Across the border of Singapore, a ferry-ride away, a fire broke out on Saturday, 8 July 2017 in a slum in Muka Kuning, Batam, Indonesia. The slum houses around 160 people and around 50 families, on an uneven plot of land smaller than the size of a football field. Given the concentration of huts built in close proximity to each other, at least 10 of these huts were ravaged by the fire, tragically affecting the lives of 10 families who struggle daily to make ends meet. Towards the center of the slum, the community center that was used for feeding and tutoring children in the slum was destroyed by the fire, devastating the whole community.
Within our sphere of influence, we are given a choice - whether to help or whether to stand aside and let things be as they are. We decided to take a small step towards making a difference in this community. We wanted to make it personal and direct to make an impact on the ground. We visited the community and in speaking with the locals there, decided that it would bring hope and restoration to the community by rebuilding their community center. Also, in speaking with the locals, we were thankful to find out that there were no casualties from the fire.
Today, around 3 months after the incident, the new community center has been rebuilt, restocked and revitalized. Tuition has now resumed in the community center and feeding is provided for the children in the community center - much to the joy of the community in Muka Kuning as well as to us.
A series of eight articles covering the Chinese Gold Market has recently been added to BullionStar’s Gold University portal. This series is titled “Chinese Gold Market Essentials”. Links to all 8 articles can be found on the left-hand frame of the Gold University pages under Research on the BullionStar desktop site, and under the “Chinese Gold Essentials” section of the Gold University, under Research on the BullionStar mobile site.
These new Gold University articles draw on both information from BullionStar analyst Koos Jansen’s Chinese gold market blogs as well as new material. The eight articles in the series follow the style and format of all other articles within the BullionStar Gold University pages. i.e. to be a reference resource for all who are interested in the global gold markets, be they industry participants, reporters and journalists, precious metals investors, or indeed general readers.
The framework for the “Chinese Gold Market Essentials” series centres around the Supply - Demand equation of the Chinese Gold Market and the infrastructure of this market.
The article “Mechanics of the Chinese Domestic Gold Market” explains the core concepts of the Chinese gold market and the central function that the Shanghai Gold Exchange (SGE) plays as the market allocation mechanism within the Chinese gold market. By design, nearly all gold in China flows through the SGE trading and vaulting network, and gold withdrawals from the SGE are therefore a suitable proxy for Chinese wholesale gold demand. This wholesale gold demand includes consumer gold demand and direct purchases of gold on the SGE (institutional gold demand). Wholesale gold demand is therefore a far broader measure of gold demand than just the consumer demand which precious metals consultancies such as GFMS and the World Gold Council report on.
There is therefore a simple and elegant gold supply-demand equation at the heart of the Chinese gold market.
Two other articles in the series address the supply side of the Chinese gold market, each of which focuses on one of the two large components of gold supply in China, namely gold imports and gold mining production.
In 2016, China net imported about 1300 tonnes of gold, making gold imports the largest single source of supply to the Chinese gold market. The article “Chinese Cross-Border Trade Rules on Gold” discusses these gold imports, and the rules around importing gold into and exporting gold from China.
Although Chinese cross-border trade rules on gold apply to both gold imports and gold exports, gold flows mostly into China, and not out again, due to the general prohibition on gold exports. Rules on gold imports are also strict and are administered by the People’s Bank of China, which issues gold import licences to the small number of authorised domestic and foreign banks. Some Chinese mining companies now also import their own gold directly into China.
As regards mining, China is also the world’s top gold producing country, with Chinese mines producing over 450 tonnes of gold output during 2016. Gold mining output is therefore the second largest source of gold flowing into the Chinese gold market. The article “Chinese Gold Mining as a Source of Gold Supply” provides an overview of the Chinese gold mining industry, and profiles some of the larger domestic gold mining companies in this sector.
The gold mining supply article also looks at the fact that China now claims to have over 12,100 tonnes of in-ground identified gold reserves that can be mined in future, and that there are even regiments of the Chinese army which specialise in surveying and exploring for gold across China.
“Gold Demand within the Chinese Gold Market” expands on the idea that Chinese gold demand is not just consumer gold demand (jewellery demand, coin and bar demand, and industrial demand) but includes substantial direct purchases of gold at the Shanghai Gold Exchange. Chinese commercial banks also hold gold on their balance sheets to cover a number of activities such as gold accumulation plans, gold leasing etc.
The article “Infrastructure of the Shanghai Gold Exchange” looks at the trading mechanisms and contracts of the Shanghai Gold Exchange. The SGE is the world’s largest physical gold exchange, an exchange in which real physical gold stored in the exchange’s vaults changes hands between trading participants via exchange traded contracts. All trading is conducted on an electronic trading platform, and counterparties are required to have the full amount of gold and cash before trading. Gold contracts traded and cleared on the SGE are known as the SGE’s ‘Price matching’ market.
Gold contracts traded bilaterally off Exchange (i.e. traded Over-the-Counter between counterparties) can also be entered into the SGE trading platform and then cleared through the SGE’s clearing and vaulting system. This is known as the SGE’s “Price Inquiry” market. Additionally, a twice daily gold price auction, known as the Shanghai Gold Price Benchmark auction, is a distinct third spoke of trading on the SGE.
There are 8 physical gold product contracts traded on the SGE representing gold bars and gold ingots ranging in weight from 50 grams through 1 kg and up to 12.5 kgs. Five of these products trade on the Main Board of the Exchange (domestic), and a further 3 trade on the Shanghai International Gold Exchange ( International Board).
A specific article in the series covers the "Shanghai International Gold Exchange". Sometimes known as the SGE International Board or SGEI, this international board is an internationally focused physical gold trading platform launched by the SGE in September 2014. This platform offers 3 Renminbi-denominated physical gold contracts, one of which, the iAu99.99, sees significant trading volume. The aims of the International Board include boosting internationalization of the Chinese Yuan, introduction of offshore Yuan to SGE trading, and internationalizing the membership of the SGE.
The SGEI also has a designated gold vault in the Shanghai Free Trade Zone. Gold imported to this vault remains outside the domestic Chinese gold market. Both domestic and international members of the SGE can trade the International Board contracts in either onshore or offshore Yuan, which as a stated aim of the Chinese authorities, supports the internationalization of the Chinese currency.
The official gold reserves of the Chinese State (monetary gold) are held by China’s central bank, the People’s Bank of China. Currently, these gold reserves are claimed (by the Chinese State) to be in the region of 1840 tonnes. However, the real level of Chinese State gold holdings may be significantly higher than official published figures suggest. The article “PBoC Gold Purchases: Secretive Accumulation on the International Market” presents evidence that the Chinese State purchases monetary gold on the international market including in the London gold market, and ships this gold back to Beijing. It also looks at the possibility that the Chinese central bank may be buying up to 500 tonnes of gold per year and that it may have in the region of 4000 tonnes to 5000 tonnes of gold in its 'real' gold reserves.
The Value Added Tax (VAT) system in the Chinese gold market exerts an important influence on both gold imports and the types of gold that flow to and through the Shanghai Gold Exchange. The article "Value Added Tax (VAT) in the Chinese Gold Market" looks at the general VAT system in China and on gold specifically, and the types of VAT receipts generated on gold transactions. It also explains when imported gold is exempt from VAT and how 'Standard' gold sold on the SGE is VAT exempt. Standard gold is gold bars or gold ingots of 50 gram, 100 gram, 1 kilogram, 3 kilogram or 12.5 kilogram form, with a fineness (gold purity) of 9999, 9995, 999 or 995.
It's that time of the year again where the Perth Mint unveils its' lineup for the year ahead. Today, we will be focusing on the latest release of the much loved Lunar Series – the 2018 Australian Lunar Series Year of the Dog. This release is part of the second lunar series released by the Perth Mint, which consists of lunar coins minted from 2008 to 2019. We are excited to bring in these coins and they are available for ordering now.
The Chinese Zodiac series, or the “Sheng Xiao”, is a circle of 12 animals that links each year to a particular animal. Each animal is thought to possess different character and personality traits that are often seen in individuals born that year. Those who are born in the Year of the Dog are said to be honest, friendly and have a strong sense of responsibility. People born in 1922, 1934, 1946, 1958, 1970, 1982, 1994, 2006 and 2018 are said to be born in the Year of the Dog.
First Look: Gold
The Lunar Dog coins have continued the tradition of “less is more” and we think it looks great! The gold coins feature a Labrador retriever proudly standing on rocks with a stylized pine tree in the background. The design also incorporates the Chinese character for "Dog", the inscription "Year of the Dog", and The Perth Mint's traditional "P" mintmark. Kudos to the Perth Mint for going with a classic interpretation of the animal. The designer portrayed the animal in its’ natural surroundings with a clean and simple background. By continuing with the classic design seen in the previous editions, the Lunar Dog coins should perform well in terms of sales.
As with previous editions, the one ounce denomination has a limited mintage of just 30,000 globally and is expected to sell out quickly like the previous years. For the other denominations, the mintage is unlimited. That means that the Perth Mint will mint the coins for the entire of 2018 and will declare the final mintage at the end of the year. Mintages for fractionals are usually low. For example, the 2016 Year of the Monkey ½ oz gold coin had a mintage of only 11,947.
First Look: Silver
The silver edition is equally stunning. As with previous editions, The Perth Mint has created two different interpretations for the gold and silver editions. The silver coin depicts a German shepherd dog and its’ puppy lying on grass with Chinese peony flowers in the background. The design also incorporates the Chinese character for Dog, the inscription "Year of the Dog" and The Perth Mint's traditional "P" mintmark.
As with previous editions, the one ounce denomination has a limited mintage of 300,000 that is guaranteed to sell out. For the other denominations, the mintage is unlimited. This means that the Perth Mint will mint the coins for the entire of 2018 and will declare the final mintage at the end of the year. Mintages for other denominations are usually low. For example, the 2016 Year of the Monkey 2 oz silver coin had a mintage of only 34,368.
Our first shipment of lunar gold and silver coins will be arriving soon and the following denominations are ready for ordering:
Collectors always lament how the prices for previous editions are much higher after the year has passed. It is noteworthy how the high premiums of past editions are resilient even during periods of lower spot prices. Hence, if you are looking to collect yearly and complete your set, don't wait! For the Perth Mint Lunar Series coins, waiting is not a good idea if you want to get the coins at a reasonable price as they tend to trade at a higher premium above spot compared to other coins due to their relative rarity.
We only have a limited quantity for each denomination available so place your orders now before the coins sell out!
The following topics were covered in Mr. Persson's speech:
1) Money System of Today
How does our monetary system work - or doesn't work? Do fiat currencies like the US Dollar have any real intrinsic value?
Mr. Persson describes the purposes and characteristics of money and explains why fiat currencies are not true money per definition. Mr. Persson educates about how money is created and how most money of today only exists in electronic form.
2) Gold Manipulation - Gold Price
Is the price of gold dictated and artificially suppressed? What happens if the current system for gold price discovery fails? Is a gold price of USD 65,000/oz in 5 years realistic?
Mr. Persson discusses how the price of gold is set/discovered on the gold marketplace and how it is vulnerable to manipulation.
Why is Singapore the best country in the world for asset preservation and wealth protection?
Mr. Persson presents the advantages of Singapore as a safe jurisdiction for buying and storing bullion. No taxes on bullion in Singapore, no reporting requirements, strong property ownership rights and safety are some of the properties that makes Singapore uniquely positioned as the best country in the world for asset and wealth protection and preservation.
In the month of August 2017, we launched a competition in collaboration with The Royal Mint. The competition invited customers of The Royal Mint and BullionStar to promote the Royal Mint Brand in Singapore through any medium! We received numerous top quality submissions and after much deliberation, we present to you the two winners of the competition, Ms. Joanne Chim and Mr. Daniel Yap!
Treasure for Life - By Joanne Chim
In an interview, Joanne mentioned that when she first saw the Queen's Beast silver coins from the Royal Mint, she felt a sense of intrigue due to the minute details that were very skilfully stamped onto each coin. Subsequently, as Joanne discovered the process behind the design and the value of the coins, she began to feel even more inspired by the creative designs and the story behind this series. The coins have enabled her to have an idea of the intrinsic value behind precious metals.
As a designer herself, Joanne is naturally fascinated with artwork and what made her fall in love with the Queen's Beasts coins were the level of detail and the effort put into designing each creature. Be it the Griffin, Lion or Dragon, the intricate details of each figurine translated into a deep sense of appreciation for the value that these coins bring.
Hence, when producing her video for the competition, Joanne wanted to convey the idea that The Royal Mint coins are just as valuable a gift as hand written letters, due to the intricate nature put into designing each coin, yet each holding a lasting significance allowing one to treasure for life. The calligraph in Joanne's video submission was a quote from Henry Hazlitt which says, "The great merit of gold is precisely that it is scarce; that its quantity is limited by nature; that it is costly to discover, to mine, and to process; and that it cannot be created by political fiat or caprice."
Check out Joanne's winning video submission below!
Mothers - By Daniel Yap
Daniel wanted to tell the story that inspired the sculptor, Philip Nathan, to create the Britannia design, which now celebrates it's 30th anniversary and is a true modern masterpiece.
It is a story often misunderstood. Many interpretations of the Britannia reflect ancient Greek mythology, but Philip Nathan hoped to create a more realistic and raw character inspired by Boudicca, commonly known as Boadicea. "I was moved by the fact that a lady beaten down would hit back with 100,000 tribesmen behind her—and win for awhile," Daniel said, "It's the sort of thing that can inspire generations. I especially appreciated the chance to convey this theme to a segment of the population whose struggles aren't usually seen as screenworthy—mothers."
As well as offering a full transactional platform for buying gold and buying silver, the BullionStar website features a wide variety of original research, analysis and other content addressing the global precious metals markets. BullionStar's aim with this analysis and content is to provide readers and viewers with unique and up-to-date insights into the precious metals markets that are not available elsewhere.
