Last week the U.S. Securities and Exchange Commission (SEC) refused to approve nine different proposals for bitcoin exchange traded funds (ETFs). This comes on top of a number of prior SEC refusals of bitcoin-based funds, including the SolidX Bitcoin Trust and two separate denials of the Winklevoss Bitcoin Trust, the first in 2017 and the second this summer.
Why have so many other U.S.-listed commodity ETFs been approved over the years whereas bitcoin ETFs keep getting rebuffed? It is tempting to view the SEC smackdown of these bitcoin ETF proposals as a sign of distaste for this new and anarchic technology. But I don't think this reading is accurate. If anything, SEC vs Bitcoin is less about Bitcoin and more about the SEC's attempt to impose standards in an age where Wall Street is trying to package almost everything into a broadly-available security.
Precious metals buyers will of course be familiar with ETFs. The granddaddy of all commodity ETFs, the SPDR Gold Trust, or GLD, has been around since 2004 and is currently backed by around US$29 billion in physical gold, or 760 tonnes. All ETF units trade on a stock market. A peculiar set of mechanics ensures that they replicate the price of their underlying index or commodity. Using GLD as an example, if the price of the ETF is above the current gold price, then special institutions (otherwise known as authorized participants) can buy physical gold, exchange it for new units of GLD, and sell those units at a profit. If GLD is trading below the gold price, these same authorized participants can buy the underpriced GLD units, redeem them for gold, and sell the commodity for a risk-free gain. Competition among authorized participants for profit ensures that the two prices do not diverge by very much. Regular investors do not have the ability to convert units into gold, or vice versa. (For a more thorough explanation, see Bullionstar's introduction to gold ETFs.)
The SEC has approved ETFs that track gold, silver, platinum, palladium, copper, oil, natural gas, coffee, as well as broader-based ETFs that track baskets of commodities. Virtual currencies like Bitcoin, also known as cryptocurrencies, have been defined by the U.S. Commodity Futures Trading Commission (CFTC) to be commodities. The SEC's refusal to allow bitcoin ETFs thus has nothing to do with bitcoin's underlying nature: like gold, silver, and the rest, it is legally a commodity. Rather, the reason that the Winklevoss Bitcoin Trust, the first of the proposed bitcoin ETFs, has failed to make it through the SEC's doors is that the SEC doesn't like the way that the market for bitcoins is structured.
Cooperation from crypto exchanges - A tall order
Specifically, the SEC is unhappy with the inability of the the Bats BZX Exchange, the stock exchange on which the Winklevoss Bitcoin Trust is seeking a listing, to secure information sharing agreements (ISAs) with important bitcoin exchanges. An information sharing agreement between the Batz BZX exchange and, say, Chinese-based Binance, one of largest bitcoin exchanges, would obligate Binance to share relevant data about market trading activity and customer identities with Bats.
The SEC believes that information sharing agreements with significant exchanges are key to compliance with the Securities Exchange Act, the body of legislation that governs the SEC. Specifically, Section 6(b)(5) of the Act requires the SEC to ensure that the securities exchanges it regulates, including Bats BZX, are designed to prevent fraudulent and manipulative acts and to "protect investors and the public interest."
The SEC has chosen to take a very strict interpretation of 6(b)(5) when it comes to the listing of an overlying security, i.e. securities that derive their value from some underlying security or commodity (much like how units of the Winklevoss Bitcoin Trust overlie, or are underlain by, physical bitcoin). Not only must an exchange like Bats BZX ensure that it has controls to prevent manipulative behaviour of Bats-listed overlying securities, but it must also take reasonable steps to ensure that the underlying instrument to which it is linked is traded on an exchange that is held to the same standards. The SEC deems that an information sharing agreement between the relevant exchanges is sufficient to fulfill this requirement. That way, if there were to be suspicions of manipulation of bitcoin on the Binance exchange, Bats BZX would be able to get data from Binance and use it to conduct investigations into possible trading violations.
