time, the London Gold Market was a market for traders, since according to the Exchange Control Act, UK residents were not allowed to purchase gold, and professional dealers had to obtain a license from the Bank of England.

In October 1979, the government headed by M. Thatcher lifted these restrictions. However, this decision was somewhat belated, as markets in the United States and Switzerland developed rapidly, making it possible to use modern derivative financial instruments in transactions with gold.

An attempt to organize a gold futures market in London was unsuccessful. Created in 1982, this market stopped trading in 1985.

Gold market in Zurich.

The largest center of gold trading in the 70s. became Zurich. From the beginning of the 80s. Switzerland imported an average of 1200 to 1400 tons of gold per year, and exported from 1000 to 1200 tons. This shows that only a relatively small part of the precious metal remains in the country. Gold is used by the national watch and jewelry industry in modest amounts: in 1993, about 25 tons.

The great role of Zurich as a European center of trade is evidenced by the fact that Switzerland's gold imports account for 70% of gold mined in Western countries, of which 60% is then re-exported to various regions of the world. From the beginning of the 80s. Zurich has become the world's gold market, through which almost half of the world's industrial demand for gold passes. Switzerland imports about 40% of the world's total gold supply.

This is also evidenced by the volume of world trade in various regions. Thus, the volume of foreign gold trade in Dubai shows that 75% of gold is imported from Switzerland, in Singapore the share of such gold reaches 30%, and in Hong Kong the share of gold from the Zurich market is 25%. Why are such significant flows of gold flowing through the Zurich market to other countries?

There are two groups of factors that contributed to the transformation of Switzerland into the largest center of the world gold trade.

The first group includes factors of an economic and political nature, among which the following can be distinguished: ~ - political and economic stability:

Free convertibility of the national currency;

Low interest rates that encourage investment and a gold business that requires a lot of capital.

The second group of factors includes the high organizational and technical level of the banking system.

The market makers of the Zurich market are the "Big Three" banks (UBS, SBC, Credit Swisse), which very quickly adapted to new market conditions and changes in the requirements of their customers. The three largest banks in Switzerland own the large brokerage firm Premex AG, which makes not only slot transactions, but also operates on the forward and options markets.

The Big Three banks are among the innovative banks of the world, those that carry out a very wide range of the most modern gold transactions.

An example is the list of such operations provided by Credit Suisse Bank to its customers: - sale of a slot to metal accounts; - buying spot, physical delivery of gold;

term transactions (forward and option), swap transactions;

Providing loans secured by gold;

Transactions structured by order for short and long terms of execution;

Swap transactions by metal location;

Accounts (metal) with deferred tax payments;

Refining, melting, final processing of gold from semi-finished products.

The advantage of Swiss banks over others is their wide presence in the world gold markets in various regions of the world. The Big Three banks are represented on the precious metals markets in Europe (Geneva, Zurich, London), the USA (New York), the Far East (Tokyo, Singapore, Hong Kong), and Australia (Melbourne). This allows them to have a 24-hour presence in the international gold market, making transactions with physical gold and with “paper” metal. Clients are offered gold bars of various sizes and a wide range of transactions, including complex derivative financial instruments.

US gold market.

Demonetization of gold in the 70s. made it possible to repeal the 40-year-old Gold Ban Act, under which US citizens were not entitled to private ownership of gold in bullion form.

The liberalization of the gold trade has led to the rapid transformation of the New York Mercantile Exchange (Commodity Exchange, COMEX) and the International Monetary Market (International Money Market, IMM) of the Chicago Mercantile Exchange (Chicago Mercantile Exchange) into the largest trading centers for gold futures contracts. It is in these centers that more than 90% of all futures contracts for the supply of gold are concluded.* Therefore, almost all European dealers participate in arbitrage transactions or hedge positions made during the European session.

The American futures markets still perform an important economic function today, which consists in the fact that speculators who take risks in these markets create the necessary level of liquidity that allows real producers and consumers of gold to hedge against price risk. Most transactions are speculative and do not end with the physical delivery of gold.

