Loco London Mechanics ☕

In addition to the #Gold held for Central Banks, ETFs, and in long-term allocation, the bullion clearing banks require an ever changing amount of physical as 'collateral' against the OTC trade flow.

Thread [1/7]
How much the clearers require all depends on the 'net' OTC positions, and the ability/willingness to extend unallocated exposure versus a predefined tolerance for risk ($ gold credit limits).. [2/7]
The term $ gold credit limits (often just referred to as limits), is an overnight credit facility measured against unallocated ounces XAU, with the risk priced in USD. [3/7]
Any unallocated amounts that exceed $ gold credit limits are first 'brokered' in a series of tri-party transfers. Book entry ledgers passed in Aurum. [4/7]
Any unallocated exposure that still exceed $ gold credit limits (post brokers), are then 'allocated' with 400 ounce LGD bars at depository vault or BOE.
Allocation = reduce unallocated exposure.
De-allocation = increase unallocated exposure. [5/7]
For example, a reduction in limits, or reduction in appetite to use current facilities, will see an increase in the amount of collateral requested against the unallocated trade flow, and vice versa should risk tolerance increase.. [6/7]
Or stated another way, the current day appetite for risk on the zero risk of the system.. [7/7]

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More from @Daniel_March3

26 Mar
For the last 40 years, the financialised price of gold (commonly expressed as XAU/USD), has been the function of the market maker's willingness and ability to extend $ based gold credit. 1/4
The last 72 hours will have fundamentally altered how market makers view risk and exposure, and there's a good chance the volumes of gold credit we have seen over the years may never return. 2/4
Liquidity is looking for an escape route, and some of that liquidity is trying to force it's way into physical. However for now, the majority appears to be running from one burning building into another, with EFP basis the canary. 3/4
Read 4 tweets

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