The topic of how much extractable gold is left in the world has become increasingly discussed within the last few years. This is because of increased focus on ‘peak gold’ and also a concern about remaining levels of unextracted gold reserves. Peak gold is a term referring to the phenomenon of annual gold mining supply peaking (i.e. the rate of gold extraction increases until it peaks at maximum gold output and subsequently diminishes).
The concern about remaining extractable gold is based on the fact that annual gold mining production is running at over 3200 tonnes per annum (e.g. 3247 tonnes in 2017 according to GFMS), while various metal and geological consultancy estimates put the amount of remaining extractable gold reserves worldwide in the region of 55,000 tonnes. In other words, at current rates of extraction, according to these estimates, known gold reserves worldwide would be depleted in about 17 years.
For example, the USGS estimates that there are approximately 54,000 tonnes of economically extractable gold reserves in the world, while consultancy Metals Focus in its annual ‘Gold Focus‘ report estimated recently that there are about 57,000 tonnes of in-ground gold mineral reserves remaining worldwide.
Given that about 192,000 tonnes of gold have been mined throughout history (according to the World Gold Council), with about half of that mined gold extracted in the last 50 years, the figures of remaining gold reserves could look quite low and potentially worrying. But should we be worried, and more fundamentally does annual gold supply really matter all that much?
Estimated Reserves are Not the Full Picture
While published estimates of remaining gold reserves are in the ballpark of 55,000 tonnes, reserves are not the full picture, and other factors indicate that there is a lot more mineable gold left in the world than reserves estimates would suggest. Firstly, the definitions of reserves and resources have to be taken into account.
“Reserves data are dynamic. They may be reduced as ore is mined and/or the feasibility of extraction diminishes, or more commonly, they may continue to increase as additional deposits (known or recently discovered) are developed, or currently exploited deposits are more thoroughly explored, and (or) new technology or economic variables improve their economic feasibility.”
Reserves, according to USGS, are the “working inventory of mining companies’ supplies of an economically extractable mineral commodity“. This inventory is limited by many factors including extraction and operating costs, as well as “the price of the mineral commodity being mined, and the demand for it.”
Future supplies, say USGS, “will come from reserves and other identified resources“ as well as from “currently undiscovered resources in deposits that will be discovered in the future“. This latter category, the undiscovered mineral deposits, “constitute an important consideration in assessing future supplies” says USGS. Therefore, the USGS reserves figure (economically extractable gold) can be augmented by identifiable resources (resources potentially feasible to extract) as well as undiscovered resources (postulated to be in mineral deposits).
The Metals Focus “Gold Focus 2017” report puts some numbers on these differences. While Metals Focus estimate that at the end of 2016 global gold mineral reserves totalled 57,300 tonnes, they think that there is “an additional 110,000 tonnes of gold in the resource category“.
And for example, while the largest 50 gold mines in the Metals Focus tracking database (responsible for over 25% of global mine supply) have on average just over 11 years of reserve mine life remaining, “these mines also have an additional 11 years of mineral resources (exclusive of reserves), which have the potential to be recategorised into reserves.”
But even in the published reserves data from USGS, reserve estimates appear to be underestimated and USGS gold reserves data at times looks more static than ‘dynamic’. Drilling down into the USGS estimate of 54,000 tonnes of gold reserves globally, only 2000 tonnes of this total is attributed to the world’s top gold producer China. However, China stated at the end of 2016 that it had a much larger 12,100 tonnes of identified in-ground gold reserves.
Likewise, the USGS estimates only attribute 5,500 tonnes of unmined gold reserves to the third largest gold producer Russia, whereas the Russian Federation says that it has 12,500 tonnes of identified gold reserves. So even within these two major gold producing countries, China and Russia, that’s another 17,000 tonnes of identified gold reserves that the USGS does not reflect in its gold reserves total. Different data methodologies perhaps for defining gold reserves and gold resources, but these deltas highlight an important point that when it comes to mineable gold, there is no one consensus figure.
Technological advances in gold mining and processing can also over time change identifiable resources (resources potentially feasible to extract) into reserves, and turn undiscovered resources (theroized to be in mineral deposits) into identifiable resources. These advances and discoveries therefore increase the pool of gold reserves over time. Likewise, some gold deposits which are uneconomic to mine at gold price X will become economically viable to mine at a higher gold price of Y.
Stock vs Flow: The Key to Above-Ground Stocks
But on a more fundamental level, do the short-term gyrations in annual gold supply really matter that much? Specialist gold consultancies such as GFMS and Metals Focus which regularly crunch annual gold mining figures would argue yes, but their fixation on annual gold supply downplays the fact that there are huge above-ground stocks of gold which have an influence on everything from gold’s investment characteristics (e.g. store of value, portfolio diversifier and safe haven) to movements in the gold price, and to the shifting direction of gold flows between east and west.
Almost all of the gold ever mined throughout history still exists in these above-ground gold stocks, be it in the form of gold jewelry, central bank gold holdings, gold held in private gold hoards within investment gold bars and coins, and gold that has been used within industrial medical and technological applications. This amounts to about 192,000 tonnes according to the World Gold Council (WGC), or significantly more according to those who dispute the WGC’s figures as being underestimated.
Using WGC figures, this would mean that the annual flow of new gold from mining (about 3100 tonnes), represents only about 1.6% of the total above-ground stocks of gold. Or in other words, the above-ground stocks of gold are about 62 times larger than the annual flow of new gold from gold mining. i.e. the stock-to-flow ratio is very high.
The majority of this above ground gold is held for saving purposes and as a store of wealth (including in the form of gold jewelry), and while much of the gold in above-ground stocks is not traded, it has the potential to be traded, and it can move into the highly liquid worldwide gold market depending on the gold price. Therefore, this far larger pool of gold held in above-ground gold stocks widens the definition of gold supply considerably.
Above-Ground Stocks – A Store of Value
Holding physical gold as a store of value works precisely because there are very large above ground stocks of gold in existence. Unlike other metals which are produced to be consumed (even including silver to some extent), physical gold is a monetary metal because it is rare, tangible, cannot be debased and has no counterparty or default risk. See here for details. Physical gold is also generally produced to be accumulated and to be used as a store of wealth and as an inflation hedge.
This accumulation of gold from the dawn of civilisations to the present day gives us the current very large above ground stocks of gold, a stock which constantly increases but increases at a slow and stable rate relative to the size of the overall stock. Therefore the value of this total above ground stock of gold is relatively stable, and over long periods of time, the purchasing power of this total stock of gold (which cannot be debased) is stable relative to the prices of other goods.
Gold’s purchasing power has also been found to be nearly constant over long periods. See for example the well-known study by Roy Jastram known as ‘The Golden Constant‘, in which he constructed gold price indexes and general price indexes and found that the purchasing power of gold, although it fluctuated, was broadly constant over long periods of time. Jastram’s study was then updated in 2009 by Jill Leyland. As Leyland wrote in an explanation of gold’s constant purchasing power which makes it an ideal store of value:
“the broad supply and demand fundamentals of gold help this stability. Gold is a scarce metal and the annual increase in supply is a small fraction of above-ground stocks. Most gold is held in a form that makes it easy to return to the market if economic circumstances dictate, thus helping to stabilise price fluctuations.”
Therefore, gold’s ability to act as store of value and as a form of wealth preservation is directly related to gold’s very large and stable above ground stocks. The presence of very large above-ground gold stocks also partially explains gold’s safe haven appeal. One aspect of why gold acts is a safe haven is that it does not have any counterparty or default risk. But there is also an understanding that in times of crisis the physical gold market will remain highly liquid, a liquidity which again is due to the ability of the extensive above ground stock of gold to be mobilised.
Gold is Less Affected by Economic Activity
The existence of very large above-ground gold stocks also drives gold’s ability to provide diversification benefits, for example, holding gold in a wider investment portfolio of other assets such as stocks and bonds is a proven way to reduce portfolio risk. This is so because of the low correlation of the gold price with the prices of these other assets which in turn is because the gold price is far less influenced by business and macro economic cycles than other assets. But why is the gold price less influenced by business and macro economic cycles than other assets?
The answer again lies in gold’s huge above ground stocks, and the highly liquid worldwide gold market that allows these gold stocks to move into the market should conditions merit it. Gold demand can therefore be met, not just from new mine supply which is correlated to business cycles, but from any of the gold that exists in gold’s extensive above-ground stocks.
“The lack of correlation between returns on gold and those on financial assets such as equities has become widely established….the fundamental reason for this lack of correlation is that returns on gold are not correlated to economic activity whereas returns on mainstream financial assets are.
It is thought that the reasons which set gold apart from other commodities stem from three crucial attributes of gold: it is fungible, indestructible and, most importantly, the inventory of above-ground stocks of gold is enormous relative to the supply flow….The potential for gold to be highly liquid and responsive to price changes is seen as its critical difference from other commodities.”
A Wider Definition of Gold Supply
In practice, what do these above ground gold stocks constitute and can they be mobilised? According to the WGC, about 90,000 tonnes of above ground gold is held in the form of gold jewellery, another 33,000 tonnes of gold are (reportedly) held by central banks, about 40,000 tonnes are attributed to private gold holders, and the remainder sits within end uses where it has been applied in industrial / technological and other fabrication uses.
In theory, all above-gound gold can be mobilised into the gold market as forms of potential supply if the price is right. In practice, all the major categories of gold holdings are served by functioning markets which allows their mobilisation. For example in India, where between 20,000 and 25,000 tonnes of gold are held by private citizens, the gold market provides a mechanism for the accumulation or sale of investment gold jewelry depending on fluctuating incomes and economic conditions. In China, where at least 17,000 tonnes of gold is held by private citizens, the gold market is served by a central physical gold exchange (the Shanghai Gold Exchange) and large networks of gold jewelery and investment gold retail outlets.
The ability to mobilise gold from the central bank and official sector is served by a functioning gold lending and gold swapping market centred in London. Admittedly, that gold lending market is so opaque due to secrecy and lack of reporting that its impossible to know how much or how little gold is actually in the possession of central banks and how much has been lent out and not returned. But overall, there is gold lent out from central bank holdings that flows into the market and is very distinct from any supply categories tracked by the major precious metals consultancies.
Many national gold markets exist around the world also exist which provide their citizens with the ability to buy and sell physical gold and which provide the necessary liquidity with which private gold holdings can be mobilised into the market. For example, see BullionStar’s Gold University for profiles of over 20 of these gold markets. Due to gold’s high value, a well-functioning scrap gold and gold recycling sector also exists around the world, with numerous refineries and processors adept at extracting valuable gold content from every end use product which contains gold bearing material.
Gold from countries that would normally be net buyers on the international market can also be turn into net gold suppliers when the need arises, in other words flows of gold from West to East can and do sometimes switch to flows going the other way from East to West. This, for example happened in 2016 when non-monetary gold flowed westwards to Switzerland from countries such as UAE, Hong Kong and Thailand (markets that are normally considered large destinations for Swiss gold) and this gold was then exported from Switzerland to mainly the UK but also the US.
There is a relative fixation in the gold industry on new gold mining supply and the impact that this has on the gold market. But beyond annual gold mining output, its important to remember that the world’s above-ground gold stocks, some 190,000 tonnes based on official figures, can and do come into play as supply sources if and when conditions merit this.
Most importantly, these vast above-ground stocks underpin some of physical gold’s most important investment characteristics, such as gold’s ability to act as a stable store of value and gold’s ability to reduce risk in investment portfolios.
In March of this year, the London Bullion Market Association (LBMA) released a series of short videos about various aspects of the London precious metals markets and the role the LBMA claims to plays in those markets. In the words of the LBMA:
“LBMA, the Global Authority for Precious Metals, has released five short films highlighting the pivotal role it plays in the global wholesale precious metals market by setting standards and developing market services thus ensuring the highest levels of integrity, transparency and quality.”
While calling these short clips ‘films’ is a bit ludicrous, the series of videos – which are indeed very short – are as follows, and they can be seen on the LBMA website as well as on the LBMA’s YouTube channel:
‘Who We Are’ (2:33 minutes)
… in which Paul Fisher (LBMA Chairman) and Ruth Crowell (Chief Executive) “discuss the central role that LBMA plays in the global OTC precious metal markets. From setting standards on the purity, form and provenance of the bars to the way in which they are traded.”
How the Market Works – OTC Overview (1:14 minutes)
… in which Jonathan Spall, LBMA Head of Communications “looks at how LBMA is at the heart of the 24-hour a day global OTC precious metals market with its bespoke transactions, which are tailored for clients’ needs.“
[Note: This video is called ‘Market Infrastructure Key Elements’ on the LBMA website.]
Good Delivery (1:08 minutes)
…in which Neil Harby (Chief Technical Officer) “takes you through the stringent Good Delivery criteria – the de facto standard trusted across the world – that enable the global trade in gold and silver bars.“
… in which Sakhila Mirza (General Counsel) and Neil Harby (Chief Technical Officer) “discuss LBMA’s Precious Metals Integrity and Provenance initiatives, ensuring the responsible sourcing of precious metals and the protection and integrity of the global supply chain.“
The commentary of each of the videos is also in transcript form on the LBMA website, and given that the videos are so short, the transcripts are likewise bitesize. While the Good Delivery and Responsible Sourcing videos deal with technical aspects of the the LBMA’s interaction with precious metals refiners, it is the ‘Who we Are’ and ‘How the Market Works’ videos which are worth discussing in the context that neither answers the questions that their titles suggest.
Who we Are
With a title of ‘Who We Are’, a newbie viewer might think that the first LBMA video would provide some insight into who is behind the LBMA and what really goes on in the London Gold Market and London’s other precious metals markets. But not surprisingly, it does not.
Instead, the LBMA’s chief executive Ruth Crowell, and LBMA chairman Paul Fisher take turns in reciting sound bites that focus exclusively on aspects of the physical precious metals markets while ignoring the vast fractionally-backed paper (synthetic) gold market and the secretive London gold lending market.
LBMA video – Who We Are’ (2:33 minutes). Source: YouTube
The video begins with a claim that the LBMA is “the world’s authority for precious metals“. An authority appointed by whom? There is no mention in the video that the LBMA is a private organisation established in 1987 by the Bank of England, or that the original founding members were 6 bullion banks involved in the London Gold Market including Rothschild, J Aron (Goldman Sachs), and Morgan Guaranty (JP Morgan). For details of the LBMA – Bank of England symbiosis, see BullionStar article “Blood Brothers: The Bank of England and the London Bullion Market Association (LBMA)”
Ruth Crowell states that “our Board has an independent Chairman, as well as Non-Executive Directors, which ensure the independence of the governance of the LBMA.” But the chairman she is referring to is of course Paul Fisher, 26 years at the Bank of England, head of the Bank of England’s FX and Gold Division in the 2000s, and an observer on the LBMA Management Committee from at least 2004.
You would be hard pressed to find less of an insider than Fisher for the role of ‘independent’ chairman of the LBMA. But not surprisingly, the LBMA video makes no mention of Fisher’s background. As James Rickards commented at the time of Fisher’s appointment to the LBMA:
For details of what Rickards was referring to, see BullionStar article “From Bank of England to LBMA: The ‘independent’ Chair of the LBMA Board“. In the video, Crowell’s use of the words ‘Non-Executive Directors’ is also misleading since, apart from Fisher, there is only one non-executive director on the Board, Andrew Quinn. Nor does she mention that the LBMA Board still contains a Bank of England observer, namely Andrew Grice.
Crowell states that ‘there are also elected Market Directors who sit on the Board and ensure the market is steering the development of the Association‘, but fails to say that half of these directors, the market makers, are from the powerful bullion banks which dominate the LBMA, such as JP Morgan and UBS.
Nowhere in the ‘Who we Are’ video does it mention that the LBMA system trades vast -quantities of unallocated fractionally-backed synthetic gold positions, that the LBMA publishes no trade reporting of any trades in the London market, that the LBMA Gold and Silver auctions are dominated by its powerful bullion bank members, that the LBMA oversees the secretive London Precious Metals Clearing Limited (LPMCL) clearing cartel for paper gold and silver, and that there is a hidden gold lending / gold swapping market in London between central banks and bullion banks, facilitated by the Bank of England.
Instead, there are multiple references to physical bars and real metal, something that is very thin on the ground in the world of the LBMA, but that gives the impression of a predominantly physical precious metals market, when in fact the opposite is the case. For example, the video refers to the following:
‘the standard-setting organisation that defines how precious metals are refined’,
‘the quality and the integrity of the metal’,
‘mined from rock in the ground, being refined, being transported’,
‘the appearance and the shape of the bars themselves’
‘physically inspect each bar as it comes through the door’
As per usual with the LBMA, this ‘Who we Are’ video also makes claims that the activities of the LBMA promote a ‘transparent market‘, when the exact opposite is the case. This must be some kind of inside joke that they insert into all LBMA media publications, i.e. that the LBMA promotes transparency. For details on how opaque and non-transparent the London Gold and Silver Markets that the LBMA oversees really are, see ‘The Gold Market – Where Transparency means Secrecy’.
The Transcript of the LBMA’s ‘Who we Are’ video can be read below:
Ruth Crowell: The LBMA is the world’s authority for precious metals.
We’re the standard-setting organisation that defines how precious metals are refined, as well as traded around the world. It’s our job to ensure the quality and the integrity of the metal itself, as well as the market participants.
Paul Fisher: Our members are leading firms involved in the full lifecycle of precious metals. From being mined from rock in the ground, being refined, being transported, being stored and then finally being sold, whether as a bar or as a piece of jewellery. These miners, refiners, banks, trading houses, ETF providers, security companies, vaults, even central banks must follow LBMA standards for the benefit of customers around the world.
RC: Our Board has an independent Chairman, as well as Non-Executive Directors, which ensure the independence of the governance of the LBMA. But they’re also elected Market Directors who sit on the Board and ensure the market is steering the development of the Association. Beyond that we have many sub-committees and working groups, in which market participants can be engaged and steering everything that LBMA does.
PF: We provide quality control for the metal produced and we set high standards for business conduct. And we are also the voice of the market for governments, regulators and investors.
RC: We do that through the Good Delivery List and the Global Precious Metals Code. The Good Delivery List defines what’s acceptable when it comes to the appearance and the shape of the bars themselves. It’s also considered the de facto international standard for gold and silver.
The Global Precious Metals Code is a code of conduct which promotes a fair, effective and transparent market. It provides market participants with principles and guidance, to uphold high standards of business conduct. All of this creates confidence in the market for all participants.
We work closely with the commercial vaults, as well as the Bank of England. And the vaults only accept bars which meet the Good Delivery Standards. They also physically inspect each bar as it comes through the door, to make sure that it’s up to standard. As such, they act as the gatekeepers of the Market.
PF: We’re also leading the world in Responsible Sourcing, thanks to the strength of our Responsible Sourcing Programme.
RC: Our aim is to maintain integrity, as well as proactively develop the Precious Metals Market. That means we are always looking forward and anticipating any future needs and requirements.
How the Market Works
For whatever reason, the LBMA decided to split the ‘How the Market Works’ (the London OTC precious metals Market) into 2 separate videos, each of which is very short, lacking in any substance, and whose content is practically pointless.
