Daniel March, Investment Director, Gold & Silver, looks at the market structure for gold. He unpicks some industry jargon and focuses on how the daily gold market, while huge in size, pivots off a dwindling amount of the physical metal that is available for delivery. He argues that this structural nuance is little understood but has potentially important implications for investors.


Gold (and silver) trade in all five continents, 24 hours a day, in the form of cash, derivatives (futures & options) and the physical metal. These three categories cover all types of gold demand, from institutional buying in the over the counter (OTC) cash market in London to futures trading in New York and wholesale physical buying in Shanghai.


The global gold market trades an average of $200bn per day but can trade materially higher during periods of increased volume. The World Gold Council notes a figure of $183bn per day for FY2020.1


In terms of the breakdown, around 60% of the trade volume is in London OTC, 30% in New York Futures, 7% in Shanghai Futures, 2% in gold ETFs and 1% in physical jewellery and bars/coins.

Physical liquidity

That just 1% of daily volume represents true physical demand via coins/bars and shipments into India (for jewellery) is important to understand, and it explains why we say that physical demand almost never drives the price of gold. Of course, this would change should investors start to seek to purchase physical in volume. More on this later.

Falling real yields mean a higher gold price

Global Gold Market % Share (*estimate)

*Note: Jupiter estimates based on market data

London retains the crown for gold trading due to the physical liquidity offered by the large unallocated gold contract for the banks and institutions wishing to trade in size. Why? This contract is the cheapest way for institutional investors to gain exposure to the gold price, but also carries unsecured credit risk.


Over the Counter ‘Loco London’ volume is split into four categories:

  • Spot gold means currency transactions using the foreign exchange ticker XAU. This contract is the most popular trading method amongst the banks and represents a `vanilla’ outright purchase on unallocated metal, settled in two business days
  • Options give the buyer the right to buy or sell gold at a certain strike price and are used by the bullion banks to delta-hedge their books
  • Leases are a fixed rate of interest earned from depositing gold (this means, contrary to popular belief, you can earn a yield from gold)
  • Swap forwards are contracts that allow traders to square out overnight exposure on the books, without purchasing the position outright

Four bullion banks

The key market players are four banks: JPMorgan, HSBC, ICBC Standard, and UBS. With the exception of UBS, the key bullion banks have their own vaulting facilities.

In addition, there are a further seven market makers that hold bullion accounts with one of the four banks. These are: BNP, Citibank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Toronto-Dominion, and Standard Chartered. This makes up the major participant bullion banks within the LBMA (London Bullion Market Association).

The London ‘float’

The term London ‘float’ refers to how much available gold is held in vaults that is not already earmarked or made claim upon. Of the 9,461 tonnes currently held in seven vaults in London2,  around 5,600 tonnes are held at the Bank of England (BOE) in official reserve for a number of countries.


The vaults hold a further 2,300 tonnes across a number of gold exchange-traded funds (ETFs), with another estimated 500 tonnes in high-net-worth individuals and family office holdings. A further estimated 200 tonnes could sensibly be deducted for day-to-day settlement within the banks. This netting out process suggests that out of the original 9,461 tonnes, the amount of available gold (the float) is at most around 800 tonnes – which we believe is a lot less than the market realises.

What if demand spikes?

The OTC and futures-dominated LBMA system can only function when there is a sufficient amount of available gold within the London vaults to meet the 3% of daily trading volume in ETF and physical coins/bars. With investment demand for gold currently off the highs from 2020, one wonders what might happen when sentiment shifts in favour of a monetary metal allocation in ETFs and physical gold. We are watching these numbers with interest.

For now, the synthetic bullion banking system remains in charge of price discovery for gold. However, it is our contention that supply and demand fundamentals will come to the fore when the amount of physical float available to the market is unable to service the demand from ETFs, coins/bars and jewellery. The only remedy for a lack of physical float would be materially higher pricing to clear these imbalances, as higher prices will coax long-term, previously unavailable, inventory back into the market.

In January, we saw spiking demand for physical silver, and we anticipate this may continue this year. The rise in physical demand has led to a number of underlying rumblings within silver market. We believe there is every reason to expect something similar may happen in gold when investors become motivated to own physical metal, rather than paper obligations of gold ownership. A further negative shift in real interest rates could be enough to drive such a move.

One further factor that could trigger a squeeze on the LBMA float are upcoming regulatory changes from Basel 3 rules, which the Gold and Silver team will be discussing in greater detail in the next article.

[1] https://www.gold.org/goldhub/data/trading-volumes

[2] https://www.lbma.org.uk/prices-and-data/london-vault-holdings-data

Please note: Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.


This communication is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice.


The views expressed are those of the Fund Manager at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Issued in the UK by Jupiter Asset Management Limited, registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI, the Management Company), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission. No part of this content may be reproduced in any manner without the prior permission of Jupiter Asset Management Limited. 27261