Two very different plumbing systems sit underneath the gold price you see on a screen: London's OTC unallocated clearing network, and COMEX's physically-deliverable futures system. Neither works the way most traders assume, and understanding both explains why paper gold and physical gold rarely interact directly.
1. How London's OTC clearing actually settles trades
London Precious Metals Clearing Limited (LPMCL) is the mechanism through which member banks clear and settle OTC gold and silver trades between each other. Rather than physically moving bars for every transaction, the vast majority of trades settle as book-entry adjustments to unallocated accounts, essentially updating a ledger of who owns what claim on a shared pool of metal, netted across all trades between clearing members at the end of each day.
2. Allocated versus unallocated gold
Unallocated gold represents a claim on a bank's general pool of bullion; the holder does not own specific bars, and the arrangement is effectively an unsecured claim on the bank, similar in structure to a bank deposit. Allocated gold assigns the holder specific, serial-numbered bars held in segregated storage, legally the client's property and not part of the bank's balance sheet. The overwhelming majority of daily OTC trading volume in London is unallocated, since converting to allocated status involves storage fees and administrative steps most short-term trading desks skip.
3. Why COMEX futures rarely result in physical delivery
A standard COMEX gold futures contract (GC) represents 100 troy ounces and technically obligates physical delivery if held into the delivery period. In practice, historical COMEX data shows typically under 5% of open interest in a given contract month actually converts to delivery; the overwhelming majority of positions are closed out or rolled forward to a later contract month before First Notice Day, the first day a short position holder can be assigned a delivery obligation.
This is by design. Most futures participants use the contracts for price exposure and hedging rather than sourcing physical metal, which is instead typically handled by refiners, mints, and bullion dealers dealing directly in physical markets.
4. What a physical delivery actually involves
When delivery does occur, COMEX issues a delivery notice specifying the exact bar serial numbers, refiner brand, and vault location involved. Delivered bars must meet Good Delivery specifications: 350-430 troy ounces in weight and a minimum fineness of 995 parts per thousand pure gold, standards maintained jointly by COMEX and the LBMA to ensure interchangeability across approved vaults and refiners.
- Practical relevance for traders: Retail CFD and spot traders never touch this delivery mechanism directly; their broker's own hedging and liquidity provider relationships absorb this layer entirely.
- Why it still matters: COMEX registered and eligible vault inventory levels, published weekly, are watched by some analysts as a rough proxy for physical market tightness, though the relationship to price is looser than commonly assumed.