Viewer discretion is advised because it will surely lead to disappointment for anyone wanting to find out how, for example, the London OTC Gold Market works. Despite the titles, this duo of videos will not tell you, and they are so short that the transcripts of each video are not more than a few sentences long. The entire exercise is a missed opportunity to properly explain details of how the London market really works.
LBMA video – How the Market Works 1 (1:14 minutes). Source: YouTube.
The first video is titled “How the Market Works – OTC Overview” and is just 1 minute 14 seconds long. The second video is titled “How the Market Works – Five Elements” (with an alternative title of “Market Infrastructure Key Elements”, and this is just 2 minutes long. Both videos are narrated by Jonathan Spall, LBMA’s Head of Communications.
The first of these videos claims to “look at how the LBMA is at the heart of the 24-hour a day global OTC precious metals market with its bespoke transactions which are tailored for clients’ needs” but at a mere one and a quarter minutes long, how is this possible even if the will was there? The second of these videos aims to “highlight how the LBMA plays a crucial role in the five main elements that allow the smooth functioning of the global OTC market.”
The (exceedingly short) transcript of the How the ‘Market Works – OTC Overview’ video is as follows:
Jon Spall: Internationally, precious metals are traded on a 24-hour basis. Either for immediate delivery, known as spot, or for a date in the future. LBMA accredited refiners annually refine approximately 5,000 tonnes of gold and more than 30,000 tonnes of silver.
Good Delivery Bars of gold and silver are traded globally in what is referred to as Over The Counter or OTC market. Approximately 25 billion dollars worth of gold is settled each day in the global OTC market, with London at its centre. This means all transactions are conducted between two parties without the need for an exchange.
An OTC market offers flexibility, in that two parties can negotiate bespoke transactions that precisely meet the needs of the customer. For example, in terms of price, amounts to be bought or sold, and time to maturity. It maintains confidentiality and means that all risks, including those of credit, exist only between the two counterparts. Typical market clients include miners, central banks, governments, fabricators, investors, hedge funds and refiners.
Despite its title, this video does not discuss how the OTC market works. The commentary, short that it is, opens with a reference to gold and silver refiners and good delivery bars, which are a very small percentage of trading in London. There is no reference to the fractionally-backed cash-settled synthetic gold claims which make up the vast bulk of trading.
The reference to approx 25 billion dollars worth of gold being settled each day is actually referring to the value of paper gold that is cleared each day by the secretive London Precious Metals Clearing Limited (LPMCL) run by five bullion banks (e.g. 18.7 million ounces of gold equivalent cleared each day in London during March 2018). There is no mention in the video of gold or silver trading statistics since this data is still off-limits to the public despite years of promises from the LBMA that it would publish such information.
This video has no reference to the secretive gold lending market between central banks and bullion banks, a market where outstanding ‘gold deposits’ owned by central banks are constantly passed around between the LBMA bullion banks and never closed.
How the Market Works – Part Deux
The second ‘How the Market Works‘ video, covering “five key market infrastructure elements” of the market is as lacking in detail and revelations as the first, and is again narrated by Jonathan Spall. These ‘key elements’ are LPMCL clearing, good delivery, vaulting, pricing, and unallocated accounts.
How the Market Works – Five Elements (2:01 minutes). Source: YouTube
The secretive LPMCL gets a one line mention with no explanation that its a private company run by JP Morgan, HSBC, UBS, ScotiaBank and ICBC Standard that keeps the either fractionally-backed London gold market afloat. Luckily, you can read about the LPMCL here in ‘Spotlight on London Precious Metals Clearing Limited‘.
Spall says that ‘there are a number of vaults in the London area operated by eight companies, including the Bank of England, which physically hold either gold or silver bars or both’, but this is as far as it goes and there is no discussion of the vault operators or the vault locations. For those interested, some of the vaults locations can be viewed here, here and here, and of course the Bank of England vaults here. While ‘London is home to one of the world’s largest physical holdings of gold’ as the video says, it does not mention the fact that most of this gold is held by central banks and ETFs, and that the bullion bank float of gold underpinning the entire market is quite low. See ‘LBMA Gold Vault Data – How low is the London Gold Float?‘ for discussion of this issue.
On the issue of pricing, the coverage is again lacking in any substance and fails to mention how the bullion banks control this aspect of the market too. There is no reference to price discovery of the international gold price, discovery which predominantly is based on the interactive trading of gold derivatives and cash-settled OTC gold positions between the London OTC Gold Market and COMEX. See ‘What sets the Gold Price – Is it the Paper Market or Physical Market?‘ for details.
And instead of explaining and coming clean about the fact that nearly all trading in the OTC market is in the form of unallocated precious metals positions that are merely claims against bullion banks and that the unallocoated system lies at the heart of the London market, the video merely says that ‘Most OTC transactions settle via unallocated accounts. The customer does not own specific bars, but has a contractual claim against the clearer.’
The video ends with the audacious claim that:
“The LBMA is at the very heart of this global market, providing standards, promoting transparency, instilling confidence, and thus maintaining integrity for all.”
That the LBMA did not make films (or videos) really explaining who runs the show in the London Gold Market, or how that market really works, is not surprising. Anyone acquainted with the writings of ANOTHER will understand this, when he wrote the following lines, which in these circumstances, appear particularly apt:
“Did you think that the high powered world of the LBMA would operate in a fishbowl for all to see? We cannot take what is on the outside as evidence for what is on the inside.”
Likewise, we cannot take what is in these LBMA videos as evidence of what goes on in the London Gold Market, at the Bank of England, in LBMA Board meetings, or in the dealings of the high powered bullion banks that control the London Gold Market.
Probably the two best known gold mining stock indexes in the world’s financial markets are the HUI and the XAU. HUI is the ticker symbol for the NYSE Arca Gold BUGS Index. XAU is the ticker symbol for the Philadelphia Gold and Silver Index. Both of these monikers make an appearance on many gold related websites and many general financial market websites as well, so its worth knowing briefly what these indexes are and what they represent.
A quick note on terminology: The words indexes and indices are equally correct, it just depends on your preference. Likewise, when talking about gold stocks within indexes, we can interchangeably use the terms gold stocks, gold mining companies, gold miners, equities, securities, index components, index constituents etc.
NYSE Arca Gold BUGS Index (HUI)
The HUI was launched on 15 March 1996 by the American Stock Exchange (AMEX), and was originally known as the AMEX Gold BUGS Index. BUGS is an acronym for ‘Basket of Unhedged Gold Stocks’. Through a process of various stock exchange mergers and acquisitions over time, the HUI is now known as the NYSE Arca Gold BUGS Index.
Briefly, in 2008, the AMEX was acquired by NYSE Euronext. In 2006, NYSE had acquired the Archipelago (Arca) trading platform. Hence, as a result of these acquisitions and exchange mergers, the NYSE changed the name of the AMEX Gold BUGS Index to the NYSE Arca Gold BUGS Index. An archived imprint of the AMEX website from 1996 can be seen here.
Also note that in 2012, Intercontinental Exchange (ICE) acquired NYSE Euronext, so the NYSE Arca is now owned by ICE and the Gold BUGS Index is now calculated by ICE. The letters in the ticker HUI do not mean anything, i.e. H, U, I is not an acronym or a shortened version of anything. If anyone thinks HUI might signify something of relevance, please add a comment below this article.
According to the official ICE methodology document, the HUI is “designed to measure the performance of companies involved in the mining of gold ore“. It specifically only includes stocks of companies that do not hedge their gold production beyond one and a half years. By including only non-hedging gold miners, the index therefore attempts to provide exposure to near term gold price movements.
Another distinguishing characteristics of the HUI Index is that its a modified equal weighted index of gold mining stocks. A modification means that companies in the index are weighted to an extent but not fully. The process works as follows. All eligible stocks are ranked based on their full market capitalization (and not their free float). The top two stocks are each attributed a 15% weight. The third ranked stock is attributed a 10% weight. All remaining stocks from fourth position down are equally weighted into the remaining 60% of the index weight. Generally speaking, the free float is that portion of the outstanding equity that is not held by insiders.
Many websites all over the internet state that the HUI is equally weighted, but this is not correct as they fail to mention the above modification. For those interested in the HUI methodology, you can read the methodology document here.
Gold mining stocks eligible for inclusion in the HUI have to be either listed on the NYSE or the ‘NYSE American’ or else traded on NASDAQ. NYSE American is a small cap exchange operated by NYSE and was formerly called NYSE MKT, and is inherited from the American Stock Exchange (AMEX). The number of gold mining stocks that can be included in the HUI is variable and the constituents can change quarterly during index rebalances. When launched in March 1996, the HUI had a base level of 200.00.
The HUI currently has 23 constituent securities predominantly companies headquartered in the US, Canada and South Africa, including the large Goldcorp, Newmont Mining and Barrick, and miners such as Eldorado Gold, Kinross Gold, and Tahoe Resources. It also includes the American Depository Receipts (ADRs) of the South African miners, AngloGold Ashanti, Randgold Resources and Sibanye. The HUI also includes the predominantly silver miners Coeur Mining and Hecla Mining. A full list of the 23 components of the HUI can be seen here.
Fourteen of the gold miners in the HUI are also members of the World Gold Council. With 24 gold mining companies currently members of the WGC, this means that 10 WGC members are not represented in the HUI, which can be put down to those companies not having a listing on a US securities exchange, and perhaps being excluded for other reasons such as hedging their production. Some gold miners in the HUI are not members of the WGC for various reasons, such as they left the WGC, e.g. Gold Fields, or they are more naturally members of the Silver Institute, such as Coeur and Hecla.
GDM and JHUI
The NYSE also operates two other gold mining indices of relevance. These indexes are less well-known than the HUI and are the NYSE Arca Gold Miners Index (GDM), and the NYSE Arca Junior Gold BUGS Index (JHUI).
Unlike the equally weighted HUI, the NYSE Arca Gold Miners Index (GDM) is a market capitalization weighted index that comprises ‘publicly traded companies primarily involved in the mining of gold and silver in locations around the world.‘ This broader representation of gold and silver mining companies from around the world (instead of just a US listing), and the fact that inclusion is not limited to miners who don’t engage in hedging, explains why there are currently 49 components in the GDM, a list of which can be seen here.
Nearly all the WGC members are present in the GDM. There are also a lot of Australian gold mining companies in the GDM, and a couple of Chinese gold mining companies in the index, namely Zhaojin Mining Industry and Zijin Mining Group, but no Russian gold miners (maybe due to political reasons). The number of stocks that can be included in the GDM is also variable and the constituents can also change quarterly during index rebalances. The GDM was launched in October 2004. Anyone interested in the GDM index methodology can read its methodology document here.
The NYSE Arca Junior Gold BUGS Index (JHUI) is a modified equal weighted index of small-cap companies involved in gold mining. With a similar index creation process to the HUI, the JHUI methodology document can be seen here.
Philadelphia Gold and Silver Index (XAU)
The Philadelphia Gold and Silver Index (XAU) is a modified market capitalization weighted index of the stocks of companies active in gold and silver mining industry. The XAU was launched in January 1979 with a base value of 100.00. Like the HUI, the XAU is now part of a bigger exchange group, in this case part of NASDAQ OMX. This follows the merger of NASDAQ and OMX in 2007 and their acquisition of the Philadelphia Stock Exchange, America’s oldest exchange, also in 2007. An archived version of the Philadelphia Stock Exchange website which mentions the XAU can be seen here.
To be eligible for inclusion in the XAU, a security of a gold or silver miner has to be listed on either the NYSE or NYSE American exchanges, or else traded on NASDAQ. The company also has to have a market cap of at least US $100 million and meet a certain liquidity threshold of at least 1.5 shares traded in the last 6 months. Importantly, the XAU does not make gold hedging an exclusion criterion, therefore the XAU can include miners that hedge their production.
A number of parameters are applied to the XAU to prevent various large cap gold miners dominating the index weights. These parameters include that no stock can have a weight greater than 30% of the index, and that the top 3 stocks by market cap together do not represent more than 60% of the index’s weight. The XAU is rebalanced quarterly at which points a company can be ejected or added based on various eligibility criteria. The methodology document of the XAU can be seen here.
There are 30 gold and silver mining stocks in the XAU. A list of component stocks can he seen on the NASDAQ site here and a list with live prices on the Investing.com website here. The XAU contains a lot of the same mining companies as the HUI such as Barrick, Goldcorp, Newmont and Kinross, but some other names besides, such as Pan American Silver, First Majestic Silver, McEwen Mining, and Sandstorm Gold. With 30 stocks in the XAU, it takes in most of the members of the 24 member World Gold Council.
VanEck Vectors Gold Miners ETF (GDX)
Another gold stock ‘metric’ which is often seen on precious metals websites is the GDX. This however is not an index but an Exchange Traded Fund (ETF), namely the VanEck Vectors Gold Miners ETF (GDX). The GDX tracks the above mentioned NYSE Arca Gold Miners Index (GDM).
There is also a VanEck Vectors Junior Gold Miners ETF (GDXJ) which tracks not the JHUI but the MVIS Global Junior Gold Miners Index. The below chart shows the performance of the GDX vs the GDXJ. Notably, from January 2010 to September 2017, a time period during which the US dollar gold price fell by 20%, the GDX returned a negative 45%, highlighting the under-performance of gold mining stocks to the gold price during this period.
Gold Mining Equities – Not the Same as Physical Gold
Investing in gold mining stocks or funds that track equity-based gold mining indexes is very different to investing and holding physical gold bars or gold coins. The stock, or common equity, of a gold mining company, is a from of ownership of that company, and comes with a risk profile very different to that of physical gold ownership. This includes stock specific risk, sectoral risk of the gold mining sector, and general equity risk connected to the equity markets.
Because these companies are generally involved in exploration and production, gold mining stocks also introduce operational risk, management risk, risks associated with corporate governance, risks associated with hedging the gold price (or not hedging the gold price), and political risk associated with the countries in which a company’s gold mining assets are located. It is precisely because of gold mining company mismanagement that there is currently an initiative underway to launch a Shareholders Gold Council of institutional buy side money to address this corporate mismanagement.
Gold mining stocks do provide a form of exposure to the gold price, and usually a leveraged one, therefore the price movements of gold mining stocks are more volatile than the gold price, both on the upside and downside.
The same is true of funds or ETFs which aim to track gold mining indexes such as HUI or GDM, albeit that a diversified portfolio of gold mining stocks that a fund holds will diversify across company specific risk, but not gold mining sectoral risk or broader equity market risk and stockmarket / exchange risk.
As it only includes mining companies that do not employ hedging, the HUI has a higher correlation with the spot gold price than the XAU. But neither the HUI nor the XAU track the gold price as can be seen from looking at the variability of the Gold / HUI ratio and the Gold / XAU ratio.
Investors can hold both physical gold and gold mining stocks and funds, Its just important to remember that they are different things, and different asset classes. Gold mining stocks are risk securities issued by corporations that trade on stock exchanges. Physical gold is a tangible asset with no counterparty risk or default risk. Physical gold exists in limited supply and cannot be created, nor can it be issued by governments or monetary authorities.
With the first half of 2018 now behind us, it’s an opportune time to look at whats been happening in the Chinese Gold Market. As a reminder, China is the largest gold producer in the world, the largest gold importer in the world, and China’s Shanghai Gold Exchange is the largest physical gold exchange in the world.
For various reasons such as cross-border trade rules, VAT rules and deep liquidity, nearly all physical gold supply in China passes through the Shanghai Gold Exchange (SGE) vaulting network. These flows include imported gold, domestically mined gold, and recycled gold. Therefore, nearly all Chinese gold demand has to be met by physical gold withdrawals from the SGE, and SGE gold withdrawals are a suitable proxy for Chinese wholesale gold demand. Therefore, at a high level:
Physical Gold Supply to the SGE = SGE Withdrawals = Chinese Wholesale Gold Demand
Gold supply includes gold imports, mine supply, gold scrap / recycling and disinvestment. Disinvestment on the SGE is the reverse process of investment. Investment is when any institutional entity or individual purchases gold directly on the SGE. Disinvestment involves selling gold bullion which then goes to a refinery and re-enters the SGE vaulting network.
Wholesale gold demand includes consumer demand and institutional demand (direct gold purchases at the SGE). For a fuller explanation of this gold supply – demand equation as it applies to the Chinese gold market, see ‘Mechanics of the Chinese Domestic Gold Market’ on the BullionStar website.
SGE Gold Withdrawals in 2018
For the 6 months to the end of June 2018, physical gold withdrawals from the Shanghai Gold Exchange totalled 1038.4 tonnes. These flows represent gold which has actually been physically withdrawn from the network of SGE vaults across China. The monthly SGE gold withdrawal figures from January to June 2018 are as follows:
January 223.6 tonnes
February 118.4 tonnes
March 192.6 tonnes
April 212.6 tonnes
May 150.6 tonnes
June 140.6 tonnes
This withdrawal total, 1038 tonnes, is the third highest SGE withdrawal total on record for the first six months of any year of the SGE’s existence, only lower than the 1098 tonnes and 1178 tonnes recorded at the end of June 2013 and June 2015, respectively. The following chart highlights the cumulative Month 6 gold withdrawals from the SGE vaults, comparing all years from 2008 to 2018.
This year’s gold withdrawals to end of June, if annualised, would be 2076 tonnes, which would represent the fourth highest SGE gold withdrawals year on record after 2015, 2013 and 2014, in that order. All in all, SGE gold withdrawal figures year-to-date point to a very buoyant and healthy gold market in China and very strong wholesale gold demand, with volumes in line with the last 5 years.
Imports of Gold into China
Around the world, monetary gold (i.e. central bank gold) is exempt from customs and trade reporting when it moves across borders. Given this exemption, it is difficult to really know how much gold central banks (including the Chinese central bank, the PBoC) actually have at any given time.
Non-monetary gold is any gold that is not classified as monetary gold. Normally, non-monetary gold flows are estimable since there is no general exemption from customs and trade reporting. However, China is the exception, as it does not publish its gold import or export statistics. Therefore cross-border non-monetary gold trade flows involving China are more difficult to gauge than most. But it is still possible to gauge gold imports into China by looking at other countries’ gold exports to China.
During the year to date, Hong Kong and Switzerland, as expected, remained the two primary suppliers of non-monetary gold to China. Smaller direct suppliers of gold to China include the UK, Australia and the US. While Hong Kong remains the largest supplier of gold into China, China has been for a few years now, sourcing more gold directly from other countries and less gold via Hong Kong,
Looking first at Switzerland, for the first six months of 2018 from January to June, the Swiss supplied 274.7 tonnes of non-monetary gold into China. Specifically, 41.2 tonnes in January, a very large 67.2 tonnes in February, 39.6 tonnes in March, 26.6 tonnes in April, 38 tonnes in May and 62.1 tonnes in June. In fact, China topped the table as the largest single destination for Swiss non-monetary gold imports in every month from January to June 2018, ahead of India and Hong Kong.
