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Bullion Banking 101 – Speech by BullionStar CEO, Torgny Persson

The following speech, by BullionStar CEO Torgny Persson, was given to an audience during a Precious Metals Seminar held at BullionStar's shop and showroom premises in Singapore on 19 October 2016.

BullionStars CEO Torgny Persson Precious Metals Seminar at BullionStarBullionstar shop during precious metals seminar Precious Metals Seminar at BullionStar

Introduction

What have I got here?

It’s 87 grams of gold.

As many of you know, we have our own bullion vault integrated in BullionStar's bullion centre here in Singapore. What if I told you that every day we sell 6 kgs (6000 grams of gold), meaning that we sell about 1500 kgs gold per year to customers storing with us, but that we actually only keep 87 grams of gold in storage as reserves.

You would call it fraud and have me arrested, right? I’m obviously running a Ponzi scheme with very small fractionalised reserves backing up huge trading of unallocated paper gold.

Now, for clarity, that's not how we conduct business. When you buy and store bullion with BullionStar, your bullion is fully allocated and you can withdraw your metals at any time by just walking into BullionStar's bullion centre. You don’t even have to notify us beforehand.

What I just explained to you is something else - it’s bullion banking per definition - more precisely it’s unallocated gold trading by bullion banks.

As most of you know, the London Bullion Market Association (LBMA) has held its annual Precious Metals Conference in Singapore over the last two days. The LBMA is at the core of the world’s bullion trading system, a system which generates extremely large trading volumes every trading day. To understand the gold market, one has to understand the LBMA system as it is of great significance to both the price of gold and also to the physical movements of gold around the world. I will therefore provide you with an introduction to bullion banking and this LBMA system, and talk about how bullion banking operates.

Bullion Banking - Unallocated Gold

Almost all gold traded in the LBMA system today is in the form of unallocated gold which is accounted for in unallocated accounts. The definition of an unallocated gold account, as we can read on the LMBA’s website, is that the holder of such an account with a LBMA bullion bank does not have any ownership interest in any specific gold bars.

Instead, the account holder is merely an unsecured creditor of the bullion bank and holds a claim on the bullion bank for an amount of gold. At the same time, the bullion bank has a liability to this customer for this same amount of gold. Therefore unallocated gold is essentially paper gold. It is gold that doesn’t exist in the physical realm.

The creation of unallocated gold is in fact very similar to how fiat currency is created in the fractional reserve banking system. The fractional reserve banking system provides a good gateway into understanding bullion banking.

How is Fiat Money Created Today?

Let’s quickly recap on how fiat money is created in the fractional reserve banking system.

Money is created out of thin air. When a bank extends a loan, the money is created out of thin air.

Let’s take an example:

1) Robert plan to buy a house for $1 million.

2) Robert goes to a bank and the bank takes a look at Robert and deems him credible. With today’s low lending standards, it is rather easy for Robert to secure a loan. The bank deposits $1 million into Robert's account.

3) Where does this $1 million come from? The answer is 'nowhere'. It doesn't come from anywhere. The money is created out of thin air when loaned out to Robert.

This is easy to understand but hard to believe for some people. But it is true that this money is created out of thin air and lent into existence. About 92% of our money today is lent into existence in this fashion.

Banks keep a very small amounts of money in reserve to cover withdrawals, but they face liabilities which are far larger in size that their reserves.

The term "loan" as used in banking has been corrupted and twisted by banks. When a bank extends a loan, there is nothing loaned. To loan something you need to be in possession of it first, but when banks make loans, there is no countervailing transaction - The money is just created when the loan is extended.

How is Paper Gold Created?

Now, what about gold? How is gold created? You might say gold can’t be created, it has to be mined, right? Yes, you would be correct, physical gold cannot be created, but gold as an investment product definitely can be created and is created on a massive scale.

When a bullion bank customer goes to the bank and requests to buy gold, the standard procedure is for the bullion bank to create unallocated paper gold and credit this paper gold to the customer’s account. This ’gold’ is simply created out of thin air as a book-keeping entry in the bank’s accounting system.

paper-gold

Similarly, if actual physical gold is deposited into an unallocated account operated by a bullion bank, this deposit of gold is also in fact very similar to a deposit of fiat money. Just as a bank keeps deposited fiat money on its own balance sheet, a bullion bank keeps deposited physical bullion on its own balance sheet.

