Account- allocated

An account in which the client’s metal is individually identified as his, and physically segregated from all the other gold in the vault; in the event of a default by the holding bank, the investor becomes a secured creditor.

Account-unallocated

An account in which the client’s bars are not specifically ring-fenced, and which may be cheaper than an allocated account as some banks do not charge for storage. The client carries higher counterparty risk, however, as he is an unsecured creditor in the event of a default by the holding bank.

American Option

An option that may be exercised on any day up to and including the expiry date

Assay

To test a metal for purity.

Backwardation

The difference between a forward price and a nearby price when the latter exceeds the former

Bar

Typical gold product, either for trading or for accumulation. Bars come in a variety of shapes weights and purities and different bars are favoured in different parts of the world.

Bear

Someone expecting prices to fall

Bid/ask

Bid or buy is the price a dealer is prepared to pay for gold bullion. Ask or sell is the price offered by the seller. (See also definition of Spread below.)

Bull

Someone expecting prices to rise

Bullion

Originally meaning ‘melting place’ or ‘mint’, probably from the French bouillon, boiling.

Bullion coin

A legal tender coin whose market price depends on its gold content, rather than its rarity or face value.

Certificates

Gold certificates are a method of holding gold without taking delivery. Issued by individual banks they confirm an individual’s ownership while the bank holds the metal on the client’s behalf. The client thus saves on storage and personal security issues, and gains liquidity in terms of being able to sell portions of the holdings (if need be) by simply telephoning the custodian

CFTC

Commodity Futures Trading Commission, the regulatory body in the US covering futures markets

COMEX

The New York Commodity Exchange, now a division of NYMEX, the New York Mercantile Exchange. The contracts in the COMEX gold market consist of 100 ounces each, and the actively traded contracts are the even months of the year.

Consignment stocks

A bullion dealer may hold gold on consignment at a client’s premises. It is the dealer’s property until the client withdraws it and pays the prevailing price. Alternatively, it may be held by the dealer at local banks until the clients come forward to purchase and take delivery.

Contango

The difference between a forward price and a nearby price when the former exceeds the latter. This is the usual situation in gold and if there is no constraint anywhere along the supply pipeline then the contango will reflect prevailing interest rates and storage charges

Deferred settlement

A situation in which the settlement of a bullion market contract is deferred by mutual agreement on a daily basis.

Delivery

The transfer of the asset from seller to buyer. This does not necessarily involve physical shipment but can be done on paper with the bullion remaining in the vaults of a specified bank

Delta

The proportion by which the price of an option changes in response to a change in the price of the underlying asset. The delta measures the sensitivity of the option’s price to changes in the asset’s price.

Delta hedging

Metal bought (sold) by the grantor of a call (put) in order to cover his potential risk. The more the price of the underlying asset moves in favour of the option purchaser, the higher the risk to the grantor that the option will be exercised against him; he will need to be covered against that risk.

Doré

A gold-silver alloy, an intermediate product from certain gold mines

EFP

Exchange for Physical; a mechanism that allows a client to open or close a futures contract through the physical market when the futures market in question is closed. A dealer will deal for the client in the over-the-counter market and then replace the position with a futures market position when the exchange opens. The differential in the price between the spot and the futures contract is often itself referred to as the efp.

European option

An option that may only be exercised on the date of expiry. Predominant in the London bullion market.

Face Value

The nominal value given to legal tender coin or currency (for example a 1-oz. Gold American Eagle coin has a face value of $50, but will always be bought and sold at a price close to the market price of 1 ounce of gold).

Fineness

Gold purity, usually expressed in parts per thousand; thus 995 or two nines five is 995/1000 or 99.5% pure. 995 was the highest purity to which gold could be manufactured when good delivery (q.v.) was determined, but for very high technology applications now it is possible to produce metal of up to 99.9999% purity.