If extrapolated on an annual basis, the 6 month flows would suggest Swiss gold exports to China of 274.7 tonnes from January to June would be roughly 550 tonnes for the full year. Comparing this to the full year 2017 when China imported 299.8 tonnes of non-monetary gold directly from Switzerland would suggest that a major change has occurred this year in the way the Chinese are sourcing their gold imports, with far more direct imports and less indirect imports from the interpot of Hong Kong.
According to Hong Kong’s Census and Statistics Department (HKCSD), Hong Kong net-exported 144.2 tonnes of gold to mainland China during the first 3 months of 2018. Extrapolating this on a 6 months basis would be about 290 tonnes, and 580 tonnes on an annualised basis. This would be a 7.5% drop compared to 2017 full year net gold exports from Hong Kong to China, but such a drop is to be expected as there is a trend of China is now engaged in more direct gold imports from destinations other than Hong Kong.
China sources gold directly from a number of other countries such as the UK, Australia, US and Canada. Together these other sources are still relatively insignificant as gold exporters to China compared to Hong Kong and Switzerland, but based on 2017 figures, together they may have sent about 30-40 tonnes of gold to mainland China during H1 2018.
Gold Production in China: 2018
Beyond gold imports, gold sourced from mining remains a critically important source of gold supply in China. According to the China Gold Association (CGA), China produced 98.22 tonnes of gold from mining in the first quarter of 2018, which was down 3 tonnes on Q1 2017. This comprised 80.8 tonnes from direct gold mining and 17.4 tonnes from extracting gold as a byproduct of other mining.
While the CGA has not yet published a gold mining output total for the second quarter of 2018 and its website has not yet been updated with such a news release, extrapolating the first quarter figure would suggest a Chinese domestic mining output figure of just less than 200 tonnes of gold for the first half of 2018 and about 400 tonnes for the full year.
Given that China produced 426.14 tonnes of gold during 2017, and the 2017 gold output total of 426.14 tonnes was itself 27.3 tonnes, or 6%, less than in 2016, it looks like 2018 will see another year of reduced gold production from the world’s number one gold producer. With continued buoyant demand from the Chinese gold market, these relative production shortfalls will have to be made up by larger gold imports or increased volumes of gold recycling.
Premiums of the Shanghai gold price to the international gold price have remained positive and steady throughout 2018, and generally low, except for a short period at the end of March. In price terms, SGE premiums during the year-to-date period have been recorded at between 1-2 Yuan per gram , or in percentage terms between 0.3% and 0.8%.
The positive premiums point to the attraction of sending gold from West to East, while the generally sedate levels of these premiums during 2018 indicate that there are currently no major supply constraints, such as tighter gold import rules, that could send the premiums higher into positive territory. Contrast this to late 2016, when the SGE gold price traded 2-3% higher than the international gold price, on the back of rumoured PBoC restrictions on gold import quotas and consignments that were said to be an attempt to control capital outflows.
With Chinese wholesale gold demand running at over 1000 tonnes for the first six months of 2018 as indicated by SGE gold withdrawals, China’s gold market has to principally meet this gold demand from the key supply sources of domestic mine production, gold imports and gold recycling and disinvestment.
For the year to date to end of June, we can assume that Chinese gold mining contributed about 200 tonnes to Chinese gold supply. Non-monetary gold imports, principally from Switzerland and Hong Kong, contributed another 560-580 tonnes. This would leave about 250 – 300 tonnes to be sourced from gold recycling and scrap through the SGE system and from disinvestment.
With the first half of 2018 now drawn to a close, much of the financial medias’ headlines and commentary relating to the gold market has been focusing on the fact that the US dollar gold price has moved lower year-to-date. Specifically, from a US dollar price of $1302.50 at close on 31 December 2017, the price of gold in US dollar terms has slipped by approximately 3.8% over the last six months to around $1252.50, a drop of US $50.
Since the world’s major gold price discovery hubs of London and New York trade gold in US dollars (or more correctly predominantly trade synthetic gold and derivatives), and since much of the mainstream financial media tends to be very US-centric, the media’s fixation with the US dollar price of gold is probably not surprising. However, it’s not the full story, because in some major national currencies as well as in cryptocurrencies, the price of gold has actually moved higher year-to-date.
From the perspective of an investment bank forex trading desk, where gold is traded as a currency in ‘pairs trades’ against a set of major fiat currencies, the varied movements of gold prices across a range of currencies will not be surprising. Currency prices (including the price of gold) are constantly moving against one another, creating these exchange rates. What’s important to these forex traders is the ‘relative strength‘ of currencies and of gold (and increasingly of cryptocurrencies).
Since the US dollar has had a relatively strong performance year-to-date 2018 against many other fiat currencies, this means on the flip side that many national currencies have weakened vis-a-vis the US dollar. By definition, this also means that the gold price performance year-to-date, measured in any currency which has weakened more in percentage terms against the US dollar than the US dollar gold price has weakened, will actually now be higher in those currencies.
For those with a base currency other than US dollars, or whose wealth or earning power is denominated in currencies other than US dollars, it’s important to keep track of the relative strength / weakness of one’s base currency, and at the same time look beyond the financial media’s headlines, and keep an eye on the gold price in that base currency / home currency.
Let’s look at some examples. Some of the worst relative performances of fiat currencies over the first 6 months of this year have been the Brazilian Real, the Swedish Krona, the Russian Rouble, the South African Rand, and the Indian Rupee, i.e. a mix of developed and emerging market currencies, and a mix of commodity and non-commodity currencies.
Given the very strong performances of cryptocurrencies late last year (especially in December 2017), and their subsequent price reversals since January, the gold price when measured in cryptocurrencies, such as Bitcoin, is also higher over the first half of 2018.
Year-to-date, the Brazilian Real (BRL) has lost more than 17% of its value against the US dollar. However, over the same time, the price of gold in Brazilian Real has gone up by more than 12.5%, rising from BRL 4315 per troy ounce at the start of January to BRL 4858 per ounce at the end of June.
The explanation for this is as follows. At the start of 2018, the US dollar gold price was trading at US $1302.50 per troy ounce, which at the USD / BRL exchange rate of USD 1 = BRL 3.31 at that time translated into BRL 4315 per troy ounce of gold. Fast forward six months and the US dollar gold price ended June $50 lower at US$ 1252.50 per ounce.
Over the same 6 month time period, the Brazilian Real weakened against the US dollar, falling from 1 dollar = BRL 3.31 at the start of January to 1 dollar = BRL 3.88 at the end of June. In Brazilian Real terms, that end of June gold price of US$ 1252.50 per ounce price now translates into BRL 4858 (1252.5 * 3.88). In this case, the rise in the local currency (BRL) price of gold is attributable to the fall in the value of the Brazilian Real. This is a classic example of the gold price adjusting to reflect the weakness in a local currency.
Taking another example, year-to-date, the Swedish Krona has also had a relatively poor performance, falling by more than 11.5% against the US dollar over the first 6 months of 2018. However, during the same time period, the gold price in Swedish Krona has rallied strongly from SEK 10685 per troy ounce to approximately SEK 11210 per troy ounce.
Again, even though the US dollar gold price fell from US$ 1302.50 to US$ 1252.50 during the first half of 2018, the SEK gold price has risen. Why? Because the Swedish Krona has weakened from 1 USD = SEK 8.023 at the start of January to 1 USD = SEK 8.950 at the end of June, meaning that the US$ 1252.50 gold price now translates into SEK 11,210 (1252.50 * 8.95).
During the year-to-date to end of June 2018, the gold price in Russian Rouble (RUB) has risen from RUB 75110 per troy ounce to RUB 78690, an increase of approximately 4.75%. Over this time, the value of the Rouble has fallen from approximately 1 USD = 57.7 RUB at the start of January to 1 USD = 62.8. Again this means that even though the US dollar price of gold has ebbed from US$ 1302.5 to US$ 1252.2 over the first 6 months of 2018, the RUB value of an ounce of gold has increased on the back of the depreciating RUB exchange rate (1302.50 * 62.8).
The story is similar in Indian Rupee. Over the year-to-date 2018, the gold price in Indian Rupee (INR) has risen 3.19% in local currency terms, from INR 83130 per troy ounce to approximately INR 85780 per troy ounce. In this case, over the first half of 2018, the US dollar strengthened from 1 USD = 63.85 INR to 1 USD = 68.45, with the higher Rupee gold price reflecting the US dollar gold price of 1252.50 translated into Rupee at a 68.45 to 1 exchange rate.
The upward price movements of the gold price denominated in Bitcoin are even more startling. From an opening price of approximately US$ 14,110 on 1st January 2018, the price of Bitcoin in US dollars fell dramatically over the first 6 months of the year, to around US$ 6400, i.e. a 55% drop in 6 months.
However, the gold price denominated in Bitcoin more than doubled over the same time frame, rising from 0.09 to 0.20 for the year-to-date. This would mean, for example, that had you traded out of Bitcoin and into gold at the start of 2018, your Bitcoin at that time would have had more than twice as much purchasing power in terms of purchasing gold as it had at the end of June.
A Better Way of Thinking
Given the constant fluctuations in fiat currencies, fixating on the gold price in US dollars, or indeed in any fiat currency, may not be the best way to think about your gold holdings. After all, many savers and investors in physical gold move their wealth and investments into physical gold precisely because it is not linked to fiat currencies and is a gateway out of government induced financial repression.
Remember that physical gold has no counterparty risk, and is not issued by any central bank, government or monetary authority. Physical gold is a mined tangible asset with inherent value and a limited supply.
A better way to think about an investment or holding in gold is perhaps by how much of it you hold. For example, I if had US$ 13,000, which I used to buy ten 1 troy ounce gold Maple Leaf coins, whatever then happens with the gyrations of fiat currencies, I still have those 10 gold maple Leafs and I can think of my holdings of physical gold as 10 gold Maple Leafs, weighing a combined 10 troy ounces.
Savers and investors move into physical gold precisely because it’s a monetary store of value that maintains its purchasing power over time and as such offers an exit from the debasement of fiat currencies such as the US dollar. Buying physical gold and then constantly trying to value it in terms of a fiat base currency is in some ways illogical. Surely a more logical approach is to say, I had x amount of dollars, but now I own X ounces of gold.
The same applies to gold’s role as a safe haven and as a form of financial insurance, i.e. physical gold is a form of wealth preservation in times of monetary and economic crisis. People make an allocation and use the safe harbor of physical gold precisely because it is ring-fenced from the turmoil of fiat currencies and associated central bank and government meddling. Again, surely a better way of thinking would be to say, I had x amount of fiat currency, I used this to buy gold, and now I have X ounces or X kilograms of gold. At a minimum, thinking in this way is a liberation from the constant barrage of mainstream media commentary about the US dollar gold price.
One of the more interesting developments in the gold mining sector at the moment is the impending launch of an investor alliance called the Shareholders Gold Council (SGC) whose objectives focus on reversing the poor shareholder returns and underperformance that has been dogging the sector’s leading gold mining stocks for some time now.
This new ‘Council’, which will be activist in nature, has been spearheaded by well-known hedge fund Paulson & Co, and was first pitched to fellow institutional investors and hedge funds during a Paulson & Co presentation at the Denver Gold Forum in September 2017.
For those unfamiliar with Paulson & Co, this is a hedge fund firm established by John Paulson in 1994. Paulson’s hedge fund firm rose to prominence in the late 2000s when it shorted subprime mortgages, and correctly bet on the collapse of the US housing market. Paulson & Co pursues event-driven strategies including merger arbitrage and corporate restructurings and runs a number of funds across equities and credit. Paulson also launched a specific gold fund in 2010 called the PFR Gold Fund which according to HedgeTracker had a “long-term strategy focus investing in mining companies and bullion-based derivatives“. This fund does not invest in physical gold, as was highlighted in the BullionStar article “Are the World’s Billionaire Investors Actually Buying Gold?“.
For those unfamiliar with the Denver Gold Forum, this is an annual three-day gathering of gold and silver mining companies, major institutional and hedge fund investors which invest in the sector, and Wall Street analysts covering the sector. In fact, the Forum’s organizers claim that the event represents nearly 90% of the world’s publicly traded gold and silver companies.
Reuters has also reported that major league institutional players such as Vanguard, State Street, Blackrock and Van Eck have also expressed interest in the SGC alliance.
High Cost Base, Destruction of Value
While hedge funds regularly attempt to turn around individual companies, the mobilization of a broad-based shareholder grouping focused on revitalizing an entire sector is still quite unusual, even for Wall Street. It is therefore instructive to examine what motivated Paulson & Co to roll out this idea and pitch the alliance to an entire institutional investment community. Although media coverage has been quite sketchy and exact details of the coalition remain unclear, the Denver presentation given by Paulson & Co’s natural resource specialist, Marcelo Kim provides some clarity, and is therefore worth reviewing.
According to Kim’s presentation ‘Gold Equities: Myths, Dreams and Reality‘, given to the Denver Gold Forum on 26 September 2017, the bottom line is that major gold mining stocks have been severely under-performing both the gold price and the broader equity indices for some time now.
This stock underperformance, thinks Paulson & Co, is due to poor investment decisions by said gold mining companies, destruction of enterprise value / low return on capital, and massive writedowns on ill-judged acquisitions, all in an environment of gigantic pay and compensation packages to gold mining company CEOs, clubby and cronie appointments to the companies boards of directors, and low stock ownership (but high options ownership) by these same company executives and board members. According to Paulson’s Kim, “CEOs and Boards get rich while shareholders lose money“.
Even more worryingly, total shareholder returns from 13 large publicly listed gold companies over the January 2010 to September 2017 period was an average negative 65%. However between 2010 and 2016, CEO pay in these same 13 leading gold mining companies was a combined US$ 550 million.
These 13 companies were Eldorado, Newcrest, Newmont, Gold Fields, Barrick, GoldCorp, Yamana, Kinross, AlgloGold, Agnico, Polymetal, Randgold, and Iamgold. All of these companies are members of the World Gold Council except for South African miners Gold Fields and Randgold and the Russian miner Polymetal. Notably, Randgold and Polymetal bucked the trend with relatively healthy shareholder return since 2010 of 35% and 20%, respectively, as well as the highest return on capital (RoC).
Additionally, over the 2010 – 2017 period, the gold mining industry had, according to Paulson and Co “written off $85 billion due to overpaying for acquisitions and massive cost overruns on mine builds“. Gold mining shareholders, said Kim, have no one to blame but themselves, as they had little engagement with company boards, chose not to engage in shareholder activism, but all the while continued to rubber stamp CEO pay, board appointments and mergers and acquisitions. Gold mining shareholders were in short, “like sheep being led to slaughter”.
Paulson’s Call to Action
The solution, according to Paulson & Co, is shareholder representation on company boards, investor rights agreements with company boards, company accountability to shareholders, the sacking of poor performing CEOs and board members, and the alignment of CEO compensation with share price performance. As all of these tactics are typical activist hedge fund tactics, it’s not really surprising that Paulson, as an activist hedge fund firm, would make these suggestions.
However, it is in the modus operandus and implementation of the scheme that there is arguably a more radical departure, since this is where the Shareholders Gold Council (SGC) comes in, with Paulson calling for a Council comprising a broad base of major (institutional) gold mining equity holders to come together and make recommendations on board appointments, CEO pay, company takeovers, as well as to make recommendations on annual general meeting (AGM) and extraordinary general meeting (EGM) voting decisions.
But still, is this really a new departure? In one way it is not, because there are perfectly good proxy advisory firms, such as Institutional Shareholder Services(ISS) and Glass, Lewis and Co which between them provide the same type of corporate governance and proxy voting research that Paulson’s Shareholders Gold Council is envisioning, and that are specialists in doing so for every major listed company in the world including every major exchange listed gold mining company.
Paulson and Co’s presentation even mentioned ISS, saying that the new Council would be ‘similar to ISS‘. According to Reuters’ June article, the Paulson led Council “will begin by releasing research reports on the gold mining sector… betting that shining spotlight on the space will result in greater accountability“. But is this just more of the same?
From a coverage standpoint, there are already countless sell-side (Wall Street) research reports covering all of the world’s leading gold mining companies that are published by a host of investment banks, in addition to umpteen buy-side research reports on the gold mining sector published by countless investment institutions and hedge funds, as well as the aforementioned governance and proxy voting research reports published by ISS and Glass Lewis.
If this new Shareholders Gold Council succeeds in gaining board level representation and in influencing investment and acquisition policy, and CEO compensation and board appointments, then this may in some way make a difference to future shareholder returns in the sector. But at this stage its impossible to say what type of influence, if any, such a Shareholders Gold Council would generate.
The Elephant in the Room
There is one topic, however, that an investor led Shareholders Gold Council could research, analyse and investigate, but for some mysterious reason has chosen not to. This is an issue that goes to the heart of a gold mining company’s operations and the performance of its share price. We are talking here about the actual gold price, how that gold price is discovered and established in today’s gold markets, whether that gold price is manipulated by bullion bank traders, and whether that gold price is subject to central bank interventions that attempt to control and stabilize it.
Simply put, the price that gold mining companies receive for their gold mining output is the most important driver of gold mining share price performance, and not the company’s cost base. We are assuming here that gold mining companies do not hedge their sales. Just look at how gold mining company stocks perform in an environment of a strongly rising or strongly falling gold price. The stock prices move up or down strongly since they are highly leveraged to corresponding gold price changes.
Take for example a simple model of a gold mining company. Its total revenue will depend on how much gold it extracts, processes and sells, and at what price it sells this gold. That’s the top line. The bottom line will be the profits remaining after subtracting total costs incurred by the mining company, which to some extent are fixed. These costs include operating costs (mining costs, processing costs, and corporate, general and administrative costs) and capital expenditure etc. Beyond this, impairments and writedowns on investments will also create an extra hit, as well as merger and acquisition costs.
As the gold price is most often quoted and understood in a price per ounce, the gold mining sector and the investment analysts which cover this sector like to calculate corresponding cost per ounce metrics, including operating costs per ounce of gold produced, total cash costs per ounce, and more recently an All-In Sustaining Cost (AISC) per ounce.
Total cash cost is a historic metric that was devised by the now defunct Gold Institute. It can be viewed as a standard metric for production cost in the gold mining sector. Cash costs would include all costs associated with producing the gold, such as direct production costs, smelting, refining, transport, and administration costs of a mine.
All-In Sustaining Cost (AISC) is a metric introduced by the World Gold Council in June 2013 which aims to try to reflect costs beyond cash costs. AISC includes cash costs but then adds other costs such as general administrative expenses (head office costs) and costs associated with maintaining and replenishing a mining company’s operations, i.e. for sustaining production. It thus includes capital expenditure and exploration costs.
So what Paulson & Co’s Shareholders Gold Council is planning, in addition to publishing research reports, is to try to have an impact on cost reduction, such as reducing CEO and board compensation, as well as to prevent gold miners making costly mistakes on acquiring overvalued mines which they will then have to take writedowns on in the future. This may all be very logical and make a difference in some way, but what the Shareholders Gold Council is not planning to do is to analyse and research anything about the gold price, which is, as was just stated above, the most important determinant of shareholder return and price performance in the gold sector.
