'Unallocated' gold is convenient but slightly risky.

The spot gold market trades this unallocated gold. After a spot gold deal there is a separate and optional transaction called an EFP (Exchange For Physical) where the customer converts an entitlement into actual bars. Banks generally save the cost of the EFP. They deal unallocated gold in large sizes both between themselves, and with their professional customers, and this neither requires a physical settlement nor results in the buyer becoming a legal owner of the gold traded. Instead the buyer is a legal creditor, and if the gold has been paid for in full the gold credit is unsecured. It is a bit cheaper to trade this way than via physical bars; the buyer saves a dollar or two an ounce in return for accepting an exposure at the bank.

What follows is an illustration of just how dominant this 'ledger gold' really is in modern bullion markets.

BullionVault buys real physical bars from a major international bullion dealer, which also deals in volume with counterparties all over the world. But against the trend BullionVault insists on physical delivery of bars into Brinks vaults, which enables BullionVault users to become the outright owners of the gold they buy. It costs an extra dollar and a half an ounce.

As its own customers buy gold BullionVault re-loads its own inventory with periodic physical purchases. So its Brinks 'Bar List' gradually grows, with batches of bars delivered sometimes a few days apart, and sometimes a few weeks. The bars were originally manufactured by a refiner, and stamped there with their unique bar numbers. They are the normal 'Good Delivery' size of 400 oz, which is the standard specification used to settle physical bullion market deals.

You can check out the actual Brinks list if you want [Click here and then click Zurich at the top of the gold panel] but the table below shows the important data. There's something surprising in the detail.

Notice how over the four weeks from 18-Jan 2006 to 14-Feb 2006, and involving the delivery of three separate purchases, the bar numbers delivered to BullionVault in Zurich are sequential. Then again, over the four and a half weeks from 19-Mar-06 to 10-Apr-06 they were sequential again, for 2 more deliveries. Then in London notice that all five physical deliveries between 09-Jan-06 and 25-Apr-06 are sequential too.

What seems like a logical conclusion (consistent with what the dealers tell us) is that BullionVault is the only customer of this major firm to trouble it with the hassle of delivering the actual physical bars.

We should not be drawn into the intrigue which surrounds the gold market in general, because we accept that trading gold on the ledger is cheaper and faster for banks, and it is natural (if frequently wrong) for banks to think themselves 100% credit-worthy. But gold buyers should note that unallocated gold is not included in depositor protection, which means if unallocated gold is what you've got then a crisis would not be much fun.

That would be a shame - one of the points of owning gold is to make financial crises fun.

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