A case in point is the BullionStar Perspectives video series which provides viewers with free access to leading independent views of the precious metals markets. In July, BullionStar had the privilege of hosting an exclusive interview in Singapore with legendary investor, author and financial commentator Jim Rogers, and this interview has now been published under the BullionStar Perspectives series.
Jim Rogers - Catastrophe and Opportunity
Rogers, who currently resides in Singapore, co-founded the famous Quantum Fund in 1973, and has written a number of best-selling investment and travel themed books.
The interview touches on potential crises that Rogers thinks could impact the global economy and the opportunities that such crisis may offer investors. Catastrophe and Opportunity can be viewed as the same phenomenon, and panic creates buying opportunities.
Ideally, Rogers thinks the Federal Reserve should stand aside since it has created many problems such as driving interest rates to zero and wiping out savers. Realistically, he doubts the Fed would be abolished, and in a future acute crisis, it will be pressured into generating ultimately futile financial market rallies.
Crucially, Rogers believes in the importance of acquiring physical gold and silver as an insurance policy, and in understanding what you are investing in. Everybody, he says, should have some gold and silver as an insurance policy if nothing else. “You hope you never need it”, but “its the best insurance policy in the world”.
Rogers owns physical gold and thinks that due to future financial market instabilities, gold could well turn into its own bubble. This is because, when financial crises hit, people go to gold and silver as a safe haven asset. "That’s what they do", he says.
Rogers appreciates that the gold market is a fractional-reserve market, with only partial backing by real physical metal. On the subject of paper gold versus physical gold, Rogers envisages that in a real crisis, there won’t be a paper gold market - the paper gold markets will close down due to widespread chaos. That is why there is a need for physical gold ownership, in your pocket or in a vault.
Jim, who has some gold stored in Singapore, thinks that Singapore is better than most as a gold storage jurisdiction, and an added attraction is that buying investment gold and silver in Singapore is tax free (GST free).
The interview with Jim Rogers is published as part of the BullionStar Perspectives series, a series which aims to provide viewers with free access to original and independent views and analysis of the precious metals markets.
The Jim Rogers Interview, which is just over 14 minutes long, can be viewed here
The BullionStar website also features in-depth factual gold market information in BullionStar's Gold University portal, original research and analysis of the global precious metals markets by BullionStar analysts Koos Jansen and Ronan Manly, a unique monthly review of the world's most important physical gold markets in chart form in BullionStar's Gold Market Charts series, and a specific company-focused blog series known as BullionStar Blogs (also known as 'Inside BullionStar').
BullionStar's Gold University is aWikipedia-style resource for use by the gold industry, by financial media and reporters and by general readers. It features contemporary factual information covering the world's gold markets, a selection of the world's largest gold vaults, profiles of the world's largest precious metals refineries and mints, and profiles gold industry associations. It also contains sections addressing the core concepts of the Chinese gold market, central bank policies on gold, and the mechanics of bullion banking and gold ETFs.
Articles and analysis by BullionStar analysts Koos Jansen and Ronan Manly, published in the form of blogs, keep readers up to date with developments in the precious metals markets. These blogs contain original research, such as on the Chinese and London gold markets, and are popular across the precious metals industry as well as being frequently featured across many other websites.
BullionStar's Gold Market Charts uses charts to capture current developments and demand and flow trends in the world’s most important physical gold markets including China, India, Russia and Switzerland.
The BullionStar Blog's series (Inside BullionStar) features posts relevant to the company BullionStar and its products, but also extends to hosting interesting articles on aspects of the gold market and BullionStar's unique Infographics on the gold market.
All of the above content can be found on the BullionStar site under the 'BullionStar Research' menu.
BullionStar in the Media
BullionStar and its team members are also frequently quoted in the wider financial media, and have appeared in coverage by well-known publications such as the Wall Street Journal, Bloomberg, Straits Times of Singapore, and CityWire Asia. Media Coverage of BullionStar is summaried in a Press Room page on BullionStar's website.
This blog post, BullionStar Financials FY 2017 - Year in Review, reviews BullionStar's performance for the financial year ending 30 June 2017 (FY 2017).
BullionStar hit a new milestone in FY 2017 with sales revenues totaling SGD 186,200,000 - a 38.7% increase over FY 2016.
During FY 2017, BullionStar launched its dedicated mobile website. When accessing www.bullionstar.com on a mobile phone, visitors and customers are able to manage all their precious metals needs on a website that optimizes the mobile user's experience, with layouts and user options tailored for mobile browsing.
During the financial year, BullionStar also continued expanding the content of its Gold University, a unique Wikipedia-style resource of up-to-date factual information covering topics such as gold markets, gold vaults, refineries and mints, and central bank policies.
In FY 2017, BullionStar increased its product range to include over 650 different bullion, numismatics and coin supply products across 10 different product categories.
BullionStar furthermore exhibited at FreedomFest 2016, which is the world's largest gathering for freedom-minded people.
BullionStar Financials FY 2017 - Year in Review - Sales
BullionStar’s sales revenue for FY 2017 grew by 38.7% to SGD 186.2 m, up from SGD 134.2 m in FY 2016.
For H1 2017, total global bullion demand increased by 11.2% when calculated in tonnage based on data from the World Gold Council comparing H1 2017 to H1 2016.
According to the World Gold Council, between 2016 and 2017, overall gold demand in Singapore shrank from 18.1 tonnes to 17.1 tonnes, a 9% fall. At the same time, demand for gold bullion fell from 5.9 tonnes in 2016 to 5 tonnes in 2017. In 2016, BullionStar sold approximately 2.3 tonnes of gold bullion, thereby representing 13.5% of all gold sold in Singapore and 46% of all gold bullion sold in Singapore.
Despite marginal growth in the bullion sector globally, and despite precious metal spot prices being range bound in a narrow range for most of the financial year - which typically results in lesser volume - BullionStar has continued to grow strongly.
With customers from 101 countries, BullionStar has continued to attract long-term international customers who are looking to geographically diversify their wealth holdings into the safe jurisdiction that Singapore offers.
With its FY 2017 results, BullionStar remains in a very strong financial position and has been profitable for the fourth year in a row. BullionStar has no long-term debts to any financial institutions.
The strong performance and growth of the company is reflected in the diagram below.
Sales per Product Category
A comparison between the chart below for FY 2017 and the corresponding chart for FY 2016 reveals that the proportional demand for gold, relative to silver, is largely unchanged. Gold consisted of approximately 73% of total sales for both FY 2016 and FY 2017.
During the financial year, BullionStar has successfully attracted larger international customers, increased the average order size, and increased the sales of larger gold bars such as 1 kg gold bars. In FY 2017, the 1 kg gold bar segment consisted of 26.8% of the overall demand for gold bars, compared to 21.5% for FY 2016.
The trend of higher sales of bullion bars and lower sales for bullion coins, as witnessed last financial year, continued during FY 2017. Sales of gold coins as a percentage of total sales fell from 18% to 12.6%, while sales of silver coins decreased from 7.2% to 4.6%.
What Lies Ahead
Unsustainable debt levels continue to plague many western countries. Together with increased geopolitical instability, the demand for physical gold has increased in the last few months, despite lackluster movements in gold spot prices. BullionStar’s sales revenue for July 2017, following on from the end of BullionStar's financial year, amounted to approximately SGD 20 m, significantly higher than average.
BullionStar expects FY 2018 to be a strong year with sales revenues at least on par with FY 2017.
BullionStar expects to launch several different new products during FY 2018 as well as conduct a major revamp of its website.
Gold & Silver Prices
The gold spot price development during BullionStar's FY 2017 was less volatile than in previous years, with gold trading between a low of SGD 52.30/gram and a high of SGD 59.39/gram. During FY 2017, the gold price decreased from SGD 57.15/gram on 1 July 2016 to SGD 55.02/gram on 30 June 2017, equivalent to a 3.7% decrease when denominated in Singapore Dollars.
The silver price, when denominated in Singapore Dollars, fell by 7.5% during the period, from SGD 0.8/gram on 1 July 2016 to SGD 0.74/gram on 30 June 2017.
BullionStar Vault Storage
When our customers store their metals with BullionStar, they have full control of their bullion portfolio online 24/7. We employ no less than 5 different audit schemes, including third party audits by the LBMA-approved auditor Bureau Veritas, to verify the existence and correctness of the stored bullion. With our vault being integrated into the same venue as our shop and showroom, customers can physically audit and withdraw their precious metals without any prior notification.
By the end of FY 2017, we stored approximately SGD 119.6 m in precious metals as vault storage provider on behalf of our customers. This corresponds to an increase of 42.2% compared to one year ago.
We are proud of our status as the premier bullion dealer in Singapore, offering customers seeking wealth protection and asset preservation a unique solution to international diversification. BullionStar's average rating at Google Reviews, with more than 800 genuine customer reviews is an outstanding 4.8.
BullionStar is Singapore's premier bullion dealer offering a wide range of precious metals products and services. BullionStar is breaking new ground by introducing modern technology into the age-old precious metals industry. With a proprietary online platform, BullionStar offers customers the ability to efficiently handle and control their bullion holdings 24/7 at their convenience.
BullionStar runs a one-stop retail shop and vault for precious metals at 45 New Bridge Road in Singapore where customers can view, buy, sell, value, deposit, test, audit and physically withdraw precious metals.
With original research and analysis covering the precious metals market on a whole and the Asian market specifically, world renowned analysts Koos Jansen and Ronan Manly keep readers updated on the news that matters.
Financial market prices are generally set by the trading venues which command the highest trading volumes and liquidity. This is also true of the gold market where the venues with the highest gold trading volumes - the London over-the-counter and COMEX gold futures markets – establish the international gold price.
However, these two gold markets merely trade paper gold claims in the form of unallocated gold positions (London Gold Market) and gold futures derivatives (COMEX). This trading creates paper gold supply out of thin air and is also highly leveraged and fractional in nature since the paper gold claims are only fractionally backed by real physical gold.
Although these highly leveraged synthetic gold trades have nothing to do with the transacting of physical gold, perversely they still establish the international gold price because physical gold markets merely inherit the gold prices derived in these ‘high liquidity’ paper gold markets.
BullionStar maintains that these paper gold markets cannot price physical gold accurately because they don’t trade physical gold, instead they trade infinitely scalable fractional claims on a smaller amount of physical gold. The international gold price is thus an artificial gold price totally removed from supply and demand in the physical gold markets.
Drawbacks of paper gold / Benefits of physical gold
Each trading day in the London OTC gold market, the equivalent of a staggering 6500 tonnes of gold is traded.
To put this into perspective, less than 7500 tonnes of physical gold vaulted in the entire London gold vaulting network, most of which is owned by central banks and Exchange Traded Funds.
Nearly all trading in the London OTC gold market is speculate activity based on unallocated gold positions. Unallocated gold positions are just book-keeping entries where the holder of the position is an unsecured creditor to a counterparty bullion bank, and the position just represents indebtedness between the two transacting parties.
Likewise, on the COMEX futures exchange during 2017, only 1 in every 2650 gold futures contracts actually reached delivery via a transfer of underlying gold. The remainder (99.96%) of gold futures are cash-settled. There is very little physical gold backing COMEX gold trading i.e. Registered physical gold inventories in COMEX approved gold vaults represent only a tiny fraction of the total volume of gold futures traded at any given time.
Conversely, real physical gold is a tangible asset that exists in limited quantities, it is inherently valuable, difficult to produce, difficult to counterfeit, and most importantly when held in the form of fully allocated, segregated and unencumbered gold bars and gold coins, it has no counterparty risk and so is no one else’s liability.
Real physical gold is not a claim on gold. It is gold. Real physical gold is real money, and is the ultimate form of saving and store of value due to its ability to retain its purchasing power over time. Unfortunately, the proliferation of paper gold trading dwarfs the volume of physical gold traded, and thus the gold price is set on these huge paper gold trading volumes.
But given the dominance of gold pricing by the paper gold markets, can this situation continue, and if so for how long?
BullionStar would contend that this situation can only continue while the bulk of paper gold market participants are happy to continue trading paper gold claims and in the absence of a shock to the physical gold demand-supply balance.
Conversely, a shift in the trading behaviour of paper gold traders away from paper gold towards physical gold, or a scenario in which physical gold demand overwhelms available physical gold supply, could cause a disconnect between gold pricing in the paper gold and physical gold markets, with the paper price falling while the physical price simultaneously rises.
Physical Gold flows West to East
As Western institutional and retail investors continue to speculate and trade staggering volumes of paper gold instruments, Eastern buyers in Asia continue to accumulate real physical gold, physical gold which is in limited supply.
These flows of physical gold from West to East have been ongoing for some time and can even be viewed as a slow and silent bank run on the physical gold market.
Classic commercial bank runs either begin when a subset of a bank’s customers suspect that the bank may not have sufficient liquid cash to repay all depositors, or else suspect that the bank’s loan base has soured. Since commercial banks employ fractional reserve banking where only a fraction of depositors’ money is kept in reserve (the majority being lent out in the form of loans), depositors with early suspicions begin withdrawing their money first.
Word spreads that the bank is having trouble meeting withdrawal requests and more and more depositors follow suit attempting to make withdrawals. Panic soon sets in with the bank forced to limit withdrawals and request emergency assistance from regulators.
The same end-game could be said to be true of fractional-reserve gold banking where holders of claims on physical gold rush to be the first to convert their claims into physical gold. Since the early 2000s, there has been a continual and substantial flow of physical gold from West to East. For example, since 2001, India has net imported over 11,000 tonnes of gold. This imported gold has for the most part stayed within India.
Likewise, since 2001, China has imported over 7,000 tonnes of gold. Because exports of gold are prohibited from the Chinese gold market, this gold cannot leave China mainland. In addition, the Chinese central bank has reported a 1400 tonne increase in its gold holdings since 2001. This is gold that the People's Bank of China buys exclusively on international gold markets in the form of wholesale gold bars and imports secretively into China, and is above and beyond reported Chinese gold import figures.
