In terms of product coverage, the survey sought data on a range of gold and silver products, including spot transactions, forwards and options. Institutional coverage was limited to the Market-Making Members of the LBMA (14 in May 1996), so the survey is not representative of the total activity in the London market. The significant amount of business undertaken by the 50 or so Ordinary Members of the LBMA, for example, falls outside the scope of this survey. Furthermore, London is home to a significant amount of 'over-the-counter' business that is conducted outside the UK but on a Loco London basis and similarly this is not captured by the survey.

There is also a growing tendency across a range of financial markets for firms to centralise certain middle and back office functions in a small number of locations. A number of international bullion houses, for example, choose to book deals that are traded in London in a single overseas centre to facilitate their risk management function. These deals are recorded in the Bank's survey which, encompasses trading undertaken in both an agency and principal capacity.

The last five years have seen some notable developments in the composition of the market, not least the increasing participation and sophistication of central banks in the leasing and swap markets and an increase in the amount of gold that they have put into the market. This has occurred alongside an increasing appetite among some gold producers to engage in large hedging programmes. These developments have, however, had little impact on the gold price which, for most of the period under review, remained in quite a narrow range. This was particularly true in May 1996 when, according to a majority or Market-Makers, activity was reported to be significantly 'below average' in a range of products. The latest turnover figures need to be considered against this background.

With one or two exceptions, the profile of the market which emerged &om the 1996 survey was remarkably similar to that in 1994. In volume terms, average daily turnover in gold was only marginally below that reported in 1994, whereas daily turnover in silver was some 10% higher. Taken together, the combined value of gold and silver activity (in US dollar terms) just exceeded that recorded two years ago.

ln the gold market, approximately 7 million ounces of the metal were traded daily during May 1996, compared with 7.5 million ounces in 1994 (see chart 1), which represents a similar clip in turnover to that experienced on Comex. A higher gold price in May 1996 than in May 1994 meant that the value of these transactions - almost $ 3 billion each day - remained largely unchanged. Spot transactions continued to account for approximately three-quarters of total turnover. The volume of OTC options contracts also remained at a similar level but there was a small rise in forwards' share of turnover. Activity in the London silver market continues to show steady growth (see chart 2) Average daily turnover exceeded. 120 million ounces in May 1996, representing any increase of more than 10% on 1994. In value terms this equates to turnover of approximately $650 million a day. In contrast, exchange-traded activity in the US was rather subdued, with turnover in silver contracts significantly below that recorded in 1994. One of the most significant features to emerge from the survey was a greater concentration of silver business in their forwards: more than 20% of silver trades were forward transactions, representing a substantial increase on the share - less than 10% - recorded in 1994.

It is likely that the increase in business in the forwards - from 10% of activity in 1994 to around 20% of all gold and silver transactions in 1996 - is a trend that will become more entrenched. Anecdotal evidence also suggests that the market is seeing increasing demand for longer dated forwards. This may pose a greater challenge for existing liquidity management techniques, as it appears that among those central banks which do participate in the London gold market there are few willing to make deposits or to undertake swaps with an initial life of more than one year. The long maturity of some of the forward sales programmes means there is something of a maturity mismatch in the market and this in turn has prompted some houses to seek to develop innovative methods to cope with the relatively short-term commitments made by central banks.

Looking ahead, there is quite a lively debate about the challenges facing the market in the short to medium term and how it will respond. The prospect of EMU and the possibility of gold sales by the MF are creating considerable uncertainty. This turnover survey throws no direct light on these questions but it does provide confirmation of the depth and liquidity available in the significant London volumes market and of and its business as they arise.