Along with futures exchange trading in gold in New York, there is a market for gold in bullion form, from where wholesale dealers supply gold to industrial and commercial consumers, and also offer metal for hoarding in different form(coins, medals, etc.).

In the last decade, along with the exchanges, the leading American banks, which are currently market makers on the international gold market, such as J. R. Morgan, J. Aron & Co., have been participating in gold trading in the last decade. Finally, there are brokerage firms operating in the US market that actively trade in financial assets and buy and sell transactions with titles of ownership of bullion gold. The New York and Chicago markets, which gained momentum after the lifting of the 1975 ban on US residents from trading in gold, are among the younger gold markets. A feature of these markets is the wide distribution of transactions of a predominantly venture nature. These include term transactions (fornard and futures), which are concluded for 1, 3, 6 months and the execution of which is carried out at a price fixed at the time of the transaction. The amount of the contract is strictly determined by the volume of 100 ounces.

Other Gold Markets The Canadian Gold Exchange has become the hub for option trading. From the end of the 80s. operations are intensively carried out on the Hong Kong gold market, where large gold dealers from Zurich, London, New York and Frankfurt have representative offices. The objects of trade are both gold bars and coins, plates, sheets, gold scrap. Since 1980, the Hong Kong Commodity Exchange has been trading in futures contracts.

Among the relatively new domestic free markets is the gold market in Turkey. The liberalization of trade in the precious metal in 1989 allowed the Turkish market to quickly become a significant regional center for the sale of gold, through which more than 200 tons of gold passed in 1993 (for comparison, in the same year Germany imported 140 tons of gold, of which 50% remained domestically for use in jewelry, dentistry, electronics and other industries). The Turkish market is a supplier of precious metal both for the national industry and for the Middle East region - to Syria and Iran.

The competition for the Turkish market in the Middle East is the older regional gold market in Dubai, which flourished in the 1950s. was based on the smuggling of precious metals. Currently, Dubai is a supplier of gold to the jewelry industry in India, Oman, Bahrain, Kuwait, Saudi Arabia, Iran. In 1994, Dubai's imports amounted to about 260 tons of gold from Zurich, London and Beirut.

Among the locally controlled markets, the Saudi Arabian gold market stands out, which provides the local jewelry industry with raw materials through imports: for example, in 1993 over 100 tons of gold were purchased.

In 1993, the local Indian gold market received 257 tons of newly mined gold, which is 11% of the total world production. After the liberalization of the gold trade three years ago, non-residents were allowed to bring up to 5 kg of gold per person, and official imports increased significantly.

A special place among structured forward transactions is occupied by gold swap transactions, the scheme of which is similar to a similar transaction with a currency, i.e. a combination of a cash and counter forward transaction. When buying 500 ounces of gold in a cash transaction (slot) at a price of $360 per ounce, the dealer simultaneously sells 5 counter-accounts for a period of 100 ounces at a price of $375 per ounce. In addition to the obvious profitability, this operation with gold has some other advantages. Therefore, swap operations are carried out not only by large banks and small financial companies, but also by the central banks of countries that need to buy foreign currency without parting with their gold reserves.

Such a transaction was carried out in 1976 by the Central Bank of South Africa. who sold 1 ^ 5.5 tons of gold to Swiss banks on slot terms and simultaneously entered into a forward deal for a period of 3 months to purchase this gold.

The same deal scheme is used by the central banks of the EMU member countries to provide 20% contributions towards the ECU gold issue on the basis of a three-month swap deal, without losing ownership of highly liquid assets such as gold.

These are special, specialized centers located on the territory of developing and developed countries of the world, where regular trade in "solar" metal is carried out.

The sellers in the gold markets are the states that are engaged in the extraction of this mineral, the Central Banks, the owners of gold reserves. Industrial firms, jewelers, speculators and investors are the buyers of this precious metal.

Classification of gold markets

There are domestic and foreign markets for gold. On international markets, "solar" metal is sold mainly in the form of standard ingots weighing 12.5 kg, 999 or 995 samples, with obligatory hallmarks of mints and refineries.