In its second refusal of the Winklevoss Bitcoin Trust, the SEC maintained that it has a long history of requiring information sharing agreements between SEC-regulated exchanges that list overlying securities and exchanges that list the underlying instrument. It points to a ruling it made in 1994 in which it required that the CBOE, which wanted to list equity options on American Depository Receipts (ADRs), would in certain cases be required to have a formal mechanism for getting information from the overseas exchanges trading the individual stocks underlying the ADR.
The SPDR Gold Trust as precedent
The SPDR Gold Trust (GLD) provides further precedent. When the SPDR Gold Trust was approved in 2004, the sponsoring exchange, the New York Stock Exchange (NYSE), was unable to establish information sharing agreements linked to spot trading. Securing agreements was deemed impossible since most gold spot exchanges occurs relatively informally via the London over-the-counter gold market.
In lieu of information about spot exchanges, the SEC decided that two factors were sufficient for the proposal to meet its requirements. First, it claimed that gold OTC markets are very liquid and thus difficult to manipulate. Second, the NYSE had an information sharing agreement with NYMEX, whose COMEX division listed the most popular set of gold futures contracts. Since the COMEX market is a regulated exchange that the SEC deemed "significant", the sharing of information between the NYSE and COMEX would help ensure that manipulation could be caught. The meaning of "significant" is sizable relative to overall trading volumes.
In the case of the Winklevoss Bitcoin Trust, the Bats BZX had entered into an information sharing agreement with the the Gemini Exchange, a New York-based bitcoin exchange that allows for spot trade. However, the SEC has decreed that this agreement is not sufficient to meet its requirements. The SEC maintains that bitcoin trading is dominated by unregulated non-US exchanges (like Binance). In this context, Gemini accounts for only a small fraction of global bitcoin trading, and therefore if a manipulation attempt were to succeed in causing a large change in the price of bitcoin, it would likely be carried out on a dominant exchange, like Binance, and not Gemini. Thus, an information sharing agreement with Gemini simply won't be effective for sniffing out manipulators.
A quick perusal of Coinmarketcap.com, a website that tracks bitcoin trading statistics, confirms that unregulated non-U.S. bitcoin exchanges dominate bitcoin trading (see screenshot below). On 31 August 2018, for instance, Gemini ranked 74th in terms of 24-hour bitcoin volume, at $18 million, whereas Binance clocked in near the top at $295 million.
Nor is the existence of information sharing agreements with a regulated bitcoin futures market sufficient to change the SEC's opinion. This is relevant because two large U.S. futures exchanges, the CBOE Futures Exchange (CFE) and CME, both launched trading of their bitcoin futures contracts in December 2017. Given that an information sharing agreement between the NYSE and NYMEX was sufficient to allow GLD to list, would an equivalent agreement between Bats BZX and either of these two futures exchanges constitute enough support for the Winklevoss Bitcoin Trust to proceed? Not so, says the SEC. In the case of other commodity ETFs like GLD, the SEC had sufficient evidence that the U.S. futures market for that commodity was large enough to be "significant." Regulated bitcoin futures still constitute a relatively unimportant part of overall bitcoin trading.
This logic used by the SEC needn't just apply to bitcoin. It might explain why there is no rhodium ETF in the U.S., for instance, whereas there is one in both Europe and South Africa. Since there is no exchange that offers rhodium futures and the spot market is relatively opaque, it would not be possible for an SEC-regulated exchange to set up the information sharing agreements necessary for SEC approval of a rhodium-based financial product. This echoes what I said at the outset: the SEC's decision is less about bitcoin and more about grappling with the complexity of market structure in an age in which financial magicians are trying to package everything into an exchange-traded product.
Dissent within SEC: underlying asset out of scope?
