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Term
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Meaning
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Account
- allocated
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An account in which the client's metal
is physically identified as his; he becomes a secured creditor of the
holding bank.
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Account
- unallocated
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An account in which the client's bars
are not specifically ring-fenced, and which is cheaper than an allocated
account in that storage charges are obviated. The client carries higher
counterparty risk, however, as he is an unsecured creditor.
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American
Option
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An option that may be exercised on any
day up to and including the expiry date
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Assay
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To test a metal for purity.
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Backwardation
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The difference between a forward price
and a nearby price when the latter exceeds the former
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Bar
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Typical gold product, either for
trading or for accumulation. Bars come in a variety of shapes weights and
fineness and different bars are favoured in different parts of the world;
see the weights conversion table in the Discover domain
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Bear
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Someone expecting prices to fall
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Bid/ask
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Bid or buy is the price a dealer is
prepared to pay for gold bullion. Ask or sell is the price offered by the
seller. (See also definition of Spread below.)
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Bull
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Someone expecting prices to rise
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Bullion
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Originally meaning melting place, from
the French bouillon, boiling, derived from the Latin bullio
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Bullion
coin
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A legal tender coin whose market price
depends on its gold content, rather than its rarity or face value.
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Certificates
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Gold certificates are a method of
holding gold without taking delivery. Issued by individual banks they
confirm an individual's ownership while the bank holds the metal on the
client's behalf. The client thus saves on storage and personal security
issues, and gains liquidity in terms of being able to sell portions of the
holdings (if need be) by simply telephoning the custodian
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CFTC
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Commodity Futures Trading Commission,
the regulatory body in the US covering futures markets
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cif
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A cif price refers to the final price
to the buyer at the point of delivery, including cost, insurance and
freight
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COMEX
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The New York Commodity Exchange, now a
division of NYMEX, the New York Mercantile Exchange. The contracts in the
COMEX gold market consist of 100 ounces each, and the actively traded
contracts are the even months of the year.
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Consignment
stocks
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A bullion dealer may hold gold on
consignment at a client's premises. It is the dealer's property until the
client withdraws it and pays the prevailing price. Alternatively, it may be
held by the dealer at local banks until the clients come forward to
purchase and take delivery.
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Contango
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The difference between a forward price
and a nearby price when the former exceeds the latter. This is the usual
situation in gold and if there is no constraint anywhere along the supply
pipeline then the contango will reflect prevailing interest rates and
storage charges
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Deferred
settlement
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A situation in which the settlement of
a bullion market contract is deferred daily
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Delivery
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The transfer of the asset from seller
to buyer. This does not necessarily involve physical shipment but can be
done on paper with the bullion remaining in the vaults of a specified bank
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Delta
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The proportion by which the price of an
option changes in response to a change in the price of the underlying
asset. The delta measures the sensitivity of the option’s price to
changes in the asset’s price.
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Delta
hedging
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Metal bought (sold) by the grantor of a
call (put) in order to cover his potential risk. The more the price
of the underlying asset moves in favour of the option purchaser, the higher
the risk to the grantor that the option will be exercised against him; he
will need to be covered against that risk.
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Doré
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A gold-silver alloy, an intermediate
product from certain gold mines
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EFP
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Exchange for Physical; a mechanism that
allows a client to open or close a futures contract through the physical
market when the futures market in question is closed. A dealer will deal
for the client in the London market and then replace the position with a
futures market position when the exchange opens. The differential in the
price between the spot and the futures contract is often itself referred to
as the efp.
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European
option
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An option that may only be exercised on
the date of expiry. Predominant in the London bullion market.
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Face Value
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The nominal value given to legal tender
coin or currency (for example a 1-oz. Gold American Eagle coin has a face
value of $50).
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Fineness
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Gold purity, usually expressed in parts
per thousand; thus 995 or two nines five is 995/1000 or 99.5% pure. 995 was
the highest purity to which gold could be manufactured when good delivery
(q.v.) was determined, but for very high technology applications now it is
possible to produce metal of up to 99.9999% purity.
