Apr 122015
 

Loco swaps are a way to move gold or silver to another location without physically shipping it. It is a transaction where two parties agree to exchange (swap) gold they have in different locations (locos) with each other.

As discussed in Loco, gold trades at different prices in different locations. This means that the loco discount or premium needs to be transferred between the swap parties in addition to the metal itself.

The Perth Mint records loco swap trades as linked buy and sell trades. For example, a mining companying swapping its Perth gold for London gold would be entered as (assuming a gold price of $1000 and a loco Perth discount of $1.00):

Trade Number 1 2
Perth Mint is Buying Selling
Metal Gold Gold
Currency USD USD
Price $1000.00 $1001.00
Ounces 100.000 100.000
Loco Perth London
Trade Value $100,000.00 100,100.00

While there are two separate trades, on settlement the USD trade values are netted against each other and the mining company pays the Perth Mint $100.00. The metal values however are settled independently as they are for different locos – the Perth Mint would deposit 100oz into the mining company’s London metal account and withdraw 100oz from its metal account with the Perth Mint.

The most common type of loco swap the Perth Mint does is with mining companies. The reason for this is many mining companies trade their gold or silver in the over the counter (OTC) market in London with bullion banks, or have other contractual obligations to deliver metal they need to meet. Miners could ask for the Perth Mint to refine their gold and ship it to London, but from the point of view of the industry as whole, however, this is not always efficient. For example, with a huge demand in India for 99.99% kilo bars it would not make much sense for:

  1. an Australian miner to ship 99.5% 400oz bars to London;
  2. a bullion bank to then ship those bars to a refinery;
  3. a refinery to reprocesses those bars into 99.99% kilo bars; and
  4. a refinery to ship the kilo bars to India for sale.

So it is more efficient (cheaper) for all parties for the Perth Mint to keep the miner’s gold, refine it directly to 99.99% purity and then ship the kilo bars to India.