Interestingly, one of the four SEC Commissioners, Hester Pierce, dissented from the regulator's decision to disallow the Winklevoss Bitcoin Trust to be listed. Her reasoning is that a reading of Section 6 of the Exchange Act does not permit the SEC to focus on the underlying market for a proposed security, whether that underlying market be the bitcoin or gold spot market. Pierce believes the SEC only has the right to regulate the market for the overlying asset, i.e. units of a Bitcoin ETF or a Gold ETF. Pierce has previously advocated a Hayekian view of markets, in which the dispersed nature of information leaves no roll for a single "omniscient" regulator:
"Regulators are people, and they are people without great access to information, so we're asking them to do a task that they're destined to fail at... not because they don't have good intentions and not because they don't work hard... they do... they're hard working people but they're just not going to be able to succeed at the task."
Pierce's criticism would constitute not just a roll-back of the SEC's bitcoin decisions, but would also throw out a decade or two of previous SEC decisions related to information sharing practices of proposed commodity-linked ETFs.
The next Bitcoin ETF - Further rejections likely
The next big bitcoin ETF that is slated for an SEC decision is the CBOE Exchange's proposal to list the VanEck SolidX Bitcoin Trust. Given that Pierce's dissent is unlikely to sway the three remaining SEC commissioners, I don't expect this ETF to be approved. Let's look at the part of the proposal that has to do with information sharing agreements:
The creators of the VanEck SolidX Bitcoin Trust point to a number of information sharing agreements into which the sponsor, the CBOE, has signed (or expects to sign). We already know that those with the CME, which lists bitcoin futures, and Gemini will not be sufficient to establish significance. What about the agreements signed between the CBOE and Bitcoin over-the-counter trading desks? The creators claim that the relevant OTC markets account for around US$250–$500 million in trading per day. But with overall exchange-related bitcoin volumes said to come in at around $4 billion per day, it will be difficult for the creators to prove that OTC trading constitutes 'significant'.
Lastly, the creators of the trust point to "other USD-bitcoin spot markets." I interpret this to mean that they may succeed in getting other U.S.-based bitcoin exchanges to join Gemini in sharing information. But if it can't get some of the largest actors in the list above, say Binance, Bitfinex, or OKEx, all of which are based outside of the US, it's hard to see how the SEC will provide its stamp of approval.
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.
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.
There are many precious metals refineries throughout the world, some local to their domestic markets, and some international, even global in scale. Many, but by no means all, of these refineries are on the Good Delivery Lists of gold and/or silver. These lists are maintained by the London Bullion Market Association (LBMA) and they identify accredited refineries of large (wholesale) gold and silver bars that continue to meet rigorous proficient standards of refining and assaying, and that are, at the same time, financial viable and stable companies. Currently, there are 71 refiners on the LBMA’s gold Good Delivery List and 81 refiners on its silver Good Delivery List, or which just over 50 of these refineries are accredited to both the LBMA’s gold and silver lists.
But within the top echelons of the world’s precious metals refineries, a number of names stand out due to their sheer scale and pedigree, as well as their global brand recognition in the production of a wide range of investment grade gold and silver bullion bars. These names include PAMP, Argor-Heraeus, Metalor Technologies, Heraeus, Valcambi, Tanaka Kikinzoku Kogyo, and Rand Refinery.
5000 Tonnes of Gold
Together these seven refinery groups have a combined gold refining capacity approaching a mammoth 5000 tonnes per year. And that’s not even taking into account their refining capacity for other precious metals such as silver and platinum. Valcambi has a gold refining capacity of 1600 tonnes per annum, Metalor 800 tonnes, Heraeus 400 to 500 tonnes, PAMP over 450 tonnes, Argor-Heraeus over 400 tonnes, Tanaka 500 tonnes, and Rand Refinery 600 tonnes.
Notably four of these refineries are based in the gold refining powerhouse of Switzerland, of which three, PAMP, Valcambi and Argor-Heraeus, are clustered literally within a few kilometres from each other in the golden triangle of Swiss refineries centred within the very south of the Swiss canton of Ticino near the Swiss-Italian border. Metalor Technologies is the exception, as its Swiss headquarters facility is based in Neuchâtel, in the north-west of Switzerland. Of the non-Swiss refineries, Heraeus, Tanaka and Rand Refinery, these are headquartered in Germany, Japan and South Africa, respectively.