Fix

The London gold fixing (see: www.goldfixing.com) takes place twice daily over the telephone and sets a price at which all known orders to buy and sell gold on a spot basis at the time of the fix can be settled. The fix is widely used as the benchmark for spot transactions throughout the market. The five members of the fix ‘meet’ at 10:30 and 3:00 London time and commence the fix with a trying price. Once Rothschild’s seat has been sold, there will once again be five fixing members. The fixing members’ representatives relay the price down to their dealing rooms, who are in contact with as many bullion dealers as are interested (or who have interested clients) and these market members then declare how much metal, on a net basis, that they require to buy or sell at that level. The dealers are themselves in contact with their clients, who may change their order, or add or cancel an order, at any time. The position declared by the dealers is the net position outstanding between all their clients (i.e. if one bank has clients wanting to buy a total of two tonnes, and other clients wanting to sell a total of one tonne, then he declares himself as a buyer of one tonne). Each fixing member then nets off the position and declares himself, as the representative of all those interested parties, as a net buyer or seller (and of how much), or to be in balance. If the market is out of balance with more gold required than offered, then the price will be adjusted upwards (and vice versa) until balance is achieved (because some clients will withdraw or amend their orders if the price does not suit them). At this point the price is declared fixed. On very rare occasions the price will be fixed when there is an imbalance, at the discretion of the chairman of the fix. The fix is thus entirely open and any market user may participate through his bank.

Forward contract

A principal’s (Over the Counter) contract that trades an asset for settlement on a specific date in the future. Each forward contract is ‘tailor-made’.

Futures contracts

An agreement to buy or sell a specific amount of a commodity or financial instrument at a particular price on a stipulated future date; the contract can be sold before the settlement date. Futures contracts are standardised and are traded on ‘margin’ on futures exchanges, such as the COMEX division of NYMEX, the CBOT, or the TOCOM.

GOFO

The Gold Offered Forward Rate, which is the rate at which dealers will lend gold against US dollars.

Gold Forward Offered Rate (GOFO)

See above

Gold Loan

A financing mechanism whereby gold is borrowed from a bullion bank (which has usually borrowed it from a central bank or banks), and sold into the market to raise cash, usually to finance a gold mining operation. The metal is then repaid over an agreed period of time. The interest on the loan is usually paid either in dollars or in gold subject to the agreement between the counter-parties.

Gold Standard

A monetary system based on convertibility into gold; paper money backed and interchangeable with gold.

Good delivery bars

Also referred to as large bars, the ingots that conform to London Good Delivery standard

Good delivery standard

The specification to which a gold bar must conform in order to be acceptable on a certain market or exchange. Good delivery for the London Bullion Market is the internationally accredited good delivery standard. A good delivery bar for London should weigh between 350 and 430 ounces (gold content), of minimum purity 99.5% (two nines five). Further specifications can be obtained from the LBMA

Grain

One of the earliest weight units used for measuring gold. One grain is equivalent to 0.0648 grams.

Hallmark

Mark, or marks, on gold (and silver) jewellery and other fabricated products.which indicate the producer and carat fineness.

Hedging

The use of derivative instruments to protect against price risk.

Karat

Unit of fineness, scaled from one to 24. 24 karat gold (or pure gold) has at least 999 parts pure gold per thousand; 18-karat has 750 parts pure gold and 250 parts alloy, etc.

Kilo bar

A bar weighing one kilogram -approximately 32.1507 troy ounces.

Lakh

A trading term meaning 100,000, deriving from the Indian word of the same meaning

LBMA

The London Bullion Market Association acts as the coordinator for activities conducted on behalf of its members and other participants in the London Bullion Market, and it is the principal point of contact between the market and its regulators.

Legal tender

The coin or currency which the national monetary authority declares to be universally acceptable as a medium of exchange; acceptable for instance in the discharge of debts.

Limit order

An order placed by a client for a transaction to be executed at a specified price. The order is triggered if the market touches that price (or betters it)

Liquidity

The quality possessed by a financial instrument of being readily convertible into cash without significant loss of value.