Bullion banks don’t generally safeguard or segregate gold deposited with them or held by them unless they are specifically instructed to do so if a customer opens an allocated gold account.

This means that depositors of gold into bullion banks' unallocated accounts are no longer the legal owners of the gold that they have deposited. Instead, they are just one of the general creditors to the bank, and they merely hold a claim for gold against the bank.

By depositing gold into an unallocated account at a bullion bank, you therefore lose ownership of your gold in return for a mere claim on gold.

Trading in unallocated gold by the bullion banks is thus based on book-keeping entries denominated in gold. The gold is fractionally reserved. Gold is created out of thin air as book-keeping entries in the banks' ledger systems, and even gold that is deposited into an unallocated account becomes the property of the bank.

LBMA Unallocated Gold Trading Volumes

From the LBMA’s published clearing statistics, which is one of the only transactional statistics that the LBMA does publish, we know that 600 tonnes of gold are "cleared" in the London Gold Market each and every trading day. Cleared means that it’s 600 tonnes of gold that's transferred between participants after netting out all trades between all trading participants.

According to a LBMA gold trading survey conducted in 2011 (the last such survey), the ratio between trading turnover and clearing on the London Gold Market was about 10 to 1. This means that the total amount of gold traded in the LBMA system each day is about the equivalent of 6,000 tonnes!

In other words, almost twice as much gold is traded in the LBMA system in a single trading day than is physically mined globally during an entire year.

LBMA Unallocated Gold Trading Volumes

But what is backing this 6,000 tonnes of unallocated gold traded each day, or 1.5 million tonnes of gold traded each year?

Let’s take a look at the reserve side of bullion banking in the LBMA system.

Bullion Bank Gold Reserves

The LBMA bullion banks' outstanding gold liabilities, and the unallocated trading system in the London Gold Market are ultimately backed by a quantity of 400 oz Good Delivery gold bars.

However, bullion banks don’t really want to hold physical gold. They will buy it if someone forces it on them but bullion banks have no real need for physical gold and are therefore incentivised to keep as little gold as possible in reserve, and lend out the gold they hold in reserve so as not to incur storage fees and handling costs. Banking reserves are looked upon as a dead asset so the banks minimise these reserves and try to make them into live assets by loaning them out.

When a bullion bank receives a gold bar by buying or borrowing it, it either sells, leases or allocates that bar elsewhere.

This sets a bullion bank apart from any other bullion entity because a bullion bank can hold deposits of gold on its balance sheet as assets even if it no longer has, or never had, the actual physical gold in its possession.

How much backing is there for all the unallocated gold traded in the LBMA-system?

We don’t exactly know as there are no reserve figures published but we can make an educated guess.

Vaulted Gold in London

How much gold is actually vaulted in London? The LBMA recently said on its website that there was approximately 6,500 tonnes of gold stored in London, about three-quarters of which was at the Bank of England. The Bank of England recently revealed that it was custodian for 4,734 tonnes of gold in its vaults.

This would leave 1,766 tonnes of gold privately stored in the LBMA vaulting system outside the Bank of England.

BullionStar research recently calculated (30 September 2016) that ETF gold holdings held in London accounted for 1,679 tonnes. This would mean that there are only 1,766 - 1,679 = 87 tonnes of gold in the LBMA system which is not allocated to ETFs!

Therefore, nearly all of the LBMA reserves are allocated to the ETFs with only 87 tonnes of gold left to back up the vast amorphous of unallocated gold trading amounting to 6,000 tonnes per day or 1.5 million tonnes per year!

gold-vaulted-in-london

Chart layout inspired by GoldChartsrus /Nick Laird. Data gathered by Goldchartsrus/BullionStar's Ronan Manly

Physical gold in the LBMA bullion banking system is therefore like physical cash in the monetary system. It is rarely seen!

london-gold-etfs

Double-counted Reserves

LBMA is a banking system that by definition is based on fractional reserve banking.

HSBC, JP Morgan and ICBC Standard Bank are the only LBMA bank custodians with their own precious metals vaults in London. Most of the circa 42 LBMA bullion banks don’t even have their own gold vaults but still keep books denominated in gold ounces. A bullion bank without a gold vaults instead holds its gold reserves with a bullion bank that does have a gold vault.