International in Scale and Ownership
Although three of the four giant Swiss refineries have historically each been owned by a Swiss bank, and although groups such as Heraeus and Tanaka are still privately owned and controlled by founding shareholders, its important to note that none of these giant refineries are purely local concerns, so their headquarters locations are to some extent a secondary concern. From operating facilities, to metal supplier networks, to customer bases, all of these refineries are now absolutely global in nature.
For example, Metalor operates four precious metals refineries globally, in Switzerland, Hong Kong, Singapore and Massachusetts (US). Heraeus runs gold refining and gold bar production facilities in Hanau (Germany), Hong Kong, and Newark (US). In addition to its Swiss refinery, PAMP, part of the Geneva-based MKS PAMP group, runs a joint venture refinery in New Delhi, in conjunction with MMTC, a large state-owned Indian trading company.
In many cases, the ownership of these refineries is international and cross-border in nature, and increasingly so over the last few years. Agor-Heraeus is owned by the Austrian Mint and two German entities Commerzbank and Hereaus. In 2015, Valcambi was acquired by Indian jewellery producer Rajesh Exports, with one of the selling shareholders being US-based gold mining giant Newmont. Indeed, just last month, Tanaka announced the acquisition of Metalor Technologies, a development which has initiated an upcoming major Japanese - Swiss precious metals refinery combination. Metalor was already international in ownership, as its controlling shareholders are French and Belgian private equity companies. While Rand Refinery of South Africa is exclusively owned by five of the largest South African gold mining companies, some of these owners, such as Anglogold Ashanti and Goldfields, are vast international concerns. Rand Refinery has also increasingly had to cast its new wider for sourcing gold to process in its refinery as South African gold mining output has declined. Rand Refinery now refines over 75% of the gold mined on the African continent (excluding South Africa), and is also increasingly tapping into gold mining output from the US and Asia.
The World's Refinery Referees
Another indicator of the esteem within which these select refineries are held is their membership of the exclusively small panels of good delivery list referees which have been appointed to run the LBMA’s good delivery lists, and similar good delivery lists maintained by the London Platinum and Palladium Market (LPPM) for platinum and palladium bars.
The LBMA’s good delivery referee panel is a five refinery member panel made up of Argor-Heraeus, Metalor Technologies, PAMP, Rand Refinery and Tanaka Kikinzoku Kogyo. The LPPM’s referee panel also comprises five refiner members, namely Metalor Technologies, PAMP, Valcambi, Tanaka Kikinzoku Kogyo and platinum specialist Johnson Matthey. So not only are these refineries listed on these LBMA and LPPM good delivery lists, they actually help run the entire set of good delivery standards and processes. With the upcoming acquisition of Metalor by Tanaka, these LBMA and LPPM referee lists may need some adjustment, since Tanaka and Metalor are members of both referee panels.
Overwhelmingly, the gold and silver bars of these refiners are all also accepted as good delivery for the COMEX gold 100 oz and gold kilo futures contracts, the gold contracts of the Tokyo Commodity Exchange (TOCOM), the Dubai Good Delivery gold list maintained by the Dubai Multi Commodities Centre (DMCC), and the good delivery standards of the Shanghai Gold Exchange.
Investment bullion bars
Although all of these precious metals refineries, to various extents, supply semi-fabricated precious metals, alloys and industrial precious metals suppliers to a diverse set of industrial and jewellery sector clients, it is perhaps the investment grade bullion products of these giant refiners that they are best known to a global audience.
PAMP fabricates a vast range of cast and minted gold and silver bars which are extremely popular across Asia and the Middle East, in fact, the premier brand in those regions. Valcambi manufactures a wide range of gold, silver and platinum / palladium investment bars, as well as precious metal coins and medals, and has become well-known as the international supplier of Combibars. Heraeus, Metalor and Argor-Heraeus produce a wide selection of gold and silver bars ranging from large wholesale (good delivery) bars through to smaller cast and minted gold and silver bars. Tanaka’s gold bars dominate the Japanese market and notably, Tanaka is also the sole distributor in Japan of gold and silver bullion Maple Leafs coins from the Royal Canadian Mint and gold and platinum Philharmonic coins from the Austrian Mint. Tanaka's acquisition of Metalor will be interesting in terms of how the combined group markets and distributes its investment bullion products going forward.