Resources & Firepower, but Don’t mention the Gold Price
The Shareholders Gold Council, which on paper will have immense research resources and firepower and influence, will not it seems devote any time or resources to questioning anything to do with the gold price and will just take it a a given. This to me is a completely lost opportunity given that there is ample material for analysis in this area, some of which would surprise institutional and hedge fund investors in the gold space if they bothered to look. Much of this material has been documented on this website and elsewhere, such as by GATA.
The entire structure of the world’s largest and most influential contemporary gold markets has little to do with physical gold. The gold price is predominantly established and discovered in two markets, the London Gold Market and the COMEX gold futures market which between them trade very little physical gold but do trade vast quantities of synthetic gold and gold derivatives. See ‘What sets the Gold Price – Is it the Paper Market or Physical Market?‘.
The vast majority of ‘gold’ trading in the London Gold Market is of unallocated gold which is merely a claim against a bullion bank, and is a form of synthetic or paper gold in as much of a way as the gold futures derivatives that trade on COMEX are. See ‘Bullion Banking Mechanics‘ and an accompanying infographic for details. All gold demand that flows into unallocated paper gold by definition does not flow into physical gold demand, a gold miner’s bread and butter. So unallocated gold syphons off real physical gold demand into a paper substitute and suppresses real demand for physical gold.
There is no trade reporting in the London Gold Market, and the London Bullion Market Association (LBMA) whose remit it is to release it has continually stalled on publishing any trade reporting. This reinforces the opacity of the one of the main gold markets which is responsible for gold price discovery. Nor is there any transparency about where major gold-backed ETFs such as GLD, that store their gold in the London gold vaults, actually source this gold from, some of which is borrowed from central banks.
Nor it there any reporting of any activity in the London gold lending market or of outstanding central bank gold loans or gold deposits. Central bank gold loans are therefore another suppressing influence on the gold price.
This is also ample evidence that the Bank for International Settlements has continually taken a keen interest in the ‘free market’ price of gold and has at times discussed at the highest levels (i.e. the governors of major central bank) how to control the gold price. See ‘New Gold Pool at the BIS Basle, Switzerland’ Part 1 and Part 2.
The COMEX gold futures market is in effect a casino which has a huge influence on gold price discovery but where little physical gold ever changes hands. Some major bullion banks have also been fined recently for manipulating the gold price. These are the same bullion banks which ran the London Gold Fixings and which now run the LBMA Gold Price auctions, auctions whose prices the gold mining companies take to sell their gold output at.
Generally speaking, gold mining executives don’t want to touch any subject related to the gold price, nor does its representative body the World Gold Council. Now it seems, the institutionally backed Shareholders Gold Council likewise does not want to broach the ‘gold price’ subject.
Which is a shame, for by not examining the issue, and by not using some of their research resources to analyse and investigate and to ‘write reports‘ on the ample evidence of structural inefficiencies and interventionalist forces that hold back the gold price, Paulson’s Shareholders Gold Council, in the same way as the gold mining shareholders which they criticize, will remain “like sheep being led to slaughter”.
On Sunday 10 June 2018, Switzerland’s electorate voted on a referendum calling for the country’s commercial banks to be banned from creating money. In a country world-famous for its banking industry, this was quite an interesting turn of events.
Known as the Sovereign Money Initiative or ‘Vollgeld’, the referendum was brought to the Swiss electorate in the form of a ‘Popular Initiative‘. The Sovereign Money referendum proposed that commercial banks in Switzerland should no longer be allowed to create money out of thin air as they currently do, and that in future only the Swiss central bank should have the power to create money. Sovereign money as a concept refers to money issued or created by a State or central bank.
The initiative was launched and advocated by Swiss group called Monetäre Modernisierung (MoMo) which was established with the goal of bringing monetary reform to Switzerland in the form of a sovereign money proposal. According to the proponents of the proposal, the initiative was launched as a reaction to the financial crisis of 2008 and 2009, and the increasing levels of commercial bank debt creation that has taken place since then.
Based on the official results of the Vollgeld referendum announced on Sunday afternoon, 24.3% of the turnout voted in favour of the initiative, with 75.7% of voters against. As opinion polls in advance of the referendum had suggested such an outcome, a majority endorsement of the Sovereign Money proposal had not been expected. However, with 1,821,835 valid votes cast in the referendum, 442,387 Swiss citizens did endorse the proposal, which is a sizeable number, and shows that at least in Switzerland, there is increasing unease about how money out of thin air is created in today’s fractional reserve banking systems.
With one of the most effective systems of direct democracy in the world, Switzerland is known for its frequent referenda on diverse aspects of Swiss law, and Swiss Popular Initiatives allow petitions to be activated by Swiss citizens to propose law changes. While there can be cantonal and communal popular initiatives in Switzerland, the Sovereign Money referendum was an initiative at the federal level, aiming to change wording in the Swiss Federal Constitution.
For a Federal popular initiative in Switzerland to get to the referendum stage, the initiative’s proponents must collect 100,000 valid supporting signatures from the Swiss electorate within an 18 month period. In the case of the sovereign money initiative, this signature collection exercise was completed in December 2015 when over 111,000 valid signatures were collected and submitted to the Federal Government enabling the proposal to move forward. Many Swiss popular initiatives never get beyond the signature collection stage as they do not attain sufficient support among the electorate. Therefore, the success of the sovereign money initiative in gaining strong initial support also shows that there was an appetite among the Swiss population to raise the commercial bank issue in the form of an official referendum.
As it was essentially proposing a ban on fractional-reserve banking by commercial banks and a return to a more sound money system, the sovereign money Initiative had garnered significant attention in the Swiss financial media in the run-up to the vote, and brings to mind a Swiss referendum which was held in 2014 on the subject of Switzerland’s gold reserves and its storage locations, which also gained similar widespread public attention at the time.
However, as the Swiss Federal Council (Government), the Swiss Parliament and Switzerland’s central bank, the Swiss National Bank (SNB), had come out against the sovereign money proposal, much like they did in the Swiss gold referendum in 2014, the positions of the establishment institutions of State undoubtedly helped sway Swiss public opinion away from voting in favour of the sovereign money proposal. Other vested interests such as the Swiss bankers Association, also, predictably, rejected the initiative.
Out of Thin Air
Although most people aren’t aware of it, the majority of money in today’s global financial system is created not by central banks, but by commercial banks. These commercial banks create money in essentially unlimited amounts when they lend money into existence, in other words, when they provide credit and create debt, which they then call an ‘asset’ on the asset side of their balance sheets.
When commercial banks create money via lending on the asset sides of their balance sheets, they also create deposits. As liabilities of a commercial bank, these deposits are only fractionally backed by the bank’s assets, hence the term fractional-reserve banking.
According to sovereign money advocates, electronic money or ‘book money’ created by commercial banks and recorded in commercial bank accounts comprises about 90% of Switzerland’s money supply, with only about 10% of the Swiss money supply made up of legal tender issued by the Swiss central bank. They also maintain that commercial bank creation of money is not constitutional, since Article 99 of the Swiss Constitution states that “The Confederation is responsible for money and currency“.
In summary, the Vollgeld Initiative called for the following:
Swiss commercial banks should no longer be able to create their own fiat currency out of thin air, i.e. be unable to create deposits through lending money created out of thin air.
Only the Swiss central bank should be able to issue electronic money to back deposits. This would mean that the SNB would have exclusive responsibility for all money creation in Switzerland, both cash in circulation and electronic money in commercial bank accounts.
Commercial banks should only be able to lend money that is already in existence, for example money long-term savings accounts, money market funds or funds sourced directly from the SNB.
The central bank should be allowed to issue new money debt-free into circulation by issuing it to the Swiss Confederation, cantons, local authorities and citizens.
According to the Sovereign money advocates, commercial bank money creation leads to a number of problems that affect the real economy, such as credit bubbles which accentuate credit boom and bust cycles, and also excessive inflation. Commercial banks also profit both from their ability to create loans out of thin air and from their ability to create money for their own financing needs. This gives the banking sector an unfair advantage (i.e. a privilege) vis-a-vis other sectors of the economy.
A return to a fully sovereign money creation process, would, according to the initiative’s adherents, lead to a more stable banking system, would prevent asset bubbles, would prevent commercial bank runs, bailouts, and bank collapses, and would prevent the need for deposit insurance protection, since all money would be central bank issued money and deposits would not be fractionally-backed. The Vollgeld backer’s also said that if the SNB had a monopoly on money creation, it would profit from seigniorage, i.e. the ability to create valuable money at a very low-cost. Currently by not creating most of the money in the Swiss economy, the SNB foregoes these profits of seigniorage.
The Swiss central bank responded to the Vollgeld initiative in typical central bank fashion, citing heightened risk, more uncertainty, tightened credit conditions, increased inefficiencies from a sovereign money system, and a reduction of monetary policy tools and flexability. Some of these concerns may have some validity, some may not.
If the Vollgeld motion had been passed, it would undoubtedly have led to short-term volatility in the Swiss banking system and in broader currency markets, and longer term unease in other country’s banking sectors, out of fear that there would be a growing call for similar changes elsewhere. But as no country has yet tried a return to a sovereign money system, its unclear how much of a risk such a change would entail.
It is probably true that if all money was created by a central bank, then that central bank would be less effective in using interest rates to regulate inflation (via the level of bank lending), and would have to concentrate on targeting the quantity of money in circulation (monetary targeting). That, says the SNB, would be a regressive step.
The Results of the Referendum
Swiss federal popular initiative referendas are based on the concept of a ‘double majority’, where for a referendum to pass, a majority of votes overall have to be in favour of the proposal, and the voting in a majority of Swiss Cantons has to also be in favour of the proposal. Although there are 26 cantons in Switzerland, due to historical splits, six of these cantons are considered half cantons in terms of electoral power, so there are 20 full cantons, and the equivalent of a further 3 full cantons, making 23 cantons in total.
According to the referendum results on the Swiss Confederation website, out of 1,821,835 valid votes cast in the referendum, a total of 442,387 votes (24.3%) were in favour of the sovereign money initiative, while 1,379, 448 votes (75.7%) were against. Overall, all 26 cantons (and 23 equivalent cantons) voted against the initiative, with nearly all cantons defeating the motion by a 3 to 1 majority, in other words between 70% to 80% of voters voted ‘No’ to the proposal. By the same token, approximately 20% – 30% of voters in nearly all cantons voted ‘yes’ to the proposal.
The turnout for the vote was quite low, at only 33.8% of the electorate across Switzerland. For these popular initiative votes, many in the Swiss electorate cast their votes in advance by postal vote, so the results are usually known rapidly soon after voting has closed.
In response to the referendum results, the Swiss National Bank (SNB), which had come against the referendum’s proposal, released a short statement saying that:
“The adoption of the sovereign money initiative would have made it considerably more difficult for the SNB to fulfill its mandate. With conditions now unchanged, the SNB will be able to maintain its monetary policy on ensuring price stability”.
It was not surprising also that the Swiss Bankers Association also welcomed the outcome of the referendum, calling the sovereign money plan a ‘radical alteration of the monetary system‘:
“The Swiss electorate has clearly rejected a radical alteration of the monetary system. The existing monetary and financial system functions well and is stable. The Swiss Bankers Association (SBA) welcomes the decision of the people and the cantons.
In reaction, the Sovereign Money Initiative’s backers remained resilient saying that:
“Despite the campaign of confusion and fear run by our opponents and the misinformation provided by the Federal Council and the Swiss National Bank…[the result] is a respectable outcome and shows that many Swiss people have realised that the creation of money by private commercial banks leads to numerous problems.”
“It is not acceptable that private commercial banks continue to jeopardise our prosperity by creating money out of nothing. In addition, technological developments such as crypto currencies will pose major challenges to the Swiss monetary system and the global economies.”
“Many of those voting ‘No’ did not vote on the Sovereign Money Initiative, but on the distorted picture of it that was conveyed to them by the authorities and the banking lobby. The result of the referendum cannot therefore be interpreted as approval of the privatisation of Switzerland’s money creation.”
Although the average person on the street knows little or nothing about how money is created in contemporary financial systems and mistakenly presumes that all money is central bank money, the Swiss sovereign money initiative is fascinating in that it has raised awareness, at least in Switzerland, as to how fractional reserve banking systems really operate, and how commercial banks create most money in the financial system out of thin air.
In 2016, ‘Monetäre Modernisierung (MoMo)’, the backers of the Vollgeld initiative, highlighted that a survey in Switzerland had found that 73% of the Swiss population mistakenly thought that the Swiss State or Swiss central bank was the creator of the majority of Swiss money and not, as is really the case, the Swiss commercial banking sector.
However, in a country with a total electorate of approximately 5.3 million, the ability to gain 110,000 signatures to advance the sovereign money proposal to referendum stage shows that the Swiss are presumably now becoming more informed about how the money creation system actually works. By the same token, a sizeable 440,000 Swiss voters backed the Sovereign Money proposal, which will no doubt cause concern in the upper echelons of the Swiss National Bank, and Swiss Bankers Association.
Since the sovereign money initiative would have fully centralised the money creation process with the SNB, it lies at the opposite end of the scale to fully decentralised forms of money such as cryptocurrencies. But what sovereign money and cryptocurrencies do have in common is that they both cut commercial banks out of the money creation process, and commercial banks could now in theory find themselves fighting on a number of fronts. With decentralised crytpocurrencies also aiming to cut central banks out of the equation, and with some central banks responding by alluding to the issue of their own cryptocurrencies, these central bank cryptos could be another form of sovereign money that the commercial banks may in future need to take account of.
Discussions of fractionally-backed banking systems also bring to mind the fractionally-backed system of trading which operates in the London Gold Market, where vast amounts of synthetic gold which do not exist are traded and cleared each day in unallocated accounts maintained by the bullion bank members of the London Bullion Market Association (LBMA). But unfortunately, the London Gold Market remains a protected enclave, protected from the disruptive scrutiny of direct democracy, and with little hope even that the financial media would dare to investigate why a gold market runs a leveraged fractionally-backed gold trading system.
On 17 April, Turkish news publication Ahval published a report stating that during 2017, Turkey withdrew 26.8 tonnes of gold that it had stored in the vaults of the New York Federal Reserve, and moved this gold under the custodianship of the Bank of England and the Bank for International Settlements (BIS).
The source of the Ahval report was a Turkish language article from the popular Hürriyet newspaper in Turkey. According to the Hürriyet report, also dated 17 April, which reported on the latest annual report of the Turkish Central Bank (Türkiye Cumhuriyet Merkez Bankası), Turkey’s central bank increased its gold holdings by 83.3 tonnes during 2017, 37.7 tonnes of which it purchased in the gold trading market of Borsa Istanbul, Turkey’s securities and precious metals exchange.
But of most interest, according to Hürriyet, was that the Turkish central bank also withdrew 28.6 tonnes of gold from the New York Federal Reserve in what it called a ‘complete reset‘, implying that this 28.6 tonnes of gold was the total gold holding that the Turkish central bank stored with the New York Fed at that time. The gold withdrawn from the Fed was then placed with the Bank of England and the BIS. Hürriyet portrays this gold movement as a ‘diplomatic crisis‘ between Turkey and the US, connected to potential military operations by the US against Syria.
Whether the withdrawal of the Turkish gold was in the form of gold location swaps between the NY Fed and the BIS and Bank of England, or whether the gold was actually withdrawn and shipped to Europe was not mentioned. NY Fed gold holdings did not materially change at all during 2018, so it appears that the withdrawal was in the form of gold swaps between the NY Fed, Bank of England and BIS.
Additionally, most gold held at the NY Fed is in the form of US Assay Office gold bars that are no longer accepted as ‘Good Delivery’ gold bars on the international market, so if the withdrawal was a physical one, the gold bars would need to be sent to a gold refinery while in transit to be converted into modern ‘Good Delivery’ bars before being deposited with the Bank of England and BIS. An inconvenience most nation-state gold holders would want to avoid.
The BIS does not have its own golds storage facilities, but instead uses the storage facilities of the Bank of England in London, the Swiss National Bank in Berne, and indeed the New York Fed, maintaining gold accounts at each of these three locations which it describes as “loco London, Berne and New York“.
Turkish gold reserves as reported by its central bank are unusual in that the reported figure of 591 tonnes includes gold which Turkish commercial banks hold with the central bank as part of their gold required reserves. Stripping these commercial bank gold holdings out, the Turkish Central Bank held 202 tonnes of gold of its own at the end of 2017, up from 116 tons held in May of 2017, an increase of 86 tonnes during 2017.
With Turkey’s complete withdrawal of its gold from the gold vaults of the Federal Reserve Bank of New York (FRBNY) under the FRBNY’s headquarters at 33 Liberty in Manhattan, the question must be asked how many other central banks that perceive the United States as a threat have done likewise or are considering doing likewise. The 2008 version of the NY Fed’s brochure ‘Key to the Gold Vault‘ stated that the Fed’s vaults under its headquarters in Manhattan stored gold on behalf of 36 central banks.
Since this Fed brochure was published than 10 years ago, the figure of 36 foreign central banks is surely out of date and needs updating and indeed downsizing. Perhaps a question to the Fed from an enterprising reporter from the Wall Street Journal or another US newspaper would set the record straight on this issue, although the Fed is famously secretive on this issue, and US mainstream financial media are almost always satisfied with a ‘no comment’ answer from the Fed.
All of the Russian Federation’s Gold Stored In Russia
Following a year in which the central bank for the Russian Federation added 214 tonnes of gold to its strategic gold reserves from January to December 2017, the Russian Federation through the Bank of Russia now continues to aggressively accumulate its gold reserves in 2018, keeping it in fifth place in world sovereign gold reserve rankings, ahead of China.
During March the Bank of Russia added another 9.3 tonnes, and now reports holding 1891 tonnes of gold, 49 tonnes more than the reported holdings of the Chinese central bank.
While Russian gold reserve accumulation is ongoing and to be expected, this week the chairman of the Russian State Duma Committee on Financial Markets, Anatoly Aksakov saw fit to react to the news that Turkey had withdrawn its gold from the New York Fed vaults, and confirmed that all of Russia’s gold reserves are stored on domestic soil within Russia.
“We do not have a gold reserve in the US, we have only Forex (foreign exchange) reserves abroad. No one can lay hands on our gold.“
With US sanctions imposed on the Russian Federation, this domestic gold storage policy by the Bank of Russia is probably to be expected but still reiterates the importance that Russia attributes to ring-fencing its gold reserves away from possible political risks and possible confiscation. As senior Bank of Russia official Dmitry Tulin told Reuters in May 2016:
“Russia is increasing its gold holdings because gold is a reserve asset that is free from legal and political risks”.
According to the Bank of Russia, two-thirds of its gold reserves are held in Moscow in a Bank building on Ulitsa Pravdy (Pravda Street), with the remaining one-third of the gold reserves stored in a building in St Petersburg. Recently, Russian media were allowed access to the Moscow vault, and documented a huge quantity of large gold bars (Good Delivery bars) stored in rows of metal cages, as the photos at this link clearly display.
Back in Turkey, Erdogan also made some eye-opening remarks this April about the potential role of gold in international lending. According to Turkish daily Hürriyet, while making a speech in Istanbul on 16 April 2018, Erdogan revealed that he had made a suggestion on this subject at a recent Group of Twenty (G20) meeting, asking:
“Why do we make all loans in dollars? Let’s use another currency. I suggest that the loans should be made based on gold.”