For example, if Citibank keeps its reserves with a bank with a vault such as JP Morgan, then Citibank merely holds a gold claim for which JP Morgan has a gold liability. These unallocated gold reserves are therefore just pooled with the bullion banks that do have vaults.

The bullion banks without a vault never see or touch the metal they keep in reserves. If a bullion bank stores its gold reserves at another bullion bank’s vault, this means that the reserves are unallocated credits/claims which are standing behind the bank’s own liabilities. So even the reserves are fractionalised. So not only are bullion banks’ liabilities to their customers unallocated, even the reserves are unallocated inter-bank liabilities which are fractionalised.

Paper gold thus stands behind the liabilities of paper gold.

The LBMA system serves as a pool of reserves and uses coordinated reserve management where the different participating bullion banks can loan and lend to each other the few physical reserves that there are in the system so as to meet any demand for physical bullion.

Gold Bank Run

The bullion banks face massive liabilities in the form of unallocated gold credits. Bullion banks are thus, just like normal banks, susceptible to bank runs.

gold-fiat-comparison

The difference between bullion banks and normal commercial banks is that whereas central banks are the ultimate lenders of last resort to commercial banks, most central banks no longer back-stop bullion banks as the lender of last resort because most central banks no longer sell or lease bullion that can be used to prop up bullion banks' reserves.

In case of the LBMA, the central bank is replaced by a private company called London Precious Metal Clearing Limited (LPMCL) which is run by 5 clearing bullion banks and whose clearing system AURUM nets out all gold claims and liabilities in the LBMA system. The clearing system functions as a pooled system in that only net balances are cleared and the bullion banks' gold reserves are essentially pooled and can be leased and double counted whenever necessary.

When they no longer have any physical gold to deliver, the ultimate rescue plan for bullion banks is to use cash settlement instead.

In the same way that banks increasingly promote cashless solutions as a means to reduce cash handling costs, earn credit card fees, reduce the risk of bank runs and lock in customers, LBMA system bullion banks promote gold-less gold transacting.

Just as the banking system inherently incentivises reckless debt behavior, the bullion banking system inherently incentivises the reckless creation of paper gold assets.

LBMA – The Paper Gold Protector

In creating artificial paper gold, bullion banking protects the fiat money system.

If even a small minority of the paper gold traded today was backed up by physical gold, the price of gold would have skyrocketed. A gold price significantly higher than today would point towards the inferiority of the fiat money system, and possibly the collapse or implosion of the current monetary system.

bb-protecting-monetary-system

Bullion banks and gold industry organisations, such as the LBMA and the World Gold Council, which itself has developed and owns securitized gold products, can profit from gold trading volumes that are far higher than they would be if they were limited to the constraints imposed by the availability of physical gold to trade.

The bullion banks and the LBMA work hard to overcome the tangible limitations of physical gold mining. By promoting gold-less gold transacting, the LBMA unallocated system artificially increases the supply of gold, earning the banks higher fees from artificially large trading volumes.

To reiterate, the LBMA unallocated gold trading is a banking system based on fractional reserve banking which is all about exposure to the price of gold but not to gold itself.

The LBMA system is used to coordinate unallocated paper gold trading where ‘gold’ is created out of thin air, and the tiny physical reserves held are pooled and shared out among participants so as to minimise costly reserves and avoid gold bank runs.

When bullion banks need to allocate gold to the ETFs, such as to the SPDR Gold Trust (GLD) in London, they use credits from the same unallocated gold credit system as was previously used to offset other gold liabilities. Even though the ETF may own the gold outright, the gold is still being double counted within the system because its being allocated out of a bullion bank pooled systems of credits.

To summarize what the LBMA is all about, it is a paper gold protector for the bullion banks which allows the bullion banks to earn fees from an artificially high trade turnover while at the same time protecting the fiat currency system.

The Guarded Secret of no Gold

The fractionally-reserved bullion banking system is a fragile system. Many investors and savers holding paper gold believe that the gold they are holding is backed up by real physical gold. But if the bullion banking system implodes, which it will do if the high demand for real physical gold in Asia is sustained at anywhere near today’s levels, these holders of paper gold will at best end up holding paper claims which will be cash-settled, or at worst these paper gold holders will be empty-handed.

