Chapter 5 of 17

OTC gold, exchange futures and location basis

Map London unallocated claims, bar allocation, exchange warrants and EFP transactions before comparing prices across venues.

3 min read · Original educational chapter

In this chapter

Start with the claim being transferred
A benchmark is not your execution
Separate three uses of the word basis
Build a transformation ledger
Inventory categories are not owner intentions
Worked example
Common mistakes
Check your understanding
Desk assignment

Start with the claim being transferred #

A gold quote is incomplete without settlement location, quality, value date and account type. Loco London is a settlement-location convention. An unallocated account is a claim for a quantity of metal against the account provider; an allocated holding identifies specific bars. LBMA’s OTC account guide explains this distinction. Credit exposure, custody and operational conditions therefore belong in the price comparison.

An exchange futures position is governed by its own clearing and delivery framework. A listed contract, a London balance and a particular bar are related exposures, not identical assets. Do not translate “backed by gold” into a legal conclusion without the actual agreement and applicable law.

A benchmark is not your execution #

ICE Benchmark Administration describes its gold and silver benchmarks as London unallocated reference prices formed through its auction process. They are not a continuous promise to fill a retail order at that price. Research and redistribution can also require data permissions.

Record the benchmark timestamp and value date separately from the time a market quote was observed. Bid/ask side, quantity and credit terms matter. A historical benchmark compared with a later futures print can manufacture a spread that never existed simultaneously.

Separate three uses of the word basis #

A spot/futures maturity basis, a London/New York location basis and an Indian local premium are different objects. One can widen while another narrows. Define each as an explicit subtraction between normalized, time-matched instruments.

An EFP is an exchange-for-related-position transaction with a futures and corresponding physical/related component under applicable venue rules. It is not a synonym for any arbitrary difference between two gold prices. Access, documentation, credit, delivery eligibility and execution matter to whether a comparison can become a transaction.

Build a transformation ledger #

To compare a fictional London quantity with a different deliverable location, list funding through the value date, bar conversion if needed, assay, transport, insurance, approved-location handling, taxes and both sides of the trade. Identify which costs are firm quotes and which are assumptions.

A location spread can remain wider than your simplified cost estimate because a bottleneck, credit constraint or unavailable facility is real. Calling it risk-free without those arrangements mistakes a price relation for an executable book.

Inventory categories are not owner intentions #

Exchange inventory reports classify metal under the venue’s reporting rules. A change in warrant status can alter registered and eligible categories without moving an ounce out of the vault. Even properly registered metal is not a universal offer to sell to everyone at the screen price.

Read the report definition, unit, cutoff and corrections. Delivery notices, open interest, inventory movements and ownership transfers describe different processes. A ratio of total open interest to one inventory category is not by itself a test of an imminent delivery failure.

Hypothetical worked example

A fictional location bridge

Suppose location A is quoted at 2,000 dollars per fine ounce and a compatible location-B forward at 2,020. The raw difference is 20. Estimated funding of 8, conversion/transport/insurance of 7 and round-trip execution of 3 leave an unexplained residual of 2 per ounce before tax and other omitted constraints.

If the 7 cost estimate is unavailable at the required size, the residual is not locked in. Prepare two ledgers: a fully executable package with firm terms and a hypothetical comparison with unresolved items. Neither identifies any current EFP level.

Common mistakes

Calling any screen spread an EFP.
Equating an inventory reclassification with an export.
Using a benchmark price as though it were an executable quote.

Check your understanding

Registered inventory falls while eligible inventory rises by the same quantity. What can you conclude from those two figures alone?

Make this chapter useful

Can you defend the reasoning?

Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.

Desk assignment

What to submit

Produce a claim/location/value-date map and a costed cross-venue bridge. Mark each executable term, estimated input and unresolved transformation.

Use the research ledger for dated evidence, or the module workbooks for calculations. Separate observations, assumptions and interpretation.

Sources and further reading

Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.

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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.