In the global gold market, Eastern buyers of physical gold are analogous to the early depositors of a commercial bank withdrawing their cash. In this scenario, a gold market ‘depositor shock’ prompting further withdrawals from the global stock of gold would be analogous to a widespread realization that the outstanding set of traded gold claims is far larger than the dwindling quantity of physical gold backing those claims. This realization would prompt further rotation out of paper gold into physical gold.
If at the margin, paper gold market players (later adopters) begin converting their paper gold claims into physical gold, or more realistically cash settle their paper claims and then try to use the proceeds to buy physical gold, this could set the scene for a disconnect between physical gold prices and paper gold prices.
On the one hand, a shift towards physical gold would overwhelm available physical gold supply, a situation which could only be rectified via an increase in the physical gold price to induce supply from existing above ground stocks. On the other hand, selling pressure in the paper gold markets to release proceeds to convert into physical gold would drive the paper gold price lower, thus also reinforcing this gold price disconnect.
Gold Price $65,000
But what would the real price of physical gold be in the absence of the subduing influence of the fractional and limitless paper gold market, or how do we even approach calculating a range of such physical gold prices?
Throughout history, gold has been the ultimate money and ultimate store of value. Until 1971, physical gold backed the international monetary system. Throughout monetary history and up until the latter half of the 20th century, gold played a critical role in backing paper currencies and in backing monetary debt. It is thus still appropriate to analyse the value of gold in relation to the value of currencies and the value of outstanding debt.
Approximately 190,000 metric tonnes of gold have been mined throughout history. Nearly all of this gold can still be accounted for in one form or another and is known as 'above-ground gold'. About 90,000 tonnes of this gold is held in the form of jewellery, 33,000 tonnes of gold are (supposedly) held by central banks, 40,000 tonnes are attributed to private gold holders, with the remainder having been used in industrial and other fabrication uses.
While 190,000 tonnes may sound like a lot, at the current gold price of USD 1250 per ounce, all the gold ever mined in the world is valued at less than $8 trillion, and official central bank gold holdings (monetary gold) are valued at just $1.3 trillion. The US Treasury claims to hold 8133 tonnes (or 261.5 million troy ounces) in its official gold reserves (a figure which, by the way, could be far lower since it has never been independently audited). At the current gold price, these US Treasury gold reserves are worth just under $320 billion.
Compare these gold valuations to total outstanding money supply figures. The total broad US money supply is currently running in excess of $18 trillion (using a "continuation M3" measure). For the US money supply of $18 trillion to be fully backed by the US Treasury’s gold, this would require a gold price of $68,840 per troy ounce.
Even at a 40% gold-backing, a backing which was historically in place for the US money supply in a recent period in US monetary history, this would imply a gold price of $27,500 per ounce.
Beyond the US money supply, total world money supply is currently running at over $85 trillion [source: broad money supply CIA World Factbook]. This global money supply of $85 trillion is approximately 11 times more than the current 'valuation' of all the gold ever mined.
For the world’s money supply to be fully backed by total worldwide central bank gold holdings [33,000 tonnes] would require a gold price of $82,600 per troy ounce. Even if world money supply was 100% backed by all the gold ever mined, this would require a gold price of $13,900 per ounce.
According to a recent study by the high-profile consultancy McKinsey, the world’s total outstanding debt is currently $200 trillion (of which government debt is $58 trillion). For the total outstanding stock of global debt to be backed by all the gold ever mined would require a gold price of $32,700 per ounce. For all government debt to be backed by the world’s official central bank gold reserves would require a gold price of $56,000 per troy ounce.
While extrapolating implied prices for physical gold in a world absent of paper gold market distortions will always be estimates, if and when the fractionally-backed paper gold market does cease to function, then ownership of allocated and unencumbered physical gold will become the only way to take advantage of the potential price movements in the physical gold market.
BullionStar carries an extensive range of investment grade gold bullion coins and silver bullion coins minted by Britain’s famous Royal Mint. The Royal Mint is fully owned by Her Majesty’s Treasury and has the distinction of being the world’s oldest mint.
BullionStar’s range of Royal Mint bullion coins includes gold and silver Britannia coins, gold and silver Lunar coins, and gold and silver Queen’s Beast coins. The Lunar and Queen’s Beast bullion coins are quite recent additions to the Royal Mint’s bullion coin range, and they substantially extend the choice of Royal Mint bullion coins now available to BullionStar customers.
Gold and Silver Britannia
The flagship of the Britannia range is the handsome 1 troy ounce Britannia gold coin, which since 2013 has been minted in 0.9999 fine gold. From its launch in 1987 until 2012, the 1 ounce gold Britannia coin was minted in 22 carat gold (0.9167 fine). In 2015, the Royal Mint also introduced fractional dominations into the Britannia gold coin range in ½ oz, ¼ oz, and 1/10 oz weights.
The latest 2017 issue of the gold Britannia coin commemorates the 30th anniversary of the coin’s launch in 1987, so for some investors, this year’s issue may hold some extra historical significance.
The Royal Mint also issues a 1 ounce Britannia silver coin, which since 2013 has been minted in 0.999 pure silver. Prior to 2013, the silver Britannia was minted in 0.958 pure silver. The 1 ounce 2017 Britannia silver bullion coin is also the 20th anniversary of the coin’s issue as it was initially launched in 1997.
In addition, the 2017 gold and silver Britannia coins both contain a new security and design feature in the form of micro inscribed radial lines on the obverse of the coin, which are configured as an intriguing radial sunburst pattern behind the Britannia figure.
The Britannia name is derived from imagery of Britannia featured on the reverse face of these coins. The current Britannia imagery displays a standing female symbol of strength embodied in the naval tradition and was designed by English sculptor and coin designer Philip Nathan.
Although gold and silver Britannias are non-circulation coins, all gold and silver bullion Britannia coins are still classified as legal tender in the UK. For example, the 1 oz Gold Britannia is legal tender with a face value of GBP 100. As legal tender, all Britannia’s are exempt from UK VAT and UK Capital Gains Tax.
Gold and Silver Lunar
In 2014, the Royal Mint launched a new series of gold bullion and silver bullion coins to celebrate the 12 signs of the Chinese zodiac.
Officially called the Shēngxiào Collection, this series is more commonly known as the Royal Mint’s Lunar series. Each of the 12 coins in the series features imagery of animals of the Zodiac on the reverse face of the coins. The imagery has been designed by British Chinese artist Wuon-Gean Ho. The gold Lunar is minted from 99.99% pure gold and is issued in the 1 troy ounce and 1/10 ounce denominations. The silver Lunar coin is minted from 99.9% pure silver and is issued in a 1 ounce denomination.
Each of the gold and silver Lunar series consists of one new coin design per year. The series began with the Year of the Horse in 2014, the Year of the Sheep in 2015, the Year of the Monkey in 2016, and most recently the 2017 gold Lunar Year of the Rooster, a coin which features an attractive design of a Marsh Daisy Rooster. The forthcoming 2018 Lunar design will celebrate the Year of the Dog.
Royal Mint Lunar gold bullion and silver bullion coins are also legal tender in the UK, and, for example, the 1 oz gold Lunar coin has a face value of GBP 100.
Gold and Silver Queen’s Beasts
In 2016, the Royal Mint again expanded its bullion coin range with the addition of the Queens Beasts series minted in gold and silver. The images on this series of coins, which were designed by Royal Mint engraver Jody Clark, are based on statues of 10 heraldic beasts that were commissioned for Queen Elizabeth II’s coronation ceremony in Westminster Abbey in 1953. These statues were themselves based on the extensive history of British royal ancestry and heraldry associated with the British monarch.
In gold, the Queen’s Beasts gold coin is available in a 1 troy ounce weight of 99.99% pure gold and a 0.25 troy ounce weight of 99.99% pure gold, while in silver, the Royal Mint has opted to produce a 2 ounce coin minted to a very high 99.99% pure silver standard. This 2 oz silver coin is the Royal Mint’s highest purity silver coin to date.
While the reverse faces of the above gold and silver bullion coins feature imagery of Britannia, Lunar zodiac animals, or Queen’s Beasts, respectively, the one consistent feature of all of these coins is that their obverse coin face features a head portrait, or effigy, of the reigning British monarch Queen Elizabeth II. Royal Mint coins issued since 2016 feature a contemporary head portrait designed by the Royal Mint’s engraver Jody Clark. Up until 2015 for a number of years, the portrait used a portrait designed by well-known sculptor Ian Rank Broadley.
Singapore GST and Investment Precious Metals (IPM)
A key driver of gold and silver bullion coin sales in Singapore is whether a particular bullion coin is exempt from Singapore’s Goods and Services Tax (GST). Qualifying coins are defined as Investment Precious Metals (IPM) by Singapore Customs.
Gold and silver Britannia coins, gold and silver Lunar coins, and gold and silver Queen’s Beast coins are all defined as Investment Precious Metals (IPM) by Singapore Customs, and so all of these bullion coins are exempt from Singapore GST.
The Royal Mint also produces the world-famous Gold Sovereign coin, a coin which has been minted in its modern form since 1817 and which has therefore been minted for some 200 years now. The Sovereign is legal tender in the UK with a nominal value of one pound sterling and features the famous imagery of St George slaying a dragon, imagery which was designed by the Italian engraver Benedetto Pistucci for the first modern Sovereign in 1817.
Currently the Mint produces both a Sovereign and a Half Sovereign denomination, however, both of these coins are minted in 22 carat gold, i.e. with a gold fineness of 91.67%. This unfortunately means that the Gold Sovereign does not qualify as IPM under Singapore Customs Rules because qualifying IPM is defined as containing 99.5% pure gold or higher. The Gold Sovereign is thus not currently on the Custom’s list of exempted precious metals coins.
Although there is strong potential interest among BullionStar’s customers in the Gold Sovereign, for most bullion coin buyers the lack of GST exemption currently makes the purchase of Sovereigns uneconomical relative to other bullion coins on the market. It is possible, however, that Singapore Customs may amend its IPM rules in the future as it considers and evaluates the worldwide popularity of the Gold Sovereign or if the Royal Mint raises this issue with Singapore Customs.
Royal Mint Gold Sovereigns
In the meantime, BullionStar does stock a number of Gold Sovereign proof sets, for example, here and here. These sets, which would be of interest to collectors, consist of 4 coins, namely, the Sovereign, the Half Sovereign, the Double Sovereign (twice the weight of the Sovereign with a nominal value of £2) and a very large ‘Five Pound’ Sovereign (5 times the weight and gold content of the Sovereign with a nominal value of £5).
In total, this set contains 2 troy ounces of gold. This is because the Sovereign has a gold content of 0.2354 troy ounces, the Half Sovereign has a gold content of 0.1177 troy ounces, the Double Sovereign contains 0.4708 troy ounces, and the large ‘Five Pound’ Sovereign contains 1.177 troy ounces of gold, i.e. 0.1177 + 0.2354 + 0.4708 + 1.177 = 2 troy ounces.
Note also that all newly minted batches of Royal Mint coins, including all of the Royal Mint bullion coins discussed above, are also assayed and tested for metal composition, weight and size as part of the long-standing annual Trial of the Pyx held at GoldSmiths Hall in London which is both a practical and traditional quality control exercise that is presided over by the Master of the Mint and the UK Treasury’s Chancellor of the Exchequer. This Trial is a further guarantee that all Royal Mint bullion coins are of the highest possible quality and workmanship.
Given the very strong price appreciation of leading cryptocurrency Bitcoin recently, Bitcoin holders who are thinking of diversifying or taking some profits on their Bitcoin positions may be interested to know that in addition to transacting in US Dollars, Singapore Dollars, and Euros, BullionStar also accepts Bitcoin as a payment option for its precious metals products, and has done so since May 2014.
Using the BullionStar website, customers can quickly and efficiently purchase gold bars and gold coins, as well as silver bars and silver coins using Bitcoin. Customers can also sell gold and sell silver to BullionStar and receive settlement proceeds in Bitcoin.
The maximum transaction size for a purchase order using Bitcoin is currently set by BullionStar at BTC 200 per transaction. There is no minimum transaction size for a purchase order using Bitcoin. For sell orders that settle in Bitcoin, the standard maximum transaction size is currently 30 BTC per transaction, but this can be higher upon discussion with BullionStar.
Bitcoin as a currency is also fully integrated into the BullionStar website. Once you select Bitcoin as the default currency from the Currency drop-down menu at the top right hand side of the BullionStar website homepage, Bitcoin becomes the default transactional currency within the website, and furthermore, all spot prices and associated charts and all product prices on the website will be displayed in terms of BTC.
If logged into your Account, your ‘My Vault Balance’ and ‘Cash Balance’ will also be displayed in BTC. Account history and “My Vault Portfolio” are also displayed in BTC once Bitcoin is selected as the default currency option.
Buying Gold and Silver using Bitcoin
To purchase precious metals on the BullionStar website using Bitcoin:
1, Select Bitcoin in the currency drop-down menu at the upper right hand side of the BullionStar homepage. This will display all product prices in Bitcoin, and will also automatically populate Bitcoin as the default payment method in the online Checkout tool.
2. From the ‘Buy Gold and Silver’ menu option, select the precious metal products you wish to buy. Product prices will be displayed in Bitcoin (BTC).
For example, if you are interested in purchasing a PAMP minted 1 ounce gold bar, select ‘Gold Bars’ from the drop-down menu and the price in Bitcoin of a 1 ounce PAMP gold bar will be displayed in BTC, which, at the time of writing was BTC 0.675530.
3. Fill in the quantity of the product you wish to buy. Then click the green “Add to Cart” button to add the selected product to your Shopping Cart.
4. Repeat Step 3 to add other products to your Shopping Cart, or if finished shopping, select the green ‘Checkout’ button towards the top right hand side of the screen.
5. In the subsequent Checkout screen, Bitcoin will appear as the default payment method. Select your preferred ‘Delivery Method’ of either ‘Vault Storage’, ‘Shipping by Courier’, or ‘Personal Collection (Pick-up)’.
Ensure that the order total is less than or equal the maximum transaction size for a purchase order of BTC 200 per transaction.
Fill in your customer information, click the check boxes to indicate that you agree with the Terms and Conditions, and that you agree that the order is binding, then click the “Confirm” button to place your order.
