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Why is the London Bullion Market Association pricing gold in US dollar, not in a pound sterling? Isn’t it strange that the most renowned precious metal exchange, which is located in Great Britain, sets gold and silver prices in the American currency? Why is this happening?

LBMA HISTORY

LBMA which stands for the London Bullion Market Association, was established in 1987, but the genesis of its origin dates back to the truly old times.

In 1750, the so-called London Good Delivery List was created. As the name suggests, it was a list of entities that were reputable and reliable. At that very time, the list was made up of companies that supplied gold to the Royal Mint, in which gold coins were minted. Time passed, the market evolved, and in 1850 it was dominated by five companies. These were: NM Rothschild & Sons, Mocata & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins. These five companies decided to join forces, resulting in the London Gold Market Fixing Company. This organization not only determined the daily price of gold, but more importantly, due to the dominance of the market by the companies that formed it, it began to influence the London Good Delivery List .

So you can say that the prototype of modern LBMA is the London Gold Market Fixing Company. It was transformed relatively recently (the 1980s). But the London Good Delivery List still applies to modern times. As before it includes a list of producers and distributors who must meet the highest criteria and standards of the metal industry.

LONDON GOLD MARKET IN 20TH CENTURY

At the beginning of the 20th century, the companies mentioned above set gold and silver (since 1896) prices. The price was obviously in pounds. This was for obvious reasons. First, the pound was backed by gold. Secondly, the pound was the dominant currency in the world. Thirdly, London was the main financial center in the world. Why should it be valued in other currency, if it was the pound used by the whole world and in pounds mainly gold was being bought as well as sold?

Stewart Pixley

Stewart Pixley, in whose firm’s office the metal price fixing took place. Source: Wikipedia. CC BY-SA 3.0

 

WORLD WARS AND THE CASE FOR GOLD

In 1914, the war came and briefly led to the following events:

a) the elimination of the gold standard and the transition to the use of paper money;

b) the outflow of gold to the United States, which sold weapon, ammunition and food to Europeans for gold;

c) strengthening of the paper US dollar, which was the only currency in the world to still be convertible to gold.

Twenty-five years later, another war came and the pattern repeated:

a) Americans sold weapon, ammunition and food to Europeans;

b) Europeans paid with gold to Americans;

c) The United States accumulated 2/3 of the total gold reserves of those held by central banks around the world.

As a result of these events, the British currency ceased to be the main reserve currency of the world (mid-1950s). It was not convertible into gold anymore. Such a privilege had only the US dollar. Therefore this is the key factor in our consideration of why the LBMA fixes gold price in the dollar. The place of metal trade has not changed. The gold market was too firmly rooted in the London City. However, the main tool used – i.e. paper pound – for trading was no longer efficient enough. Green papers had to replace royal banknotes.

TRANSFER TO THE DOLLAR

In the mid-1950s, the US dollar became deservedly the main reserve currency in the world. As a result, central banks around the world wanting to buy gold had to pay for it in dollars. Wanting to sell gold, they received dollars. The dollar was the basis, the dollar ruled.

And in this way, the LBMA was forced to give the price of gold first, not in pound but in the US dollar.

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