In domestic markets, gold is sold and bought in the form of bars weighing from 5 g to 1000 g, as well as in the form of plates, coins, sand, discs and sheets.

In Europe, the following largest domestic markets for "solar" metal are successfully operating, located in French Paris, Italian Milan, German Frankfurt am Main, Japanese Tokyo, Brazilian Buenos Aires and Rio de Janeiro.

Domestic markets for "solar" metal are classified into free and non-free or controlled (in Cairo, Athens). In countries where the government imposes currency restrictions on transactions with gold, so-called shadow ("black") markets (in Bombay) are formed.

Gold markets are also classified into exchange and over-the-counter. "solar" metal is represented by trading floors of precious stones and precious metals.

On the over-the-counter gold markets, there are consortiums of local banking institutions whose main task, along with trading in the "solar" metal, is to manufacture ingots of various sizes and carry out refining, that is, purification of the precious metal.

International markets for "solar" metal

In the world today there are about 50 markets for this precious metal. There are 11 of them in Western Europe, 19 in Asia, 11 in America, and 8 in Africa.

Great Britain

London Bullion Market (abbreviation LBM), which means the London bullion market, is the center of international trade in "solar" metal. It is controlled by the Gold Bullion Market Association. It includes 10 largest British banks (market makers), and five of them (Barclays, Bank of Nova Scotia, Deutsche Bank AG, Societe Generale, HSBC Bank USA) fix the "solar" metal. The price of this precious metal is fixed twice a day (at 10:30 and 15:00).

New York

In December 1974, the solar metal market was formed in New York. This year, the President of the United States allowed the free sale/purchase of gold.

The New York market of "solar" metal is distinguished by one feature: derivative commodity instruments are very popular here (futures and options trading is developed). The use of futures in trading this precious metal began back in the 70s of the last century (initially on the Wennipeg Commodity Market in Canada, later on the New York Mercantile Exchange (abbreviation COMEX) and Chicago.

Today, it is COMEX that is considered the central market for "solar" metal in the United States.

Switzerland

Since 1945, this state has been the center of the wholesale trade in "solar" metal in ingots. Banking institutions "Credit Suisse", the United Bank of Switzerland and the Swiss Bank at that time controlled the jewelry market in Italy, India and the Middle East. In 1954, after the resumption of the activity of the London Bullion Market, the above banking institutions became the main buyers of the gold that was sold on it.

In the 70-80s. two largest producers of "solar" metal worked with Switzerland: the USSR and South Africa. About 1000 tons of gold passed through its market every year.

Today, the Swiss gold market, although still an international center for the bullion trade, is no longer very popular. Most of the operations with "solar" metal, the largest banking institutions in Switzerland have transferred from Zurich to London.

Japan

Operations with "solar" metal in this state are carried out on a commodity trading floor in Tokyo (abbreviation TOCOM). The latter was formed in 1984 by the merger of three institutions such as Tokyo Gold, Textile Products Exchange and Rubber Products Exchange.

TOCOM trades gold futures contracts (one-kilogram bars of 999 fineness - minimum) in yen.

Singapore

In April 1969, the solar metal market was formed in Singapore. It should be noted that the consumption of gold by the state itself is insignificant. Singapore is a center for the redistribution of physical gold flows to countries such as Indonesia, Southeast Asia, Vietnam, Thailand, Pakistan and India.

India

the state is the largest consumer of "solar" metal in the world. Official gold to India at the end of the last century was estimated at 660 tons per year. India's gold reserves are approximately 11,000 tons.
The main trading center for "solar" metal is located in the Indian city of Mumbai (former Bombay).

Russia

At times Soviet Union transactions with "solar" metal on the domestic market were strictly prohibited. Gold was mainly sold in Zurich, Switzerland.

In the 1990s, gold mining in Russia decreased significantly. Today, about 600 enterprises (Nori Nickel, ALROSA) are engaged in gold mining in the Russian Federation. In 2005, Russia exported about 120 tons of "solar" metal.