Erdogan also added that:
“with the dollar the world is always under exchange rate pressure. We should save states and nations from this exchange rate pressure. Gold has never been a tool of oppression throughout history.”
These soundings by Erdogan about international loans denominated in gold, coupled with the context of a ‘diplomatic crisis‘ between Turkey and the USA which precipitated the gold repatriation by Turkey away from the NY Fed, both underscore the extreme importance with which nation states regard physical gold as a strategic metal, and the lengths to which nation states such as Russia and Turkey will go to protect their interests against what they perceive as political risks from storing the yellow metal in locations where it might be seized or commandeered.
It may also not have been a coincidence that it was in May 2017 that Erdogan and his entourage visited Washington DC, and it was at this point in May 2017 that the Central Bank of Turkey also began to ramp up its gold purchases after a period of no accumulation, adding on average 11 tonnes of gold to its reserves between May 2017 and December 2017.
While the NY Fed gold vault figures do not show any net gold withdrawals during 2018, it may have been in May 2017 that Erdogan made the call to move Turkey’s New York stored bullion back to less politically risky storage locations in Europe.
On 29 January 2018, the Commodity Futures Trading Commission (CFTC) Division of Enforcement together with the Criminal Division of the US Department of Justice and the FBI announced criminal and civil enforcement actions against 3 global investment banks and 5 traders for involvement in trade spoofing in precious metals futures contracts on the US-based Commodity Exchange (COMEX). COMEX is by far the largest and most active futures exchange in the world for trading precious metals futures including gold futures contracts and silver futures contracts.
The CFTC is bringing the charges under what it calls “commodities fraud and spoofing schemes“. Spoofing of orders is illegal under the US Commodity Exchange Act. The 3 banks in question are Deutsche Bank, UBS, and HSBC. As part of the CFTC’s prosecution, Deutsche Bank is being fined US$ 30 million, UBS US$ 15 million, and HSBC US$ 1.6 million.
The CFTC’s Order against the banks maintains that from at least February 2008 to at least September 2014, Deutsche Bank traders were involved in a scheme to manipulate precious metals futures prices by spoofing orders for those futures contracts, and also by extension that this spoofing triggered customer stop-loss orders.
Similarly, the CFTC Order says that UBS traders on the UBS precious metals spot trading desk were involved in spoofing orders in gold futures and silver futures contracts from January 2008 to at least December 2013, and likewise triggering customer stop-loss orders.
In the case of HSBC, the CFTC says that HSBC, through its New York office, spoofed orders in gold futures and other precious metals. However, the CFTC Order does not specify the period under which HSBC is accused of engaging in such spoofing. This may be because, according to the CFTC, HSBC cooperated during the CFTC’s investigation and offered to settle. But overall, the spoofing by one or more of the named banks was said to have run from January 2008 to at least September 2014.
As part of the process, the CFTC also announced civil enforcement actions against precious metals traders Andre Flotron formerly of UBS, and James Vorley and Cedric Chanu formerly of Deutsche Bank for what the CFTC describes as “spoofing and engaging in a manipulative and deceptive scheme in the precious metals futures market“.
According to the Department of Justice (DoJ) press release on the matter, Vorley (a UK citizen) and Chanu (a French citizen) are being charged in a criminal complaint in the Northern District of Illinois court with “conspiracy, wire fraud, commodities fraud, and spoofing offenses in connection with executing a scheme to defraud involving both solo and coordinated spoofing on the COMEX“. During that time, Vorley was based in London with Deutsche bank and Chanu was based in London and Singapore with Deutsche Bank.
Flotron is charged in an indictment in the District of Connecticut for “conspiracy to commit spoofing, wire fraud, and commodities fraud” during the time when he worked at UBS as a precious metals trader on the UBS trading desks in Zürich, Switzerland, and Stamford, Connecticut USA.
The DoJ statement also names Edward Bases and John Pacilio, and says that Bases and Pacilio are charged in a criminal complaint with “commodities fraud in connection with an alleged scheme to engage in both solo and coordinated spoofing on the COMEX“. Bases was at Deutsche Bank until June 2010 at which point he moved to a unit of Merrill Lynch. Pacilio worked for a unit of Merrill Lynch during 2010 and 2011 when some of his trade spoofing is alleged to have taken place.
Note that according to the DoJ “a complaint, information, or indictment is merely an allegation, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law“.
For an excellent explanation of some of the spoofing activities that these traders are accused of have engaged in, please see the recent article ‘US Gold & Silver Futures Markets: “Easy” Targets‘ by specialist researcher Allan Flynn posted on the BullionStar website and on his own ‘COMEX We have a Problem’ website here.
Spot, Fixes and Futures in the Gold and Silver Markets
While gold and silver futures trading is one side of the wholesale precious metals markets, it is not the full picture, because as well as COMEX, the over-the-counter (OTC) London Gold and Silver Markets are key gold and silver trading venues for these same investment banks, as well as key components of gold and silver price determination. And central to the London Gold Market and London Silver Market are the daily fixing auctions for gold and silver.
The investment bank precious metals traders who trade gold and silver in the wholesale market do so not just through exchange traded futures contracts or OTC contracts, but both. And they constantly trade across the London and COMEX ‘venues’ at the same time. In both gold and silver, predominant price discovery for the international gold price and for the international silver price occurs in the London OTC Market and on COMEX.
Price movements in one location, for example on COMEX futures, get instantly reflected in the London OTC spot quotes, and vice versa. Therefore price quotes in the London market, including opening prices and round prices for the London daily Fixings can be influenced by moving the futures prices. For example, if there is collusion among traders to push the futures prices lower so as to benefit other traders who have positions based on Fixing levels, this can be done by the trader from one bank pushing the futures price lower, while a trader at a second bank benefits from this movement in terms of his exposure to the Fixing price which has also moved lower. Such price movements are documented in the ‘Final Notice’ that the UK Financial Conduct Authority (FCA) levied against Barclays Bank and one of its precious metals traders in May 2014 (See below for details).
As highlighted below, the majority of the banks mentioned in the CFTC fines were also central to these gold and silver fixings, and astoundingly one of the traders mentioned above and subject to the CFTC and DoJ actions, James Vorley, was even a director of both of the private companies that oversaw the London Gold and Silver Fixings.
With the CFTC / DoJ fines, complaints and indictments against the banks and their traders for manipulating gold and silver futures prices now in the public arena, the question of manipulation of the London Gold and Silver fixing auctions now comes back in focus, and the question now needs to be asked – where are the regulators in investigating (and perhaps prosecuting) banks and traders for gold and silver fixings manipulation?
Because even a superficial look at the banks and traders, the trading desks and their operations, the trader chat room transcripts, and the connections between the futures and fixings at the time of the fixings should give even the most dullard regulators and prosecutors pause for thought.
Deutsche Bank and HSBC – New York Futures and London Fixings
As a reminder, the London Silver Fixings were a daily auction of (paper) silver at midday in London that operated up until August 2014 when they were replaced by the LBMA Silver Price auction. The London Gold Fixings were a twice daily auction of (paper) gold at 10:30 am and 3:00 pm in London that operated up until March 2015 when they were replaced by the LBMA Gold Price auction.
The London Silver Fixings were administered by a private company called London Silver Market Fixing Ltd (LSMFL) whose three members were Deutsche Bank, HSBC and the Bank of Nova Scotia. Deutsche Bank, HSBC and Bank of Nova Scotia were also the only 3 entities allowed to take directly participate in the silver fixings, and each had become a member of the silver fixings by acquiring one of the 3 traditional companies that had run the fixings – ScotiaBank acquired Mocatta in 1997, Deutsche acquired the old Sharps Pixley in 1993, and HSBC had acquired Samuel Montagu and rebranded as HSBC during its 1990s reorganisation.
The London Gold Fixings were administered by a private company called London Gold Market Fixing Ltd (LSMFL) which had 5 members, namely Deutsche Bank, HSBC, Bank of Nova Scotia, Barclays, and Societe Generale (SocGen). Only these 5 banks were allowed to directly participate in the gold fixings. These 5 banks were also the only banks in the gold fixings from 2004 all the way to 2014.
So from “January 2008 to at least September 2014“, the period stipulated by the CFTC that covers manipulation of gold and silver futures, the same banks, i.e. Deutsche Bank and HSBC, were at all times active members of the daily gold and silver fixings in London.
Even more amazingly, James Vorley, the Deutsche Bank trader who is the subject of the CFTC / DoJ accusation of “conspiracy, wire fraud, commodities fraud, and spoofing offenses” on COMEX was a Director of both London Silver Market Fixing Ltd and London Gold Market Fixing Ltd from September 2009 until May 2014, which is all the way through the period of ‘at least February 2008 to at least September 2014’, when Deutsche Bank precious metals traders were involved in a scheme to manipulate precious metals futures prices by spoofing orders for those futures contracts. You couldn’t make this up!
Vorley, along with Deutsche’s Kevin Rodgers resigned from the London Gold and Silver Market fixing companies in May 2014, when Deutsche Bank dropped out of the daily gold and silver fixing auctions. Matthew Keen of Deutsche Bank had previously resigned as a director of the gold and silver fixing companies in January 2014 when he left the bank and was replaced by Rodgers who was Global Head of Foreign Exchange at Deutsche Bank at that time. But curiously, Rodgers also left Deutsche at the end of April 2014.
There is plenty written elsewhere on how the LBMA maintained its stranglehold over the London gold and Silver reference price benchmarks when the old tarnished fixings were no longer viable and the bullion banks running those fixings had to quickly pretend to distance themselves from the fixing while at the same time maintaining total control over the new versions of the auctions. But in summary, in August 2014, when the new LBMA Silver Price auction was launched by the LBMA with just 3 bank members, HSBC and Bank of Nova Scotia continued as 2 of these members. When the LBMA Gold Price auction was launched in March 2015, the existing incumbents of the old Gold Fixings namely Barclays, HSBC, Bank of Nova Scotia and SocGen, rejoined the new auction along with its new members, UBS and Goldman Sachs.
Barclays Mini-Puke: Gaming the Gold Fixing
In May 2014, the UK Financial Conduct Authority (FCA) fined Barclays Bank £26 million for systems and controls failings and conflicts of interests in relation to the London Gold Fixing auctions of which it was one of the 5 bullion bank participants. According to the FCA, these failings persisted from 2004 (when Barclays joined the fixings) until 2013. The year 2004 was also when the gold and silver fixings stopped being conducted in a room in Rothschilds offices and began to be conducted remotely.
As part of the May 2014 fines of Barclays, the FCA also fined Daniel Plunkett, one of the Barclays London-based precious metals traders, £95,000. While the fine for Plunkett was specifically to penalise his placement and cancellation of orders which were intended to manipulate prices within the rounds of the fixing, the commentary supplied by the FCA on the case is interesting in that it shows how gold futures price movements external to the fixings also very much influenced the fixing round prices during the auction that the FCA penalised Plunkett for.
At the start of the 28 June 2012 Gold Fixing at 3:00 p.m., the Chairman proposed an opening price of USD1,562.00. However, the proposed price quickly dropped to USD1,556.00, following a drop in the price of August COMEX Gold Futures (which was caused by significant selling in the August COMEX Gold Futures market, independent of Barclays and Mr Plunkett).
You can see here the interactions and influences that the COMEX gold futures prices movements had on the opening price that the Gold Fixing Chairman proposed to the begin the auction with. And now that we know there was collusion between the various precious metals traders across the bullion banks, it is not difficult to accept that the traders from one bank could be moving the futures lower to not only help themselves but as a favour to precious metals traders at other cartel banks that were also involved in the collusion schemes.
Banging the Fixes – Chat Room Transcripts from Class Action Suits
But there is also direct evidence of trader collusion to manipulate prices in the London gold and silver fixings in the form of trader chat room transcripts. This is not speculation, it is fact. Facts that have been documented in class action proceedings in the New York courts brought by plaintiffs against the bank member of the London Gold and Silver Market Fixing companies.
Again we turn to Allan Flynn, who was probably first to call attention to the manipulation of the silver market by these same banks with his extensive and succinct coverage of the evidence from the New York class action suits in his 8 December 2016 article ‘How to Trigger a Silver Avalanche by a Pebble: “Smash(ed) it Good”‘ posted on the BullionStar website and on Allan’s website here, and in his follow-up article from 14 December 2016 titled “When Gold Pops 1430 We Whack It“, posted on his website and on the ZeroHedge website here.
In the silver class action suit against Deutsche Bank, HSBC, the Bank of Nova Scotia, and UBS, Deutsche agreed in April 2016 to settle with the plaintiffs and to produce“instant messages, and other electronic communications” as part of the settlement. See BullionStar article ‘Deutsche Bank agrees to settle with Plaintiffs in London Silver Fixing litigation‘for full details of the April 2016 announcement.
Attorneys for the plaintiffs subsequently, as Allan Flynn documented “submitted samples of dozens of chat room messages between UBS and Deutsche Bank“, indicating “many efforts to artificially suppress gold prices, and to manipulate gold prices at the time of the Fixing.”
“One chat see’s a Deutsche Bank trader confirming with a UBS trader his trading had indeed influenced the Gold Fix: ‘u just said u sold on fix.‘ The UBS traded replied ‘yeah,’ ‘we smashed it good.‘
Another transcript example contained the following exchange:
“During a trading day which had been less successful the Deutsche Bank trader assured his opposite trader from Bank of Nova Scotia that ‘at least the fix will be fun . . . make it all back there!!!!!!‘”
So here we have precious metals traders actually colluding to artificially move the price levels on the fixings.
Technology Facilitated the Manipulation of the Fixes since 2004
In June 2015, I wrote an article on the BullionStar website titled “The pre-2015 London Gold Fixings – More technologically advanced than reported” in which I set out substantial evidence that the former Gold Fixings up until March 2015 were not some archaic dial-in telephone based auction using paper and pencils to set the price as the mainstream financial media choose to believe, but that the auctions since 2004 in both gold and silver employed sophisticated web-based technology apps, trading software, messaging apps and chat apps, all of which could also facilitate collusion and price manipulation across multiple trading desks in ‘rival’ banks.
When Rothschild pulled out of the Gold Fixings in 2004, Barclays took Rothschild’s place and the fixings moved to a remote model where traders from each of the 5 members banks of the Gold Fixing coordinated remotely instead of meeting twice a day face to face. At the same time, the fixing members introduced this new communication technology to assist their twice daily fixes.
In November 2014, the Swiss financial regulator FINMA announced that an investigation of UBS had found manipulation and attempted manipulation of by UBS Zurich employees of forex and precious metals benchmarks. At the time, Mark Branson, FINMA’s CEO said that “we have [also] seen clear attempts to manipulate fixes in the precious metals markets.”
According to FINMA, it found that chat groups between traders at multiple banks were central to how the manipulation was coordinated:
“In the improper business conduct in foreign exchange and precious metals trading, electronic communication platforms played a key role. The abusive practices were evidenced in the information exchanged between traders in chat groups. FINMA examined thousands of suspicious chat group conversations between traders at multiple banks.“
The introduction of new technology and chat apps from 2004 is also highly correlated with academic research findings showing “a decade of manipulation” of the gold fixing from 2004 until 2013. As highlighted in the Bloomberg article “Gold Fix Study Shows Signs of Decade of Bank Manipulation“
“Abrantes-Metz and Metz screened intraday trading in the spot gold market from 2001 to 2013 for sudden, unexplained moves that may indicate illegal behavior. From 2004, they observed frequent spikes in spot gold prices during the afternoon call. The moves weren’t replicated during the morning call and hadn’t happened before 2004, they found.
Large price moves during the afternoon call were also overwhelmingly in the same direction: down.
On days when the authors identified large price moves during the fix, they were downwards at least two-thirds of the time in six different years between 2004and 2013. In 2010, large moves during the fix were negative 92 percent of the time, the authors found.
There’s no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards, Abrantes-Metz said in a telephone interview this week.”
Well, there is an obvious explanation. The downward price movements identified by Abrantes-Metz and Metz started in 2004 because that’s when the London gold fixings went to a remote model and technology including chat apps was introduced. The suspicious price movements were more prevalent in the London afternoon because that was also the New York morning where COMEX gold futures were more active and where New York based traders could force the futures down causing a corresponding drop in the opening prices and round prices in the fixing auctions.
Prosecuting banks and traders for price manipulation on COMEX futures while ignoring the far larger London market and its gold and silver fixings looks like a job half done. Trading desks and their traders are agnostic to trading venues and with interlinked markets, the COMEX and the London Fixings are two sides of the same coin.
With blatant evidence that the same banks and traders were involved in both markets, and with actual chat room transcripts now confirming that precious metals traders across multiple banks were colluding in fixing price manipulation, then why are their no active regulatory investigations of trader manipulation of the London Gold and Silver Fixings?
Is it because of lack of jurisdictional authority or are the regulators and criminal enforcement agencies such as the FCA, DoJ, FINMA and the German BAFIN too terrified of opening a can of worms into the huge liabilities that would arise from proving a decade long criminal manipulation of the London Gold and Silver price benchmarks and that were used throughout the world the value of everything from ISDA contracts to institutional precious metals products, to ETFs.
This is a guest post by Allan Flynn, specialist researcher in aspects of gold and silver.
BullionStar does not endorse or oppose the opinions presented but encourages a healthy debate.
Following news coverage of the charging of five precious metals traders and three banks in January, Commodities Futures Trading Commission and Department of Justice documents reveal a global criminal cabal of 16 traders operating in at least four major financial institutions between 2008 and 2015 to defraud COMEX gold and silver futures markets.
Of the many examples published, one reveals a UBS AG precious metals trader spoofing sell orders to push down the price of gold futures on September 6, 2011, the day the gold market attained, and commenced a lengthy retreat, from its historic peak of US $1,923.70.
Jury trials are sought for Cedric Chanu and James Vorley of Deutsche Bank, Edward Bases and John Pacilio of Merrill Lynch Pierce Fenner & Smith, and Andre Flotron of UBS AG. The traders are indicted with multiple offences including spoofing, manipulation and attempted manipulation of the precious metals futures market. FBI investigations found many of the traders had placed “thousands” of fake orders over “hundreds” of occasions during the relevant period. Some even more.
Enforcement orders totalling $46.6 million were issued to Deutsche Bank, UBS AG and HSBC. Bank of America Merrill Lynch, parent company of Merrill Lynch Pierce Fenner & Smith, although implicated by the alleged actions of its subsidiaries traders, has not been sanctioned.
The agencies said traders placed genuine orders to buy or sell and concurrently huge opposite spoof orders to present a false picture of supply or demand. Other traders were thus tricked into accepting the genuine orders at prices favourable to the manipulators. The spoof orders being placed far enough away from the current price to safeguard against their actual execution were then swiftly cancelled. The traders had the ability using spoofing to move prices up or down.
By correlating details among multiple court documents and public sources it has been possible, with a high degree of certainty, to match the sample chats provided with the indicted traders, and banks they worked for.
