The gold price arrives on the news as a single number. Few people ask where it comes from. Much of the answer lies in London, with an organisation most savers have never heard of: the London Bullion Market Association, or LBMA. It explains a great deal about how gold is priced. It also explains why the bars at the heart of that market differ so much, for UK savers, from UK legal tender gold coins.
What the LBMA is
London has been the centre of the world gold trade for centuries. For much of that time the Bank of England kept order. In 1987 it recognised the need for an independent body to oversee the standards of the market. The London Bullion Market Association was formed. Its members now include banks, traders, refiners and miners across dozens of countries.
The LBMA does not buy or sell gold itself. It sets the rules. It decides which refiners are trusted, what a bar must contain and how members should conduct business. Those rules let gold change hands between strangers on opposite sides of the world.
A wholesale market measured in tonnes
The London market is wholesale. Trading happens over the counter, directly between institutions rather than on a public exchange. Central banks, bullion banks, refiners and large funds deal in very large sizes. Much of the gold that changes ownership never leaves the vault.
This is the engine room of the global gold market. When a central bank adds to its reserves, the trade very often settles in London. London's vaults hold thousands of tonnes of gold, much of it for central banks.
Beneath Threadneedle Street
The best known of those vaults sit under the Bank of England itself. They lie on two underground levels beneath its headquarters in the City of London. The present building went up between 1924 and 1933. The ground was dug out more than 15 metres deep to make room for the basements and foundations.
The Bank says it stores more than 400,000 Good Delivery bars. Its 2015 annual report valued the gold in its care at £130 billion, which works out at roughly 5,100 tonnes. Very little of it belongs to the Bank. Most is held for other central banks and for institutions. The United Kingdom's own reserves of around 310 tonnes are kept there too, held for HM Treasury.
That is why a change of ownership in London so often needs no lorry. A bar can be sold from one account to another while it sits on the same shelf, which is how such vast amounts of gold can trade so quietly.
The Good Delivery bar
At the centre of it all is a single standard. Good Delivery dates back to 1750, when the Bank of England first recognised refiners whose bars met the required quality. The LBMA now maintains that standard and publishes the Good Delivery List of approved refiners.
A gold Good Delivery bar must contain between 350 and 430 fine troy ounces of gold, with a minimum fineness of 995 parts per thousand. Most weigh around 400 troy ounces, or roughly 12.5 kilograms. Only bars made by accredited refiners and held in approved vaults keep their Good Delivery status. That is what makes one bar interchangeable with another, whoever made it.
Interchangeable is the important word. A central bank selling gold in London does not need to know which refinery made the bars, or have each one tested. If a bar is on the list and has stayed in the approved chain of vaults, it is accepted. That trust is what allows very large amounts of gold to change hands without a single bar being melted, tested or moved.
These are not objects for a kitchen drawer. A 400 ounce bar is built for institutions and central bank vaults, not households.
Where the gold comes from
Purity and weight are not the only tests. Since January 2012 refiners on the Good Delivery List have faced annual audits of where their gold comes from. Today every one of them must follow the LBMA's Responsible Sourcing Programme, which includes annual independent auditing and public reporting. The rules draw on international guidance on due diligence, money laundering and terrorist financing.
The aim is simple. A bar on the Good Delivery List should be clean in every sense. Its metal should be what the stamp says. Its origins should be known. Taking part is a condition of trading in the London market, which is why the standard carries so much weight around the world.
How the gold price benchmark is set
For almost a century the world's reference price was the London Gold Fix. It began in 1919, when five leading firms met at the offices of N M Rothschild & Sons to agree a price. In March 2015 it was replaced by the LBMA Gold Price, run by ICE Benchmark Administration.
The modern benchmark is set by an electronic auction twice each business day, at 10:30 and 15:00 London time. Participants place orders to buy and sell. The price is adjusted in short rounds until buying and selling are in balance. The result is then published. Contracts and valuations around the world refer to it.
For a household buying a single coin, this may feel far away. Yet it touches every purchase. The price of a Britannia or a Sovereign starts from the value of the gold inside it. That value is measured against the same global market that London's benchmark reflects.
Bars, coins and Capital Gains Tax
The LBMA's world is bars and wholesale trading, not the coins most UK savers buy. That difference matters, because bars and coins are taxed differently.
UK legal tender gold coins such as the Britannia and the Sovereign are sterling currency. HMRC's own manual states that coins which are sterling currency are not chargeable assets. Gains on them are exempt from Capital Gains Tax for UK residents.
Gold bars have no such status. They are not currency. Like other valuable personal possessions, a gain on gold bars can be chargeable to Capital Gains Tax when they are sold. Over a long holding that difference can be significant.
Put simply, the same gold price can lead to two different results. A saver who sells bars after a long rise may have a gain to report. A saver who sells UK legal tender gold coins after the same rise does not, which is why the form gold takes matters to UK savers.
Why we focus on coins
Gold Tier Advisory does not sell gold bars. We specialise in UK legal tender gold coins, available loose or sealed and graded by NGC. Coins come in sizes a household can hold. Part of a holding can be sold one coin at a time.
NGC graded coins are the security-first choice. Each is sealed in a tamper-evident holder with its own certification number, which can be checked online in seconds.
The LBMA keeps the wholesale market orderly and its benchmark open to all. That benefits every gold buyer, including those who never touch a bar. For UK savers, coins priced off that same global market carry a tax advantage that bars do not.
Speak to a specialist
If you would like to talk it through, call a specialist on 0208 064 0076, Monday to Friday, 9am to 5pm, or book a call at a time that suits you.
Sources
- LBMA, A Guide to the Loco London Precious Metals Market: London Good Delivery
- ICE, ICE Benchmark Administration to administer the LBMA Gold Price from 20 March 2015
- HMRC Capital Gains Manual CG76881 (sterling currency)
- GOV.UK, Capital Gains Tax: what you pay it on
- BullionStar, Bank of England gold vaults
- LBMA, Responsible Sourcing guidance documents
This article is for information only. The value of gold can go down as well as up.