The pallet that left a vault in central London this morning weighs a little over half a tonne and carries 40 gold bars of the large type used in wholesale trading, each about 12.5 kilograms. By the end of the week they will have been melted down in the Swiss Alps, recast into one-kilogram bars and flown to a vault in Asia. Nobody involved expects to see them again.
That journey, repeated hundreds of times a year, is how bullion moves from the old centres of the gold trade to the buyers who are now paying the most for it. It depends on refining capacity and armoured air freight, and above all on the exchange rate between the dollar and the Chinese yuan.
From London vaults to kilobars
Wholesale gold in London is traded in bars of roughly 400 troy ounces. They are ideal for banks, which need a standard unit, and inconvenient for almost everyone else. Buyers in Asia, from jewellery makers to retail investors, prefer the one-kilogram bar, which is small enough to fit in a hand and easy to price in local currency.
So the large bars have to be changed. Castellan Vaults, a custodian with premises near the City, released 11 tonnes to refiners in the last quarter, compared with around four tonnes a year earlier, according to figures the company shared with Break.
The refiner's queue
Most recasting happens in a handful of refineries in southern Switzerland, close to the Italian border. One of them, Valtorre Affinage, runs its furnaces on two shifts and has added a third for the busiest months. Marco Bernasconi, its head of sales, said the waiting time for a large order has stretched from a few days to nearly three weeks.
"We melt, we assay, we cast, we stamp," he said. "The stamp is the only part the customer cares about, but it is the last thing we do." Each kilobar carries the refinery's mark, a serial number and a purity of 999.9 parts per thousand. The fee for the conversion runs to a few dollars an ounce, according to two traders who buy from Valtorre.
Armoured air freight
The recast bars travel as cargo on scheduled passenger flights, packed in sealed wooden crates inside secure containers. A specialist logistics firm, Hollin Secure, collects them from the refinery in an armoured van, escorts them to the airport and hands them to the airline's secure cargo unit. At the destination, another armoured van takes them to a vault.
Insurance is the largest single cost. Clara Voss, who runs the precious-metals desk at Hollin, said shipping a tonne of gold from Switzerland to Asia costs somewhere between $30,000 and $50,000 all in, depending on route and timing. "The gold is heavy and the planes are full of passengers," she said. "We book the space weeks ahead."
Watching the yuan
Why go to all this trouble? Because gold bought in dollars in London sells for more in yuan in Asia. The difference, known as the local premium, has averaged around $25 an ounce this year, according to Meridian Bullion, a research house in Singapore, compared with a few dollars in quieter years.
The premium tends to widen when the yuan weakens against the dollar. A weaker currency makes local buyers keener to hold an asset priced in dollars, and the premium they pay rises to reflect that. Traders watch the daily yuan fixing as closely as they watch the gold price itself.
When the yuan slips, my phone starts ringing before the market even opens.
That was Wen Hao, a bullion trader at Lantau Precious Metals in Hong Kong, who has shipped gold on this route for twelve years.
What the premium says
For economists, the premium is a signal of how much demand for gold exists outside the dollar system. For traders, it is a margin: buy in London, refine in the Alps, sell in Asia, and pocket the difference once freight, insurance and refining are paid. When the premium narrows below about $15 an ounce, the trade stops paying and the pallets stay in London.
This morning's pallet will reach the refinery tomorrow. If the premium holds, the kilobars will be on a plane in under three weeks.
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