gold investment, silver investment

Precious metals investment terms A to Z

Over-the-Counter Market (OTC)

An over-the-counter (OTC) market is a decentralized market, without a central physical location where market participants trade.

In an OTC market, dealers independently act as market makers by quoting prices at which they will buy and sell an asset. Thus, OTC trading is done between two parties, without any supervision of an exchange. Decentralized exchange means that there is no public record of trade volume or prices, i.e. information about most transactions is not as easily available to the public, which makes this market less transparent. On the other hand, OTC trading offers confidentiality as transactions are conducted solely between the two parties involved. It also means that that all risks, including credit risk, are only between the two parties of a transaction. This is why OTC trading is subject to fewer regulations than trading on public exchanges.

OTC Gold Market

The global gold trade takes place in different marketplaces with different structures. Paper gold is traded on public futures exchanges, such as Comex, while physical bullion is traded in the OTC market. There are many local OTC gold markets, however, the London gold market is by far the largest global center for over-the-counter (OTC) transactions.

The main reason behind the OTC structure of the London market (and other physical gold markets) is probably the fact that it assures confidentiality. Investors do not want the data on their large positions in physical gold to be publicly available. Gold, unlike other commodities, cannot be consumed (at least not to an important extent), and its large stock in the market is held by diverse people. As such, gold is more decentralized than many other commodities. This unique feature of the gold market combined with the natural unwillingness of big gold holders to reveal their positions (theft or government confiscation may be issues) explains why the London gold market is organized as an OTC market.

We encourage you to learn more about gold – not only how it is traded in the OTC market, but also how to successfully use gold as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.

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