While this Guide is concerned with the operation of the global Over The Counter trading of precious metals markets, it would be remiss to ignore other methods by which investors look to gain exposure to precious metals and how they relate to the OTC market.

Futures Markets

Precious metals trade on a large number of futures exchanges around the world. As mentioned earlier in this Guide, in an exchange-traded environment, transactions will be for standard quantities (or their multiples), purities and for delivery on set dates. However, in the OTC market, a dealer will provide a tailor-made service – offering quotes for variable quantities, qualities and types of precious metal, as well as for various value dates and delivery locations. Thus, OTC markets offer far greater flexibility for clients compared to a futures exchange that operates within standardised parameters.

While there are different delivery locations and dates, and contract specifications (potentially including metal purity and bar size) between the OTC market and the various futures exchanges, it is often possible to switch positions between the two relatively simply. However, this comes with the important proviso that it will depend on applicable laws and the requirements of the various exchanges themselves.

The mechanism for switching a position in gold from/to a futures exchange (CMEs Globex, for example) to/from Loco London OTC gold would be an Exchange For Physical trade – less commonly called an Exchange Futures for Physical trade. However, in both cases, the acronym is simply EFP.

The calculation of the EFP – differential between an OTC spot transaction and a longer-dated futures contract – will vary depending on a number of factors:

  • The number of days between spot delivery and futures delivery
  • The level of currency and metal interest rates
  • The ease, cost and time taken to transport metals between London and the requisite futures location
  • The cost of exchanging 995 London Good Delivery Gold to the requisite futures exchange purity and bar size.
  • Having bars created by refiners that are on the Good Delivery Lists of the LBMA (or LPPM) or the relevant futures exchange
  • Complying with relevant laws and any taxes

Of course, not all futures exchanges quote the precious metals in terms of US dollars. Therefore, there may also be currency exchange rates to take into account.

Looking down from the podium onto the NYSE trading floor as the LBMA Executive and guests prepare to ring the closing bell