It's also not widely appreciated that Rand Refinery has refined over 50,000 tonnes of gold since it first opened in 1921, which is a staggering nearly one-third of all the gold ever mined. Rand Refinery large gold bars are held widely by central banks across the world. Rand Refinery’s flagship gold bullion Krugerrand coin is also held very widely, with over 60 million Krugerrands minted since 1967.
This article has not touched on the Perth Mint, Royal Canadian Mint or Royal Mint, which its important to remember, each operates its own precious metals refinery facilities in addition to being a sovereign national mint.
In summary, the seven refineries featured above are truly giants of the industry, and their longevity and customer trust attest to the authenticity and quality of their investment bullion products.
To learn more about the world's top precious metals refineries featured in this article, please see the full refinery profiles which have now been published on BullionStar's Gold University pages:
16 June 2021 is exactly five years from today. What will the gold price be on 16 June 2021?
Currencies are Worthless
As the world’s fiat paper currencies have lost 99% or more of their purchasing power over the last 100 years, its critical to understand that fiat paper currencies are not a suitable unit of account for accurately measuring prices.
In fact, gold is a far superior measuring stick of value than paper currencies.
A paper currency doesn’t measure anything. It merely has an arbitrary value placed upon it by the population using it. It’s not backed by anything and it can fail at any time. From historical experience, we know that the unbacked fiat paper currencies used today will ultimately destruct and become worthless. All unbacked fiat currencies throughout human history have failed.
A more accurate measurement would be to measure fiat currencies in gold. If we look at the US Dollar measured in gold, we can see that the US Dollar has utterly failed in retaining its value, as its value has plunged about 98% over a mere 50 years. It cannot therefore be seen as a store of value.
Extrapolating into a likely future, a future in which you will need a stack of USD 100 bills to buy a carton of milk and a couple of eggs, underlines that the US Dollar gold price is meaningless as an indicator of value. When discussing the price of gold, the key is to recognise that gold retains its purchasing power over time. If a 1 oz gold coin can buy an exclusive men’s suit today at USD 1,300 and the same 1 oz gold coin buys an exclusive men’s suit at USD 2,600 tomorrow, this only means that gold is still reflecting USD 1,300 intoday's purchasing power and hasn’t gained in value. It’s the US Dollar that has depreciated vis-à-vis gold. Similarly, if the gold price goes to USD 650 and it can still buy the same suit, then it’s merely the US Dollar that as appreciated vis-à-vis gold.
As a society, we should by now have transcended the idea of measuring value in fiat currencies. Currencies are not a reliable measuring stick. Just imagine if the centimeter, meter, yard or foot were to fluctuate in length.
100 cm 100 years ago has become 2 cm today. Think about it. This is what has happened with our currencies.
The Gold Price
The gold price is an interesting term because the gold price doesn’t reflect what’s happening on the physical gold market whatsoever.
In today’s marketplace, a lot of things are regarded as “gold”. On the London Gold Market alone, there’s 600 times more gold traded each day than there is gold mined globally on that same day.
All sorts of paper gold passes for “gold” on the financial markets. The vast majority, certainly more than 95%, and likely more than 99% of this paper gold is not backed by any physical gold.
“Gold” is created out of thin air as paper obligations. The demand for and supply of this paper gold has little to do with the physical gold market.
During the last couple of year, demand for real physical gold has been insatiable , however the price of gold has not reflected this huge demand. Physical gold has been flowing from the Western vaults to Asia. The Chinese in particular have been vacuuming the London vaults for gold. However, this substantial physical demand hasn't been reflected in higher gold prices because whereas Easterners have been buying physical gold, Westerners have been selling paper gold.
