PT. Solid Gold Berjangka
Loco London Gold
Gold is one of the most popular commodities for investment. It is also used as a financial/economic standard, foreign exchange reserve, and a primary means of payment in several countries. Investors typically buy gold as a hedge or safe haven against crises including economic, political, social, or currency-based crises.
Physical gold demand has increased significantly year by year, while global reserves are limited. Therefore, some developed countries offer alternative investments in gold derivatives using margin as collateral (margin trading). Margin is needed because gold prices can fluctuate like other commodities.
AHistory of Gold Trading
In commodity markets, the term "Loco" means "in". It comes from Latin 'Locus' meaning place. Loco London represents the base for international gold and silver trading and settlement in London. This market is under the London Bullion Market Association (LBMA), but it is not an exchange.
The largest physical gold (spot) markets are London and Zurich, with London being the most prominent. London rose to dominance when gold became the primary currency. Significant discoveries in the Ural (Russia) boosted global gold production in the 18th century.
In the mid-19th century, the UK dominated global trade and finance, supplying capital for gold mining and adopting the gold standard for the British Pound. This made London the center of global gold trading and settlement.
Over-the-Counter (OTC) Trading
The London gold market is an Over-The-Counter market, meaning trades occur directly between two parties without a third-party exchange.
OTC markets run 24 hours a day without a formal structure or central meeting place. Most trading is done by phone or electronic dealing systems.
In today’s global financial market, London gold trades almost continuously worldwide. Bid and ask prices are quoted continuously via financial information systems such as Reuters. Other major centers include New York, Zurich, Tokyo, Sydney, and Hong Kong (the main hub in Asia).
Why invest in gold (Spot OTC)
- Prices are usually quoted and traded against the US dollar;
- The Loco London Market serves hedging, investment, and speculation purposes;
- In OTC markets, investors can hold positions for as long as they want without expiration;
- Receive interest when selling Loco-London gold or silver at the prevailing rate;
- Leverage transactions with margin;
- Investment portfolio diversification.
BGlobal Gold Markets
1. Loco London Gold Market
In London, gold and silver are traded by LBMA members under the supervision of the Bank of England. Most members are international banks or bullion dealers and major refiners.
Gold trading in London has a 3-century history. Gold Fixing was established after World War I in 1919, originating from the London silver market, providing a single quoted price for global investors.
The Fixing is conducted twice daily at 10:30 am (16:30 WIB) and 3:00 pm (21:00 WIB) in London, involving five Fixing members:
- Scotia-Mocatta, successor of Mocatta & Goldsmid, part of Bank of Scotia
- Barclays Capital, replacing N. M. Rothschild & Sons Limited
- Deutsche Bank, owner of Sharps Pixley
- HSBC, owner of Samuel Montagu & Co.
- Société Générale, replacing Johnson Matthey and CSFB (Credit Suisse First Boston)
2. US Gold Market
In 1975, the New York Commodity Exchange (COMEX) started gold forward trading, becoming the global center for gold forwards. Today, the New York gold futures market has replaced London in setting global gold prices due to advantages in trading methods, aggregate supply, marked price, and trading hours.
3. Hong Kong Gold Market
The Hong Kong gold market is also known as the Loco (Local) London market. It has around 70 active participants, mostly banks, investment firms, and local gold dealers hedging futures positions. Loco London gold is quoted in USD per troy ounce of 99.99% pure gold with delivery in London.
The Chinese Gold and Silver Exchange Society operates one of the world’s largest gold markets. Gold traded has 99% purity, measured in tael and quoted in HKD. Prices generally track London, Zurich, and New York. Turnover reached 4.3 million tael in 2001.
CGold Price Analysis
In practice, gold prices are not only driven by supply and demand, but also by overall economic conditions.
Several economic situations often affect gold prices:
1. Exchange rate changes
A weaker US dollar usually pushes gold prices higher. Investors sell dollars and buy gold to protect asset value. For example, in mid‑October 2009, the dollar weakened while gold rose to $1,070 per troy ounce—its highest level at the time.
2. Global political situations
Gold prices rose in late 2002 and early 2003 due to the upcoming Iraq invasion led by the US. Investors shifted from money and stock markets to gold, sharply increasing demand.
3. Supply and demand
An example of supply-demand effects occurred in the mid‑1980s when mining companies’ forward sales were blamed for gold price changes. In business terms, forward selling when prices rose helped secure favorable output prices.
Another example was mid‑1998 when gold prices fell sharply after European central banks announced plans to reduce gold reserves ahead of the euro. Prices dropped to around $290 per troy ounce.
4. Global economic conditions
About 80% of gold supply is used by the jewelry industry. Jewelry demand strongly affects overall demand.
When economic conditions improve, jewelry demand tends to rise. However, data shows it is more sensitive to gold price changes than to economic growth.
The decline in jewelry demand during the 1982–83 recession was mainly due to simultaneous gold price increases. In the early 1990s recession, demand fell as gold prices dropped.
Uncertain economic conditions can lead to high inflation. Gold is commonly used as an inflation hedge. This benefit has long been recognized: during 1978–1980, while US inflation rose from 4% to 14%, gold prices tripled.
5. Interest rates
When interest rates rise, investors prefer deposits over non‑interest‑bearing gold, pressuring gold prices. Conversely, lower interest rates tend to support higher gold prices.
In theory, higher short‑term interest rates mean lower gold prices, but this does not always hold in Indonesia.
In 1998, the rupiah fell sharply against the US dollar, prompting the government to raise interest rates significantly. Despite higher rates, gold prices still rose.
DLoco London Gold Derivative Contract (SPA)
Loco London gold derivative contracts are traded via the Alternative Trading System (SPA) under Bappebti Regulation No. 72/BAPPEBTI/Per/9/2009. Other products include foreign cross currency derivatives and index derivatives.
*) Compiled from multiple sources