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Fix
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The gold fix takes place twice daily in
the offices of N M Rothschild in London. The five members of the fix meet
at 10:30 and 3:00 London time and commence the fix with a trying price. The
fixing members representatives relay the price down to their dealing rooms,
who are in contact with as many bullion dealers as are interested (or who
have interested clients) and these market members then declare how much metal,
on a net basis, that they require to buy or sell at that level. The dealers
are themselves in contact with their clients, who may change their order,
or add or cancel an order, at any time. The position declared by the
dealers is the net position outstanding between all their clients (i.e. if
one bank has clients wanting to buy a total of two tonnes, and other
clients wanting to sell a total of one tonne, then he declares himself as a
buyer of one tonne). Each fixing member then nets off the position and declares
himself, as the representative of all those interested parties, as a net
buyer or seller (and of how much), or to be in balance. If the market is
out of balance with more gold required than offered, then the price will be
adjusted upwards (and vice versa) until balance is achieved (because some
clients will pull out if the price does not suit them). At this point the
price is fixed. On very rare occasions the price will be fixed when there
is an imbalance, at the discretion of the chairman of the fix. The fix is
thus entirely open and any market user may participate through his bank.
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fob
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An fob price refers to the price of a
commodity on a vessel at its point of departure, and usually includes
transport insurance and loading costs; hence Free on Board
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Forward
contract
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A principal’s (Over the Counter)
contract that trades an asset for settlement on a specific date in the
future. Each forward contract is “tailor-made”
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Futures
contracts
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An agreement to buy or sell a specific
amount of a commodity or financial instrument at a particular price on a
stipulated future date; the contract can be sold before the settlement
date. Futures contracts are standardised and are traded on “margin”
on futures exchanges, such as TOCOM or the COMEX division of NYMEX.
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GOFO
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The Gold Offered Forward Rate, which is
the rate at which dealers will lend gold against US dollars.
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Gold Forward Offered Rate (GOFO)
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See above
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Gold Loan
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A financing mechanism whereby gold is
borrowed from a bullion bank (which has usually borrowed it from a central
bank or banks), and sold into the market to raise cash, usually to finance
a gold mining operation. The metal is then repaid over an agreed period of
time. The interest on the loan is usually paid either in dollars or in gold
subject to the agreement between the counter-parties.
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Gold
Standard
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A monetary system based on
convertibility into gold; paper money backed and interchangeable with gold.
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Good
delivery bars
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Also referred to as large bars, the
ingots that conform to London Good Delivery standard
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Good delivery standard
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The specification to which a gold bar
must conform in order to be acceptable on a certain market or exchange.
Good delivery for the London Bullion Market is the internationally
accredited good delivery standard. A good delivery bar for London should weigh between 350 and 430 ounces (gold content), of minimum purity 99.5% (two
nines five). Further specifications can be obtained from the LBMA
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Grain
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One of the earliest weight units used
for measuring gold. One grain is equivalent to 0.0648 grams.
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Hallmark
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Mark, or marks, which indicate the
producer of a gold bar and its number, fineness, etc.
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Hedging
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The use of derivative instruments to
protect against price risk.
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Karat
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Unit of fineness, scaled from one to
24. 24 karat gold (or pure gold) has at least 999 parts pure gold per
thousand; 18-karat has 750 parts pure gold and 250 parts alloy, etc.
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Kilo bar
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A bar weighing one kilogram
-approximately 32.1507 troy ounces.
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Lakh
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A trading term meaning 100,000,
deriving from the Indian word of the same meaning
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LBMA
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The London Bullion Market Association
acts as the coordinator for activities conducted on behalf of its members
and other participants in the London Bullion Market, and it is the
principal point of contact between the market and its regulators.
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Legal
tender
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The coin or currency which the national
monetary authority declares to be universally acceptable as a medium of
exchange; acceptable for instance in the discharge of debts.
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Limit
order
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An order placed by a client for a
transaction to be executed at a specified price. The order is triggered if
the market touches that price (or betters it)
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Liquidity
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The quality possessed by a financial
instrument of being readily convertible into cash without significant loss
of value.