Whether physical demand is up or down 5 tons in China or India matters little when there’s 5,500 tons of paper gold traded each day in London as visualized in this infographic. London, and to a lesser extent COMEX in the US, are the price discovery markets for gold. However, paper gold on these markets is almost exclusively cash settled with less than 1% of the contracts/futures settled with delivery of physical gold.
The gold price is therefore not dependent on the market fundamentals of physical gold but this may very well change in the future.
With China picking up all physical gold available every time the price slides, widespread shortages are a likely outcome if the gold price ever were to decrease significantly again. Given that the historic vaulting capital of the world, London, has already been running out of stockpiled gold, there just wouldn't be enough physical gold to satisfy demand if the price were to ever plunge significantly again.
It's actually been a healthy development for the physical market’s demand/supply balance that the gold price has increased 22% in USD Year-to-Date 2016. However, we have to understand that the largest potential for a revaluation of the gold price paradoxically may be preceded by a decrease in gold prices.
When trend seeking Western investors sell their paper gold and the price slides, Easterners take the opportunity to buy physical gold at bargain prices, thereby stressing the physical market with shortages as a result. Such shortages may very well be what ultimately breaks the neck of the paper markets. Because when there is no longer any physical gold available at the price dictated by the paper markets, there will be a disconnect between the price of paper gold and the price of physical gold. Paper gold will go towards zero whereas the price of physical gold will skyrocket.
Such a revaluation of physical gold will bring the fiat paper currencies to their knees as their worthlessness as a store of value will become clear to all.
What will the price of gold be in 5 years’ time?
Gold is savings - Gold is wealth, and as such, the price denominated in something as inferior as the US Dollar isn't very important.
For the sake of reflection, we can play with the idea of what the price of gold would have to be if the US Dollar were to go on a fully-backed gold standard.
The US gold reserve officially stands at 8,133.5 tons although it has never been properly independently audited. At USD 1,300/oz, this would be equivalent to 340 billion dollars. The total US money supply is about 17,000 billion dollars. For each "gold backed" dollar today, there are therefore 49 unbacked dollars. The gold price would thus have to increase 50-fold to USD 65,000 if the US Dollar were to be fully gold-backed by 16 June 2021.
This COMEX Gold Futures Market infographic guides you through the largest gold futures market in the world, COMEX.
Did you for example know that only 1 in 2500 contracts on COMEX goes to physical delivery whereas the other 2499 contracts are cash-settled? This corresponds to a delivery percentage of 0.04% of all gold contracts.
The US government claims to hold a fair bit of gold in reserves but how much is it really holding?
In this infographic you will learn more about the COMEX gold futures market considering
BullionStar was founded on the belief that precious metals generally, and gold specifically, has a central role in the monetary sphere.
Gold is rare, beautiful and has superior metallic characteristics to other metals. Furthermore, gold is durable, portable, divisible, fungible and possesses intrinsic value. This has led to gold being used as money throughout most of recorded human history. One of the strongest historical value propositions of gold as money is that gold naturally emerged as money in different civilizations and continents worldwide, without the civilizations being aware of each other.
Unbacked fiat/paper/credit, and nowadays electronic currency, has a poor track record. Every time it has been tried historically, it has vanished through hyperinflation, war or political decrees. The fiat currencies of today actually have comparatively good track records, but even so, most currencies in circulation a century ago are no longer in existence today and the ones that are have lost 99% or more of their purchasing power.
Still, there's a lot of gold bashing in the mainstream media as the gold price has fallen slightly over the last couple of years when priced in some of the fiat currencies. Measuring gold in something worthless (fiat currency) is upside down though. Gold has maintained and even increased its purchasing power in the last century, whereas all fiat currencies have lost 99% - 100% of their purchasing power.
Why are there no fiat currency bashing articles in mainstream media? 99% - 100% lost in a century - What a fraud!