Deutsche Bank trader and Informant David Liew thought so highly of UBS co-conspirator, Trader F, according to Bloomberg’s disclosure of a sealed indictment, that he called him “The Legend.”
In a teaching moment with a colleague about best practice for spoofing, on April 30, 2010, The Legend instructed:
“u gotta be quick with spoofs cause everyone else knows the trick too … except for smaller shops … and algos of course.”
Then contrasting the ease at which spoofing could be pulled off in years past:
“u know i use[d] to do that is Stamford so i can get filled … i’d be short 10k, show a bid for 35 lots … mkt chases it … i shift it lower … and lower.”
Trader F, as CFTC UBS Orders name, worked hard spoofing precious metals futures at UBS, appearing in nine of 12 manipulation samples listed in the CFTC UBS AG Orders, seven of which involve David Liew, Deutsche Bank informant.
Until further details emerge, the identity of The Legend among four UBS traders, two unnamed, remains unclear. While the regulators describe four UBS traders as involved in the scandal, they currently seek a jury trial for only one.
Veteran UBS precious metals specialist ‘Andy’ Flotron’s term at the trading desk predates the bank itself.
He began trading gold and silver in 1982 with the Swiss Banking Corporation, Zurich. While still at the SBC precious metals desk, the corporation amalgamated with the Union Bank of Switzerland becoming UBS AG in 1999.
In over 15 years at UBS, the 55 year old worked two stints each in Zurich and Stamford. In addition to trading, he held also managerial and training responsibilities until January, 2014, when placed on leave from Zurich following an internal investigation.
As the FBI investigators found, a hallmark of Flotron’s spoofing operation became placing of fake orders in quantities such as 22, 33, 44, 55, or 99 contracts by “automated trading software which had the ability to … place, modify, and cancel multiple orders nearly simultaneously.” He undertook this activity with up to 3 other UBS co-conspirators, directing one in particular.
An FBI affidavit describes how from July, 2008, Flotron mentored a new UBS employee in the art of spoofing. Trader#1 sat with Flotron for 2 months at his trading desk in Stamford, Connecticut “shadowing and observing” him with the aim of then transferring to the UBS precious metals desk in Singapore. Trader#1, now the former spoofing Legend, is assisting the FBI investigation in return for immunity from prosecution.
In one example of his larger spoofings, allegedly aiming to manipulate the market down to his own favourable purchase orders on October 17, 2013, Flotron placed and then withdrew three large fake sell orders for futures worth $30.5 million in gold over a 2.5 minute period.
The largest of his fake orders was placed, a parcel of 99 lots worth $13 million in gold, immediately doubled the volume of sell orders compared to buy orders, while “never intending” it to be executed, the indictment says. The multi-million dollar spoof order was sufficient to immediately bring sellers down from $1319.30 to $1,319.20 filling several of the trader’s partially concealed 1-contract bids totalling $1.5 million gold value.
Sometimes the traders could move COMEX much more.
On January 28, 2009, Deutsche Bank’s Edward Bases allegedly shifted the gold futures price two dollars in one attack alone by placing and quickly cancelling a number of large bids in order to “help” his then colleague Cedric Chanu’s resting orders fill.
As a post-spoof chat shows, the technique and camaraderie bore a strong semblance to computer gaming.
Bases: “so glad i could help…got that up 2 bucks…hahahahah.”
“that does show u how easy it is to manipulate so[me]times.”
Chanu: “yeah yeah of course.”
Bases: “that was alot of clicking”
Chanu: “basically you tricked alkll [sic] the algorythm”
Bases: “good man. Correct.i know how to “game” this stuff…”
Chanu: “THAT IS BRILLIANT.”
Bases: “I just dotn have the time to do it.. but i do it a lot in the aftermakete. i f..k the m[ar]k[e]t around a lot…not alot of people…had it figgied out…thats [sic] why i love electronic trading.”
Bases: “im just glad we got you out…”
Besides helping each other achieve better than market prices, the Deutsche Bank traders helped UBS traders and traders from another global financial institution, Bank of America Merrill Lynch. One of the traders, at different times, worked for two of the banks.
Edward Bases was a metals tough guy. A 25-year career trading gold and silver in New York for the world’s largest banks, including a couple of years at Bear Sterns, gave him some trading bristle.
The era of floor trading in commodities and stocks was coming to an end when Bases departed Deutsche Bank for Bank of America Merrill Lynch in June, 2010. There, as he reminisced with a UBS trader in 2015, he was already a formidable spoofer in the pits long before he clicked his way to wealth at Deutsche Bank.
UBS Trader #2: “when you were a younger man where you also this angry?”
Bases: “In a different way”
“I was a tyrant” “Different world” “U called out dealersla” “Sppoofed the mkt” “Lined people up” “It was very physcial and emotional” “I was very good” “At it”
At the trading desk as on the floor, when extra muscle was required to move prices Bases strong-armed it.
Paraphrasing the indictment: on January 28, 2009, his then colleague Cedric Chanu placed an iceberg order to sell 170 contracts with only one visible lot at $892.50. Five minutes later to help him out, Bases placed a spoof order to buy 250 contracts at $890.80, worth $22 million in gold, which he cancelled two seconds later. Straight away Bases placed a 240 lot spoof order to buy at various prices between $890.80 and $892.40, and all 170 of Chanu’s primary orders became filled.
The spoofing methods and amounts could be tweaked depending which market participants were being targeted.
Hailing from the neighbouring affluent townships of New Caanan and Southport, Connecticut, 50 miles from New York, Bases, 56, and John Pacilio, 54, share an indictment of five charges in connection with Title 7 and 18 spoofing, manipulation, conspiring and fraud involving a commodity for future delivery.
While trading precious metals at a Bank of America Merrill Lynch, subsidiary in New York, John Pacilio is alleged to have spoofed solo and in tandem with his colleagues including Bases, and other banks between January, 2010, and April, 2011. Pacilio’s published trades include the largest of spoofing examples by the six traders.
On February 4, 2011, Pacilio placed and cancelled within the space of less than a minute, spoof orders to sell the equivalent of $74.1 million worth of gold in futures contracts.
His spoofing victims weren’t always human and rational as the trader advised seven others at BOAML including Bases on November 16, 2010.
“guys the algos are really geared up in here. if you spoof this it really moves. thats where alot of this noise is coming from.”
According to court filings, 20 seconds later Pacilio placed an iceberg Primary Order to sell 10 silver futures contracts at $25.48. After 29 seconds he then placed a succession of Opposite Orders totalling 250 lots to buy silver futures at between $25.455 and 25.47, which were cancelled as soon as his Primary Orders were filled.
Three years after commencing with Deutsche Bank precious metals desk London, Cedric Chanu was promoted to Director, Precious Metals Trading Singapore, in 2011, where called on, in between weekend recreations, to promote and represent the German bank in its Asian precious metals business.
When interviewed by the Wall St Journal in September, 2012, Chanu, perhaps alluding to a growing disdain for spoofable forms of gold, noted “a dramatic increase in customers wanting to move out of paper, that is over-the-counter gold, and into physical.”
The trader had a brief stint trading for the Swiss company Gunvor after leaving Deutsche Bank at the end of 2013. The conglomerate got out of precious metals trading however, according to Bloomberg in December 2014, when “executives decided to abandon the precious metals trading business partly because of difficulties in finding steady supplies of gold where the origin could be well documented.” Gunvor, it appears, couldn’t locate unspoofable gold bullion at the same price and volume at which gold futures and unallocated gold investments were trading.
Part owned by Russian billionaire Gennady Timchenko until March, 2014, Gunvor ceased precious metals operations only one month after Deutsche Bank announced it was pulling out of precious metals trading in November, 2014.
Cedric Chanu’s indictment details nine examples out of “hundreds” of precious metals manipulations while at Deutsche Bank between December, 2008, and June, 2013.
A shared indictment for Chanu, 37, and his Deutsche Bank colleague James Vorley, 38, residents of the UAE and the UK respectively, was filed in an Illinois Court on January, 19. A Status Conference for the related civil case titled: CFTC vs Vorley and Chanu is scheduled for May, 7.
London precious metals desk Deutsche Bank trader James Vorley cast himself in the theatre of chat as the quintessential English gent with a strong sense of fair play.
He even told a trader at another firm in October, 2007, of his repulsion at a third firms manipulation of either futures or another precious metals instrument:
“this spofi.ng [sic] is annoying / its illegal for a start…”its just not cricket.”
It was all a bad joke as FBI Special Agent Nevens found, seven months later from at least May, 2008, Vorley was running a “self enrichment scheme” to defraud the COMEX precious metals futures market and spoof training a new employee. His collaborators: Chanu and other Deutsche Bank traders, and those at another bank.
According to the indictment, the FBI uncovered over “a thousand” instances of Vorley trading in a pattern consistent with spoofing, “placing over ten thousand Opposite Orders,” presumably withdrawn, and coordinating in spoofing with his Deutsche Bank colleague Cedric Chanu “over one hundred times” up to March, 2015.
Included, an episode on March 16, 2011, when Vorley is recorded chatting to his colleague about “spoofing it up / ahem ahem” in relation to simultaneous platinum and gold futures trades.
Deutsche Bank co-conspirator turned informant David Liew whom Vorley trained in spoofing, testifies that Vorley preferred the term “jam it” when referring to the illegal act.
After one operation assisting Liew getting an order filled on November 3, 2010, Vorley “submitted and cancelled 29 buy orders at 10 contracts each”, and celebrated after:
“was cladssic [sic] / jam it / woooooooooooo…bif [sic] it up.”
As a sign of gratitude, his understudy Liew responded glowingly:
“tricks from the…master.” (Emphasis supplied.)
Not one to readily admit to wrongdoing, when queried in March, 2015, by Deutsche Bank compliance and employee relations, Vorley told them the term spoofing had been used “to describe more innocent and everyday occurrences.” He went on to defend the reason for his “inopportune use of the word spoof ” as “a bad example of market banter masquerading as sarcasm.”
A study by West Australian University Prof. Andrew Caminschi published September, 2013, observed gold and silver futures, and the GLD ETF, were “significantly impacted” by downward pricing anomalies from the London Gold and Silver PM Fixings leaking, prior to the publishing of the Fixing auction results.
A previously unreported crack through which the Fix prices may have bled from London to Chicago and elsewhere can be found in one of the six futures trader’s connection to the London Gold and Silver Fixings.
At the same time Deutsche Bank’s James Vorley is alleged by the CFTC and FBI to have manipulated COMEX precious metals futures, at least from May, 2008, to March, 2015, he was also a director of London Silver Market Fixing Limited and the London Gold Market Fixing Limited auctions.
The London Gold and Silver Fixings set the world benchmark prices for the precious metals twice daily. Vorley’s tenure on the Fix lasted between September 2009 and May, 2014, for the Gold Fixing, and October, 2015, for the Silver Fixing.
Three short weeks after Caminschci’s paper was published, UBS AG self-reported to global authorities that an internal investigation had uncovered “possible signs of manipulation, collusion and other market abusive conduct in foreign exchange trading” between the bank and other financial institutions. The Precious Metals Desk at UBS was a sub-unit of their Foreign Exchange Desk.
As precious metals class action lawsuits flooded US courts in the following three years, Vorley’s employer Deutsche Bank, failing to find a buyer for it’s seat, dropped out of the London Gold and Silver Fixings, disbanded their precious metals trading unit, payed $98 million to settle class action lawsuits alleging collusion in the London Gold and Silver Fixings, and supplied antitrust plaintiffs with significant evidence against co-defendants.
Short of an innocent sounding explanation as to how the precious metals pricing got so quickly from Fix-to-Futures, “ahem ahem,” it remains to be explored what Fixing information Vorley had prior to its publishing and what use, if any, he made of it in futures trading.
After joining Deutsche Bank as a fresh graduate in 2009, David Liew was assigned, at completion of a short orientation and training period, to the Singapore Deutsche Bank precious metals desk. He was supervised and trained in manual spoofing by Vorley and Chanu, among others in Singapore and the UK, with whom he shared a “common electronic trading platform screen.” Here his trading could be monitored and he in turn could observe his mentor’s spoofing activities on his monitor.
CFTC findings stressed that by allowing the traders to observe each other’s orders, Deutsche Bank facilitated their spoofing activities. The bank’s traders also communicated across the globe via electronic chat rooms and video teleconferencing.
The 31 year old who participated in, solo and coordinated spoofing with other traders “hundreds of times,” and stop loss manipulation coordinated with Trader F at UBS, pleaded guilty in a Chicago court on June 1, 2017. Stop loss manipulations were also undertaken with others at Deutsche Bank in relation to information about a large metals trade for a bank customer.
The penalty handed down by the CFTC for Liew included a lifetime ban from commodity trading, while a monetary fine was not imposed “based upon his cooperation in a Commission investigation and related proceedings.” The DOJ prosecutes his criminal trial where he is expected to receive reduced sentencing in return for cooperation as a witness.
According to the sealed FBI affidavit cited by Bloomberg, after Liew was taught to spoof by Vorley and Chanu at Deutsche Bank he went on to train others in the “tricks.”
Since leaving the bank, Liew has continued to use his business and training skills, as he told the Court in June last year.
“I’ve set up my own businesses. So, I — a co-owner of a restaurant. I own a online toy store for children. And most recently I’ve also started teaching programming to kids.”
Presently up to four Deutsche Bank, two Merrill Lynch and UBS AG traders associated with the alleged manipulations are absent from indictments. Similarly an HSBC trader who allegedly spoofed alone remains at large.
The only US financial organisation implicated, Bank of America Merrill Lynch and its indicted traders, Edward Bases and John Pacilio are absent from CFTC Orders and Complaints.
The first public proceedings for the six traders is to begin in couple of weeks with Flotron’s jury selection scheduled for April, 6. His trial under Judge Jeffrey A. Meyer in Newhaven, Connecticut, is set to commence on April, 16.
Even with the first trial about to start, four years since the last of the allegations, the precious metals probes continue.
The Department of Justice Fraud and Antitrust Divisions opened their precious metals investigations into financial institutions in 2015, but the criminal antitrust probe was closed in January, 2016. The US Government agencies were not the only parties investigating banks precious metals trading though.
The banks, defending also civil antitrust precious metals class action lawsuits, received an extraordinary boost in the form of letter/s from the DOJ announcing closure of the investigations. Predictably the letter was used by defendants straight away in an attempt to convince the Courts to dismiss the lawsuits.
The Court: “You all love this letter, don’t you?”
Defense Attorney: “They are not that easy to get, your Honor.”
The Court: “That’s true. You should have gold bars around it.”
Raising the spectre that the DOJ had botched the antitrust probe, in October the Court denied Motions to Dismiss against all the banks except UBS, the only non-Fixing bank defendant.
Challenging the Courts decision to dismiss civil complaints against UBS, only a short month later in November, the antitrust plaintiffs submitted damning new evidence.
Frank chat messages between traders in different banks, including UBS, about manipulating the Gold and Silver Fixes had been provided to plaintiffs by Deutsche Bank in their settlement cooperation materials. Surprisingly the DOJ had for 13 months sifted the same evidence without finding criminal evidence of antitrust conspiracy.
At the request of the DOJ the Court then placed the civil antitrust lawsuits on a partial stay of discovery for 12 months until December, 2017, doubtless to protect their ongoing precious metals fraud investigation.
To be fair to the DOJ, as Judge Valerie Caproni, former FBI General Counsel, had warned at the April, 2016, arguments, mistakes are not uncommon in government investigations. “Just because a government investigation is closed…doesn’t mean everybody is innocent.”
Another reason for delays in criminal prosecution of the cartel, concerns international treaties. Andre Flotron’s indictment and arrest on US soil in September last year was a stroke of luck for investigators and prosecutors who understand that extradition between countries with different laws can be problematic.
For example in May, 2015, the CFTC brought spoofing charges in gold and silver futures against UAE traders Heet Khara and Nasim Salim for manipulation between February and April, 2015. In 2016 a Federal New York court ordered the duo to pay $1.38 and $1.31 million in civil monetary penalties, but the pair are yet to be indicted in the US.
The FBI is yet to declare if the futures traders were also manipulating the underlying commodity such as the Gold and Silver Fix and spot markets, not to mention other products such as ETF’s.
At Andre Flotron’s pre-trial Status Conference December 4, 2017, DOJ Fraud Section Attorney Micheal Rinaldi hinted at a bigger picture:
“The larger conspiracy includes this much larger universe where Mr. Flotron is spoofing on a regular basis.”
The Swiss trader, was all but named by a Swiss regulator in 2014 who said they had, “seen clear attempts to manipulate fixes in the precious metals markets,” at the UBS precious metals desk in Zurich. FINMA went on to ban two UBS precious metals traders for one year, evidently Flotron, principal trader at the desk since 2010, and another uncharged.
Answering the judge’s question at the October 5, 2017, Status Conference about Flotron’s witness statement and the possibility of new evidence emerging, Assistant U.S. Attorney Jonathon Francis said:
“if we have communications, his chats, his e-mails, something like that, here’s no reason not to give them to them now. It’s when we get into the sort of the everything else. And I’ll tell you, the everything else goes beyond spoofing. Because this investigation dealt with trading more broadly and many banks.”
This article was first published at Allan Flynn’s website here.
This article is now transcribed below, here on the BullionStar website.
Central bank gold price suppression is a well-documented fact. Central banks have a long and colorful history of manipulating the gold price. This manipulation has taken many shapes and forms over the years. It also shouldn’t be surprising that central banks intervene in the gold market given that they also intervene in all other financial markets. It would be naive to think that the gold market should be any different.
n fact, gold is a special case. Gold to central bankers is like the sun to vampires. They are terrified of it, yet in some ways they are in awe of it. Terrified since gold is an inflation barometer and an indicator of the relative strength of fiat currencies. The gold price influences interest rates and bond prices. But central bankers (who know their job) are also in awe of gold since they respect and understand gold’s value and power within the international monetary system and the importance of gold as a reserve asset.
So central banks are keenly aware of gold, they hold large quantities of it in their vaults as a store of value and as financial insurance, but they are also permanently on guard against allowing a fully free market for gold in which they would not have at least some form of influence over price direction and market sentiment.
The Central Bankers’ Central Bank
The Bank for International Settlements (BIS) crops up frequently in gold price manipulation as the central coordination venue and the guiding hand behind a lot of the gold price suppression plans. This is true in all decades from the 1960s right the way through to the 2000s. If you want to know about central bank gold price manipulation, the BIS is a good place to start. Unfortunately the BIS is a law onto itself and does not answer to anyone, except its central banks members.
In the 1960s, central bank manipulation of the gold price was conducted in the public domain, predominantly through the London Gold Pool. This was in the era of a fixed official gold price of $35 an ounce. Here the US Treasury and a consortium of central banks from Western Europe explicitly kept the gold price near $35 an ounce, coordinating their operation from the Bank for International Settlements (BIS) in Basel, Switzerland, while using the Bank of England in London as a transaction agent. This price manipulation broke down in March 1968 when the US Treasury ran out of good delivery gold, which triggered the move to a “free market” gold price.
