Gold Market Primer Gold Prices

March 2018 www.gold.org

Price discovery is crucial for any market. Gold Summary not only has a spot price, but it also has the LBMA Gold Price, as well as several regional  The LBMA Gold Price is an important reference price for prices. The LBMA Gold Price is used as an the market. The price is used globally by numerous different participants, including bullion banks, central important benchmark throughout the gold banks, miners and fabricators. market, while the other regional prices are  The LBMA Gold Price is determined via an auction important to local markets. process, whereby participants submit buy and sell orders. The price is continually adjusted until these are in balance This primer serves as an introduction to the Bullion and the price is agreed. Market Association (LBMA) Gold Price, as well as other key  Regional gold prices reflect local dynamics. has gold prices across the globe. The first section is an introduced the Gold Benchmark Price to better introduction to how the LBMA Gold Price is determined reflect an RMB-denominated reference price. In India, and used. The second section provides an overview of the local gold prices are affected by several factors, and can Shanghai Gold Benchmark Price, while the third section vary from state-to-state. explores the factors affecting prices in India.

1

auction is over, they will have a bilateral trade with their LBMA Gold Price Direct Participant. They do not share in the imbalance. In March 2015, the LBMA Gold Price was introduced, To be able to qualify as a Direct Participant of the auction, replacing the historic London Gold Fixing. This change firms must have the following: brought the process in line with modern financial practices  Ordinary Member accreditation from the LBMA and is compliant with regulatory bodies such as  Individuals with appropriate experience, skill and training International Organization of Securities Commissions  Organisational and governance arrangements (IOSCO).  Appropriate credit lines, or equivalent arrangements The price-setting process takes place on the ICE  Clearing/settlement arrangements with existing Direct Benchmark Administration (IBA) auction platform, which Participants provides independent administration and governance. 1 LBMA Gold price discovery process The price is set in US dollars per troy ounce. (- and euro-denominated prices are also available, although these are indicative and for settlement purposes only). 2 Mechanics of the new price determination process There are similarities between the LBMA Gold Price and the London Gold Fixing: the price is set twice a day, at 10:30 and 15:00, and is determined via an auction process. The key attributes of the new mechanism are:  An independently administrated and tradable auction process  An electronic, physically settled auction  Aggregated and anonymous bids and offers published on- screen and in real-time  Auction conducted in US dollars. The process begins with the Chairman setting an opening Source: ICE Benchmark Administration, World Gold Council price for the auction. 3 Participants enter their buy or sell volumes at this price, and the imbalance (net volume) is calculated. If the imbalance is below 10,000 ounces, then the auction is complete and the price set. If the imbalance As of December 2017, 13 institutions were accredited as is above the 10,000-ounce tolerance, the price is adjusted, participants in the LBMA Gold price process, 12 of which and participants resubmit buy and sell orders at this new were Direct Participants: price. This will continue until the buy and sell orders are balanced (within 10,000 ounces when netted).   Bank of Communications If there is an imbalance, but within 10,000 ounces, then the  Goldman Sachs International imbalance is shared equally amongst the participants  HSBC Bank USA NA (irrespective of whether they submitted an order in the  Industrial and Commercial Bank of China auction or not) to maintain fairness.  INTL FCStone Who participates in the auction process?4  JPMorgan Chase Bank, N.A. London Branch There are two different categories of participant in the  Jane Street Global Trading auction: Direct Participants and Indirect Participants. The  Koch Supply and Trading LP former manage their buy and sell orders through the ICE  Koch Commodites Europe Ltd.* Trading Platform and will share any imbalance. At the end  of the auction, their orders will be centrally cleared or  The Bank of Nova Scotia - ScotiaMocatta settled bilaterally with other Direct Participants. Indirect  Toronto-Dominion Bank Participants are clients of a Direct Participant. They manage *Indirect Participant their own orders via the ICE Trading Platform and once the