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The global gold market in a broad sense covers the entire circulation system of this precious metal on a global scale - production, distribution, consumption. The volume of gold supplies to the global market consists of three sources: gold mining, its recycling and pure gold hedging. At present, the third source has practically no effect on the market. In 2015, gold supplies to the market were determined by its mining (73%) and recycling (27%) (Table 1).

The volume of gold supplies to the market in 2015 amounted to 4,306 tons, having increased by more than 30% compared to 2006, mainly due to the growth in its production and risk hedging.

The peculiarities of the gold market are that, firstly, gold is used by virtually all states as an insurance and reserve fund. The recorded state reserves of gold, concentrated in the Central Banks and the IMF reserves, today amount to more than 31,500 tons.

A significant part of these stocks may be put up for sale. Secondly, the population has even larger amounts of gold (jewelry, coins, etc.). Some of this gold - at least in the form of scrap - also enters the market. As a result, the following picture emerges. The main share in the supply of gold falls on its mining. But production volumes have a significant inertia, respectively, the supply of mined gold from year to year has a relatively small variation - much less than the supply of scrap gold, the sale of gold by banks and investors.

An analysis of the global trends in the development of gold mining and exploration over the past 25 years shows that both increase and decrease in gold production are actively manifesting themselves. The multiple increase in the market price of gold in the seventies dramatically affected the activity of its producers in most countries of the world community. It became profitable to process poor and difficult-to-dress ores; bring into operation off-balance reserves (previously considered unsuitable for production due to technical, technological and economic reasons); to resume the operation of previously abandoned and "mothballed" quarries and landfills, mines and shafts; process man-made dumps of many mining and processing plants containing a certain amount of metals (as associated components or incompletely extracted during primary processing).

Fundamental changes in the technology of metal extraction due to heap, heap with cyanidation and biological leaching in columns, the "coal in pulp" method, the improvement of other pyro- and hydrometallurgical methods (for example, autoclave concentration of refractory ores) made it profitable to recycle poor ores and preserved " tailings” of gold recovery plants with a gold content of 1.0–0.3 g/t or less.

The geographical structure of gold mining in the world has changed radically over the past three decades. New large gold producers have emerged in the southwestern part of the Pacific Ocean - the Philippines, Papua New Guinea and Indonesia. Gold mining in Latin America grew rapidly. Significant shifts in the territorial structure of gold mining also took place during the 1990s.

Between 1993 and 2005, gold production increased: in Peru by almost 850%, in Indonesia by 368%, in China by 180%, in Mexico by more than 100%, in Mali gold production increased 10 times , gold mining industries were created in Argentina and the Kyrgyz Republic, and this is with a growth of only 8.7% in the world. At the same time, production in South Africa continued to decline - by more than 50% over ten years, and although in 2002, for the first time in 9 years, metal production increased by 1% compared to 2001, in 2003 gold production in this country fell again. In 2015, gold production in South Africa amounted to only 150 tons.

Global gold production has increased continuously since 2006 and reached 3,158 t in 2015, up 26% from 2006 levels. almost 2 times.

The top 20 producing countries accounted for 83% of all world gold production in 2015 (Table 2).

China remains the largest gold producer, far ahead of other producing countries. In 2015, it accounted for 14.5% of world gold production. However, in terms of reserves, it is significantly (4 times) inferior to Australia and Russia. China is followed by Australia, Russia, the USA, Peru, Canada, South Africa, Indonesia and Mexico, which annually extract more than 100 tons of gold. These nine countries account for 62% of the world's gold production.

Over the past 10 years, production has grown most rapidly in Russia (1.5 times), Canada (1.5 times), Mexico (3.2 times), Brazil (1.7 times), Colombia (1.8 times) and China (1.9 times).

In the US, Peru and especially in South Africa, production was declining. In other countries, it generally stagnated. As a result of these trends, South Africa has lost its role as a world leader in gold production, dropping to seventh place. The United States moved from second to fourth place, while Russia moved up from sixth to second (Table 3).

