ResearchTeam

Mar 222016
 

After two decades with The Perth Mint, Bron Suchecki has left to take up a new career challenge. We wish him well in his new venture and thank him for his outstanding contribution to our business during his time in Perth.

We’ve decided that this is a great opportunity for the Research Blog to take a time out.  We’ll use this time to review its place in our overall suite of content sites, and ensure that The Perth Mint continues to offer insightful content in the right format to our readers and followers.  While we do this, we will ensure that the valuable content and reference material currently available on the Research Blog remains available to you.

And we look forward to sharing with you some new initiatives to ensure The Perth Mint stays at the top of your list of sites to visit for knowledge and thought-leadership in precious metals.

Apr 102015
 

Loco is short for Location. Location is relevant for gold and silver because it is a physical commodity and it costs money to move it between locations. People used to trading shares and bonds and other “virtual” products can sometimes overlook the implications and risks of dealing in something that is physical.

In the industry “spot price” is really shorthand for “the price of gold located in London”. Why London? Because that is where, historically, gold was traded. It is where the major bullion banks have head offices and where many large vaults are located and a fair amount of physical gold is located. Thus the price quoted on information services like Reuters and Bloomberg is for gold located in London, or in industry jargon, “loco London”. If you are dealing with a dealer who has trading accounts with bullion banks, the spot price they are quoting is effectively a loco London price. This is effectively gold’s “base” price.

If you deal in gold in other locations, e.g. loco Perth, the price is different to gold’s price loco London because it costs money to freight gold between locations. The question is, who pays this difference? Answer is, supply and demand.

For example, Australian mines produce a lot more gold than domestic buyers want, so loco Perth supply is higher than demand. Without enough Perth buyers the gold will have to be shipped to London or China or other markets where there are more buyers. So Perth gold trades at a discount to the loco London gold price, the discount generally being equal to the cost of getting the gold to the other location.

So each location can trade at a premium or discount to London depending upon local supply and demand at that time. As a result, loco discounts/premiums are not fixed and change over time as local supply/demand changes. Normally the supply/demand situation is stable, which is another way of saying that the physical flows around the globe are stable.

Generally loco discounts/premiums are small and are often included into fabrication premiums. This can therefore give investors the impression that there is one global spot price for gold. This is misleading because when markets change and there is sustained buying or selling imbalances in a location, the discount/premium can start to become quite large. The result may be that the spot price in that location starts to diverge from the loco London price

 

Apr 092015
 

Foreign currency and precious metal markets use the International Organization for Standardization’s (ISO) currency code standard ISO 4217:2008 when referring to currencies. Each currency has a three-letter alphabetic code which, where possible, is composed by making the first two letters equal the ISO 3166 country code and setting the third letter as the first letter of the currency name.

The four precious metals are included in the list as they are treated by most financial firms as a currency and traded on their foreign currency systems. The precious metals are the only metals with a formal currency code. The coding convention for precious metals is “X” as the first letter and the metal’s element symbol as the next two letters.

Some of the currency codes used by the Perth Mint include:

Country Currency Alphabetic Code
n/a Gold XAU
n/a Silver XAG
n/a Platinum XPT
n/a Palladium XPD
Australia Australian Dollar AUD
Hong Kong Hong Kong Dollar HKD
India Indian Rupee INR
Indonesia Rupiah IDR
Japan Yen JPY
Malaysia Malaysian Ringgit MYR
Netherlands Euro EUR
New Zealand New Zealand Dollar NZD
Singapore Singapore Dollar SGD
South Africa Rand ZAR
Switzerland Swiss Franc CHF
United Kingdom Pound Sterling GBP
United States US Dollar USD
Apr 082015
 

There are three key dates recorded on Perth Mint precious metal buy and sell transactions: Trade, Value and Delivery.

Trade Date

Trade Date is the date on which the deal is executed, that is, the metal price and other terms are agreed. Trade Date is often abbreviated to “T”. The gold or silver price is fixed on this date and once agreed, the client and the Perth Mint are both committed to that price and the transaction will not be reversed or refunded.

Value Date

Value Date is the date on which the transaction settles, that is, cash and metal are exchanged and when the buyer gains ownership/title to the metal. Sometimes it is referred to as Settlement Date.

The precious metals markets, like foreign exchange markets, work on a standard of settling transactions two business days from the trade date. You will see this referred to as “T+2” or “spot”. Therefore, when you see references to the “spot price” of gold it means agreeing to the price to buy or sell gold today with settlement of cash and metal to occur in two business days.

It is possible to arrange for settlement on the trade date (unusual) or in one business day – referred to as T+1 or TOM (short for tomorrow). Settlement of transactions later than T+2 are also possible and these are referred to as “forwards”. A “forward” metal price will differ to the “spot” metal price as it takes into account the cost of funding the delayed settlement (that is, the cash value of the trade is adjusted for the time value/interest rates of money and the metal).

The calculation of value date needs to take into account any public holidays that apply to the countries where both of the currencies in the transaction will settle. For example, the purchase of loco gold London in US dollars would need to consider both US and UK holidays.

Foreign exchange market convention requires one business day between the trade date and the value date for US dollars and for all other currencies (including gold and silver) there must be two business days between the trade date and the value date.

An example of how this works can be found at the London Bullion Market Association precious metal value dates webpage. Consider these two examples:

  • Trade date of Monday 31st December 2012. Normally a Monday trade would settle two days later on a Wednesday, but with a New Year’s Day holiday on Tuesday the 1st of January, the revised value date is Thursday 3rd of January as the metal side of the trade requires two business days.
  • Trade date of Thursday 14th February 2013. Normally settlement would be on Monday the 18th, but that is US President’s Day holiday so the value date is moved to the next day Tuesday the 19th.
  • Trade date of Friday 15th February 2013. Settlement will occur on Tuesday the 19th, even though US President’s Day holiday is on Monday the 18th. The “one business day minimum for US dollars” rule means that the Tuesday value date fulfils that requirement and for the metal side of the trade there is no UK public holidays so the “two day minimum for all other currencies” rule is satisfied.

Note that in the case of an Australian dollar gold transaction, the value date would need to take into account Australian and UK holidays and apply a two business days rule to both.

Delivery Date

Delivery (or Stock) Date is a Perth Mint specific term indicating the date on which physical metal is delivered/shipped to the client.

Normally in wholesale market transactions the delivery date of the physical (or paper) metal equals the value date. There is a risk with this that the customer fails to send its cash (or metal) on the value date, leaving the Perth Mint short. We manage this by setting a maximum (credit) limit of how much we are prepared to risk, based on the credit rating and trustworthiness of the other party.

In the case of individuals or companies without credit ratings, the Perth Mint cannot take such a risk, so it needs to verify that it has received the cash (or metal) on the value date before sending the metal (or cash) to the customer. As a result, the delivery of the metal (or cash) occurs on a different date to the value date when the cash (or metal) was received.