1 www.theice.com/iba/lbma-gold-silver-price 3 However, unlike the historic gold fix, the Chairman is appointed by the IBA 2 The price discovery process will be in US dollars, but the participants can and is independent from any participant in the process choose to settle in an alternative currency if they wish. 4 www.theice.com/iba/lbma-gold-silver-price

Market Update | Gold Prices 2

Governance and oversight SGE Benchmark gold price was launched in April 2016 The process introduced in March 2015 has been important in bringing gold market pricing in line with current market principles and regulations. However, governance and oversight of the process goes further. An Oversight Committee was created to monitor, assess and review all aspects of the benchmark, ensuring that it evolves to meet the needs of the market, while still adhering to regulation and its published methodologies. Should there be any change in regulation or market requirements, the committee will oversee any necessary adjustments to the benchmark. The committee, whose members are respected veterans from a diverse cross section of the market, is responsible for ensuring that direct participants of the process adhere to their pledged Code of Conduct.5 From Left to Right: Song Xin, Chairman, China Gold Association; Jiao Jinpu, Chairman, Shanghai Gold Exchange; Pan Gongsheng, Deputy Governor, People’s Bank of China; Zhao Wen, Vice Mayor, Shanghai Municipal Shanghai Gold Government; Aram Shishmanian, CEO, World Gold Council Benchmark Price Source: World Gold Council

In 2016, the Shanghai Gold Benchmark Price was introduced with the intention of providing a reference price  A Fixing Member can submit market reference prices for gold within China. The purpose of the Shanghai Gold during the designated window before the centralised Benchmark Price is “To provide a tradable and reliable auction begins and can make a supplementary offer RMB-denominated gold benchmark price…” and “To against the imbalance. Fixing Members are made up of improve the development of China’s financial market”.6 domestic and foreign banks.  A Reference Price Member can submit a market How is the benchmark price determined? reference price only during the first round of the The Shanghai Gold Benchmark Price is an RMB- centralised referencing price offering period. Reference denominated reference price which is set twice a day – Price Members are made up of domestic gold consumers 10:15 and 14:15 (Beijing time) – through a centralised and producers, as well as banks. auction process hosted on the Shanghai Gold Exchange’s trading platform. The first price was set on April 19, 2016 at 256.92 yuan/gram. SGE Gold Benchmark Price discovery process The price discovery process is similar to that of the LBMA Gold Price: participating members submit buy and sell orders from their clients based on an initial market price.7 These orders are aggregated, and the price adjusted, until the orders are in balance to within 400 kilograms. Who participates in the auction process? The auction participants are divided into two categories: Fixing Members and Reference Price Members. Both can submit market reference prices in the designated window before the centralised auction begins. In the event of an imbalance, Fixing Members can submit a supplementary offer until the imbalance is corrected.

Source: Shanghai Gold Exchange; World Gold Council

5 www.theice.com/publicdocs/LBMA_Gold_Price_Code_of_Conduct.pdf 7 The initial price will be determined in one of three ways: 6 Shanghai Gold Exchange, Shanghai Gold Benchmark Price White Paper www.en.sge.com.cn/upload/file/201703/24/QWVkHbWRqxCONGSK.pdf

Market Update | Gold Prices 3

 Taxes: As with any imports, taxes and duties are applied Indian Gold Prices when gold enters the country, which will create a differential between the local price and the international Unlike London and Shanghai, gold prices in India are not price. Gold imports are subject to a 10% import duty and determined through a formal exchange. Rather they are a 3% Goods and Service Tax (GST)1. These are added to determined by local jewellery associations in each state the international price, to generate what is known as the according to local market dynamics. This contributes to a ‘landed’ price of gold. fragmented market: different prices are quoted in Chennai,  Import restrictions: India has, in the past, imposed , Delhi and Kolkata, for example. market-disrupting rules on gold imports, making the local The factors determining the local price can be either price move away from the global spot price. For example, national or state-specific and include: in 2013 the Indian government implemented the 80:20 rule, where for every 100t of gold imported, 20t had to be  Exchange rate (to US dollar): As India does not produce gold in significant quantities – just 2t of gold per year – it exported as jewellery. must import almost all the gold it consumes. As a result,  Seasonal factors: India's demand is connected to a gold prices in India are heavily influenced by the broad range of local factors, including wedding seasons, international gold price. The exchange rate will also affect religious festivals, harvests and the monsoon. The the price at which importers will be able to source the relative strength or weakness of these events can affect metal. demand and push the local price to a premium or a discount.