Gold mining and refining make a significant contribution to the country's economy. Such a contribution is determined by the size of conditionally net production (value added). This indicator is usually calculated in two ways. The first, the so-called. income, includes calculations of the amounts of operating profit, depreciation and labor costs. The second method is the so-called. production, in which conditionally net production is calculated as the volume of sales of gold minus the cost of intermediate goods and services consumed in production. According to calculations, the volume of nominally net production in the gold mining industry of the 15 leading mining countries in 2012 amounted to $ 78 billion. This amount exceeds the national income of such countries as Ecuador or Azerbaijan with a population of 15 and 9 million, respectively, or 30% of the gross Shanghai product. The contribution of gold mining is especially important for a number of developing countries. Thus, the gold mining company Newmont Ghana Gold creates 48.3 thousand jobs in Ghana, of which 1,700 are in the company itself and 5,100 in supplier companies. If we take into account all the activities associated with gold mining, then total number jobs in this country reaches 32 thousand.

A similar study conducted by the World Gold Council showed that the four largest gold mining companies in Peru directly created 4.5 thousand jobs in this country and contributed 1.4% to the country's GNP. Another 4,000 workers were employed in related industries.

The volume of conditionally net production of the gold mining industry for the leading countries is shown in Fig. 1. China’s gold mining generated the largest volume of value added products – $12.6 billion in 2012.

However, its contribution to the country's GDP was insignificant - only 0.2%. In the US, Russia, Australia, and Peru, PPPs were $9.3, $8.6, $8.6, and $8 billion, respectively.

The largest contribution of gold mining products was recorded in Ghana - 8%, Uzbekistan - 5%, Papau New Guinea - 15%, Peru - 3%, Tanzania - 6%. For these countries, gold mining is a large and important sector of the national economy. Value added per ounce of gold mined ranges from $946 in China to $1,352 in Peru, with a global average of $1,139.

Another indicator of the contribution of gold mining to the economy is the number of employees. Such data for 15 leading countries are given in Table. four.

Comparison of production volumes with the number of employees reveals a picture of the efficiency of the gold mining industry. Some of the highest production rates were recorded in the USA (20.8 kg/person), Peru (18.8 kg/person) and Canada (15 kg/person), and the lowest in China (4 kg), Russia (1 .7 kg) and South Africa (1.2 kg). The average volume of value-added production produced in gold mining per employee in 14 leading producing countries amounted to $295,000. At the same time, it was the highest in the USA - $842,000, and the lowest - in South Africa - $40,000 .

In 2015, 6 out of 10 companies reduced their production volumes, which was mainly due to low gold prices, one of the consequences of which is the reduction in capital expenditures and the development of new deposits. The depreciation of national currencies has a short-term positive impact mainly on those companies that operate within the same or closely related markets, which explains the generally worse dynamics of gold mining by the largest producing companies, which in most cases operate in several markets.

In January 2017, the Russian company Polyus acquired the right to develop the largest gold deposit, Sukhoi Log. Gold resources in this deposit are estimated at the level of 1953 tons, silver - 1541 tons. Such resources make it possible to extract 80–90 tons of gold and 20–25 tons of silver per year. Sukhoi Log's achievement of planned indicators will become a global phenomenon, moving Polyus from ninth to second or third place in the world.

The given data relate to the official sector of gold mining, large and medium-sized companies. However, the handicraft and small business (ASM) sector also plays an important role in gold mining. This sector is characterized by the exploitation of small and so-called. marginal deposits, lack of significant capital, high labor intensity and weak links to the market and related services. According to some estimates, the artisanal and small-scale industry sector produces 330 tons of gold annually, or 12% of the world's total production. The level of employment in this sector is difficult to estimate, but, according to some calculations, it is 10 times higher than employment in large mining companies, i.e. is at the level of 5 million people. .

The earnings of gold miners in this sector range from 5 to 10 dollars per day. This sector is also characterized by weak state control, almost no social protection, the use of child labor and the smuggling of gold by criminals. Table 1 gives an idea of ​​the role of the sector of small companies and handicrafts in the gold mining of a number of countries. 6.