6. After clicking “Confirm”, an order confirmation will appear on the screen. This order confirmation details your order number, the products ordered, the order date, your customer information, and the Bitcoin payment information, i.e. the payment amount in BTC and the unique Bitcoin address to which to send your payment to. An example of a Bitcoin payment amount and a Bitcoin address is shown in the screen below.
Your order confirmation is also sent to your email address.
Upon placing an order and hitting ‘Confirm’, you have 20 minutes in which to send your Bitcoin payment to the unique Bitcoin address that specified on your order confirmation.
7. As soon as BullionStar has received 6 block confirmations of your Bitcoin payment, which can take anywhere from 20 minutes to a few hours, you will automatically receive a payment confirmation update to your email address. BullionStar will thereafter process your order.
For those unfamiliar with the Bitcoin transfer confirmation process, block confirmation is Bitcoin’s way of verifying transactions.
When a Bitcoin transaction is made, it is then verified by Bitcoin miners and is grouped with other transactions into a new block on the blockchain, upon which it is confirmed. Then when subsequent blocks are added to the block chain, all previous blocks are reconfirmed, a process which generates additional block confirmations.
Generally, merchants and retailers who accept Bitcoin require 6 confirmations to ensure that a transaction has been fully validated.
Upon receipt for 6 confirmations, BullionStar will proceed to process your order.
Selling Gold and Silver using Bitcoin
To sell gold or sell silver on the BullionStar website and receive the proceeds in the form of Bitcoin:
1. Select Bitcoin in the currency drop-down menu at the upper right hand side of the BullionStar homepage.
Select the product(s) and quantity you wish to sell.
Ensure that the total value of the sell order in BTC is less than or equal to BullionStar's current online maximum transaction size for a sell order of BTC 30 per transaction.
(Note: If you would like to place a sell order for an amount larger than BTC 30, please send an e-mail to email@example.com or call +65 6284 4653 to enquire whether we can settle your sell order in Bitcoins.)
Enter your customer information. The Payment Instructions box will be defaulted to Bitcoin. In the Bitcoin Address box, enter the Bitcoin address where you want to receive your Bitcoin payment to. Then submit your order by clicking “Confirm”.
To convert Bitcoins to traditional fiat currency, one straightforward option is to use a Bitcoin exchange such as Bitstamp in the USA or FYB-SG in Singapore. The steps to follow would be to open an account with a Bitcoin exchange, transfer your Bitcoins to your account wallet on the Exchange, sell the Bitcoins on the exchange, and then withdraw the proceeds of the sale in a currency such as US Dollars.
Those who currently do not hold Bitcoin but who might want to can also open and fund a Bitcoin account with one of the Bitcoin Exchanges, and then buy Bitcoin to hold in their Exchange account. This Bitcoin could then be subsequently used in a transaction on the BullionStar website to buy gold or buy silver.
BullionStar Charts: View and Create Bitcoin Charts
Note that historic Bitcoin prices are also available on the BullionStar Charts page, where Bitcoin is listed under the Currencies category along with 18 major currencies. The BullionStar charting tool allows you to chart the price of Bitcoin in terms of other currencies and in terms of precious metals, commodities, major stocks, popular stock indices, and in terms of the prices of BullionStar’s product range.
With a Bitcoin price history that goes back to January 2011, you can now use BullionStar charting tools to check and view the price action of Bitcoin for the last 6 and a half years.
The following article is arranged in Question and Answer (Q & A) format. Through the Q & A approach, this article raises some important issues about price discovery in the gold markets and aims to explain the view that the gold price is being set by the paper gold markets.
BullionStar’s CEO Torgny Persson and precious metals analyst Ronan Manly are of the opinion that due to the structure of contemporary gold markets, it is primarily trading activity in the paper gold markets which sets the international price of gold.
Question: The international gold price is constantly quoted in the financial media alongside other major financial indicators. What is this international gold price, and how is it defined?
The international gold price usually refers to the price of gold quoted in US Dollars per troy ounce as traded on the 24-hour global wholesale gold market (XAU/USD). Gold is traded non-stop globally during the entire business week, creating a continuum of international gold price quotes from Sunday evening New York time all the way through to Friday evening New York time. Depending on the context, this international gold price sometimes refers to a spot gold market quote, such as spot gold traded in London, and at other times may refer to the front month of a gold futures contract price as traded on the US Commodity Exchange (COMEX). The front month contract is a nearby month which will usually exhibit the highest trading volume and activity.
The international gold price can also at times be referring to the LBMA Gold Price benchmark price as derived during the London daily gold price auctions (morning and afternoon auctions). LBMA is an abbreviation for London Bullion Market Association.
Therefore, this 'international price' could be referencing a spot gold price, a futures gold price, or a benchmark gold price, but all three would, at a comparable time, be roughly similar in magnitude.
Question: Where does this international gold price come from, where is it derived?
Recent empirical research has determined that gold price discovery is jointly driven by London Over-the-Counter (OTC) spot gold market trading and COMEX gold futures trading, and that the "international gold price" is derived from a combination of London OTC gold prices and COMEX gold futures prices. See “Who sets the price of gold? London or New York (2015)” by Hauptfleisch, Putniņš, and Lucey.
In general, the higher the trading volume and liquidity in a specific asset market, the more that market contributes to discovering prices for that asset. This is also true of the global gold market. Between them, the London OTC and New York trading venues account for the vast majority of global gold trading volume, and in 2015, the London OTC spot market represented approximately 78% of global gold market turnover while COMEX accounted for a further 8% (See Hauptfleisch, Putniņš, and Lucey (2015)).
Based on London gold clearing statistics for 2016, a quick calculation shows that total trading volume in the London OTC gold market is estimated to have been at least the equivalent of 1.5 million tonnes of gold in 2016, while trading volume of the 100 oz COMEX gold futures contract reached 57.5 million contracts during 2016, equivalent to 179,000 tonnes of gold. Gold trading volume on the London OTC gold market in 2016 was therefore about 8.4 times higher than trading volume in the COMEX 100 oz gold futures contract.
However, COMEX has been found, by the above academic research, to have a larger influence on price discovery than London OTC, despite the lower trading volumes of COMEX. This is most likely due to a combination of factors such as COMEX' accessibility and extended trading hours via use of the GLOBEX platform, the higher transparency of futures trading compared to OTC trading, and the lower transaction costs and ease of leverage in COMEX trading. In contrast, the London OTC gold market has limited trading hours (during London business hours), barriers to wider participation since it's an opaque wholesale market without central clearing, and trading spreads which are dictated by a small number of LBMA bullion bank market-makers and a handful of London-based commodity brokerages.
The bottom line though is that both sets of trading statistics, London OTC and COMEX, are gigantic in comparison to the size of the underlying physical gold markets in London and New York.
Question: So, does the physical gold market or the paper gold market set this international price of gold?
The international gold price is purely set by paper gold markets, in other words it is set by non-physical gold markets. Based on their respective gold market structures, the London OTC gold market and COMEX are both paper gold markets. Supply of and demand for physical gold plays no role in setting the gold price in these markets. Physical gold transactions in all other gold markets just inherit the gold prices that are discovered in these paper gold markets.
The London OTC gold market predominantly involves the trading of synthetic unallocated gold, where trades are cash-settled and not physically delivered (i.e. no delivery of physical gold). These synthetic gold transactions have little connection to any underlying gold holding, hence they are de-facto gold derivative positions. By definition, unallocated gold positions are just a series of claims on bullion banks where the holder is an unsecured creditor of the bank, and the bank has a liability to that claim holder for an amount of gold. The holder, on its side, takes on credit risk towards the bullion bank. The London OTC gold market is therefore merely a venue for trading gold credits.
The London OTC gold market is also one in which the bullion banking participants employ fractional-reserve gold trading to create large amounts of paper gold out of thin air (analogous to commercial lending), where the trading is also leveraged and opaque, and where this paper gold is only fractionally backed by physical gold. This “gold” is essentially synthetic gold. See BullionStar Gold university article "Bullion banking Mechanics" for further details on fractional-reserve gold trading.
Since COMEX only trades exchange-based gold futures contracts, it is, by definition, a derivatives market. Cash-settlement is the norm. Only 1 in 2500 gold futures contracts traded on COMEX is delivered with a transfer of warrants representing metal. The rest of the contracts are cash-settled. This means that 99.96% of COMEX gold futures contracts are cash-settled. See BullionStar US Gold Market Infographic for details.
Given COMEX trading gold futures and London trading synthetic unallocated gold, both the London and COMEX gold markets essentially trade gold derivatives, or paper gold instruments, and by extension, the international gold price is being determined in these paper gold markets.
Beyond the London OTC gold market and COMEX, all other gold trading venues are predominantly price takers that take in and use the gold prices established by the paper gold markets in London and New York. These other markets include physical gold markets around the world which look to the international gold price as an input into their domestic gold price setting mechanisms and conventions.
Question: Explain a little more about the market structures of these London OTC and COMEX markets?
By definition, futures trading is trading of securities whose value is derived from an underlying asset but whose securities are distinct from those of the underlying asset, i.e. derivatives. COMEX gold futures contracts are derivatives on gold. COMEX registered gold stocks are relatively small, very little physical gold is ever delivered on COMEX, and even less physical gold is withdrawn from COMEX approved gold vaults. COMEX gold trading also employs significant leverage. Hauptfleisch, Putniņš, and Lucey (2015) state that “such trades [on COMEX] contribute disproportionately to price discovery”. Note that the COMEX gold futures market is actually a 24-hour market but its liquidity is highest during US trading hours.
Turning to the London OTC gold market, nearly the entire trading volume of the London OTC gold market represents trading in unallocated gold, which to reiterate, merely represents a claim by a position holder on a bullion bank for a certain amount of gold, a claim which is rarely exercised. London OTC gold trades also predominantly cash-settle. Traders, speculators and investors in unallocated gold positions virtually never take delivery of physical gold.
Dentons states that “the reality of unallocated bullion trading is that buyers and sellers rarely intend for physical delivery to ever take place. Unallocated bullion is used as a means to have “synthetic” holdings of gold and so obtain exposure to the price of gold by reference to the London gold fixing.”
Although the LBMA does not publish gold trading volumes on a regular basis, it did publish a one-off gold trading survey covering Q1 2011 in which it was revealed that during the first quarter of 2011, 10.9 billion ozs of gold (340,000 tonnes) were traded in the London OTC gold market. During the same period, 1.18 billion ozs of gold (36,700 tonnes) were cleared in the London OTC gold market. This would suggest a trading turnover to clearing turnover ratio of 10:1. In the absence of live trading data from the London OTC gold market, this 10:1 proxy ratio can continue to be applied as a multiplier to the LBMA London Gold Market daily clearing statistics, which are published every month, and which are always phenomenally high.
For example, average daily clearing volumes in the London Gold Market during January 2017 totalled 20.5 million ounces. That’s the equivalent 638 tonnes of gold cleared per day in London. On a 10:1 trading to clearing multiple, that’s the equivalent of 6,380 tonnes of gold traded per day, or 1.6 million tonnes of gold traded per year.
Since there are only about 6,500 tonnes of gold stored in London, most of which represents static holdings of central banks, ETFs and other holders, the London OTC gold trading activities are totally disconnected from the underlying physical gold holdings. Furthermore, only about 190,000 tonnes of gold have ever been mined throughout history, half of which are estimated to be held in the form of jewellery. Therefore, the trading of nearly 6,500 tonnes of gold per day within the London OTC gold market has nothing to do with the physical gold market, yet perversely, this trading activity drives global gold price discovery and the pricing of physical bullion trades and transactions.
Revealingly, according to the LBMA bullion bankers who established the reporting of London gold clearing statistics, who specifically were the then LMPCL chairman, Peter Fava, and JP Morgan’s Peter Smith, these LBMA gold clearing statistics include trading activities such as “leveraged speculative forward bets on the gold price” and “investment fund spot price exposure via unallocated positions”, activities which are just side-bets on the gold price. See October 2003 article titled “Clearing the Air Discussing Trends and Influences on London Clearing Statistics“, from LBMA Alchemist Issue 32.
In essence, trading activity in the London gold market predominantly represents huge synthetic artificial gold supply, where paper gold trading is deriving the price of gold, not physical gold trading. Synthetic gold is just created out of thin air as a book-keeping entry and is executed as a cashflow transaction between the contracting parties. There is no purchase of physical gold in such a transaction, no marginal demand for gold. Synthetic paper gold therefore absorbs demand that would otherwise have flowed into the limited physical gold supply, and the gold price therefore fails to represent this demand because demand has been channelled away from physical gold transactions into synthetic gold.
Likewise, if an entity dumps gold futures contracts on the COMEX platform representing millions of ounces of gold, that entity does not need to have held any physical gold, but that transaction has an immediate effect on the international gold price. This has real world impact, because many physical gold transactions around the world take this international gold price as the basis of their transactions.
Although gold clearing volumes and the LBMA's market survey provide some useful inputs into calculating London gold trading volumes, there is very little known publicly about how much physical gold actually trades in the London gold market. This is because the LBMA and its member banks choose not to reveal this information. There is no trade reporting in the London OTC gold market, no reporting of physical gold vault positions, no reporting of the unallocated gold liabilities of LBMA member bullion banks, and no reporting of how much physical gold in total these bullion banks retain to back up their fractional-reserve unallocated gold trading system. However, physical gold trading is by definition an extremely minuscule percentage of average daily trading volumes in the London OTC gold market. For details on the workings of the gold market in London, see BullionStar Infographic the "London Gold Market".
While one of the three components that comprise the London gold clearing statistics is stated to be “physical transfers and shipments by LPMCL clearing members”, the LBMA doesn’t even see fit to publish a breakdown of these 3 components. This compounds the secrecy and is another example of where bullion banks and central banks keep the global gold market in the dark about how much gold is being physically transferred and shipped.
Question: How do local gold markets around the world use the international gold price?
