Active vs. Passive Liquidity in the Global Gold Market: A Deep Dive
Gold Market Liquidity
Understanding where liquidity comes from—and how it behaves—in the gold market is essential for any serious trader. This article dissects Active Liquidity and Passive Liquidity through the lens of market microstructure, drawing on the three core pillars of the gold ecosystem:
Physical gold (London OTC / Loco London)
Gold futures (COMEX / CME)
Gold ETFs (SPDR® Gold Shares, GLD)
Our goal is to build a unified framework that clarifies how different participants supply and consume liquidity, and how their interactions shape price discovery, risk, and strategy. Seven illustrative figures accompany the text to reinforce key concepts.
1. Introduction and Core Concepts
Gold has long been a cornerstone asset – a global reserve, an inflation hedge, and a safe haven in turbulent times. Its importance means that market liquidity in gold – the ease with which one can buy or sell large quantities without moving the price – directly affects price stability and efficiency. However, liquidity is multi-dimensional. As one IMF working paper notes, liquidity involves tightness (transaction costs), depth (available quantity at the best prices), resiliency (speed of price recovery), and other facets. In practice, gold markets exhibit very high liquidity: for example, roughly 70% of global gold trading volume happens in the London OTC market.
In this article, we adopt an “Active vs Passive Liquidity” framework to untangle how different players supply or consume liquidity. These terms are not standard industry jargon, so we define them operationally as follows.
Passive liquidity is supplied by participants (often bullion banks, exchange-appointed market makers, and ETF authorized participants) who post continuous two-sided quotes in the market (e.g., limit orders), earning bid-ask spreads or fees for providing trading depth.
Active liquidity comes from participants who take liquidity to trade immediately (e.g., using market orders), usually to speculate, hedge, or adjust holdings – such as institutional funds, central banks, or commodity producers.
In trading parlance, passive strategies “provide liquidity” by placing limit orders, while active (aggressive) strategies “remove liquidity” by using market or marketable orders.
This “active vs passive” lens – inspired by market microstructure theory – will be applied across three core arenas: the London spot market (“Loco London” OTC gold), the COMEX/CME futures market, and gold ETFs (SPDR® Gold Shares, GLD, as an example). We will see that passive liquidity (from bullion banks, exchange-designated market makers, and ETF authorized participants) forms the structural bedrock of the market, while active liquidity (from speculators, arbitrageurs, miners, central banks, etc.) drives price discovery by consuming that liquidity. Critically, these roles are interlinked: passive providers hedge their risks (often becoming active participants elsewhere), and active demands shape passive quoting. Throughout, we draw on official sources and research – from the LBMA, LPMCL, CME Group, SPDR filings, and academic studies – to ground our analysis.
2. Physical Gold Market Mechanisms (Loco London)
London’s OTC gold market (“Loco London”) is the hub of the global spot market, handling most wholesale trading and settlement of bullion. The London Bullion Market Association (LBMA) oversees market practices, and its core clearing engine is the London Precious Metals Clearing Ltd (LPMCL). We first examine how passive and active liquidity operate here.
2.1 Passive Liquidity: Bullion Banks and the Clearing System
The backbone of liquidity in Loco London is a handful of bullion banks (market makers) that continuously quote two-way prices. LBMA designates certain banks as “Market Makers” with explicit quoting obligations: they must post firm bid and offer quotes to each other for agreed minimum sizes during trading hours (typically 8:00–17:00 London time). For example, major banks like HSBC, UBS, and JPMorgan are required to maintain tight quotes in spot, forwards, and options markets; at any time they have orders sitting in the book, ready to trade. These banks hold both allocated accounts (physically segregated gold bars) and unallocated accounts (analogous to bank cash accounts) with each other. Most London trading is settled via unallocated accounts: it operates much like bank deposits of bullion.
Settlement of trades runs through LPMCL, owned by the big four clearing banks (HSBC, ICBC, JPMorgan, UBS). As LPMCL’s website notes, “the metal leg of much of the global OTC precious metal trading is cleared through the London clearing system,” in which deals are netted and settled. For example, LPMCL data report that in June 2025, an average of $44.9 billion of gold was cleared per day (net) in London. After each trading day, trades are netted among members: offsets occur via debiting and crediting unallocated accounts, and only at delivery does gold move between allocated vaults. This netting reduces physical transfers – only when a customer requests delivery do actual bars get moved out of vaults.
Passive providers’ incentives and risks: Market-making banks provide liquidity mainly for the bid-ask spread and fees. They earn the spread by buying at the bid and selling at the ask. But this exposes them to inventory risk (the gold price can move against their positions), adverse selection (incoming market orders might be informed), and settlement risk (delivery failures). Common risk controls include hedging through futures or forwards: a bank quoting spot might hedge its net position in COMEX futures to stay market-neutral. They also manage their quotes dynamically: if inventory builds, they may widen spreads or pull back. These hedging and pricing adjustments essentially turn passive liquidity into active trades in other markets. In summary, bullion banks supply a stable layer of depth in Loco London (an average of 14 million ounces net clearing per day), forming the structural liquidity base. Their continuous quotes mean that at any moment, a reasonable amount can be traded – a critical foundation for market continuity.
2.2 Active Liquidity: Central Banks, Producers, and Institutions
Against that passive backdrop, large buyers and sellers interact as liquidity takers. Major examples include central banks and sovereign wealth funds adjusting reserves. When a central bank decides to buy or sell gold en masse, it typically does so via OTC blocks, often negotiated with bullion banks or split into many trades. Such orders – very large – “consume” liquidity from the books and can move the price. For instance, if a central bank sells 100,000 ounces through market orders, it will demand bids and push prices down until completion.