Another important indicator of the development of the gold mining industry is the level of investment in the industry by mining companies. In table. 7 presents data on capital investments of gold mining companies in 14 leading countries of the world (for which there are official statistics). Capital investments are divided into two types: current investments to maintain current operations and investments to expand production (production), as well as to develop new deposits.

In 2012, the total volume of investments in gold mining by the leading countries of the world amounted to almost 18 billion dollars. These data do not cover the entire production, since in some countries, especially in China, such statistics are significantly underestimated.

It is noteworthy that investments in the expansion and development of production are almost twice as high as investments in maintaining production.

However, the situation varies by country. The countries most focused on further growth in gold production are Canada (investment in expansion is 5.6 times more than maintenance costs), Russia (6 times), Brazil (4.2 times), Argentina (4.5 times). But in countries such as South Africa, Indonesia and China, capital investments are directed mainly to maintain current production, which indicates a possible reduction in the medium term.

For some countries, gold mining is a significant source of exports and, consequently, a source of foreign exchange earnings (Table 8).

The largest exporters of gold in the world market are the USA and China, the export volume of which in 2012 amounted to 34 and 23 billion dollars, respectively. For a number of countries, gold exports accounted for an important part of national exports: for Tanzania - 36%, for Ghana and Papua New Guinea - 26%, for Peru - 21%. For the USA and China, despite their leading positions in gold mining, its exports did not play a significant role in the total exports of these countries, accounting for 2.2 and 1.1%, respectively.

As a major sector of the national economy generating employment and a social product, gold mining by mining companies provided cash receipts to countries where such companies operated through a variety of taxes and fees. Table 9 summarizes the taxes and fees levied on gold mining companies in the world's leading countries.

Table 9 shows that the most common tax in the gold mining industry is a royalty levied on the volume of turnover, reflecting the level of resource utilization. Another common tax is a license fee collected at the beginning of the exploitation of deposits.

These tables allowed PwC to calculate the volume of payments received by the state from gold mining companies in the top 14 countries of the world. This information is presented in Table. ten.

The table shows that the largest revenues to the state budget from gold mining are recorded in China and Russia, respectively, 1400 and 800 dollars. Both countries have relatively high royalty rates per ounce and large production volumes.

Unlike royalty payments, receipts from other taxes and fees are difficult to estimate. In many cases, these payments fluctuate from project to project. Moreover, tax payments in gold mining can change over the life cycle of mining. Thus, during the period of exploration, permitting and preparation of the field, which can last from seven to ten years, tax revenues are usually minimal. After the start of production, revenues from royalties and excises appear. However, until the initial investment pays off, corporate income tax revenues are also minimal.

Recycled gold is gold obtained from the processing of gold-bearing products, or scrap.

In table. 11 presents data on the production of such gold by country.

As already noted, the production of gold from production waste is a significant part of the total supply of this metal to the global market. However, over the past 10 years, the role of this segment in the global gold market has decreased from 37% in 2006 to 27% in 2015. At the same time, in a number of countries, such as China, Russia and the UK, the production of such gold has increased markedly, and in the United States , Indonesia and South Korea, on the contrary, decreased significantly. As a result, the US and South Korea lost the leading positions they held in the mid-2000s.

In the world market, the total demand for gold is formed from four main parts:

Buying gold by central banks

Investment demand for gold bars and coins

Jewelry

Manufacturing industry and technological use

The role of each of these sectors is presented in fig. 2.

The main gold consuming countries are clearly divided into two groups. On the one hand, this is a group of technically developed countries. They use gold relatively widely in various fields of technology and industry, as well as for the manufacture of jewelry. Among the countries leading in the use of gold for technical purposes are Japan, the USA and Germany.

Here, gold acts as an indicator of the development of high technologies in the electronic and electrical, space, instrument-making industries, etc.

Gold is an important element of reserve assets for central banks and investors. Central banks are thus an important source of demand for gold and their purchases in 2012 amounted to 535 tons, or 12% of the total demand for the metal. The price of gold is sufficiently resilient to inflation and allows central banks to effectively hedge against exchange rate fluctuations associated with economic and monetary policy. One of the latest studies by the World Gold Council shows that gold is an effective alternative in the strategy of central banks to diversify reserves. In addition, the price of gold is resilient to macroeconomic shocks and therefore able to maintain liquidity during times of economic turmoil.