Local gold markets all around the world look to the international gold price, and take in this gold price, usually quoting their local country gold prices in comparison to the international gold price.
In the physical gold market, product pricing of gold coins and bars is based on a combination of the spot gold price plus a premium. The premium is that part of the product price in excess of the value of the precious metal contained in the coin or bar. Given that the physical gold market is a price taker, physical gold market spot prices feed in from where the price is being discovered, i.e. the international gold price.
For example, the 2017 issue of the Royal Canadian Mint 1 troy ounce Gold Maple Leaf bullion coin is quoted on the BullionStar website at a US dollar price which reflects the US dollar spot price of gold plus a premium.
Gold coin and gold bar premiums are based on a number of factors. Part of the premium will reflect natural minting / refining costs such as fabrication, marketing, distribution and insurance costs. If the products have been distributed through a wholesaler, the premium will reflect a wholesaler mark-up. Another component of a premium is semi-variable and reflects physical market imbalances caused by supply and demand fluctuations. If demand for a gold coin or gold bar is high, its premium will increase. If supply of the product is abundant, the premium would tend to be lower than if in short supply.
In general, premiums on gold coins are higher than those on gold bars, while premiums on large gold coins and gold bars are lower than premiums on smaller gold coins and gold bars.
Question: What contribution does the Shanghai Gold Exchange make to gold price discovery and does the SGE, with its large physical trading, influence the international gold price?
The Shanghai Gold Exchange (SGE) is the world’s largest physical gold exchange and nearly all physical gold bars in China flow through the SGE. Gold trading volumes and gold withdrawal statistics for the SGE are certainly impressive. For the year 2016, total SGE gold trading volumes reached 24,338 tonnes, a 43% increase over the 2015 figure of 17,033 tonnes. SGE trading volumes include physical contracts, deferred contracts, OTC trades settled through the SGE, and also trading volumes on the Shanghai international Gold Exchange (SGEI). In 2016, physical gold withdrawals from the SGE totalled 1,970 tonnes, down 24% from 2015’s withdrawals of 2,596 tonnes, but still huge on an absolute basis because these withdrawals represent actual physical gold taken out of the SGE vaults.
By the end of 2016, the SGEI (International Bourse), which was launched in September 2014, had recorded cumulative trading of nearly 9,000 tonnes of gold. The Shanghai Gold Benchmark Price (a.k.a. Shanghai Gold Fix), which was launched on 19 April 2016, is a gold auction for 1 kilo gold bars of 99.99 purity quoted in RMB. Over the 8 months from launch to end of 2016, the Shanghai Gold Fix had traded 569 tonnes, which equates to over 1.5 tonnes per day on average.
All in all, the SGE has generated impressive physical gold trading volumes (24,338 tonnes for 2016) and withdrawals (1970 tonnes for 2016). For the sake of comparison, compare these annual SGE physical gold trading volumes to the bloated London OTC gold market where trading volumes of approximately the equivalent of 6,500 tonnes of gold per day are the norm. Such a comparison reveals the fractional-reserve nature of the London gold market and the fact that physical transactions can only be a minuscule fraction of the London market.
But does SGE trading affect the international gold price as derived in the London OTC and COMEX markets, or is the SGE a price taker?
The short answer is that the SGE does not influence the international price and the SGE is a price taker. There may be some lagged influence by the SGE on the international price but this would require further study. The Chinese gold market is still a closed gold market with market frictions and distortions. Gold can be imported into China but cannot in general be exported out of China. There is therefore no freedom of movement of gold out of China. Gold imports into China are strictly controlled via import licenses and these licenses are only issued to a small number of Chinese and foreign banks.
But it’s worth looking at SGE premiums to see if changes in SGE premiums ever provide any signalling ability for subsequent changes in the international gold price. SGE premiums arise when the Shanghai gold price trades above the international gold price. SGE premiums are a possible gauge to determine whether SGE trading affects the international gold price. In November and December 2016, SGE premiums rose sharply from less than 0.5% to over 3% which was a period in which gold imports into China surged. However, during that same period, the international gold price fell. So in this case, the expanding SGE premiums had no effect on the international gold price.
That example was just eyeballing, but a recent study by Metals Focus (MF) consultancy, titled "Links Between the Chinese and International Gold Prices" also found that the correlations between changes in the LBMA Gold Price (AM) and SGE premiums are not significant and were in some cases even found to be negative, which in summary means that SGE trading was not affecting the international gold price. MF also calculated some lagged correlations to see if SGE premiums influence subsequent changes in the LBMA Gold Price, due to, for example, "increased shipments of bullion to China over subsequent days". MF claims that "SGE premiums have a modest but positive and statistically significant impact on future gold price [LBMA Gold Price] moves" however, correlation is not causation. Properly functioning financial markets are supposed to instantaneously reflect pricing information in other markets, not take days to reflect it. There are also too many other variables which could also be responsible for explaining why the LBMA Gold Price moved higher after SGE premiums had previously moved higher.
However, unlike the OTC and COMEX, the Shanghai Gold Exchange is structured around physical gold price discovery. The establishment of a gold exchange in Shanghai was first referenced in China's 10th Five Year plan in 2001 as an integral part of the nation's gold liberalisation strategy. Following its launch in 2002, the SGE was quick to promote physical gold ownership and by 2004 was allowing private citizens in China to transact on the Exchange and purchase gold bullion. On the SGE, physical delivery of gold is the norm, not the exception. The SGE has a network of 61 gold vaults in 35 cities across China.
This makes the SGE a nature candidate to take the lead in pricing real physical gold and acting as a physical gold price discovery centre if and when the physical gold markets detach from the paper gold markets, and physical gold demand and supply becomes the natural determinant of the international gold price.
Question: What is the significance of the LBMA Gold Price?
The LBMA Gold Price is a twice daily auction for unallocated gold controlled by the LBMA. The final output of the auction is a benchmark gold price. The auction is conducted in US Dollars, however the derived price is also published in 11 other currencies. This auction is the successor to the London Gold Fixing and the benchmark is now a ‘Regulated Benchmark’ under UK financial regulations and is administered by ICE benchmark Administration (IBA), part of the ICE exchange group. But the new auction mechanics are fundamentally similar to the older London Gold Fixing mechanics. The auction opening prices are based on COMEX and London OTC price quotations as well as trading prices at auction opening times, i.e. at 10:30 am and 3:00 pm respectively.
Structurally, the LBMA Gold Price auction has very narrow direct participation, with only a handful of LBMA member bullion banks being authorised by the LBMA to take part. These are the same bullion banks which are the market makers and largest traders in both London OTC gold market trading and in COMEX futures gold trading. The LBMA Gold Price auctions therefore lack broad market participation and is not representative of the broader gold market. The LBMA and ICE Benchmark Administration also refuse to reveal the identities of the auction chairpersons, a refusal which suggests that those now involved have connections to the former scandal tainted London Gold Fixing auction. They also refuse to reveal how the chairperson chooses the opening price for the auctions. See "Six months on ICE – The LBMA Gold Price" for more details.
Not surprisingly, the LBMA gold auctions also settle in unallocated gold, so trading and settlement in the auction is also detached from physical gold markets. Trading volumes in the daily gold auctions usually only reach the equivalent of 1-2 tonnes of unallocated gold transfers, and rarely exceed 3 tonnes. So not only do the LBMA gold auctions not offer wide participation to the thousands of gold trading entities around the world, the volumes traded in the auctions are not representative of the global gold market and the benchmark is therefore not a reliable representation of the global gold market.
Perversely however, the LBMA Gold Price benchmark price is very influential in the gold world in that it is a widely-used valuation source for gold-backed Exchange Traded Funds (ETFs) such as the SPDR Gold Trust and the iShares Gold Trust. Furthermore, it is often used ad a transaction reference price by physical bullion dealers when purchasing physical gold from refineries and suppliers. The LBMA Gold Price is also widely used as a benchmark for valuing financial products such as ISDA gold interest rate swaps, gold options and other gold derivatives, and is even used by other futures exchanges as a reference point on their gold futures contracts, for example the gold futures contract (FGLD) of the Malaysia Derivatives Exchange.
Therefore, this reference price and auction, which is controlled by a handful of bullion banks under the banner of the LBMA, is based on trading synthetic gold, but is referenced widely around the world in countless gold contracts and in countless physical gold markets and retail gold outlets.
Even very large central bank physical gold transactions take this gold fixing reference price derived in London and then use it as a price with which to execute their own independent bi-lateral transactions. For example, when the Swiss National Bank used the Bank for International Settlements (BIS) gold trading desk as its agent to sell hundreds of tonnes of physical gold in the early 2000s, the transaction prices used for the transfers were based on taking the London Gold Fixing price as a reference price. As another example, in 2010, the IMF’s so-called ‘on-market’ gold sales were conducted by a selling agent who also based the sales transfer prices on the London Gold Fixing price. This is the same London Gold Fixing that is currently under investigation in an ongoing New York court class action suit.
Of concern here is that a benchmark that was controlled by a cartel of London-based bullion banks, that was opaque in its operation, and that is currently the subject of a gold price manipulation class action suit, was being used to value very large physical gold transactions. The question must be asked, was this benchmark fit for purpose and to what extent was it representative of the underlying worldwide physical gold market?
Question: So what about outside London and US / NY trading hours. Do other markets contribute more during these other times, for example TOCOM in Japan and MCX in India?
In general, higher trading volumes mean more liquidity to drive price discovery. But since financial markets are integrated, price information rapidly flows between markets due to simultaneously and overlapping trading. Futures markets such as TOCOM in Japan and MCX in India do contribute to gold price discovery, especially at times when the larger markets are not trading, but because these other venues are less liquid, COMEX tends to lead in the lead-lag analysis of futures prices. This finding is according to a study by financial academics from Bangkok University led by Rapeesorn Fuangkasem.
Question: How does gold lending affect the gold price?
The Gold Lending Market is centred in London at the Bank of England. It is here that central banks and commercial bullion banks interact in the execution of ultra-secretive gold lending and gold swaps transactions that increase the available supply of gold. Bullion banks euphemistically refer to this as liquidity provision but these transactions act as a supply overhang on the gold market. Few if any transactional details about the gold lending market are ever made public. If gold lending trade details were market-wide knowledge, their impact would be immediately reflected in the gold price. But they are not. Secrecy about central bank gold lending transactions therefore makes this market informationally inefficient. And when a market is informationally inefficient, the prices in that market do not necessarily reflect the non-public information in that market.
Likewise gold lending and gold swaps are not reported distinct from central bank gold holdings. In the perverse world of central bank accounting policies, gold held and gold lend/swapped is merely reported as one line item of 'Gold and Gold Receivables' on central banks' balance sheets. Therefore, the real state of central bank gold holdings is obscured for any central bank engaged in gold lending or gold swaps.
Gold Lending also provides borrowed physical gold for bullion banks to engage in leveraged fractional-reserve bullion banking and trading, mostly in London where the international spot gold price is predominantly determined. Therefore, gold lending, the leveraged and fractional-reserve nature of gold trading, and the lack of reporting of real central bank gold holdings, all align to have a potentially depressing effect on the gold price as discovered in the London Gold Market.
Question: Given that paper gold markets determine the gold price, then when or how could physical markets begin determining the gold price?"
There are two sets of gold markets – on the one side, the COMEX gold futures and London OTC unallocated gold spot markets which are both ultra leveraged and which both create gold supply out of thin air, and on the other side, the physical gold markets which inherit the gold prices derived in these paper gold markets. Currently the physical gold markets have no effect on the international gold price.
Any shift away from the dominance of gold price discovery in the paper markets to a dominance of gold price discovery in the physical gold markets could only occur via a disconnect between physical gold prices and paper gold prices. The conditions for such a disconnect to occur would only be possible in an environment in which trading behaviour in the paper markets changed and/or the supply-demand balance in the physical gold market became acutely stressed and out of balance.
A shift in trading behaviour in the paper gold markets refers to an increased preference for converting paper gold claims (unallocated positions or gold futures positions) into physical holdings either directly by exercising conversion rights, or indirectly by selling paper gold and then using the proceeds to buy physical gold. Many of these paper claims are held by institutional and wholesale market clients. An increase at the margin in paper gold holders demanding direct conversion of their paper claims into physical gold would probably make such conversion impossible as cash-settlement of futures and unallocated positions would be introduced and made obligatory by regulators and exchange / marketplace providers.
The indirect option would be to sell paper gold and then buy physical bullion on the physical gold market from bullion dealers such as BullionStar. This move into physical gold would raise physical gold demand to such an extent that it could overwhelm available gold supply. At the same time the international gold price would fall because of selling pressure in the paper gold markets, thereby creating a disconnect between the price of paper gold and the price of physical gold, and would make the continued holding of paper gold claims ever riskier.
One trigger that could prompt a shift in sentiment from paper gold to physical gold would be a realization by a critical mass of paper gold holders that physical gold stocks are finite, while paper gold claims are at best fractionally-backed. The acceptance of this reality would be a self-fulfilling prophesy, prompting more and more paper gold claim holders to attempt to rotate into physical gold.
The contemporary physical gold markets have already witnessed sustained flows of physical gold from West to East over the last number of years driven by huge physical gold demand emanating from China, India and much of the rest of Asia. While physical gold flows are dynamic and while gold flows can and sometimes do reverse out of normal recipient destinations such as Hong Kong, Turkey, Dubai and Thailand, this is not true of China and to a large extent is not true of India either, where gold that gets imported does not come back out again. India has imported over 11,000 tonnes of gold since 2001. China has imported 7,200 tonnes of gold since 2001.
As more and more gold goes into destinations such as China and India in quantities which exceed annual gold mine supply, there is less gold available in above ground stockpiles to meet supply deficits. This is akin to a slow bank run on gold. There is also very little gold stored in the London gold market that is not already accounted for by central bank gold holdings or ETF gold holdings. Coupled with this, if in the future the paper gold holders shift to a preference for converting their paper claims into physical gold, this could also be a catalyst for tipping the physical gold market even further into a situation of excess demand and acute supply stress.