Demand for ETF’s and unallocated gold will likely not stress the system systemically since the pooled LBMA gold reserves are used for leasing and double counting. It is the demand for real physical gold, draining bank gold reserves, that stresses the system.

Many gold investors/savers buy various paper gold products as a means of protecting themselves against the fiat currency Ponzi scheme. It may therefore come as a surprise to some holders that these investments are no safer or even less safe than the fiat currency against from which they are seeking to protect themselves. Bullion banks give the impression that these investors into unallocated gold are actually holding gold, whereas in reality they are just unsecured creditors holding paper gold, gold that is created out of thin air, in a fractionally-reserved Ponzi scheme.

As long as everyone is happy to buy and sell ledger entries/book-keeping entries, this fragile system can continue to balance on a thin thread. The systemic problem arises when larger entities start to demand physical delivery, a trend which has been happening in the last few years, most notably in Asia and Russia. There is therefore an imminent risk of the bullion banking system collapsing in the next few years.

vault

This is an accident waiting to happen, because when enough holders of paper gold ask for delivery, the default that will follow will trigger the biggest bank run for gold in history, which due to gold’s significance as a monetary proxy, will shake the entire monetary system.

When there is no longer any physical metal to deliver, the ensuing shortage will result in a disconnect between prices, in which paper gold will become worthless while the price of real physical gold will be revalued at a much higher level based on the market equilibrium for physical supply and demand of gold.

Thank you!

BullionStar attends LBMA Conference in Singapore, October 2016

Introduction

This year, the well-known annual conference of the London Bullion Market Association (LBMA) was held in Singapore between Sunday 16 October and Tuesday 18 October at the impressive Shangri-La Hotel. The conference attracts delegates and speakers from across the world of bullion, with representatives from precious metals refiners, mints, bullion banks, brokers, trading and technology providers, bullion dealers and bullion wholesalers. This year over 700 delegates attended.

The main speaker sessions, presentation and panel sessions of industry representatives ran over two days, between Monday 17 October and Tuesday 18 October. Topics covered in the speaker sessions were numerous and varied and included the bullion market in China, developments in the Indian gold market, responsible gold guidance, LBMA updates and developments, a dedicated session on platinum group metals, and a session on the financing of refineries.

As interesting as the speaker sessions and presentations are, many of the conference attendees use at least some of their time at the LBMA conference to engage in meetings with each other on the sidelines. This explains the constant stream of small breakout meetings that took place in the hotel lobby's seating areas, as well as in dedicated meeting rooms around the hotel. BullionStar also used the occasion to meet with existing suppliers from the refining, minting and wholesaling world, as well as to discuss potential business opportunities with new suppliers.

There were also approximately 20 exhibitor stands at the conference, including stands hosted by CME Group, Brinks, the World Gold Council, IE Singapore (Singapore's trade development authority), Istanbul Gold Refinery (IGR), Metals Focus consultancy, Cinnober, and Nadir Refinery.

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Shangri-La Hotel, Singapore

Hong Kong - Shenzhen Gold Connect

On the Sunday prior to the conference, the Chinese Gold and Silver Exchange (CGSE) and the Singapore Bullion Market Association (SBMA) co-hosted a pre-conference presentation titled “Building a physical gold corridor in Asia: Shanghai – Hong Kong / Qianhai – Singapore”, at the hotel, which featured a series of discussions about the CGSE’s new gold trading and vaulting project located in the Shenzhen free trade zone at Qianhai, just across the border from Hong Kong.

Haywood Cheung, Permanent President of CGSE, gave an introductory overview of the Qianhai project, showcasing it as part of China’s “One Belt, One Road” plan, after which Dong Feng, Ping An Commodities Trading in Shenzhen presented a detailed explanation of how the linkages between the CGSE’s trading platform in Hong Kong and Qianhai’s clearing and settlement will for the first time enable the trading of both onshore and offshore Renminbi and the trading of onshore and offshore gold. The Qianhai project integrates trading, clearing, settlement and vaulting, with a 1500 tonne capacity vault, and a trading hall. ICBC will provide settlement of both onshore (Shenzhen) and offshore (Macau) Renminbi as well as providing use of its Shenzhen gold vault (onshore gold settlement) until the CGSE Qianhai vault is completed.

