Market Definitions and Glossary of Terms

A Market Participant that transacts on behalf of and for the account of a Client.

An interest that a Market Participant might have to transact in a given product at a price that may be better than the prevailing market rate.

Contango and backwardation are terms used to define the structure of the forward curve. When a market is in contango, the forward price of a futures contract is higher than the spot price. Conversely, when a market is in backwardation, the forward price of the futures contract is lower than the spot price.

The LBMA Gold, Silver, Platinum and Palladium price auctions are recognised as the international global benchmarks for precious metals as defined in documentation for the International Swap Dealers Association (ISDA).

Contango and backwardation are terms used to define the structure of the forward curve. When a market is in contango, the forward price of a futures contract is higher than the spot price. Conversely, when a market is in backwardation, the forward price of the futures contract is lower than the spot price.

In precious metals, a forward contract (often shortened to "forward") is a custom, over-the-counter (OTC) agreement between two parties to buy or sell a specified quantity of precious metal on a future date at a price agreed upon today. "Forward forwards" or "forward swaps" are a specific type of forward where the start date of the contract is in the future, rather than being a direct transaction from the spot price.

This could be for a simple purchase or sale of metal for settlement beyond spot, an outright forward or for forward swap transactions. Forward swaps are a simultaneous purchase and sale in which one leg of the transaction is generally for spot value and the other forward, conducted at an agreed differential to the spot leg of the deal. This leads to the terms “borrowing on the swap”, in the case where the spot is purchased and the forward sold, or “lending on the swap” where the spot is sold and the forward purchased, in order to differentiate from leasing metal.

Interest for loans of precious metals can be paid in either currency or more precious metal, with the payment method determined by the agreement between the lender and borrower, often a central bank or bullion bank. Interest in metal typically involves gold or other bullion, as seen in central bank gold lending transactions, but central banks can also stipulate that interest be paid in a currency of their choice. In a low interest rate environment, there is generally no difference in the rate as to whether the ultimate interest is to be paid in currency or in the metal itself.

This type of transaction is similar in nature to a currency or a stock loan. One party borrows an agreed quantity of precious metal and makes periodic rate payments over the term of the transaction. The other party lends precious metal and receives rate payments.

The term ‘Loco London’ simply refers to gold and silver bullion that is physically held in London vaults to underpin the trading activity in this market. Only gold and silver bars that meet the LBMA’s Good Delivery standards are acceptable in settlement of a Loco London gold or silver transaction.

The spread or charge that may be included in the final price of a transaction in order to compensate the Market Participant for a number of considerations, which might include risks taken, costs incurred and services rendered to a particular Client.

A view shared by Market Participants on the general state of and trends in the market

Gold, silver, platinum and palladium options are normally expressed, as in other markets, in terms of volatility in discussions between market makers. If a customer has a preference, this can instead be quoted in terms of USD per ounce – or, indeed, in whatever currency the strike price is set in. The standard, if not specified, will be for a European option.

The traditional unit of weight used for Precious Metals. One troy ounce is equal to 1.0971428 ounces avoirdupois. The accepted conversion factors between troy and metric are that one kilogram equals 32.1507465 Troy Ounces, and one Troy Ounce equals 31.1034768 grams.

The basis for settlement and delivery of the Loco London quotation is for delivery of a standard Good Delivery Bar at the London vault nominated by the Dealer who made the sale. While settlement or payment for a transaction will generally be in US dollars over an account in a New York bank, delivery of metal against transactions in Gold and Silver are in made in a number of ways. These include physical delivery at the vault of the Dealer or elsewhere, by credit to an allocated or unallocated account with the Dealer or through the London Precious Metals Clearing to the unallocated account of any third party.

A swap is an over-the-counter (OTC) derivative contract where two parties exchange cash flows tied to a precious metal's price, or they simultaneously enter into spot and forward transactions of the metal itself.

The allocated and unallocated terminology simply reflects the type of account over which the metal clears post trading. Allocated accounts are opened when a customer requires metal to be physically segregated and needs a detailed list of bar weights and assets. The Client has full title to this metal, with the Dealer holding it on the Client’s behalf as custodian. While unallocated accounts represent a general entitlement to a quantity of metal without specific bars assigned to you, much like a bank currency account.