In a scenario of a destructing paper gold market, ownership of physical allocated and segregated gold is paramount. This means physical gold that is unencumbered, free from competing claims and titles, and that cannot be lent out or swapped. The paper gold market is already a gigantic bubble which has expanded to an unsustainable size and whose huge fractionally-backed claims are supported by very small physical gold foundations. The unsustainable nature of such a bubble dictates that it's a matter of when and not if the paper gold bubble bursts. In such a scenario, physical gold ownership is the only thing that can protect against a systemic collapse of the financial system and protect against the destruction of the fractionally-reserved gold banking system.
BullionStar's ideological belief promotes freedom of speech and liberty. Likewise, we believe that open debate produces improved analysis and research. Indeed, the BullionStar blog platform encourages varied opinions and well-researched ideas. Debate is particularly important when applied to the gold market, a market which is often opaque and deliberately shrouded in secrecy by its influential bullion bank and central bank participants.
BullionStar’s precious metals analyst Koos Jansen has a different view and believes that while paper markets might have some short-term impact on price, the physical gold market is more dominant in gold price formation over the long-term. Due to having taken some time off recently for health reasons, Koos did not contribute to the following article. But he recently summarized his view as follows:
"Due to my research in recent years my opinion has shifted from 'the gold price is purely set in the paper markets' to 'the physical market is more dominant in the long-term whereas the paper market has more impact in the short term'. That's where I stand now. If central banks suppress the price over years/decades they need to supply physical gold or the paper and physical price would diverge. Potentially there is a combination of paper and physical schemes at work."
Koos Jansen will, at a later point in time, present his view by answering and publishing the same or similar questions on the BullionStar website.
BullionStar has adopted a transparent approach in releasing BullionStar financials i.e. information about the company's overall company performance and sales data for each financial year. This blog post presents the BullionStar Financials FY 2016 - Year in Review as the financials stood at the end of the financial year 2016 which ended on the 30th June 2016 (FY 2016).
FY 2016 was a very strong year for BullionStar with sales revenues totaling SGD 134,200,000, a 111.7% increase from FY 2015. BullionStar launched several new products and services during FY 2016 - the BullionStar Stored Value Facility, which allows customers to keep funds on account with BullionStar, being the most notable one. BullionStar also launched the Gold University, a unique Wikipedia-style resource of up-to-date factual information covering topics such as gold markets, gold vaults, refineries and mints and central bank policies during the financial year.
In FY 2016, BullionStar increased the product range to include over 500 different bullion, numismatics and coin supply products across 10 different product categories. We also revamped our savings and tradings product, the Bullion Savings Program, enabling our customers to convert their BSP Grams to physical bullion at any time without any charge.
BullionStar Financials FY 2016 - Year in Review - Sales
BullionStar’s sales revenue for FY 2016 was SGD 134.2m, up from 63.4m in FY 2015.
For Q1 2016, the total global bullion demand increased by 21% when calculated in tonnage and by 17% when calculated in USD, based on data from the World Gold Council comparing Q1 2016 to Q1 2015.
BullionStar saw strong demand from local investors/savers in H2 2015 and an increased demand from international investors/savers in H1 2016.
Overall bullion demand in Singapore decreased from 1.6 tonnes in the first quarter of 2015 to 1.2 tonnes in the first quarter of 2016, marking a 25% decrease, according to the World Gold Council. For Q1 2016, BullionStar sold approximately 0.5 tonnes of gold bullion, thereby contributing to 42% of the total Singaporean bullion market based on the figures published by the World Gold Council.
BullionStar has grown substantially during the financial year and we continue to demonstrate strong performance regardless of whether the price trend for precious metals is positive or negative. Our growth is derived from a mix of increased sales originating from both domestic and international customers. With more and more international customers finding out about the jurisdictional advantages of buying and storing bullion in Singapore, the international customer segment is increasing in importance.
BullionStar is in a strong financial position and continued to be profitable for the third year in a row with FY 2016. BullionStar has no long term debts to any financial institutions.
The strong performance and growth of the company are evidenced in the below diagram. The volume of orders, average order size and median order size all increased for FY 2016 compared to FY 2015.
Sales per Product Category
A comparison between the below chart for FY 2016 and the corresponding chart for FY 2015 reveals that the proportional demand for gold, in relation to all metals sold by the company, increased in FY 2016. Gold consisted of 66.30% of total sales for FY 2015 whereas it increased to 72.57% of total sales for FY 2016. The increase in popularity for 100 gram gold bars and 1 kg silver bars are attributable to the high demand for the BullionStar 100 gram gold bar and the BullionStar 1 kg silver bar.
What Lies Ahead
In the wake of the high uncertainty in the global markets post-Brexit and post-Trump, the demand for gold has been revived in the west while gold continues to be the savings asset of choice in the east. This combination of demand continues to put pressure on the wholesale gold market with virtually no gold available in the gold capital of the world, London.
BullionStar expects FY 2017 to be an even stronger year and has to date increased its sales revenue significantly compared to the figures as presented in this BullionStar Financials FY 2016 report.
Gold & Silver Prices
The first half of 2016 was characterized by a trend reversal in the spot prices for gold and silver.
During FY 2016, the gold price increased from SGD 50.85/gram on 1 July 2015 to SGD 57.15/gram on 30 June 2016, equivalent to a 12.39% increase when denominated in Singapore Dollars.
The silver price, when denominated in Singapore Dollars, increased 17.65% during the period, from SGD 0.68/gram on 1 July 2015 to SGD 0.80/gram on 30 June 2016.
BullionStar Vault Storage
When our customers store their metals with us, they have full control of their bullion portfolio online 24/7. We employ no less than 5 different audit schemes, including third party audits by the LBMA-approved auditor Bureau Veritas, to verify the existence and correctness of the stored bullion. With our vault being integrated into the same venue as our shop and showroom, customers can physically audit and withdraw their precious metals without any prior notification.
By the end of FY 2016, we stored approximately SGD 84.1m in precious metals as vault storage provider on behalf of our customers. This corresponds to an increase of 58.7% compared to one year ago.
We are proud of our status as the premier bullion dealer in Singapore offering customers a unique solution to international diversification. At BullionStar, we continuously develop new products and services enabling our customers' full control of their precious metals online combined with the physical accessibility of our bullion center in Singapore.
BullionStar is Singapore's premier bullion dealer offering a wide range of precious metals products and services. BullionStar is breaking new ground by introducing modern technology into the age-old precious metals industry. With a proprietary online platform, BullionStar offers customers the ability to efficiently handle and control their bullion holdings 24/7 at their convenience.
BullionStar runs a one-stop retail shop and vault for precious metals at 45 New Bridge Road in Singapore where customers can view, buy, sell, value, deposit, test, audit and physically withdraw precious metals.
With original research and analysis covering the precious metals market on a whole and the Asian market specifically, world renowned analysts Koos Jansen and Ronan Manly keep readers updated on the news that matters.
Bullion banks are some of the most influential participants in the global gold market. But who are these players and what do they actually do? And most importantly, how can these bullion banks trade thousands of times more gold each year than is actually in existence?
This infographic lifts the lid on bullion banking, looking at the world of fractional-reserve paper gold trading built on the unallocated gold account system. Topics covered include:
The identities of these bullion banks
The fractional reserve nature of bullion banking and the paper gold creation process
How the staggeringly large paper gold trading volumes are generated
The gold price discovery process and how the price of gold is set in London by unallocated trading which channels gold demand away from real physical gold and into paper
The secretive nature of the bullion banking club and how its activities in the City of London are deliberately shrouded in secrecy
How new competitors into the London Gold Market claim to be providing competition but are actually perpetuating the underlying unallocated gold account system of trading
For more information about the mechanics of bullion banking, please also see BullionStar Gold University article Bullion Banking Mechanics.
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Gold-backed Exchange Traded Funds (ETFs) have grown strongly in scale and popularity over the last decade and their combined gold holdings now surpass all but the largest central bank gold reserve holdings. However, its important to understand the mechanics of these gold-backed ETF investment vehicles and to appreciate what they can and can't provide to gold investors.
This infographic takes you on a tour of gold-backed ETFs and illustrates insights into how these products really work, including the following:
The contemporary gold holdings of the world's largest gold-backed ETF platforms
Why holders of gold ETFs are holders of units / shares, not gold holders
The characteristics and common objectives of gold-backed ETFs
How the world's largest gold ETFs support and perpetuate the opaque practices of the London Gold Market
The secretive vault network within which many large gold-backed ETFs allocate and store their gold in
How the amount of gold represented by an ETF unit erodes over time
The summary mechanics and infrastructure of many of these gold ETF vehicles
For more information about the mechanics of gold-backed ETFs, please also see BullionStar Gold University article Gold ETF Mechanics.
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The following speech, by BullionStar precious metals analyst Ronan Manly, was given to an audience during a Precious Metals Seminar held at BullionStar's shop and showroom premises in Singapore on 19 October 2016.
Good evening ladies and gentlemen, you are all very welcome to this event at BullionStar.
This evening, I will be discussing the topic of transparency versus secrecy in the gold market, and specifically looking at this transparency and secrecy by highlighting a number of areas of the gold market which claim to be transparent but which are in fact very secretive.
Transparency is an important concept in financial markets mainly because it encourages informational and market efficiency. Applied to the gold market for example, this would prevent larger gold traders having an information and trading advantage over the retail gold buying public such as ourselves. So transparency is not just an abstract concept, it has real world implications.
To illustrate this contradiction of transparency versus secrecy, I’ll look at two main sets of gold market participants:
- firstly the central bank or official sector, which includes central banks and organisations such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS),
- and secondly the wholesale London gold market as represented by the London Bullion Market Association (LBMA) and its bullion bank members.
I have chosen the official sector and the investment sector since together they represent two of the largest areas of gold ownership and gold activity globally, with central banks claiming to hold about 33,000 tonnes of gold, and bullion banks being the largest traders of gold globally.
The London gold market, which is a wholesale gold market dominated by bullion banks, is also arguably the most influential market for gold price discovery. And as Torgny explained just now, these bullion banks are generally defined as the large commercial or investment banks involved in the wholesale gold market.
Central banks and bullion banks also overlap in the gold lending market which is also centred in London, and which is an ultra-secretive market, probably the most secret market on the planet.
The title of my talk actually stems from a recent article that I wrote about the 2010 International Monetary Fund (IMF) gold sales and how those sales were marketed by the IMF as being transparent but which in actual fact were the exact opposite - they were highly secretive, and information about those sales even remains highly classified to this day, six years later.
But first, let's quickly define what we mean by transparency. We are talking here about financial market transparency. A Transparent financial market is one in which, simply put, much is known by many.
In a transparent market, the market institutions are also transparent, and importantly, the institutions can be held to account - i.e. accountability.
In a transparent market there is also open exchange of information between all market participants, and accurate information is freely available about price, supply, demand and market transactions.
And one last point, which is very important, is that in a transparent market, the market data of that market is available and open to independent verification by investors and analysts. Which is totally not the case in the gold market as we'll see shortly.
In short, a transparent market is one in which all relevant information is freely and fully available to the public (and to all participants).
The opposite of transparency is obviously secrecy, which comes from the Latin ‘Secretus’ meaning hidden, concealed, and private. Secrecy at the extreme allows collusion to occur between market participants.
So the extent of transparency in a market can be visualised as a spectrum with transparency at one end of the scale and secrecy, or opacity, at the other.
Lack of transparency in market structure also contributes to lack of transparency in the derivation of market prices, in other words lack of transparency stifles price discovery, and also causes associated higher trading costs for market participants than would otherwise be the case.
Transparency is also a prerequisite for market efficiency. Simply put, market efficiency is the degree to which financial asset prices reflect or embody all available information.
An efficient market is also informationally efficient. This information efficiency requires competition, low barriers to entry, and very importantly, it requires low costs of information gathering. i.e. 'transparency'.
Some of you might be familiar with the work that Nobel prize-winning financial academic Eugene Fama did on market efficiency. I used to work at Dimensional Fund Advisors (DFA) which is an investment firm that subscribes to market efficiency and which actually has Eugene Fama on its board of directors. So this market efficient view was drilled into me.
But you don’t have to agree with market efficiency theory to see how it's linked to transparency. The more transparent a market is, the more information is available in that market, and therefore the more likely it is to be an efficient market.
The opposite of this is inefficient markets which can allow a situation to develop known as asymmetric information. That’s where some market participants possess far more information than others, who then have an advantage over others in trading and transacting.
There are some markets such as the stock market where there is a relatively high degree of transparency since individual companies have to maintain high standards of investor relations, high standards of corporate governance, and proper corporate communication because of the intense scrutiny under which the market puts those companies and also the in-built checks and balances that exist in common equity such as company voting rights.
Similarly in bond markets, be it sovereign bonds or corporate bonds, there is a high level of available market data about those markets, and in-depth information on the mechanics and market mechanisms of those markets.
There is a debate as to whether it’s the army of equity and bond analysts and hedge fund analysts actually scrutinising stock and bond markets that keeps them efficient, or whether those markets are inherently structurally efficient, but whatever the answer, stock and bond markets are generally considered to be quite efficient.
So, when I turned my attention to looking at the gold market a few years ago, it was actually quite a shock, at least when looking at the central bank and London Gold Market segments of the market, that there is little information of real substance available about the workings of these areas of the gold market, and also, and this is a critical point, there is a culture of secrecy in the gold market that I had never witnessed before in other financial markets.
Perhaps as surprisingly, is the fact that the gold and commodity market analysts working in the major investment banks in places like London and New York don't seem to ask the simple questions, at least in public, as to how the central bank and wholesale London gold markets actually work. This lack of scrutiny also extends, in my view, to the London financial media, who as far as I can see, almost never question how the gold market really works or question why the gold market is so secretive. Whatever most of these financial reporters actually do all day, they don't investigate the gold market. That is for sure.
Back in 2011 and 2012, I visited the Bank of England archives in London and the Banque de France archives in Paris a number of times and read and photographed a lot of files about central bank gold operations and transactions that took place between the 1960s and early 1980s, which I then subsequently researched using file copies that I had made.