Similarly, gold miners and jewelry fabricators introduce active demand. A miner might want to lock in future revenue, placing sell orders (via forwards or spot) that absorb bids. A jewelry firm might buy actual bars to meet production needs, hitting asks. Even investment flows (ETF flows or fund rebalancing) can show up as bursts of market orders. In all these cases, the orders are marketable: they hit the passive quotes. Central banks or producers usually avoid upsetting the market too much by working through banks or using algorithms, but they nonetheless represent active liquidity shocks.
In summary, the Loco London market is characterized by a thin group of passive providers (lead bullion banks) creating a resilient two-sided market most of the time, and a diverse set of active takers (sovereign funds, miners, etc.) driving big price moves. These roles coexist: for example, when a bullion bank widens its quoted spread because it worries about an adverse event, that reflects it shifting from passive supply to a protective (or active) stance. Conversely, when an active large order hits, the passive banks’ strategies adjust (they may hedge or swing quotes). London’s clearing and vaulting infrastructure (LPMCL, LBMA vaults, etc.) underpins all of this by enabling near-instant net settlement and secure custody.
3. Gold Derivatives Liquidity (COMEX/CME)
The gold futures market (COMEX, part of CME Group) provides a centralized price discovery and hedging platform. Its liquidity structure parallels the spot side but uses standardized contracts and exchange rules.
3.1 Passive Liquidity: Exchange Liquidity Programs and Market Makers
On CME, market-making obligations create passive liquidity. The exchange often designates certain firms as Official Market Makers or Liquidity Providers for gold futures. These participants sign agreements to quote continuous two-sided markets with specified minimum quote sizes and maximum bid-ask spreads during trading sessions. For example, CME’s “Gold Kilo Futures Market Maker Program” required participants to “quote continuous two-sided markets in the applicable Product, at predetermined average bid/ask spreads and minimum quote sizes” during designated hours. In practice, this means that at all times, a gold futures market maker will have limit orders on both sides of the order book, providing depth. In exchange for this service, makers may receive incentives such as fee breaks or priority.
These designated providers typically deploy ultra-low latency systems. They monitor order flow and inventories in real time, automatically refreshing quotes as needed. The exact algorithms and parameters (balancing inventory vs. quote aggressiveness) are proprietary, but the goal is the same: earn spreads by staying flat. The exchange tracks compliance (CME notes that participants’ volumes are tracked “to ensure proper distribution of earned incentives”). Overall, the CME’s structure ensures that gold futures always have a tight bid-ask spread and a stack of resting orders in normal times, anchoring the market’s depth.
3.2 Active Liquidity: Speculators, Arbitrageurs, and Execution Algorithms
On the demand side, active liquidity in futures comes from speculators (hedge funds, CTAs), commercial hedgers, and arbitrageurs. Speculators use market orders to quickly exploit perceived short-term price moves – for instance, a macro fund might use a market order to buy 1,000 contracts if they expect a rally. Commercial hedgers (e.g., jewelry producers) will sell or buy futures to lock prices, also often hitting standing bids/asks.
Arbitrage plays a key role, too. Traders constantly cross-check the gold spot price (e.g., LBMA price) with futures, and also between related contracts (gold vs. silver or different delivery months). If futures become relatively cheap, an arbitrageur might buy futures and sell spot, thus adding active sell orders in one and buy orders in the other until prices align. This activity ties together markets and enhances price efficiency.
Large institutions executing big blocks in futures typically use algorithmic strategies like VWAP (Volume-Weighted Average Price) or TWAP (Time-Weighted Average Price). A VWAP algorithm will slice an order based on the historical intraday volume profile – trading more when liquidity is high – to minimize market impact. An educational guide notes that VWAP is “a trading algorithm based on a pre-computed schedule…used in the execution of a bigger order to minimize the impact on the market price”. TWAP, by contrast, spreads trades evenly over time. The idea is to avoid pushing the price too much: as one source explains, “TWAP is a trading strategy used to execute a large-volume order by breaking it into equal parts…to minimize slippage and signaling”. Both strategies still consume liquidity (they issue many smaller aggressive orders), but try to blend in with normal volumes.
In sum, the futures market blends structured passive provision (exchange-designated market makers) with dynamic active consumption (speculative and hedging flows). The result is generally high liquidity: daily volume in COMEX gold futures often exceeds 100,000 contracts (each 100 ounces), backed by CME’s robust clearinghouse. The continuous interaction of passive quotes and active trades ensures the futures price is an efficient indicator of global gold value, yet both sides must manage risk. Market makers carry futures inventory risk (often hedged in spot), while large takers face execution risk and price impact (mitigated via algorithms).
4. Gold ETF Liquidity (SPDR Gold Shares, GLD)
Gold ETFs like SPDR® Gold Shares (GLD) combine features of the spot and futures markets. GLD is structured with a primary market (creation/redemption by Authorized Participants, APs) and a secondary market (shares trading on exchanges like any stock). This two-tier system yields distinct liquidity roles.
4.1 Primary Market (Authorized Participants and Physical Creation/Redemption)
In GLD’s primary market, only Authorized Participants (large institutions) can exchange blocks of shares (“creation units”) for gold or cash. The process anchors the ETF to its underlying gold value. As GLD’s prospectus explains, creating or redeeming shares “requires the delivery to the Trust or the distribution by the Trust of the amount of gold and any cash represented by the Baskets being created or redeemed, the amount of which is based on the combined NAV”. In practice, to create 100,000 shares, an AP must deposit a specified weight of bullion (plus a small cash component to match fees/expenses) into GLD’s trust. Conversely, to redeem, the AP returns shares and gets allocated gold bars in return.