Good delivery

What Is Good Delivery?

Good delivery refers to a set of recognized standards for the quality and specifications of precious metal bars, particularly gold and silver, in the wholesale bullion market. This concept is integral to commodity markets and falls under the broader financial category of market microstructure. It ensures that bars traded in large quantities meet rigorous criteria for purity, weight, and physical appearance, providing confidence and liquidity in transactions. The most prominent example is the standards maintained by the London Bullion Market Association (LBMA).³⁸

History and Origin

The concept of standardized delivery in commodity markets dates back centuries, evolving from early forms of forward contracts for agricultural products. In the United States, the Chicago Board of Trade (CBOT), established in 1848, played a crucial role in formalizing futures contracts with standardized agreements on quality and delivery terms for grains.³⁶, ³⁷

For precious metals, the London market emerged as a leading hub for gold and silver trade, with formal standards developing to facilitate global transactions. The London Bullion Market Association (LBMA) was established in 1987, formalizing and overseeing the "Good Delivery" standards that had evolved over time. The LBMA maintains the Good Delivery List, which includes approved refiners whose bars meet specific criteria, ensuring the integrity and quality of bullion traded in the over-the-counter (OTC) market in London.³⁴, ³⁵ The current edition of the LBMA's Good Delivery Rules for Gold and Silver Bars was published in January 2023.

Key Takeaways

• Good delivery defines the accepted quality and specifications for gold and silver bars in wholesale markets.³³
• The LBMA (London Bullion Market Association) is the primary body that sets and maintains Good Delivery standards for gold and silver.³¹, ³²
• Refiners must meet strict criteria, including minimum production volumes, financial stability, and the ability to produce bars conforming to precise specifications, to be listed on the LBMA Good Delivery List.²⁹, ³⁰
• Good delivery ensures consistency, trust, and liquidity in the global precious metals trade.²⁸
• Good delivery bars are typically large, such as approximately 400 troy ounces for gold and 1,000 troy ounces for silver.²⁷

Formula and Calculation

Good Delivery does not involve a financial formula or calculation in the traditional sense, as it pertains to the physical specifications and qualitative standards of precious metal bars rather than a numerical outcome derived from variables. Instead, it relies on precise measurements and adherence to established tolerances for purity and weight.

For gold, a Good Delivery bar must have a minimum fineness of 995.0 parts per thousand (99.5% pure gold) and typically weighs between 350 and 430 troy ounces.²⁶ For silver, the minimum fineness is 999.0 parts per thousand (99.9% pure silver), with bars typically weighing between 750 and 1,100 troy ounces. These specifications are verified through assaying and meticulous weighing processes.

Interpreting the Good Delivery

Interpreting good delivery means understanding that a precious metal bar carrying this designation signifies it meets the highest standards for physical characteristics and has been produced by a refiner deemed trustworthy by the industry. For example, a gold bar marked as "Good Delivery" assures buyers of its purity (e.g., at least 99.5% fine gold) and weight (e.g., approximately 400 troy ounces).²⁵ This standardization is critical for efficient trading, as it eliminates the need for individual inspection and verification of each bar in large-scale transactions.

In the context of the London bullion market, only Good Delivery bars are acceptable for the settlement of "Loco London" contracts, where bullion is physically held in London vaults.²⁴ This adherence to a common standard fosters confidence and reduces transaction costs by streamlining the exchange process. Investors and institutional buyers rely on the Good Delivery status as a benchmark of quality and ethical sourcing.²³

Hypothetical Example

Imagine a large institutional investor, "Global Assets Inc.," wants to purchase 10,000 troy ounces of gold for their diversified portfolio. Instead of buying smaller, non-standardized bars that would require individual verification, Global Assets Inc. specifies that they only accept Good Delivery gold bars.

They place an order with a bullion dealer, "Precious Metals Corp." Precious Metals Corp. sources the gold from a refiner on the LBMA Good Delivery List. The refiner provides gold bars each weighing approximately 400 troy ounces with a fineness of 99.5% pure gold, marked with the refiner's hallmark, serial number, fineness, and year of manufacture.

When the bars are delivered to Global Assets Inc.'s designated vault, there is no need for extensive individual testing or re-assaying because the bars conform to the globally recognized Good Delivery standard. This trust allows the transaction to be settled quickly and efficiently, facilitating the investor's asset allocation strategy without delays or disputes over quality.

Practical Applications

Good delivery standards are fundamental to the operation of global precious metal markets, impacting various aspects of finance and investment.

