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Bastions of Bullion…the evolving role of bullion banks in the gold marketplace
by Roy Van Til, Ph.D.
Abstract:
For the last several decades, the bullion banks that are Market Making Members* of the LBMA have taken a pivotal role in the gold marketplace. A half century ago, a large number of merchant banks across Europe and North America created a competitive market. But eventually their numbers dwindled due to consolidation when a few of the largest bullion banks cemented their dominance by buying up their smaller competitors. As the old guard of merchant banks were absorbed or faded from the scene, these international banks enhanced their position at the heart of the market for physical gold, as well as dominating the larger OTC and futures markets. As one of their many roles in the global marketplace, the bullion banks hold both allocated and unallocated physical gold in their vaults for their clients.
But in recent years, the bullion banks have been pulling back from physical gold as the traditional London fix has been replaced by newer processes, and as many refiners, institutional investors, and other stakeholders in the gold investment world seek more efficient and responsive pathways to gold ownership. These clients, whether as demanders who purchase new gold or as suppliers who deposit their gold at one of the major LBMA banks, are eager to compare the costs and benefits of alternative ways of attaining an ideal allocation of hard assets.
In response to this growing demand for better access to investment gold, coupled with dramatic changes in messaging, automation, flexibility, and the arrival of many alternative solutions that entail lower costs, bullion banks are placing a lower priority on precious metals as they specialize in more profitable but unrelated sectors. Physical gold investment or the financing of mining operations and gold refineries were never their major profit centers in the first place. Gold dealers, miners, refiners, and other intermediaries in the chain of custody of gold benefit from access to a more direct route to the customers than through the bullion banks. Thus efficiency is increased as the global market for physical gold broadens.
As an alternative to approaching the bullion banks, these institutional investors gain direct access to physical gold and other precious metals through more direct means unaffiliated with the banking system. More agile than the bullion banks, robust technology platforms provide a more effective, transparent, flexible, secure, and liquid process for the procurement, ownership, trading, and redemption of gold bullion. They expedite and facilitates the widespread procurement and global exchange of physical precious metals. This modernizes the marketplace by opening up the real possibility of an asset-backed monetary system, with physical gold as the centerpiece serving as both a store of value and a medium of exchange.

*The 13 Market Making members of the LBMA that provide two-way pricing in gold are: Citibank NA, Goldman Sachs International, HSBC, JP Morgan Chase, UBS AG, Bank of Nova Scotia-ScotiaMocatta, BNP Paribas SA, ICBC Standard Bank, Merrill Lynch International, Morgan Stanley & Co International Plc, Societe Generale, and Standard Chartered Bank.
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