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Pdf Gold Prices 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 London Bullion and the price is agreed. Market Association (LBMA) Gold Price, as well as other key Regional gold prices reflect local dynamics. China has gold prices across the globe. The first section is an introduced the Shanghai 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. (Pound sterling- 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 China 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 Morgan Stanley 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 Mumbai, 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.
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