• Wholesale Bullion Trading: The primary application of good delivery is in the wholesale, over-the-counter trading of physical gold and silver, particularly in major hubs like London. It ensures that large quantities of metal can be bought and sold efficiently.²²
• Futures Contracts: Commodity exchanges like the CME Group (which includes COMEX) incorporate Good Delivery specifications for the physical settlement of gold and silver futures contracts. This guarantees that delivered metal meets the required purity and weight.²⁰, ²¹
• Central Bank Reserves: Central banks holding gold as part of their foreign exchange reserves typically require their gold to be Good Delivery bars due to the assured quality and global acceptability.
• Exchange Traded Funds (ETFs) and Physical Gold Funds: Many Exchange Traded Funds (ETFs) that physically back their shares with gold or silver hold Good Delivery bars in secure vaults. This provides investors with assurance regarding the underlying asset's quality.
• Responsible Sourcing: The LBMA's Good Delivery standards also include requirements for responsible sourcing, aligning with efforts to prevent conflict minerals and promote ethical practices in the supply chain. This is underpinned by the Responsible Gold Guidance (RGG) which sets out responsible sourcing requirements for all LBMA refiners.¹⁸, ¹⁹ The World Gold Council also has Responsible Gold Mining Principles (RGMPs) which complement these efforts.¹⁶, ¹⁷

Limitations and Criticisms

While good delivery standards are crucial for market integrity, they do have certain limitations and face criticisms. One common misunderstanding is that all gold and silver bars are considered good delivery; in reality, only bars meeting specific quality standards and produced by approved refiners qualify.¹⁵

• Exclusion of Smaller Bars: The standards primarily cater to large, wholesale bars (e.g., 400 oz gold, 1,000 oz silver).¹⁴ This means smaller, retail-sized bars, even if produced by an LBMA-approved refiner, are not considered "Good Delivery" themselves, potentially limiting the liquidity of such smaller holdings in the institutional market.
• Refiner Dependence: The system relies heavily on the ongoing compliance and reputation of approved refiners. If a refiner is removed from the Good Delivery List, it can have serious financial and reputational implications for that refiner, and potentially affect the perceived quality of bars previously produced by them.¹², ¹³
• Cost of Compliance: For refiners, meeting and maintaining the stringent requirements for Good Delivery status, including regular audits and financial standing mandates, can be costly.¹¹
• Ethical Sourcing Complexity: While the LBMA has integrated responsible sourcing into its Good Delivery requirements, ensuring complete traceability and ethical sourcing across the entire supply chain, from mine to market, remains a complex challenge.¹⁰ Despite efforts like the Responsible Gold Guidance, the vastness of the global precious metals market makes universal oversight difficult.

Good Delivery vs. Investment Grade

Good delivery refers specifically to the technical and physical specifications of large bullion bars that are acceptable for settlement in major wholesale markets, most notably those governed by the LBMA. It encompasses precise requirements for weight, purity, dimensions, and the marks on the bar, as well as the accreditation of the refiner.⁹

In contrast, investment grade is a broader term, often used in the context of bonds and other fixed-income securities, to denote a credit rating that suggests a relatively low risk of default. An investment-grade bond, for instance, typically has a rating of BBB- or higher from Standard & Poor's or Baa3 or higher from Moody's. While good delivery ensures the physical integrity and market acceptance of a precious metal, investment grade assesses the financial health and creditworthiness of an issuer. While a Good Delivery gold bar is certainly a high-quality physical asset, the term "investment grade" applied to gold usually implies its suitability as a store of value or a hedge against inflation, rather than a specific physical standard. The two terms address different aspects of investment quality and marketability.

FAQs

What does "Good Delivery" mean for a gold bar?

For a gold bar, "Good Delivery" means it meets specific, internationally recognized standards for its purity (e.g., at least 99.5% fine gold), weight (approximately 400 troy ounces), dimensions, and appearance. It also signifies that the bar was produced by a refiner approved and listed by a major authority like the London Bullion Market Association (LBMA).⁸

Why are Good Delivery standards important in precious metal markets?

Good Delivery standards are crucial because they ensure uniformity and trust in the wholesale trading of precious metals. By establishing precise specifications, they eliminate the need for individual bar testing in large transactions, facilitating smooth and efficient settlement, reducing market risk, and maintaining the integrity of the global bullion market.⁶, ⁷

Can an individual investor buy Good Delivery bars?

While technically possible, individual investors typically do not buy Good Delivery bars directly. These bars are very large and expensive, designed for institutional trading and central bank reserves. Individual investors usually purchase smaller bars (e.g., 1 oz, 10 oz, 1 kg) or coins, which, while often produced by LBMA-approved refiners and of high purity, are not themselves referred to as "Good Delivery" bars.⁵ However, investors can gain exposure to Good Delivery gold through vehicles like physically-backed gold ETFs.

What is the LBMA Good Delivery List?

The LBMA Good Delivery List is a list of approved gold and silver refiners whose bars meet the stringent quality, weight, and ethical sourcing standards required for trading in the London bullion market. Refiners must undergo rigorous evaluation and ongoing monitoring to remain on this list.³, ⁴

How does Good Delivery relate to futures contracts?

In futures markets, such as those operated by the CME Group, Good Delivery specifications often define the acceptable quality and form of precious metals that can be physically delivered to settle a futures contract. This ensures that the buyer receives a standardized and verifiable product.¹, ²