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Loco
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The place at which gold is held and to
which a delivery price applies. London is the common denominator world-wide
and represents the basis for international trading and settlement in gold
and silver.
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Lot
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Alternative term for a futures contract
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Margin
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A deposit required to be put up before
opening a futures, forward or option contract.
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Margin
(initial)
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The amount of money deposited per
contract at the start of the trade
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Margin
(maintenance)
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A sum that must be maintained on
deposit throughout the life of the trade
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Margin
call
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Money that is called for from the
client, during the life of the transaction, to cover exposure resulting
from an adverse price movement (or an endemic increase in margins by the
exchange).
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Mark to
market
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The valuation of an open position as at
current price levels.
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Market
Maker
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A dealer who makes a market, i.e.
quotes bid and offer prices to counter-parties and is prepared to deal at
those prices
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Naked
short
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A seller of a contract who does not
have the metal to back up his position
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Numismatic
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Coins that are valued for their rarity,
condition and beauty beyond the intrinsic value of their gold content.
Generally, premiums for numismatic coins are higher than for bullion coins.
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Open
interest
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The number of contracts (long and
short) outstanding in any one futures contract
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Option
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An option contract gives the buyer
right but not the obligation to buy (call option) or to sell (put option) a
quantity of the underlying asset at a specified price (strike price) by or
on a certain date.
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Option
premium
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The price paid for an option is known
as the premium; the strike price is the pre-determined price as which an
option may be exercised.
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Option
strike price
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The purchaser of an option has the
right but not the obligation to exercise that option. The price paid
for an option is known as the premium; the strike price is the
pre-determined price as which an option may be exercised.
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OTC
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Over-The Counter, or a principals'
contract
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Pennyweight
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An American unit of weight for gold.
Twenty pennyweights equal one ounce.
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Restrike
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A modern replica of previously issued
coins. Governments and their mints can choose to restrike a previous issue
rather than introduce new coinage.
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Settlement
date
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The date on which a contract is
scheduled for delivery and payment. Spot settlement in the bullion market
is two days after the bargain has been struck
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Short
covering
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The closure of short positions
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Speculative
Long
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A trader who has bought a forward or
future in the expectation of closing it out at a higher rice
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Speculative
short
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A trader who has sold a forward or
future in the expectation of buying it back at a lower price.
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Spot
deferred
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A forward contract in which the
contracts may be rolled forward as they mature. There is thus no
pre-specified delivery date, and as each contract comes to maturity it is
rolled forward with fresh interest rates. The facility is, however, set up
to terminate within a pre-determined maximum period (a client may, for
example, roll forward every three months for up to ten years).
This is also known as a floating rate forward.
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Spot price
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The price for spot delivery which in
the gold market is two days from the trade date
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Spread
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The difference between Bid (the price a
buyer is prepared to pay for gold) and Ask (the price a seller offers)
prices.
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Stale Bull
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Speculator who has bought a commodity
or trading instrument in the expectation of price rises and then sells on
disappointment at the market's failure to fulfil his expectations.
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Stale bull liquidation
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Selling of a long position by a
disappointed bull when the price has not performed up to his expectation
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Stop
Loss Order
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An order that will close out a loss
making position when the price reached a specific level. Such trades are
carried out on a best efforts basis, since it cannot be guaranteed that a
specific price will be traded if the markets are moving rapidly (as they
often are when large amounts of stop losses are triggered)
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Term
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Meaning
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Troy ounce
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The standard weight in which gold is
quoted in the international market, weighing 31.1035g (see also our Weights
Conversion table). Named after the old French city of Troyes, where there
was an annual trading fair in mediaeval days and where this was a unit of
weight.
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Warrant
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A securitised product issued by a
specific bank or securities house and usually carrying the name of the
issuer, which gives the purchaser the right to buy gold at a certain price
on a specific date. They are thus not dissimilar to options, but the
pricing mechanism is generally simpler. Options are a generic instrument
and would not be specifically tied to one house.
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Writer,
grantor
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Alternative terms for the seller of an
option (whether it is a put or call is irrelevant)
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