Chart 1: Indian premium and discount

Source: Thomson Reuters Eikon; Multi Commodity Exchange of India Ltd; Reserve Bank of India; NCDEX; World Gold Council

1 21 January 2013 Import tax increased to 6% from 4% 2 05 June 2013 Import tax increased to 8% from 6% 3 22 July 2013 Introduction of 80:20 policy 4 13 August 2013 Import tax increased to 10% from 8% 5 28 November 2014 Removal of 80:20 policy 6 01 January 2016 PAN card mandatory on jewellery purchases above 2 lakhs 7 01 July 2017 Introduction of nationwide Goods & Services Tax (GST)

1 Goods and Services Tax (GST) was introduced in July 2017 to replace the multi-layered VAT system. For more information, visit www.gold.org/research/market-update/gst-impact-on-indias-gold-market

Market Update | Gold Prices 4

About the World Gold Council For more information

The World Gold Council is the market development organisation Please contact: for the gold industry. Our purpose is to stimulate and sustain Market Intelligence demand for gold, provide industry leadership, and be the global [email protected] authority on the gold market.

We develop gold-backed solutions, services and products, based on authoritative market insight and we work with a range of partners to put our ideas into action. As a result, we create structural shifts in demand for gold across key market sectors. We provide insights into the international gold markets, helping people to understand the wealth preservation qualities of gold and its role in meeting the social and environmental needs of society. Based in the UK, with operations in India, the Far East and the US, the World Gold Council is an association whose members comprise the world’s leading gold mining companies. World Gold Council 10 Old Bailey, London EC4M 7NG United Kingdom

T +44 20 7826 4700 F +44 20 7826 4799 W www.gold.org

Copyright and other rights © 2018 World Gold Council. All rights reserved. World Gold Council and the World Gold Council does not guarantee the accuracy or completeness of any Circle device are trademarks of the World Gold Council or its affiliates. information. World Gold Council does not accept responsibility for any losses or damages arising directly or indirectly from the use of this information. All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational This information is not a recommendation or an offer for the purchase or sale of purposes only. ICE Benchmark Administration Limited accepts no liability or gold, any gold-related products or services or any other products, services, responsibility for the accuracy of the prices or the underlying product to which securities or financial instruments (collectively, “Services”). Investors should the prices may be referenced. Other third-party content is the intellectual discuss their individual circumstances with their appropriate investment property of the respective third party and all rights are reserved to them. professionals before making any decision regarding any Services or Reproduction or redistribution of any of this information is expressly prohibited investments. without the prior written consent of World Gold Council or the appropriate This information contains forward-looking statements, such as statements copyright owners, except as specifically provided below. which use the words “believes”, “expects”, “may”, or “suggests”, or similar The use of the statistics in this information is permitted for the purposes of terminology, which are based on current expectations and are subject to review and commentary (including media commentary) in line with fair industry change. Forward-looking statements involve a number of risks and practice, subject to the following two pre-conditions: (i) only limited extracts of uncertainties. There can be no assurance that any forward-looking statements data or analysis be used; and (ii) any and all use of these statistics is will be achieved. We assume no responsibility for updating any forward-looking accompanied by a citation to World Gold Council and, where appropriate, to statements. Metals Focus, Thomson Reuters or other identified third-party source, as their source.

Market Update | Gold Prices 5