This onshore and offshore trading and settlement of Yuan and physical gold will facilitate arbitrage trading, and is another step in China’s liberalisation of its currency and its gold market as it links the Chinese currency to physical settlement of gold inside and outside of China. This initiative is one to watch and will demonstrate the Chinese government’s gradual easing of cross-border restrictions on currency and gold flow. Next phase gold trading in Qianhai by CGSE member companies will commence on 7 December.

With the CGSE having already established a gold trading link with the Shanghai Gold Exchange (SGE) though its Shanghai-Hong Kong Connect, and with the Shenzhen (Qianhai) - Hong Kong Connect now coming on stream, the CGSE is also planning a Singapore - Hong Kong Connect, and a Dubai - Hong Kong Connect, which, if they materialise, will extend physical gold corridor (trading and vaulting connections) across the Asian region and beyond.

Albert Cheng, CEO of the SBMA, wrapped up the afternoon with an overview presentation of SBMA’s aspirations to evolve Singapore into a bullion market hub for the entire ASEAN region, including countries such as Indonesia, Vietnam and Myanmar. However, details of how this plan will be implemented were not addressed. Cheng also showcased the SGX gold contract which is backed by the SBMA, but which has yet to take off despite being launched over 2 years ago.

Singapore Skyline - Central Business District
Singapore Skyline - Central Business District

LMEprecious gold Futures

The first event we attended on Monday was an early morning presentation by the London Metal Exchange (LME) about LMEprecious, its new suite of spot, daily, and monthly gold and silver futures contracts to be launched in the first half of 2017, that will trade on LME’s trading platform, with market-making offered by 5 investment banks such as Goldman Sachs and ICBC Standard Bank. These futures are for delivery of unallocated metal in the London market and the contracts will still clear through the London bullion market's LPMCL unallocated bullion clearing system. In time, the LME plans to launch platinum and palladium futures contracts on LMEprecious, as well as options contracts on all 4 metals. The LMEprecious platform will also link into LBMA’s planned trade reporting system.

ICE gold Futures

On Monday morning, ICE Benchmark Administration (IBA), a direct competitor to LME in the precious metals trading and clearing space, used the LBMA conference to make a very well-timed announcement that it too will be launching a new gold futures contract for delivery of unallocated gold in London (loco London). The ICE contract will trade on the ICE US futures platform and will begin trading in February 2017, in advance of the LME contracts. This contract is being designed to be compatible for settlement within the LBMA Gold Price auction which IBA administers in London, and it will, according to IBA, allow the introduction of central clearing into the auctions, and thus facilitate wider auction participation. Currently,the direct auction is exclusively open  to a handful of large banks that have large bi-lateral credit lines with each other. At this stage it’s unclear how the connections between the futures contract and the LBMA Gold Price auction will work, but BullionStar plans to examine this development in future coverage.

Unallocated Gold, Gold Lending and Central Banks

Given that the LBMA Conference is attended by dozens and dozens of precious metals refineries and mints, it was notable that the subject of "unallocated gold" cropped up in the discussion of LMEprecious and ICE futures contracts, but that there was no discussion in the actual LBMA conference programme schedule of 'unallocated gold' as the term is used by the LBMA. An unallocated gold position in an account in the London gold market is merely a contractual claim for gold against the bank that the account is held with. As such, it is a synthetic gold position.

It was also odd in our view that there was no seminar or discussion about the London gold lending market within the conference programme. As gold lending is an important and influential area of the London gold market, it affects marginal gold supply, and it has an impact on gold price formation.  Notably, the topic of central bank activities in the gold market was completely missing from the conference schedule this year,  a notable omission compared to previous years.

Gold price benchmark for Singapore revisited

In another announcement on Monday morning at the conference, the Singapore minister for trade and industry announced that the SBMA in conjunction with the LBMA and ICE Benchmark Administration (IBA), they'll begin a feasibility study on launching a “pre-AM gold price” auction, which would serve as a benchmark for the Asian region and which would be held at 2pm Singapore time, in advance of the European trading day. This Singapore benchmark was already discussed and announced over 3 years ago, but has put on hold in 2014 due to European regulatory investigations at that time into manipulation of the London Gold Fix.