Central banks continued to suppress gold prices in the 1970s both through efforts to demonetize gold and also dump physical gold into the market to dampen price action. These sales were unilateral e.g. US Treasury gold sales in 1975 and over 1978-1979, and also coordinated (and orchestrated by the US) e.g. IMF gold sales across 1976-1980.
Gold Pool 2.0 – Force it Down Quick and Hard
Collusion to manipulate the price also went underground, for example in late 1979 and early 1980 when the gold price was rocketing higher, the same central banks from the London Gold Pool again met at the opaque BIS in Switzerland at the behest of the US Treasury and Federal Reserve in an attempt to launch a new and secretive Gold Pool to reign in the gold price. This was essentially a revival of the old gold pool, or Gold Pool 2.0.
These meetings, which are not very well known about, were of the G10 central bank governors, i.e. at the highest levels of world finance. All of the discussions are documented in black and white in the Bank of England archives and can be read on the BullionStar website.
The wording in these discussions is very revealing and show the contempt which central bankers feel about a freely functioning gold market.
Phrases used in these meetings include:
“there is a need to break the psychology of the market” and “no question of any permanent stabilisation of the gold price, merely at a critical time holding it within a target area” and “to stabilise the price within a moving band” and “it would be easy and nice for central banks to force the price down hard and quickly“.
And these meetings of top central bankers were in early 1980, 11 years after the London Gold Pool and 8 years after the US Treasury reneged on its commitment in August 1971 to convert foreign holdings of US dollars into gold.
Whether this new BIS gold pool was rolled out in the 1980s is open to debate, but it was discussed across the board for months by the Governors at the BIS, and may have been introduced in a form which would provide physical gold to the oil producers (gold for oil trades) without putting a rocket under the gold price. Their main worry was to allow the Middle Eastern oil producers to acquire some gold for oil without pushing the gold price up.
The Bank of England was also involved in the 1980s in influencing prices in the London Gold Fix auctions, in what an ex Bank of England staffer described euphemistically as ‘helping the fixes’. And the Bank of England has even at times used terminology in the 1980s such as “smoothing operations” and “stabilisation operations” when referring to coordinated central bank efforts to control the gold price.
Paper Gold Ponzi
Probably two of the most influential changes on the gold market in the modern era are structural changes to the gold market which channel gold demand away from physical gold and into paper gold. These two changes were the introduction of unallocated accounts and fractionally backed gold holdings in the London Gold market from the 1980s onwards, and the introduction of gold futures trading in the US in January 1975.
In unallocated gold trading in the London OTC market, gold trades are cash-settled and there is rarely any physical delivery of gold. The trading positions are merely claims against bullion banks who don’t hold anywhere near the amount of gold to back up the claims. Unallocated bullion is therefore just a synthetic paper gold position that provides exposure to the gold price but doesn’t drive demand for physical gold.
When gold futures were launched in the US in January 1975, the primary reason for their introduction, according to a US State Department cable at the time, was to create an alternative to the physical market that would syphon off demand for gold, creating trading that would dwarf the physical market, and which would also ramp up volatility which in turn would deter investors from investing in physical gold. Gold futures are also fractionally backed and overwhelmingly cash-settled, and their trading volumes are astronomical multiples of actual delivery volumes.
Central banks as regulators of financial markets are therefore ultimately responsible for allowing the emergence of fractional reserve gold trading in London and New York. This trading undermines the demand for physical gold and allows the world gold price to be formed in these synthetic gold trading venues. Price discovery is not happening in physical gold markets. Its is happening in the London OTC (unallocated) and COMEX derivative markets. So this is also a form of gold price manipulation since the central banks know how these markets function, but they do nothing to crack down on what are essentially gold ponzi schemes.
Imagine, for example, that central banks were as tough on paper gold as they seem to be now on crypto currency markets. Now imagine if central banks outlawed fractional gold trading or scare-mongered about it in the same way that they do about crypto currencies? What would happen is that the gold market participants would panic and unwind their paper positions, precipitating a disconnect between paper gold and physical gold markets. So by being lenient on the fractional structure of trading in the gold markets, central banks and their regulators are implicitly encouraging activities that have a dampening effect on the gold price.
Gold Lending – A Riddle wrapped in a Mystery inside an Enigma
The gold lending market, mostly centred in London, is another area in which central banks have the ability to cap the gold price. Here central banks transfer their physical gold holdings to bullion banks and this physical gold then enters the market. These transactions can either be in the form of gold loans or gold swaps. This extra supply of gold through the loans and swaps disturbs the existing supply demand balance, and so has a depressing effect on the gold price.
The gold lending market is totally opaque and secretive with no obligatory or voluntary reporting by either central bank lenders or bullion bank borrowers. The Bank of England has a major role in the gold lending market as the gold used in lending is almost all sourced from the central bank custody holding in the Bank of England’s vaults.
There is therefore zero informational efficiency in gold lending, and that’s the way the central banks like it. furthermore, freedom of information requests about gold lending are almost always shot down by central banks, even sometimes on ‘national security’ grounds.
Many central banks have lent out their gold long ago, and just hold a ‘gold receivable’ on their balance sheet, which is a claim against a bullion bank or bullion banks. These bullion banks roll over the liability to the central bank for years on end and the original gold is long gone. Since central bank gold is never independently audited, there is no independent confirmation of any of the gold that any central banks claim they have.
Gold receivables are another fiction that allows central banks to fly under the radar in the gold lending market, and central banks go to great lengths to make sure the market does not know the size and existence of outstanding gold lending and swapped gold positions.
In Febuary 1999, the BIS was again the nexus for secretive discussions about the gold market when a number of the large powerful central banks basically ordered the IMF to drop an accounting change that would have split out gold and gold receivables into two separate line items on central bank balance sheets and accounting statements. These discussions are documented in the IMF document which is available to see here.
This accounting change would have shone a light on to the scale of central bank gold lending around the world, information which would have moved gold prices far higher.
Gold Loans and Gold Swaps – Highly Market Sensitive
However, a group of the large central banks in Europe comprising the Bank of England, the Bundesbank, the Bank de France and the European Central Bank (ECB) applied pressure to torpedo this plan as they said that “information on gold loans and swaps was highly market sensitive” and that the IMF should “not require the separate disclosure of such information but should instead treat all monetary gold assets including gold on loan or subject to swap agreements, as a single data item.”
Central banks also at times sell large quantities of gold, such as the Swiss gold sales in the early the 2000s, and the Bank of England gold sales in the late 1990s.While the details of such gold sales are always shrouded in secrecy, and the motivations may be varied, such as bullion bank bailouts or redistribution of holdings to other central banks, the impact of these gold sales announcements usually has a negative impact on the gold price. So gold sales announcements are another tactic that central banks use to at times keep the pressure on the price.
There are many examples of central bankers discussing interventions in the gold market. In July 1998, former Federal Reserve chairman Alan Greenspan testified before the US Congress saying that “central banks stand ready to lease gold in increasing quantities should the price rise.”
In June 2005, William R. White of the BIS in Switzerland, said that one of the aims of central bank cooperation was to “joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.”
In 2008, the BIS at its headquarters in Switzerland even stated in a presentation to central bankers that one of the services it offers is interventions in the gold market.
In 2011, one of the gold traders from the BIS even stated on his LinkedIn profile that one of his responsibilities was managing the liquidity for interventions. After this was published, he quickly changed his LinkedIn profile.
Collectively, the central bank sector claims to hold the world’s largest above ground gold bar stockpile, some 33,800 tonnes of gold bars. Individually within this group, some central banks claim to be the top holders of gold bullion in the world, with individual holdings in the thousands of tonnes range.
This worldwide central bank group, also known as the official sector, spans central banks (such as the Deutsche Bundesbank), international monetary institutions (such as the Bank for international Settlements) and national monetary authorities (such as the Saudi Arabian Monetary Authority – SAMA).
These institutions hold gold as one of their reserve assets. Any gold held by a central bank as a reserve asset is classified as monetary gold. In addition to monetary gold, central bank reserve assets include such things as foreign exchange assets (such as US Dollars) and IMF Special Drawing Rights (SDRs). In general, reserve assets held by central banks are managed according to the criteria of safety, liquidity and return.
Given that central banks don’t generally divulge the gold that they lend, swap or otherwise use as collateral, the question as to whether the official sector actually holds 33,800 of gold, or far less than that amount, is debatable. But for the purposes of this discussion, the amount of gold that the central banking sector holds is not important.
This discussion focuses on why central banks hold gold. This discussion also uniquely draws on actual responses from many of the world’s largest central banks as to why, in their own words, they hold gold. While the common reasons for central banks holding gold range from store of value, to financial insurance, to asset diversification, we thought its best to let the actual gold holding central banks state their case.
Taking the list of official sector gold holders compiled by the World Gold Council (which uses IMF data sourced from the individual banks), the Top 40 gold holders on this list were identified. While most of the Top 40 gold holders are national central banks or equivalent, there are also a small number of international monetary institutions in the Top 40, namely, the Bank for International Settlements (BIS), the European Central Bank (ECB), and the International Monetary Fund (IMF). A similar question was sent out to each bank and institution. The question was:
“in the context that central banks hold gold as a reserve asset on their balance sheets, can Central Bank X clarify the main reasons why it continues to hold gold as a reserve asset?”
The central banks which responded to this question with constructive or definitive answers were as follows:
Germany’s Deutsche Bundesbank, which is most famous recently for repatriating gold from New York and Paris, but which still stores gold in London and New York, placed a particular emphasis on gold’s high liquidity, as well as gold’s powerful role in financial crises and emergencies:
“The part of the Bundesbank’s gold reserves which is to remain abroad could, in particular, be activated in an emergency. Therefore one part will remain in New York following completion of the relocation – the United States has the most important reserve currency in the world – and one part in London, the world’s largest trading centre for gold.
In the event of a crisis, the gold could be pledged as collateral or sold at the storage site abroad, without having to be transported. In this way, the Bundesbank could raise liquidity in a foreign reserve currency. However, these are purely precautionary measures as we are not expecting this kind of contingency scenario at the current time.
Gold is a type of emergency reserve which can also be used in crisis situations when currencies come under pressure.”
In neighbouring Austria, the Oesterreichische Nationalbank (OeNB), Austria’s central bank, also mentioned the liquidity characteristics of gold, its benefits in a crisis, and also gold’s diversification benefits. The OeNB also recently made headlines when it too repatriated some of its gold back from storage in London. The OeNB told BullionStar that:
“Gold is an essential part within our strategy for crisis prevention and crisis handling and is held as liquidity reserve but is also a means to diversity our investments.”
Staying in the region, Switzerland’s central bank, the Swiss National Bank (SNB) highlighted the diversification and risk optimisation benefits of gold, responding that the National Bank holds gold because:
“As part of a good diversification of currency reserves, a certain proportion of gold can help reduce the balance sheet risk. The Swiss Federal Constitution, art. 99 stipulates that the SNB has to hold a part of its currency reserves in gold.
See also the speech given by Fritz Zurbrügg, Vice Chairman of the Governing Board of the SNB; it contains comments on the role of gold in the SNB’s currency reserves: .”
Article 99 of the Swiss Constitution in part says that “the Swiss National Bank shall create sufficient monetary reserves from its profits; a part of these reserves shall be held in gold“.
Fritz Zurbrügg’s speech cited by the SNB, which was mostly a politically loaded SNB attack against the 2014 Swiss gold referendum more than anything else, says in part that gold reserves can be used in crisis management and that the SNB’s gold is “stored in multiple locations for reasons of risk diversification“.
The Polish central bank, Narodowy Bank Polski (NBP), provided a very detailed answer to BullionStar covering gold’s lack of credit risk and counterparty risk and its finite supply, as well as gold’s safe haven and diversification benefits: The NBP said that:
“Gold, due to its attributes is a quite specific asset, and traditionally has been an important component of central bank’s foreign reserves.
The main features which support the unprecedented role of gold at the same time constitute the rationale for holding gold within central bank’s reserves. These are: lack of credit risk, independence from any country’s economic policy, limited size of the resource, physical features such as durability and almost imperishability.
Additionally, gold has been constantly perceived as a safe haven asset, and is particularly desirable in crisis times, when gold prices increase while other core assets’ prices have a downward tendency.”
Moving north to Sweden, the Swedish Riksbank, the world’s oldest central bank, responded to BullionStar with an explanation that its holds gold for liquidity, foreign exchange intervention, and diversification reasons:
“In brief, gold is a financial asset that, like the currency reserve, aims to ensure that the Riksbank can carry out its tasks. The gold can, for example, be used to fund liquidity support or foreign exchange interventions.
The main reason why Sweden still has a gold reserve is because the value of gold does not normally follow the same pattern as the value of the currency reserve. Consequently, the combined value of the gold and currency reserve is more stable than the value of the gold reserve and the currency reserve separately.”
Elsewhere in Europe, the Bank of Greece, Greece’s central bank, told BullionStar that it holds gold because of its safe haven and high liquidity characteristics during crises, crises which notably the Bank of Greece has faced plenty of in the recent past:
“The two main reasons central banks, including the Bank of Greece (typically prudent-oriented organisations), choose to include gold as a reserve asset on their balance sheets, are: 1) its recognition as a safe haven asset during periods of markets’ unrest and 2) the ability of instant liquidation in case of emergency.”
The Bank of Portugal, the Portuguese central bank, kept its answer generic, and seemed to speak on behalf of central banks in general, covering the main arguments why central banks as a group hold gold:
“Gold reserves are kept by Central Banks mostly for safety, liquidity, return and as a diversification strategy. Gold compares extremely favorably to other traditional reserve assets with high-quality and liquidity helping Central Banks to preserve capital, diversify portfolios, mitigate risks and on the medium/long-term Gold has consistently outperformed the average returns of other alternative financial assets.”
The United Kingdom’s official gold holdings are held in the name of HM Treasury, and not, as sometimes thought, in the name of the Bank of England. The Bank of England is custodian of the HM Treasury gold as well as custodian for the gold of many nations, including many of the central banks mentioned in this article. HM Treasury told BullionStar:
“The Government’s official holdings of international reserves comprise gold and foreign currency assets, and (IMF) Special Drawing Rights (SDRs).
HM Treasury appoints the Bank of England as its agent to carry out the day-to-day management of the international reserves. The Bank of England’s ‘Handbook on Foreign Exchange Reserves Management’ sets out the traditional reasons for countries holding gold in their foreign exchange reserves.”
Looking at this Bank of England Handbook, a section titled “The Role of Gold” sums up the UK’s traditional reasons for holding gold:
the “war chest” argument – gold is seen as the ultimate asset to hold in an emergency and in the past has often appreciated in value in times of financial instability or uncertainty;
the ultimate store of value, inflation hedge and medium of exchanges – gold has traditionally kept its value against inflation and has always been accepted as a medium of exchange between countries;
no default risk – gold is “nobody’s liability” and so cannot be frozen, repudiated or defaulted on;
gold’s historical role in the international monetary system as the ultimate backing for domestic paper money.
While the BoE author (John Nugée) questions if gold is suitable for the reserve management strategies of all central banks, he concludes that:
“The traditional view of gold as the ultimate asset still carries weight, and gold also provides an excellent diversification for currency assets; over the very long run there is a significant negative correlation between gold and other assets and a portfolio containing gold will show lower volatility over several business cycles.
Moreover central banks can increasingly manage their gold holdings to enhance returns through gold lending, gold swaps, collateralised borrowing, and so on. “
Notably, apart from South Africa’s answer below, the Bank of England paper is the only reference to gold lending and gold swaps in all the correspondence and references generated by these central bank responses. But it is not surprising that the Bank of England mentions gold lending and gold swaps, since the Bank of England is the world’s centre for these particular central bank activities.
Responding from Sydney, the Reserve Bank of Australia (RBA) told BullionStar that it views gold as financial insurance and to some extent as a form of asset diversification:
“The principal reason the Bank continues to hold some gold is as a contingency against unforeseen events. You may be aware that in 1997 the Bank sold 167 tonnes of gold, reducing its holdings from 247 tonnes to 80 tonnes after it was concluded that the gold holdings provided fewer diversification benefits than some other reserve assets.”
From this annual report, there are a number of reasons stated as to what the National Bank of Romania holds gold as a reserve asset:
“The gold reserve is meant, inter alia, to enhance confidence in the stability of the Romanian financial system and of the leu, being particularly useful in times of heightened economic turmoil (domestically or abroad) or geopolitical tensions.
Unlike other asset types, gold has no solvency risk attached, because it is not “issued” by an authority (such as a government or a central bank).“
Bangko Sentral ng Pilipinas, the Central Bank of the Philippines, also highlighted the themes of gold as a safe haven asset and as a portfolio diversifier, as well as an inflation hedge:
“The BSP, like other central banks, holds gold as reserve asset for the following reasons:
Diversification. By diversifying its reserve assets to include gold, the BSP is in a better position to manage risks and promote stability since gold is not directly influenced by economic shocks and policies. Moreover, its supply and demand are independent from the factors affecting the value of other reserve assets components.
Security. Gold is a real asset and bears no counterparty or credit risk. In times of uncertainty, gold is considered a safe-haven asset.
Inflation hedge. When inflation and inflation expectations are high, gold is considered a hedge against accelerating asset prices. Central banks buy gold to protect their currencies’ purchasing power in the event of an inflation.
Moreover, since the Philippines is a gold-producing nation, the BSP can purchase gold from small-scale miners, refine and cast these into gold bars (good delivery bars) that would qualify as reserve asset. Therefore, it can build up its gold reserves without relying too much on external purchases that would have to be paid for in foreign exchange.”
The Reserve Bank of South Africa (SARB) provided what is probably the most comprehensive answer of all the central banks polled, possibly a model text book answer. SARB said that:
the SARB as a central bank can be viewed as a “traditional gold holder” which has inherited gold reserves as part of a legacy and has over time kept its level of gold reserves unchanged to support a broad country strategy. South Africa being one of the main gold producers in the world, it is appropriate for the SARB to hold part of its official reserves in gold to confirm the country’s confidence in the metal.
More in general and similar to many other central banks, the rationale for SARB [holding gold] remains:
Gold acts as a store of value in times of crisis and is therefore seen as a safe-haven for capital preservation
Gold acts as a hedge against inflation. In other words, the price of gold tends to increase as inflation rises
Gold provides some diversification to official reserves – it’s rather low correlation with government bonds and money-market instruments
Gold has an intrinsic value and as a result it is nobody’s liability. As a unique asset class, it is not influenced by a country’s economic policy and outlook
Although short-term gold lending rates are currently very low, this has not always been the case and these rates may increase again, suggesting that it may not forever remain a non-income earning asset. In addition, when investing for longer time periods, gold loans earn positive, albeit low, returns when compared to other asset classes
Gold reserves can be regarded as insurance against unlikely, but extremely damaging events, such as the collapse of financial systems or debt default by major sovereign nations
Banco Central do Brasil, the Brazilian central bank, referenced reserve diversification and store of value in its response to BullionStar:
“The asset allocation of the Brazilian foreign reserves, including Gold, is a strategic decision of the Board of Governors. But, according to some Central Banks best practices, Gold as a commodity may be used as storage of value and to diversify their foreign reserves portfolio.”