The weak dependence of gold on the dynamics of key currencies and a strong negative correlation with the dollar makes gold an ideal investment for risk hedging. Due to these properties, gold is also an object of investment by individuals and companies, which account for 35% of the world's demand for the metal. The largest segment of demand for gold is production jewelry accounting for more than 40% of global demand. The world's largest producers of gold jewelry are India and China (Table 12).

Over the past ten years, the share of the top 10 gold jewelry manufacturers has grown from 69% to 77%. At the same time, in all countries except China and India, such production tended to decrease, especially in Turkey, Japan and Italy. As a result of production growth in India and China, the share of these countries in 2015 exceeded 50% of world production.

Gold is also used to produce various industrial technological goods. Such qualities as electrical conductivity, ductility and resistance to corrosion have made gold an important component in the manufacture of electronic equipment and instruments. In some areas, such as installation wires (due to the high cost of gold components), alternative metals (copper, silver) are increasingly being used. However, they are not an ideal replacement for gold (having some similar characteristics) mainly due to less corrosion resistance.

Even in the production of mounting wires, gold continues to play a leading role per unit length (1 m). Gold is also indispensable in the production of devices operating under increased load, aggressive environments and safety requirements (automatic brake systems and medical equipment).

The largest industrial consumer of gold is the electronics industry (70% of industrial gold consumption). Gold also plays an important role in healthcare and pharmaceuticals due to its biocompatibility and resistance to the spread of bacteria. Research is underway on the use of gold in the treatment of cancer and some biomedical devices. Gold is part of medical diagnostic devices. For example, in 2012, 160 million malaria test kits were used around the world, each containing gold nanoparticles, allowing for accurate and cost-effective diagnosis and treatment of the disease .

Finally, gold is increasingly being used in green technologies, including clean energy production, emissions control, and as catalysts in chemical processes. For example, in the automotive industry, gold is expected to be used in exhaust catalytic converters to reduce emissions of harmful substances into the atmosphere.

In table. 13 presents statistics on the industrial consumption of gold in a number of leading producing countries. In total, about 400 tons are sent for these purposes in the world. The main industrial consumer is the electronics industry with a share of about 70%. China and the USA are the main consumers of gold for industrial purposes; with the United States leading in consumption in electronics and China in dentistry. In general, the seven leading countries presented in Table. 13 accounts for about 50% of the world's industrial consumption of gold.

The specificity of gold as an investment product affects its price, the volatility of which is much higher than the volatility of prices for most other mineral resources, which is explained by the high share of the investment component in the demand structure.

In addition to prices, the problem for the industry remains the decline in capital investments in the depletion of deposits with a high content of gold in ore. The low level of investment in the development of new deposits may, over time, lead to an increase in average costs per ounce of metal mined and a decrease in already price-pressed margins.

In 2012, gold prices peaked at $1,684 per ounce on average for the year, which was primarily due to the strong demand for the metal from investors. In 2013, gold prices slightly decreased, but remained at a fairly high level - about $1,400 per ounce. In 2015, the average gold price was $1,160.1 per ounce. In 2016, gold prices began to rise and rose above $1,300 per ounce.

As you can see, gold is not going to lose its position as one of the leading financial instruments, although formally the yellow metal has not been synonymous with money for more than thirty years: after the abolition of the gold standard in 1971, no currency is associated with the price of gold, and settlements between states are carried out according to a form more modern than the physical movement of ingots from one vault to another. But the gold reserves of states remain an essential factor in its power. This becomes especially noticeable in times of economic instability: even a not too deep crisis inevitably entails an increase in gold prices. If we also take into account that the volume of world gold production is falling, and the demand for the precious metal (not only from financial institutions, but also from the aviation, space, jewelry industries, and medicine), on the contrary, should grow, it is easy to conclude that gold mining is still a profitable and socially significant business.