Governments are keen, and rightfully so, about going after companies setting up Multi-Level Marketing (MLM) and Ponzi schemes, but always exempt themselves, and their buddies at the central bank, from the rules.
In an MLM scheme, the idea is to recruit downstream marketing participants, known as ‘downline’, so as to generate multiple levels of compensation for the recruiter. This form of pyramid scheme is exactly what we have today with our fiat currencies. Early receivers of newly printed money i.e. governments, central banks and commercial banks are gaining purchasing power, whereas late receivers, read: most normal people, are losing purchasing power.
Today's monetary system, built on the fragile basis of fractional reserves, is a system that is doomed to go bust. You just can't borrow forever and in the process create the money out of thin air with no intention of paying anything back.
For the last four decades, we have experienced tremendous monetary inflation and money printing. The worst villain, the United States, has hyperinflated its currency, and although we've seen substantial price inflation, it hasn't been as high as the monetary inflation. The reason for this is the exorbitant privilege the US is holding in terms of printing the reserve currency of the world, the US Dollar. The only reason the system is holding up is the promise of more and more easy credit to infinity.
However, in the end, the problem of too much debt can't be solved with more debt.
What we are witnessing now is the USD quickly losing structural foreign support as a reserve currency. This is one of the topics I recently covered at BullionStar's 3 year anniversary.
Governments and central banks around the world are no longer interested in increasing their holdings of US Dollar denominated debt. China, the largest sovereign holder of US debt, has not increased its holdings of US debt for four years and the pattern is the same for other surplus countries.
The only reason the system is still holding up is due to the increase in private non-US demand of US Dollar denominated debt. With many developing markets and their currencies crashing, and with people being conditioned to run to the US Dollar as a safe haven in the short-term, this is the savior for the time being.
The US has a national debt of USD 17,000,000,000,000 and unfunded liabilities of USD 100,000,000,000,000 - USD 200,000,000,000,000. How's that for a safe haven?
In reality, everyone knows that the US has no credibility, but it's when people start to act on the knowledge that the US has no credibility that we will see a loss of confidence triggering an avalanche of deleveraging. In previous instances when private support for US debt decreased, there was always foreign government support, but that's no longer the case.
We are at the beginning of the end. Everything today is pointing towards a deflationary depression, but it's when, in a deflationary depression, the government starts to buy debt/credit with cash at all costs coupled with a loss of confidence that we arrive at the end stage - hyperinflation. Policy has never and will never allow for deflation.
Why is the government protecting the most fraudulent schemes?
This is likely an effect of several large MLM/Ponzi gold schemes, like those offered by Genneva Gold, The Gold Guarantee and Suisse International in Singapore, failing during the last 3 years. It's startling that people still fall for scam after scam with guaranteed interest payouts of 20 plus percent and/or guaranteed gold buy-back prices.
One of the suggested measures in Singapore to be tabled in Parliament during 2016 is that buy back schemes where a seller sells gold with a guaranteed buy-back at an agreed price will be regulated as debentures. This is a very good measure which will hopefully clear the Singaporean market from the scammers for good as it will then be clearly illegal to run unlicensed MLM gold schemes.
At BullionStar, we support these steps taken by the MAS.
A larger question however, is whether government authorities around the world are missing out on the really big Ponzi schemes.
The world's largest wholesale gold market is the London Gold Market. The London Gold Market is generally very opaque in nature and there isn’t any trade turnover data published, only net clearing volumes. The trend is unfortunately that transparency is decreasing as the London Bullion Market Association (LBMA) forward market makers have stopped publishing the interest rate for lending gold (GOFO), have ceased supplying data on gold forwards, and has chosen not to be transparent about the process used in the LBMA gold price auction.
To give a hint of the trading volumes at the London Gold Market, the most recent data available is from a survey conducted by the LBMA in the first quarter of 2011. 36 of LBMA's 56 participating members submitted trading statistics for the quarter in question. The average daily trading volume reported, after adjusting for double accounting, turned out to be 170,195 tons of gold for the quarter or 2,700 tons of gold per day.Albeit a staggering number, it's likely that the real volume is even higher as only 64% of the LBMA’s members participated in the survey.