LBMA Trade Reporting

The conference speaker programme opened on Monday morning with introductory remarks from Lim Hng Kiang, Singapore Minister for Trade and Industry, outgoing LBMA chairman Grant Angwin, incoming newly appointed Chairman Paul Fisher who recently arrived from the Bank of England, Tim Pearce, the chairman of the London Platinum and Palladium Market (LPPM), and LBMA CEO Ruth Crowell.

The LBMA CEO’s introductory speech touch on the planned launch of trade reporting services for the London Gold Market. This trade reporting contract has been awarded to financial technology providers Cinnober – BOAT Services – Autilla, after those partners won the LBMA’s recent RfP tender which had been launched in October 2015. Ruth Crowell referred to trade reporting as ‘Phase 1’ of a new suite of technology services. Trade reporting  will be launched in Q1 2017, and will, according to the LBMA “demonstrate of the size and liquidity of the market for clients, investors and regulators”. Phase 2 of this project refers to services such as central clearing in the London bullion market.

Further background to the chosen trade reporting solution was provided by Jamie Khurshid, the CEO of BOAT Services. Surprisingly, even though this RfP took the LBMA over 1 year to complete, it will still now require a 'design phase' where BOAT/Cinnober needs to meet with LBMA member firms to discuss the scope of reporting, followed by a period of customisation and configuration of the implementation. Details on what exactly will be reported (the scope) remain sketchy, and since full London gold and silver trade reporting by all participants (including central banks) is not mandatory in a regulatory sense, it remains to be seen to what extent transparency will be improved.  Because if you don't have full mandatory reporting, you don't have transparency. In another related presentation, Sakhila Mirza, LBMA General Counsel stated that trade reporting will apply to loco London spot trades, forwards and options, but that "LBMA and its members retain control over the scope of reporting", which highlights the self-regulatory nature of the reporting, and again may suggest that the trade reporting may not be as granular or have as much informational value as some may think, especially given that central banks will be exempt from trade reporting.

The Shanghai Gold Exchange and Chinese Gold Market

Monday's schedule also included an  informative series of presentations titled "The Bullion Market in China" from an impressive list of experts. Jiao Jinpu, chairman of the Shanghai Gold Exchange (SGE), provided an overview of the latest developments from the SGE, which has a network of 61 vaults across 35 cities in China, and where physical trading volume reached 34,100 tonnes of gold in 2015. Jinpu revealed that the International Board of the SGE (known as SGEI) has, since launch in September 2014, traded 7,838 tonnes of gold, while the daily Shanghai Gold Price auction, only launched in April 2016, has already traded 384 tonnes, worth RMB 105.5 billion, giving it an average daily trading volume of 3.4 tonnes. Jinpu also vindicated BullionStar's estimates of 2015 SGE gold withdrawals, because, in the words of Jinpu, he sits on the SGE tap, and knows exactly how much gold has been withdrawn from the Exchange vaults.

In his speech, Jinpu announced that in the near future, the SGE and other exchanges will begin using the SGE Gold Price benchmark to develop gold price derivative products.

SGE Chairman Jiao Jinpu
SGE Chairman Jiao Jinpu

In another notable confirmation, Yang Qing, from the Bank of China, one of China's largest commercial banks involved in the global gold market, responding to a question posed by BullionStar, said that he thinks that in future, the Chinese currency, the Renminbi, should have an element of gold backing.

In what was probably one of the most interesting and revealing presentations from BullionStar's perspective, and which vindicates the extensive research and analysis that BullionStar's precious metals analyst Koos Jansen has done on the Chinese gold market, Matthew Turner from Macquarie Commodities Research in London gave a presentation about how to accurately capture and estimate the total trade flows of gold into China given that China does not publish this data itself.

One of Turner's approaches is to use the trade data of all other countries which do report gold exports to China. This approach reveals that China imported 1626 tonnes of gold in 2015 from a number of countries, primarily Hong Kong, Switzerland, the UK and Australia. Another more elegant Turner approach is to take China's total import figure which it does publish, as well as the summated figures of  all of China's other import categories of data, which China also does publish, and then derive the gold import quantities as the delta.