Those documents made me realise that central banks and the large bullion banks used to regularly discuss the gold market, and also operated within it, and often the discussions and memos were classified and even Top Secret. There are literally hundreds of these files and memos on gold markets in the archives, if not thousands. So, my view is that although 30-40 years has passed since the 1960s - 1980s, and although technology and products have changed, that behind the scenes, the physical gold market is still pretty much the same, and still generates a lot of discussion by central banks and their bullion bank counterparts.
So when I see an opaque contemporary gold market and knowing that central banks and bullion banks used to discuss this gold market in-depth, it motivated me to research this area and try to find out how the contemporary gold market works, how its infrastructure and its transactions work, because I still think that central banks and bullion banks regularly and frequently discuss the market, although never in public.
Transparency claims by Central Banks
There are many examples where central banks claim transparency in their operations and policies, but where these claims don’t stand up to scrutiny when applied to their operations in the gold market. Given this contradiction, the only rationale conclusion is that the central banking sector merely pays lip-service to operating with transparency.
Let’s look at a few examples:.
We'll start with The Bank of England, one of the largest gold storage custodians in the world, also custodian for the UK's gold reserves, and also heavily involved in the London Gold Market in conjunction with the clearing group London Precious Metals Clearing Limited (LPMCL), and also central to facilitating lending in the London gold lending market. The Bank of England actually established the LBMA in 1987. So what does the Bank of England say about transparency? The Bank of England says:
“A transparent, accountable and well-governed central bank is essential not only for effective policy, but also for democratic legitimacy”
This quote comes from a Bank of England report in 2014 titled ‘Transparency and Accountability at the Bank of England’.
Next we have the transparency claims made by the European Central Bank.
“Today, most central banks, including the ECB, consider transparency as crucial.”
This quote actually come from the ECB's web site from a page entirely devoted to describing the ECB's supposed transparency.
Then we have the International Monetary Fund, with a transparency claim that it pronounced in relation to its 2010 IMF gold sales:
“The need for transparency and evenhandedness, which is essential for an international financial institution, argues for providing as much information as possible to the public”
So how do these organisations respond when asked questions related to the gold market? I've asked the Bank of England a number of gold related questions over the years, and their answers are mostly classic deflection, i.e. not answering the question. As an example, the Bank of England is involved in gold clearing in the London gold market, where each of the 5 clearing members of LPMCL maintain gold accounts at the Bank, and where the Bank of England clears the net positions of the 5 clearers (from the AURUM system) each day using book entry transfers (BETs) at the Bank of England. In effect, the Bank of England is the London Gold Market's central clearer.
So I asked the Bank of England to explain its role in this gold clearing? The Bank of England's answer...
"The Bank is not a member of LPMCL and therefore has no links to AURM. The LPMCL website should be able to answer most of your questions."
However, the LPMCL website has zero information about this process. So, as you can see, the Bank of England is engaging in disinformation and deflection. And this is an institution which claims to be gold custodian for 4857 tonnes of gold held in its London vaults.
The UK Government also claims that all of its departments are transparent and it even launched a 'Public Sector Transparency Board" in 2010 at which time it stated:
“We want transparency to become an absolutely core part of every bit of government business.”
However, the UK Treasury doesn't seem to have gotten this message about transparency, since Her Majesty's Treasury (HM Treasury), a UK government department, is even more uncooperative than the Bank of England in relation to gold market related questions. The UK's gold reserves are actually owned by HM Treasury and managed by the Bank of England in an account called the Exchange Equalisation Account (EEA).
I was recently writing an article about central banks that hold both gold bars and gold coins in their gold reserves. The UK holds some gold coins, including gold Sovereigns, in its gold holdings. These holdings of gold Sovereigns are actually mentioned in the UK National Archives files as well as in the Bank of England archives.
So I asked HM Treasury what any reasonable person would consider an innocuous question about HMT's gold coin holdings, and I even included the links to the Archive websites that discuss the HM Treasury gold sovereign holdings:
Can you clarify which gold coins are held as part of the EEA gold holdings, it is gold Sovereigns?"
Not surprisingly, HM Treasury replied:
“Data on the composition of the EEA’s gold is not disclosed due to its market sensitive nature”
HM Treasury actually wrote an entire page to me as an answer while deflecting the question and padding it out with irrelevant material which had nothing to do with my question.
What about the ECB, an institution which holds over 500 tonnes of gold reserves. More transparency than the aloof British institutions? Actually, far from it. As preparation for this presentation, I sent a question to the media department of the ECB asking:
"Where is the ECB gold held, how is it audited, and can you send me a weight list?"
Answer? After two weeks, and 2 emails (including a follow-up), there is no answer from the ECB media team, i.e. complete radio silence.
[Note, since this presentation, the ECB responded after I sent additional emails to them. Their response said that the ECB gold is held in 5 locations in London, Paris, New York, Rome and Lisbon. The ECB hold is not physically audited at all since the ECB considers the central banks that hold it to be 'totally reliable, and no surprise, the ECB will not publish a weight list of the gold bars which it claims to hold since it says that "the weight of each gold bar is a technicality" and " does not warrant a publication“. See BullionStar blog "European Central Bank gold reserves held across 5 locations. ECB will not disclose Gold Bar List" for full details.]
Next we come to the Bank for International Settlements (BIS), the central bankers' central bank, based in Basel, Switzerland.
In a 2007 presentation, the BIS actually had a slide titled the ‘Golden Triangle of central bank autonomy’ where it links the concepts of Transparency, Accountability, and Autonomy and says that transparency is "important for holding central bank to account", while accountability is the "crucial counterpart of autonomy in open society" as it "makes transparency more credible".
The BIS holds its own gold holdings on its balance sheet, as well as holding gold as a custodian on behalf of other central banks, and it also offers these banks a gold deposit taking service. Altogether these BIS holdings represent over 900 tonnes of gold.
So you may think maybe the BIS takes these transparency claims seriously, for example in the gold market, especially given its fondness for gold with the Golden Triangle analogy. However, unfortunately no.
Quite recently, I asked the BIS about its gold as follows:
:Can you confirm the storage locations of the BIS custody gold and the BIS’ own gold?"
The BIS answered:
'I regret that we cannot be of assistance with your query, as the information that you have requested is not made publicly available.”
So it seems that the only gold that the Bank for International Settlements will talk about is the 'gold' in its ‘Golden Triangle’ gimmick of Transparency, Accountability, and Autonomy. In the real world, transparency does not apply to the BIS real gold. Another example of the fiction and deception practiced by central bankers.
IMF Gold Sales
As mentioned earlier, the title of my talk is based on some research I did on the gold sales of the International Monetary Fund which I wrote about recently. Between November 2009 and December 2010, the IMF sold 403.3 tonnes of gold in a series of off-market and on-market sales. The off-market sales were direct sales to a number of central banks: 200 tonnes to India in November 2009, 10 tonnes to Sri Lanka, 2 tonnes to Mauritius, and later on in late 2010, 10 tonnes to Bangladesh.
Then 181.3 tonnes of gold were sold via ‘on-market’ transactions over 10 months between February to December 2010. You might think that "on-market" means that the gold was sold on a well recognised market somewhere, but this was not the case, or at least we don't know what market was used since the entire operation was and is still secret.
When these 'on-market' sales began in February 2010, the IMF came out with a statement saying “A high degree of transparency will continue during the sales of gold on the market”.
Actually, the well-known gold investor and entrepreneur, Eric Sprott, was starting a gold fund at that time and went to the IMF saying that he was interested in buying the entire 181.3 tonnes of IMF gold, but the IMF quickly told him his money wasn't good with them. The well-known website Business Insider then asked the IMF a series of questions on why Sprott couldn't buy the IMF gold. These questions were also either arrogantly not answered or dismissed by the IMF’s external communications officer.
Last year, when looking at the IMF online archives for a different reason, I stumbled upon 3 IMF reports titled 'Monthly gold sales' which actually covered the first 3 months of these sales in 2010, i.e. Monthly reports on gold sales for February / March 2010, March / April 2010, and April / May 2010. These reports contained some, but not a lot, of information about the sales process and seemed to indicate that the BIS had been used as the sales agent. I wrote about these reports in my blog and you can find all the details on the BullionStar website.
But a footnote in the 3 monthly reports caught my eye since it referenced 2 further IMF papers as follows:
“Modalities for Limited Sales of Gold by the Fund (SM/09/243, 9/4/09) and DEC/14425-(09/97), 9/18/09“.
SM stands for "Staff Memorandums" which are classed under the IMF's Executive Board Documents series. DEC stands for ‘Text of Board Decisions’, which are also Executive Board Documents. These 2 document titles looked interesting and relevant, however, when I checked, neither of these 2 documents appeared to be retrievable in the IMF archives. The IMF have a 3 year rule on releasing Executive Board Documents into their archives, so both of these documents should have been available by at least 2013, and definitely by 2015.
So I went to the IMF archives people with 2 sets of questions. Firstly, could they confirm where these 2 missing documents were, the staff memorandum about the IMF gold sales, and the text of the board decision about the same sales.
Secondly, in a separate question, I asked the IMF archives staff where the other 7 monthly gold sales reports that were missing were, since logically, as these gold sales were conducted over 10 months, one would expect 10 monthly reports in the IMF archives, not just 3 reports covering February to the middle of May 2010.
After a large number of email exchanges with the IMF Archives people about the staff memorandum and the text of the Executive Board decision, they ultimately responded and said:
“these two documents are still closed because of the information security classification”
“The decision communicated back to us is not to declassify these documents because of the sensitivity of the subject matter.”
On the 7 missing monthly gold sales reports, the IMF responded that:
"The reports after May 2010haven’t been declassified for public access because of the sensitivity of the subject matter."
So as you can see from the slide, there is absolutely nothing transparent about these gold sales when the documents relating to them have not even been declassified due to the supposed "sensitivity of the subject matter".
So the IMF's claims that “The need for transparency and evenhandedness, which is essential for an international financial institution, argues for providing as much information as possible to the public” is actually a complete lie. And this is an institution which still claims to hold 2815 tonnes of gold.
Based on the IMF archive rules, these Executive Board Documents can only be declassified on the authorisation of the IMF Managing Director, who is currently MS Christine Lagarde. I'm not making this up. I did think of maybe sending her an email asking 'Please can you declassify these documents' but then I thought what's the point, it wouldn't be any use.
My personal theory is that some or all of these sales involved the IMF using the BIS to transfer gold to either the Chinese State (People's Bank of China), or else helping to bail out bullion banks by selling IMF gold to a set of bullion banks, or both of these scenarios.
It looks like we'll have to wait a long time to find out the exact answers, but this incident hopefully illustrates to you that in the official sector gold market, Transparency really does mean Secrecy. So, gold is not just a 'Pet Rock', as the Wall Street Journal would have you believe. In the IMF world, gold is a topic whose discussions remain highly classified due to the sensitivity of the subject matter.
The Secrecy of Gold Storage Locations
Last year in 2015 I did some research on which central banks stored gold at the Bank of England's vaults in London, and how much each bank stored there. This required asking a number of central banks, by email, about their gold storage locations. While a few such as the Bank of Korea told me that they store their gold at the Bank of England vaults, many central banks didn't divulge this information. Lets look at a few examples:
The Banca d’Italia, one of the biggest central bank gold holders in the world, which holds 2450 tonnes of gold, half of it in Rome, said “The Banca d'Italia will not be giving information in addition to the website note.
The Bank of Japan, which claims to hold 765 tonnes of gold: “We have nothing to comment on the matter”.
The South Africa Reserve Bank (or SARB), a holder of 125 tonnes of gold: “The SARB cannot divulge that information”
The Spanish central bank claims to hold 280 tonnes of gold. They replied to me that: “The only information provided [to the public] on Banco de Espana's gold reserves is total volume [held]”
Between them, these 4 banks claim to hold more than 3,600 tonnes of gold, and they won't even provide a breakdown of where their gold is stored.
Since we happen to be in Singapore at the moment, what about the central banks in the local South east Asian region? Do you think these central banks would be more transparent than some of the examples we've just looked at, or less transparent, or about the same when it comes to gold storage locations?
As it turns out, they're pretty much the same, i.e. not transparent. The Bank of Thailand replied “I could not share that information as requested”.
The Malaysian central banksaid “If the information you require is not on our website [which it's not], it may imply that the said information is not meant for public viewing / reference”. Since they knew that this storage information is not on their website (hence the question), this is a particularly lame response from Bank Negara Malaysia.
TheMonetary Authority of Singapore, here in Singapore replied that “We are unable to share with you where we store the gold as the information is confidential.”
The Bank of Thailand claims to hold 152 tonnes of gold reserves, Singapore 127 tonnes, and Malaysia 36 tonnes, that's 315 tonnes of gold where central banks in the region won't say where its held.
These central banks we've just looked at were actually some of the central banks which did bother to respond to me. Many central banks such as the central banks in Lebanon, Kuwait, Jordan, Morocco, Kazakhstan and Cambodia didn't even respond.
Where are the Central Bank gold bar Weight Lists?
Another huge area for central bank secrecy on gold is the topic of weight lists, or gold bar lists. A gold bar weight list is, as the name suggests, just an itemised list of all the gold bars held within a holding that uniquely identifies each bar. In the wholesale gold market, such as the London Gold Market, there are rules on the data that this list has to contain.
These rules are specified in the LBMA's "Good Delivery Rules", actually in Annex H which is titled "Sample Weight Lists". For each gold bar on a weight list, and these are the large variable weight bars which each roughly weighs 400 ozs, it must include the bar serial number, the refiner name, the gross weight of the bar in troy ounces, the gold purity of the bar and the fine weight of the bar (i.e. the gold content weight). The LBMA also state that "year of manufacture is one of the required ‘marks’ on the bar"
The Good Delivery Rules annex even states that “This Annex shows the form of weight lists that should accompany shipments of GD bars to London vaults”, which confirms that all gold bars entering and exiting the London vaults will be on such a list.