In the survey, the LBMA stated that "it can also be seen that there is an approximately ten to one ratio between the turnover figures and the clearing statistics".
Using the approximation that trade volume is approximately 10 times higher than net clearing volume (which is conservative as mentioned above) and looking at the LBMA clearing statistics since 2011, there was a slight surge in volume in 2013 inferring a daily average about 3,413 tons of gold traded per day after adjusting for double-accounting. For 2015, volumes have decreased slightly to 2,756 tons of gold traded per day equivalent to about USD 100 billion per day based on the current gold price.
The volume traded during one day on the London Gold Market is thus at least 88% of awhole year's gold mining production. Assuming about 250 trading days in a year, the volume traded solely on the London Gold Market is about 22,000% higher than the world's annual mining production. And this is a conservative estimation.
The clearing and turnover volumes are nothing short of shocking.
As the London Gold Market, together with the New York market, is the global price discovery market for gold, it's apparent that physical supply and demand of gold has nothing to do with the price of gold.
Which do you think carries a higher weight when it comes to influencing the price of gold; An increase or decrease of 10 tons of physical gold demand for the Indian wedding season in a quarter, or the 170,195 tons of paper gold changing ownership each quarter in the London Gold Market?
Factors like Indian wedding demand are often cited by media as a cause of price movements, whereas the London Gold Market volumes are never mentioned. Whether demand is high during the Indian wedding season or not does not matter one ounce in terms of price fluctuations. It totally misses the point as the London Gold Market, together with the US/New York market, dominates price discovery.
Physical demand matters in stressing and ultimately breaking the market structure but it does not matter for the (paper) price of gold today. The fundamentals for physical gold are completely separated from the paper price of gold. The paper price of gold has nothing to do with the physical market whatsoever.
The price for physical bullion products is never traded at parity with the paper price. There is always a price premium. When demand for physical gold is increasing, as we have seen over the last couple of months, price premiums are shooting up, diverging the physical price from the paper price even further.
BullionStar deals only in physical precious metals
When putting the above in perspective, it's clear that the paper trading of precious metals is irrelevant to physical gold and that it is unsustainable in the longer term.
That's why we at BullionStar have a strong aversion to all forms of paper trading of precious metals.
At BullionStar, we don't engage, trade or speculate on any paper markets, financial markets, commodity exchanges, commodity platforms or anything similar. We don't engage in forwards, futures, spot commodity trading or anything of the kind. We never in any capacity work with brokerages of any kind.
BullionStar merely purchases fabricated precious metals items, and to a smaller extent numismatics and jewellery, from wholesalers, mints and refineries and retails these items.
Physical precious metals decoupling
Prices for physical precious metals are in the process of decoupling from the paper price.
The first phase, in which we are now, is that we get shortages of physical bullion.
The second phase is that the physical flow completely dries up and the physical price resets based on physical supply and demand at a higher level few people can imagine today.
Paper gold trading needs to have a functional physical market in the background for keeping up the confidence in the paper trading. When gold supply dries up on the physical market, there will no longer be any confidence in the paper market as everyone will realize that the paper market consisted by nothing but paper gold created out of thin air. As a result the paper gold market will crash and the price of physical gold will reset higher.
When this happens, it's important that you deal with a bullion dealer without any exposure to paper commodity markets that only deals in physical precious metals.
BullionStar operates with the ideological belief that physical precious metals have important monetary properties and that paper trading is inherently risky. That is why we refrain from participating in the paper trading casino style market. The bullion we offer is physical in nature. We have never and will never offer any unbacked metal, collateralization of customers’ physical bullion, forwards, futures or leveraged trading. All bullion you buy from BullionStar is fabricated, unencumbered, and fully physically allocated bullion.
By Torgny Persson, CEO BullionStar
45 New Bridge Road Singapore059398Singapore Company Registration No.: 201217896Z
Phone: +65 6284 4653