This approach yields a net gold import figure of 1693 tonnes in 2015. Both of these figures are very close to BullionStar's previously published Chinese gold import data estimates, as calculated by Koos Jansen. Adding 2015 Chinese gold mining production to imports gives total new supply coming into the Chinese market in 2015 in excess of 2000 tonnes, which is over 1000 tonnes higher than consumer gold demand as estimated by consultancies such as GFMS and the World Gold Council.

LBMA and SGE familiar with BullionStar's research

On the Monday evening we attended a dinner hosted by Australia and New Zealand Bank (ANZ) at Singapore’s famous Raffles Hotel. Just after arriving we had the privilege of chatting for a few minutes to Jiao Jinpu, chairman of the Shanghai Gold Exchange (SGE) via his colleague and interpreter Jess Yang, and we highlighted to him BullionStar’s extensive research from Koos Jansen on the China gold market and the SGE, which we were impressed that he was already familiar with. Dinner conservation was interesting and varied as we were seated at a table with representatives of the London Metal Exchange, ICE Benchmark Administration (IBA), the CME Group, GFMS, Metalor Singapore, and the Royal Canadian Mint.

During the conference, we also learned that the LBMA is familiar with BullionStar's research into the London gold market, another confirmation that the analysis that we publish is read widely within the bullion industry.

As the conference wrapped up on the Tuesday afternoon, delegates were asked to forecast what the US Dollar gold price will be this time next year. Audience members submitted their forecasts via a special handheld device in the auditorium, which resulted in an average forecast of US$ 1347.

BullionStar Seminar during LBMA Week

To coincide with the fact that the LBMA conference was located in Singapore this year, BullionStar hosted a number of events at its shop and showroom premises on New Bridge Road, Singapore. On the Saturday prior to the conference,  15 October, BullionStar held a 'meet and greet' morning, where customers and anyone in town for the conference could pop in and chat with BullionStar staff. On Wednesday 19 October, BullionStar held a precious metals seminar in its showroom premises at which BullionStar CEO Torgny Persson and Precious Metals Analyst Ronan Manly presented to an audience on the topics of Bullion Banking, and Transparency vs Secrecy in the gold market, respectively. The presentations and transcripts of the speeches will be published on the BullionStar website in the near future.

The World’s largest Precious Metals Refineries

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.

crucible
Gold Refineries, Heraeus, PAMP, Valcambi, Metalor, Argor-Heraeus, Tanaka, Rand Refinery

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:

Heraeus: https://www.bullionstar.com/gold-university/heraeus-refinery

PAMP: https://www.bullionstar.com/gold-university/pamp-refinery

Valcambi: https://www.bullionstar.com/gold-university/valcambi-refinery

Metalor: https://www.bullionstar.com/gold-university/metalor-refinery

Argor-Heraeus: https://www.bullionstar.com/gold-university/argor-heraeus-refinery

Tanaka Kikinzoku Kogyo: https://www.bullionstar.com/gold-university/tanaka-refinery

Rand Refinery: https://www.bullionstar.com/gold-university/rand-refinery

In addition, the refining activities of the Royal Mint, Royal Canadian Mint and Perth Mint can be consulted in their respective profiles, also on BullionStar's Gold University pages:

Royal Mint: https://www.bullionstar.com/gold-university/the-royal-mint

Perth Mint: https://www.bullionstar.com/gold-university/perth-mint

Royal Canadian Mint: https://www.bullionstar.com/gold-university/royal-canadian-mint

 

Infographic: London Gold Market

This London Gold Market infographic guides you through the secretive OTC wholesale gold market in London. The London Gold Market is the largest gold market in the world and the volumes traded are staggering.

The London Market serves as a price discovery market for the worldwide gold spot price and is home to the London Bullion Market Association (LBMA).

London is also a hub for gold storage with 6,500 tonnes of gold stored in gold vaults around London.

In this infographic you will learn about the importance of the London Gold Market considering

  • Trading Volumes
  • Fractionally Reserved Paper Gold Trading
  • Price Discovery for the Gold Price
  • Gold Vaults
  • Secrecy in the London Gold Market

You can learn more about the London Gold Market at the BullionStar Gold University

London Gold Market Infographic

Infographic London Gold Market

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