The large gold-backed Exchange Traded Funds (ETFs) such as the SPDR Gold Trust (GLD), which holds nearly 1,000 tonnes of gold, and the iShares Gold Trust (IAU), actually produce and publish weight lists of their gold bar holdings in pdf format each and every trading day. It's not a big deal and it doesn't take long to produce these lists because the process is automated from the vault to the custodian back office all the way to the ETF websites.
For example, here's a line item for an iShares gold bar weight list, where you can see the refiner name PAMP, the bar serial number, the purity, and the bar weight (gross and fine weight). It even says where the bar is stored, in JP Morgan's vault in London.
BrandBar No.AssayGross OzsFine Ozs Vault
PAMP. SA. TC7490 9998 413.425 413.342 JPM London V
A full weight list is also needed when completing a physical gold bar audit, which is something that the large gold-backed ETFs perform twice per year.
So you would think that since commercial gold-backed ETFs produce gold bar weight lists, then central banks should be able to also? And given that large central banks have large teams of technology staff, and good IT infrastructure, that it will not be a big issue for them to produce such a weight list, in either pdf or Excel format.
However, the reality is that not a single central bank, when asked, will produce and publish such a gold bar weight list.
Koos Jansen, precious metals analyst at BullionStar, recently asked the Dutch central bank, De Nederlandsche Bank (DNB), to provide a weight list.
The De Nederlandsche Bank, which holds gold in Amsterdam, London (Bank of England), and New York, replied:
“We do not intend to publish a gold bar list. This serves no additional monetary purpose to our aforementioned transparency policy, however it would incur administrative costs.”
Frankly, this reply from the Dutch is an absurd and infantile excuse and is implausible since gold-backed ETFs produce pdf versions of their gold bar weight lists on their websites each and every trading day which run into hundreds of pages in length.
In preparation for this presentation, I recently asked the Austrian central bank (the OeNB) the same question, could they provide a weight list. The Austrian central bank holds 280 tonnes of gold, 80% of which is currently stored in London at the Bank of England. The OeNB's response was:
“We are sorry to inform you that the Oesterreichische Nationalbank (OeNB) does not publish a weight list of the gold reserves.”
Last year in October 2015, the German Bundesbank issued a useless list of its gold bar holdings, useless since the industry standard required refiner brand and bar serial number details were omitted from the weight list. As the Bundesbank, which claims to hold 3,378 tonnes of gold, stated at the time:
“Information on the refiner and year of production are not relevant for storage or accounting purposes and merely provide supplementary information.”
This continual accumulation of evidence that central banks refuse to issue industry standard gold bar weight lists suggests that there seems to be a coordinated campaign between central banks never to release this information into the public domain.
FOIA: Central Bank of Ireland
The Central Bank of Ireland holds 6 tonnes of gold, the majority of which, according to its annual report, is in the form of “gold bars held at the Bank of England”. In June 2015, I submitted a Freedom of Information Request to the Central Bank of Ireland asking for a weight list / bar list that identifies these bars of gold held on behalf of the Central Bank of Ireland by the Bank of England.
My request was refused by the central bank. The FOIA reply mentioned that the Central Bank of Ireland didn’t have a weight list, and couldn’t find one. Their exact reply was:
“the record concerned does not exist or cannot be found after all reasonable steps to ascertain its whereabouts have been taken.”
The only documentation the Central Bank of Ireland claimed to have was a statement from the Bank of England dated 2009 which listed a 'total' of the number of bars stored on behalf of the Central Bank of Ireland and an equivalent total in 'fine ounces', but they said that could not provide this statement to me on the basis that it could have “serious, adverse effect on the financial interests of the State”.
I followed up with a phone call to the FOIA officer who had handled my request (as is the procedure) and was told that the Central Bank of Ireland had conducted 2 conference calls with the Bank of England about my request, with the second conference call even including a 'chief security officer' from the Bank of England FOI office, and that the Bank of England told the Central Bank of Ireland that 'you absolutely cannot' send this statement out to this guy with bars total and fine ounces since its 'highly classified'.
While you will note the conflict that arises when a request made under the Freedom of Information Act of one country (Ireland) can allow interference from the central bank of another country (the Bank of England) in determining its outcome, the pertinent point here is that the Bank of England views the topic of gold bars as ‘highly classified’.
Given that the Central Bank of Ireland reports to the Minister of Finance who, as part of the Irish Government, works on behalf of the citizens of Ireland, this refusal shows that the Central Bank of Ireland is not in the least bit transparent or accountable to its citizens, especially about a topic as important as its gold bar holdings.
Fully Opaque - Central Bank Exemptions on Trade and Reporting
There are many other areas of central bank secrecy in the gold market that make a mockery of their transparency claims. The gold that central banks hold on their balance sheets as official reserves alongside major currencies and Special Drawing Rights (SDRs) is conveniently defined as by the IMF as a ‘financial asset’ and so is exempt from international merchandise trade statistics. Therefore, central banks can transport gold between countries and foreign locations and no on will ever know, since customs authorities are prohibited from reporting on these gold movements.
Central Bank accounting of gold holdings is another area of complete secrecy where the reporting does not follow international norms, and where for most central banks, ‘Gold and Gold Receivables' are reported as one line item. This ‘get out clause’ accounting rule for central banks arose from lobbying of the IMF at the BIS in Basel in 1999 by a group of European central banks including the Bank of England, Bundesbank and Banque de France when they forced the IMF to drop plans to split out gold receivables such as gold loans and gold swaps, since, in the words of the bullying central banks, the data was ‘highly market sensitive’.
As you can see, the words ‘highly classified’, ‘sensitivity of the subject matter’, ‘highly market sensitive’, ‘confidential’, and ‘not publicly available’ are all different forms of the same thing, i.e. they reflect a culture of secrecy, where aloof and arrogant central bankers think that they have a mandate to cover up market sensitive information and not allow free markets to operate efficiently nor allow free market price discovery to work.
This arrogant and misguided behavior by central banks is not surprising given their constant meddling and intervention in all things market related. Again, the mainstream financial media will never discuss this, preferring to be invited as ‘embedded reporters’ for freebies at events such as the LBMA conference that we’ve just attended here in Singapore.
London Gold Market and the LBMA
We now look at the London Gold Market, its industry representative body, the London Bullion Market Association (LBMA) and its bullion banking members. The LBMA has recently begun to make soundings that it wishes to improve transparency in the London bullion market, a desire which is partially in the context of a UK regulatory Fair and Efficient Markets Review (FEMR).
However, this newly found sense of duty by the LBMA for transparency is hard to believe when you realise that the gold market today is even less transparent than it was 20 years ago.
In January 1997, the LBMA published Issue 6 of its magazine ‘The Alchemist’ and devoted the entire issue to the theme of Transparency, even going so far as to title the cover page “Towards Transparency”. The very title of the publication, ‘Towards Transparency’, conceded that the London Gold Market was not transparent at that time and admitted that the bullion market was secretive and lacking in information and data.
There was an introduction to that issue written by the then chairman of the LBMA, Alan Baker, who worked at Deutsche Bank at the time. I want to share with you just the first few lines of that introduction since its quite eye-opening:
Alan Baker wrote:
“The bullion market is oftencriticised by observers for being secretive and lacking in information and data. Unfortunately, to an extent, this is inevitable given the need for a duty of care to clients which dictates that a high level of discretion is an essential element in so much of the business that takes place in the market, particularly for gold.
While discretion and integrity will always be bywords in the London Bullion Market, the LBMA is nevertheless conscious of the general call for greater transparency. With this in mind we have considered ways in which to enhance transparency in the market while in no way compromising integrity, something perhaps of a delicate balancing act.”
Therefore, we have a situation where the ‘Towards Transparency’ era of January 1997 has not only not improved, but it's actually gone backwards. So if January 1997 was ‘Towards Transparency’ what exactly should 2017 be called, perhaps ‘Still Towards Transparency but quite a way to Go’?
There was also an article in Issue 6 of the Alchemist about GOFO, the Gold Offered Forward Rate (GOFO), which also had a notable quote about what the London gold forward market was like before GOFO was introduced in 1989. The author of that article, Martin Stokes of JP Morgan, quoted Winston Churchill, saying that before 1989, the gold forward market was “a riddle shrouded in mystery wrapped up in an emigma”, and that ‘transparency was non-existent’.
The January 1997 issue of the Alchemist covered 3 developments of the time which the LBMA considered as moves towards transparency:
The launch of clearing statistics for the London gold and silver markets
The publication of trading data from a 1998 survey by the Bank of England
The launch of a London Gold Lease Rate page by the LBMA on the Reuters terminal to compliment the GOFO rates that the LBMA had begun publishing in 1989.
Now, fast forward nearly 20 years from January 1997 to practically January 2017, and what do we have? What we have is:
The same high level practically useless rolled-up London gold and silver market clearing data each month which doesn’t really explain anything since it’s not granular enough, and which baffles people more than anything due to the phenomenally large clearing volumes stated in the data
There was a trading survey in Q1 2011 but nothing since then, nothing in nearly 6 years
GOFO has been discontinued since January 2015
So the question needs to be asked, what happened to this “general call for greater transparency” back in 1997?
Looking at the ‘London Gold Market’ in 2016, there is:
No trade reporting, physical or otherwise, Monthly Clearing data is practically meaningless
No data on the size of unallocated gold positions in the market
No confirmation of the identities of central bank & bullion bank customers at the Bank of England
Commercial gold vault locations in London are not published by the LBMA
No official data about the London Gold Lending Market. Zero!
GOFO and Forward Curve submissions were discontinued by January 2015
The LBMA ‘Moved the goalposts” – as they altered 2013 refining production figures from 6600 to 4600 tonnes after I had reported on the original numbers, thereby obscuring the fact that a few thousand tonnes of large bar wholesale gold left the London market for Switzerland, where it was melted down into kilobars and shipped to markets in Asia.
This list is just a sample. There are plenty of other areas where there is no transparency in the LBMA controlled London Gold Market.
As mentioned, the LBMA has recently been making soundings that it will improve transparency in the London bullion market, specifically in the context of trade reporting. There was even a slide titled “LBMA’s commitment to enhance transparency” in one of its Singapore conference presentations that addressed trade reporting and the appointment of BOAT Services and Cinnober as the planned provider of a London gold and silver market trade reporting service in the first quarter of 2017.
But this new awareness of transparency seems, in the first instance, to be being undertaken for regulatory reasons and to optimise something called the Net Stable Funding Ratio (NSFR) which is a Basle Committee concept for banking sector stability. So transparency for transparency's sake and for the benefit of the smaller participants in the global bullion market is not the raison d'être.
Furthermore, the LBMA has made it clear that central banks will be exempt from any 'transparency' that may arise out of the planned London bullion market trade reporting project in 2017. In a letter dated January 2015 to the Bank of England Fair and Efficient Markets Review, the LBMA wrote that:
"it is worth noting, that the role of the central banks in the bullion market may preclude ‘total’ transparency, at least at public level, but that transparency could be increased via post-trade anonymised statistical analysis of nominal volumes, provided by the clearing banks."
As to what exactly the role of central banks is in the bullion market, the LBMA did not say, nor did the Bank of England query. But I think we can conclude that this nudge-nudge wink-wink codespeak about central banks' operations in the bullion market is exactly as it appears to be, i.e. nefarious.
So here again we see that central banks are going to be given an exemption from transparency, i.e. central bank trading in the London Gold Market will remain opaque, with the blessing of the LBMA and the banking regulators. The post-trade anonymised statistical analysis unfortunately looks like it will be another stitch up and cop-out, and as useless a set of data as any data that gets deliberately rolled-up and masked.
In conclusion, why do central banks refuse to release details of the serial numbers of their gold bars Because after all, If the gold is allocated, then there shouldn't be an issue. This secrecy around weight lists appears to be deliberate.
In my view, the reason for non-publication of central bank weight lists is because of gold lending. If a gold bar serial number turned up in the weight list of an ETF, then it would become clear that the ETF was holding borrowed gold that the central bank still claimed to hold. And the more lent gold that appears in transparent gold holdings such as ETF weight lists, the more the wider gold market knows the extent of the gold lending market. The same would be true of gold for US dollar swaps.
Similarly, if a gold bar turns up in one central bank's list when it was previously in another central bank's holding, this could suggest undisclosed central bank gold sales or alternatively it could suggest a location swap, where gold was swapped between holdings at two different gold depositories / vaults.
Publishing a central gold bar list would forever more also allow those bars to be independently traced with a high accuracy due to the serial number - refiner brand - year of manufacture attributes.
So there appears to be a concerted and coordinated effort by central banks, most likely formulated and imposed by the large gold custodians, to absolutely prevent any central bank gold bar weight list from ever being published anywhere.
However, in my view, there are other reasons for the secrecy. Like major currencies, monetary gold is a reserve asset on the balance sheets of central banks, and like major currencies, gold can be used for international payments, gold swaps, and for interventions into fx and gold markets. Monetary gold is also a strategic asset, what the Bank of England called a ‘war chest’, or the ultimate store of value. The Bank of England also described the rationale for holding gold as an insurance policy against gold making a re-appearance at the centre of the international monetary system
There is also a general culture of secrecy in central banking and an aloofness where central banks don’t feel obliged to justify their policies and decisions due to an entitlement issue with ‘independence’.
Turning to bullion banks, and to put it simply, these large banks are commercial enterprises, and they wish to protect their status quo and also to protect their profit margins. This motivation goes back to asymmetric information, where one party possesses more information than the other.
However, for investment banks, some of the superior knowledge relative to the wider gold market is obtained, not because of superior skill, but because of being able to operate in an environment where secrecy is not just tolerated, but where secrecy is actively protected by the industry body (LBMA) and the regulators (the Financial Conduct Authority and the Bank of England).
Although central banks and large bullion banks often have different motives in the gold market, their motives align in protecting the market’s secrecy. Taken central bank secrecy and bullion bank secrecy together, the phrase ‘A riddle shrouded in mystery wrapped up in an emigma’ is unfortunately still an excellent description for the entire London Gold Market.
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