Loco

The place at which gold is held and to which a delivery price applies. London is the common denominator world-wide and represents the basis for international trading and settlement in gold and silver.

Lot

Alternative term for a futures contract

Margin

A deposit required to be put up before opening a futures, forward or option contract.

Margin (initial)

The amount of money deposited per contract at the start of the trade

Margin (maintenance)

A sum that must be maintained on deposit throughout the life of the trade

Margin call

Money that is called for from the client during the life of the transaction to cover exposure resulting from an adverse price movement (or an endemic increase in margins by the exchange).

Mark to market

The valuation of an open position as at current price levels.

Market Maker

A dealer who makes a market, i.e. quotes bid and offer prices to counter-parties and is prepared to deal at those prices

Naked short

A seller of a contract who does not have the metal to back up his position

Numismatic

Coins valued for their rarity, condition and beauty beyond the intrinsic value of their gold content. Generally, premiums for numismatic coins are higher than for bullion coins.

Open interest

The number of contracts (long and short) outstanding in any one futures contract

Option

An option contract gives the buyer right but not the obligation to buy (call option) or to sell (put option) a quantity of the underlying asset at a specified price (strike price) by or on a certain date.

Option premium

The price paid for an option is known as the premium; the strike price is the pre-determined price at which an option may be exercised.

Option strike price

The strike price is the pre-determined price at which an option may be exercised.

OTC

Over-The Counter, or a principals’ contract. The over-the-counter gold market trades on a 24-hour per day continuous basis and accounts for the bulk of global gold trading. Most OTC trades are settled using gold stored in London, irrespective of the country where the deal is actually transacted.

Pennyweight

An American unit of weight for gold. Twenty pennyweights equal one ounce.

Restrike

A modern replica of previously issued coins. Governments and their mints can choose to restrike a previous issue rather than introduce new coinage.

Settlement date

The date on which a contract is scheduled for delivery and payment. Spot settlement in the bullion market is two days after the bargain has been struck

Short covering

The closure of short positions

Speculative Long

A trader who has bought a forward or future in the expectation of closing it out at a higher rice

Speculative short

A trader who has sold a forward or future in the expectation of buying it back at a lower price.

Spot deferred

A forward contract in which the contracts may be rolled forward as they mature. Delivery dates are specified in the same way as for any forward contract, but as each contract comes to maturity it may be rolled forward using current interest rates.The facility is, however, set up to terminate within a pre-determined maximum period (a client may, for example, roll forward every three months for up to ten years). This is also known as a floating rate forward.

Spot price

The price for spot delivery which in the gold market is two days from the trade date

Spread

The difference between Bid (the price a buyer is prepared to pay for gold) and Ask (the price at which a seller offers to sell) prices.

Stale Bull

Speculator who has bought a commodity or trading instrument in the expectation of price rises and then sells on disappointment at the market’s failure to fulfil his expectations.

Stale bull liquidation

Selling of a long position by a disappointed bull when the price has not performed up to his expectation

Stop Loss Order

An order that will close out a loss making position when the price reached a specific level. Such trades are carried out on a best efforts basis, since it cannot be guaranteed that a specific price will be traded if the markets are moving rapidly (as they often are when large amounts of stop losses are triggered)

Term

The tenor, or length of time until expiry, of a contracted transaction.

Troy ounce

The standard weight in which gold is quoted in the international market, weighing 31.1035g (see also our Weights Conversion table). Named after the old French city of Troyes, where there was an annual trading fair in mediaeval days and where this was a unit of weight.

Warrant

A securitised product issued by a specific bank or securities house and usually carrying the name of the issuer, which gives the purchaser the right to buy gold at a certain price on a specific date. They are thus not dissimilar to options, but the pricing mechanism is generally simpler. Options are a generic instrument and would not be specifically tied to one house.

Writer, grantor

Alternative terms for the seller of an option (whether it is a put or call is irrelevant)

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