While there is some skepticism as to how much gold the central bank of Libya actually has in the aftermath of its recent invasion, the Banque du Liban provided an interesting response on why it still holds gold, i.e. that its prevented by law from selling its gold holdings:
“When the LBP [Libyan Pound up to 1971] was very strong versus the USD in the early seventies ,Banque du Liban bought a large portion of its gold reserves what was very wise as the ounce price was around 42 USD.
Then after the turmoil that plunged the country into war and chaos and in order to preserve the reserves, the parliament issued a law preventing Banque du Liban from trading on gold and consequently from selling the existing reserves. The law is still in force and Banque du Liban is holding now the 15th largest gold reserves worldwide.”
European Central Bank (ECB)
The ECB responded to BullionStar’s question without actually addressing the question and by citing references which not not address the question either. This deflection strategy is not unknown in ECB press conferences. The ECB said that:
The only reference the 4th central bank gold agreement (which was between the ECB and European central banks) makes to gold reserves is that “Gold remains an important element of global monetary reserves“, but does not say why. Interestingly, the ECB’s ‘Foreign Reserves and own Funds” page states that “The ECB’s foreign reserves [which include gold] ensure that the ECB has sufficient liquidity to conduct foreign exchange operations if needed.”
These “foreign exchange operations” are, according to the ECB, mainly foreign exchange interventions, which can be unilateral or concerted (ECB member banks together), and can be centralised (directed by the ECB) or decentralised (carried out by the member banks on behalf of the ECB). So is ECB gold being used as liquidity in foreign exchange operations? The Swedish Riksbank mentioned this use of gold, so it might be an operational tactic of the ECB also.
A number of banks, although they responded, said that they could not comment on the reasons they hold gold. This secretive approach isn’t very logical and is even more surprising given that some of the banks which took this approach are all from otherwise progressive and advanced OECD economies.
The Banco de España, which is a member of the ECB’s Eurosystem alongside such central banks as the Portuguese, German and Austrian central banks, seemed to be particularly secretive as to why it holds gold, and told BullionStar:
“We do not make public comments on the reserve assets policy of the Banco de Espana so unfortunately we cannot help you in your query.”
“Regarding your inquiry on our gold asset, we cannot disclose any information other than the information published on our website due to our confidentiality policy.”
However, looking at the Bank of Japan website, there is nothing material on the site addressing why the BoJ continues to hold a very large amount of gold.
Bank for International Settlements (BIS)
The BIS, headquartered in Basel, Switzerland, is commonly known as the central bankser’s central bank. The BIS is also infamously known for organising and plotting gold price suppression and gold market interventions through its various Gold Pool cartels. As well as holding gold in its own name, the BIS holds gold on behalf of other central banks. Perennially secretive, it was not surprising that the BIS refused to answer BullionStar’s question directly, but at least they replied. The BIS said:
While there is some discussion of gold in BIS Papers 40 and 58, there is no discussion for the reasons why central banks hold gold as a reserve asset.
The cutoff point for this survey was the Top 42 gold holding central banks in the world, as this allowed the inclusion of Australia and Brazil, both of which are large gold holders and both of which are also large domestic gold producers. Between them, these 42 central banks and monetary institutions claim to hold 32,075 tonnes of gold, which is 95% of the 33,790 tonnes of gold claimed to be held by the 100 central banks on the World Gold Council list.
Of the central banks and institutions contacted, 21 replied with definitive responses. Arguably, this is quite a high response rate given that it was surveying a diverse cross-section of central banks from around the world on a subject which central banks are traditionally quite secretive about. Of the central banks in the Top 42 list, emails were sent to all of those that were contactable by email. In a few cases a web contact form was used.
Five central banks were not contactable as they did not have any obvious email address or web contact form. These banks were from Lebanon, Venezuela, Mexico, Taiwan and China. The Chinese People’s Bank of China is notoriously difficult to contact, even for BullionStar which has been writing about the PBoC and the Chinese Gold Market for years.
Four central banks had a bounce back on the email addresses stated on their websites. These were the central banks of Algeria, Egypt, and Indonesia. None of the three banks contacted by web form responded. These were the central banks of India, Turkey, and Saudi Arabia.
Not surprisingly, banks from more developed and democratic countries have a more transparent means of being contacted and they maintain media and communications staff. Therefore it is logical that these banks are more likely to have responded.
Of the 9 central banks and institutions which did not respond within a reasonable time-frame, they were then re-contacted, asking them had they had time to look at the query. Nearly all of these banks still did not reply. These institutions were the US Treasury, and central banks from the Russia Federation, South Korea, Kuwait, Kazakhstan, Belgium, Netherlands, Thailand, and Italy.
Its notable that the US Treasury, which claims to have the largest official gold reserves in the world, 8133 tonnes of gold, did not respond as to why it supposedly holds the largest gold reserves in the world. These supposed US gold reserves are as large as the gold reserves of the next three countries combined (Germany, Italy and France).
The IMF, headquartered in Washington DC, sent a generic reply to say that they had received the query, but they never responded. The Central Bank of Iraq received the query, forwarded it to their operations department, but there was no subsequent response.
Some of these non-responding banks have ‘reasons we hold gold’ sections on their websites or in their annual reports, so for anyone interested, those information sources could be consulted.
In their own words, the reasons central banks hold gold in large quantities are many fold, however there are consistent themes in the central banks’ explanations. Many of the respondents cited gold’s ability to be mobilized in a crisis, that ‘gold holdings can be activated in an emergency’, that gold is an ‘emergency reserve in a crisis’, ‘a contingency against unforeseen events’, a form of ‘insurance’, or as the Bank of England says ‘a war chest’ and the ‘ultimate asset to hold in an emergency’. As such, nearly all central banks referred to gold as a safe haven asset.
Many central banks mentioned gold’s high liquidity, and some referred to the ability to use their gold to raise liquidity in a foreign currency, even for foreign exchange intervention.
Gold’s role as a hedge against inflation was cited in a number of the central bank answers, which explains why central banks look to the gold price as a barometer of inflation expectations.
Many of the banks also pointed out that because of the unique attributes of physical gold, such as limited supply and mined into existence, gold does not have any counterparty risk or credit risk, and because it is not issued by governments, it has no default risk.
The return generating potential of gold was also cited by a few central banks via the use of gold lending, gold swaps and the use of gold as collateral. Interestingly, very few of the banks that responded directly mentioned gold lending, although many of these central banks do engage in gold lending. This in itself highlights the absolute secrecy surrounding all data relating to the gold lending market which is centred in London at the Bank of England and also through the Swiss National Bank in Berne and the Banque de France in Paris.
Many of the respondents also highlighted gold’s portfolio diversification benefits. Because its price is not affected by economic events in the same way as the prices of financial securities, the gold price is not highly correlated with the prices of other assets. Gold therefore brings stability to a reserve asset portfolio.
With such widespread support among the world’s central banks for holding physical gold, as a safe haven, as an inflation hedge, and as a form of investment diversification, their enthusiasm for gold in 2018 looks as strong as it has ever been in any decade of the modern era.
In August 2014, the long-standing and tainted London Silver Fixing daily auction was replaced by a newly launched London Bullion Market Association (LBMA) Silver Price daily auction. Similarly, in March 2015, the infamous London Gold Fixing daily auctions were replaced by revised twice daily LBMA Gold Price auctions.
In both cases, the new auctions, which the LBMA were quick to maintain control over, were trumpeted by the bullion bank controlled LBMA as ushering in an era of improved transparency in gold and silver price discovery within the London Gold and Silver Markets, a marketplace which dominates in setting the international gold and silver prices.
The LBMA Gold Price and LBMA Silver Price auctions are both critical to the world of precious metals, because they derive benchmark reference prices for gold and silver which are used extensively in the valuation of everything from Exchange Traded Funds (ETFs) to OTC precious metals contracts.
The benchmarks are also used as reference prices in all sorts of transactions from sophisticated wholesale market transactions of central banks, refiners and miners, to small quantity gold and silver coin purchases in bullion dealer shops all over the world.
Both benchmarks are also ‘Regulated Benchmarks’ under UK financial market regulations as “policed” by the UK’s Financial Conduct Authority (FCA).
It was therefore surprising that last week on 1 March, ICE Benchmark Administration (IBA), the administrators of the LBMA Gold Price and LBMA Silver Price auctions, issued a ‘Notification’ announcing that from 1 April 2018:
“the LBMA Gold and Silver Prices will not be available on the LBMA website until midnight London time on the date that the prices are set.“
More extensive quotes from the IBA Notification are as follows:
“Please note that effective 1 April 2018, the arrangements for delayed redistribution of the LBMA Gold Price and the LBMA Silver Price will change so that the delay period increases from 30 and 15 minutes to midnight London time.”
“delayed prices are available with no monthly fee, currently with a delay of 30 minutes from publication for the LBMA Gold Price and 15 minutes from publication for the LBMA Silver Price.”
“Any public websites that display the LBMA Gold Price and the LBMA Silver Price (currently with a 30 minute and 15 minute delay respectively) will be required to delay prices to midnight London time.”
So instead of a 30 minute delay, starting on 1 April (April Fool’s Day) the price for the morning LBMA Gold Price auction will not be available until about 14 and a half hours after the auction completes.
For the afternoon LBMA Gold Price auction, the price will only be available to the public about 9 hours after the auction finishes. For the LBMA Silver Price auction, the lag time on the public being able to see the daily reference price will now be 12 hours instead of 15 minutes. That’s a whopping 40 times longer. If only this was an April Fools joke. Alas, it’s not.
Any rational person would therefore conclude that the changes to the auctions being forced in by ICE Benchmark Administration (IBA) can only be described as torpedoing the concepts of price transparency and price discovery.
It should also be remembered that although IBA is the auction administrator, IBA would never make these publication time changes without the blessing of the LBMA, since the LBMA is the intellectual property owner of the benchmarks and the ultimate authority on these benchmarks as well as the gatekeeper on who can take part in these auctions.
“The revised arrangements for delayed redistribution of the LBMA Gold Price and LBMA Silver Price… recently announced by ICE Benchmark Administration (IBA)… are consistent with the timing of the publication of the LBMA Platinum and Palladium prices.”
As a reminder, the LBMA also controls the worldwide pricing for platinum and palladium through the LBMA Platinum Price auction and the LBMA Palladium Price auctions, both of which were awarded to the London Metal Exchange by the LBMA in 2014 during a secretive and non-competitive tender process.
The publication time (to the public) of the platinum and palladium prices is indeed midnight on the day the auctions occur. As the LBMA website states:
“Since 13 July 2015, the prices on the LBMA’s website are displayed with a delay until midnight following the setting of the prices each day.”
Why the worldwide platinum and palladium user base is not up in arms about these platinum and palladium price delays, only they can answer. But it is certainly a spin too far to think that anyone will accept the warped alchemy of the LBMA that because the LBMA Platinum and Palladium prices are ‘freely’ published only at midnight, that somehow this validates the decision of the IBA / LBMA to also roll back transparency in the LBMA Gold and Silver auctions to midnight.
Overall, this price publication time rollback is farcical, but not surprising in the world of the LBMA where black is white and where a step backwards is spun as a step forwards. This development might also be humorous if it wasn’t so important. Especially as the changes are being implemented on 1 April, April Fool’s Day! But the auction prices are important and also very influential in the global gold and silver markets. Hence, it is no laughing matter.
London Gold and Silver Trade Reporting: Not in Your Lifetime
Apart from the regressive step on LBMA auction price timing which will make the London gold and silver markets more opaque, the lack of Trade Reporting for London gold and silver trades is another area that continues to shroud the London Gold and Silver Markets in a virtual blanket of secrecy. That’s right, there are no trades reported in the London gold and silver markets. Zero. And there never have been any trades reported in the London gold and silver markets.
With no trade data, there is no market efficiency. How could there be any market efficiency when the market cannot analyse the trades that have taken place? Insider bullion banks are therefore free to trade gold and silver in the knowledge that the global markets don’t know what the insiders are doing. This also applies to the central banks in the London Gold Market in their buying and selling and lending and swaps transactions. So the London Gold and Silver Markets are not ‘Fair’.
At the end of January, I wrote an article titled “What’s Happening (or Not) at the LBMA: Some Updates” which in part discussed the broken promises on trade reporting made by the LBMA over the last 2-3 years, and the complete lack of progress that the LBMA has made on actually publishing any trade data to the Market. As early as January 2015 (over 3 year ago), the LBMA stated to the UK Regulator’s “Fair and Effective Markets Review” (FEMR) at that time that it would:
“welcome further transparency through post trade reporting, providing the industry with data that at the moment does not exist for the bullion market.”
During the course the next 3 years, the LBMA made many promises about publishing this trade reporting data, none of which came to pass.
For example, in February 2016 for trade reporting, the LBMA claimed that there was a “target delivery date in the second half of 2016”. This never happened.
The next broken promise, made at the LBMA annual conference in October 2016 claimed that”Phase 1 will focus on reporting and will launch in Q1 2017. This reporting covers all Loco London Spot, forward & option trading.” This never materialised.
This was followed by a litany of further promises during 2017 from the LBMA CEO, the LBMA Chairman and the LBMA Legal Counsel that all promised a publication date for trade reporting of early 2018. In May 2017, the LBMA CEO said that “Reporting will begin later this year in a phased approach and, following a period of quality checking the data, it is expected that it will be published in early 2018.“
In August 2017, the LBMA Chainman said that “it is expected that the first data will be published in early 2018“. At the LBMA’s annual conference in October 2017 in Barcelona, the LBMA’s Legal Counsel said that “the data will then be aggregated and published but not until Q1 2018.“
Now that the first quarter 2018 has come and nearly gone, you can probably guess what has happened. The correct answer is …nothing has happened, with the LBMA again totally disregarding its own promises and now unbelievably shifting the trade reporting publication date out an entire year more to “early 2019“. You couldn’t make this up.
And as per usual, there was no LBMA press release about this further delay, only a small reference buried in the back of the latest issue of its in-house magazine, The Alchemist. As per the reference:
“Many members have already begun to report their trades to the LBMA-i platform and many members are being on-boarded. The reporting process will continue during 2018 with a view to establishing a robust data set which will be published in early 2019“.
Nothing more can be said about this trade reporting fiasco other than it must be obvious to everyone that the LBMA and its bullion bank members do not want the transparency that gold and silver trade reporting would provide. Otherwise they would not have spent 4 years on a project which any individual investment bank could start and complete within less than 3 months.
As I said in the conclusion of my January commentary on this topic:
“In this extremely long drawn out exercise by the LBMA, it must be clear by now that the LBMA and its trading members are engaging in this trade reporting project on their own terms, and with little regard for the spirit and recommendations of the Fair and Efficient Markets Review. There is also a trend of missed deadlines, broken promises, and a lack of explanation for the delays.“
To this you can now add another year (to early 2019). Will we be saying the same thing in early 2019, of more missed deadlines? Based on the LBMA’s track record, any bookie worth their salt would probably say ‘Yes’.
This article is in 3 parts and covers a) upcoming trade reporting in the London gold market which is being led by the London Bullion Market Association (LBMA), b) the recent publication by the LBMA of a Guide to the London OTC precious metals markets, and c) an update on monthly vault reporting which the LBMA and the Bank of England launched in 2017.
LBMA Trade Reporting
The lack of trade reporting in the London gold market is possibly one of the biggest ommissions in global financial markets, since the lack of gold trade data totally obscures knowledge of gold price discovery in a market that is predominantly a synthetic paper trading market, but which also plays hosts to the secretive world of central bank gold trading and central bank gold lending.
Trade reporting in the London gold market is also an initiative which the London Bullion Market Association (LBMA) has been promising to establish for more than 3 years, but which as yet has not produced one scrap of gold trade data, as the launch date and publication dates for this trade reporting have been continually pushed out.
In June 2014, in the wake of widespread trading misconduct, the UK Financial authorities launched the “Fair and Effective Markets Review” (FEMR) to improve confidence in the UK’s Fixed Income, Currency and Commodities (FICC) as well as to improve the fairness and efficiency of those markets.
The Review was conducted by the Treasury, the Bank of England and the UK Financial Conduct Authority (FCA) with the help of an independent Market Practitioner Panel drawn from the financial sector.
According to the FEMR, fair markets are those that have features such as market transparency and open access, while efficient markets are markets where trading and post-trade infrastructures provide sufficient liquidity and allow participants to discover and trade at competitive prices.
The FEMR recommendations were published in June 2015, which is now over two and a half years ago. One of the key recommendations of the FEMR report was to promote fairer market structures in FICC markets including improved transparency in over-the-counter markets. The Market Practitioner Panel also recommended that standardized physical markets such as the gold bullion trading market should have post-trade reporting so as to:
“provide an understanding of liquidity, help to dispel some concerns over information abuse” and “work towards levelling the playing field.”
During the review process, the FEMR authorities allowed interested parties to submit their views on the review, and in January 2015, the LBMA submitted a letter to FEMR (c/o the Bank of England) in which it stated that:
“The LBMA would also welcome further transparency through post trade reporting, providing the industry with data that at the moment does not exist for the bullion market.”
While this statement sounds innocuous enough, in a case of trying to steer the FEMR agenda while making it appear to be fully in agreement, the LBMA submission letter also made it clear that its members wanted the “precious metals market” to “report anonymised unique transactional data”.
In its submission, the LBMA further showed its true colours, i.e. that it primarily represents the powerful bullion banks and their central bank clients, as well as representing the interests of the Bank of England, when in a case of managing the expectations of the FEMR, the LBMA stated that “the role of the central banks in the bullion market may preclude ‘total’ transparency, at least at public level.” It also said that “transparency could be increased via post-trade anonymised statistical analysis of nominal volumes, provided by the clearing banks.”
The LBMA also cleverly retained control of the FEMR related agenda as it applied to the gold market when in April 2015 the LBMA launched its own “Strategic Review” of the London bullion market by commissioning the “independent” consultancy EY to undertake the actual strategic review and write a report.
Although the LBMA at the time gave lip-service to transparency and said that it would engage with the global bullion market in shaping this strategic review, the reality was otherwise and, for example, this author’s request for engagement were ignored by the LBMA. Furthermore, the actual EY report and its recommendations were never published and even the well-connected Financial Times in October 2015 said that it had only “seen” a “copy of the recommendations”.
One of the initiatives that supposedly grew out of this EY review was a Request for Information (RFI) by the LBMA to potential financial technology service providers in October 2015. This RFI was to “to assist the LBMA in delivering the EY recommendations from the Strategic Review.”
What exactly the EY recommendations were is unclear, since the EY report was never published, but based on LBMA press releases, the goal of the review in terms of strategic objectives was said to be to enhance transparency, improve efficiency, and expand the use of technology in the gold and other precious metals markets.
The following month in November 2015, the LBMA announced that it had received 17 responses from 20 providers to its RFI queries, and that it had reappointed EY to help evaluate these responses.
Then on 4 February 2016 (i.e. exactly 2 years ago), the LBMA launched a Request for Proposals (RfP) process and asked a short-listed of 5 of the above 20 service providers to submit proposals to deliver a number of services to the London gold market including trade reporting, portfolio reconciliation and valuation curves, and also to build or provide infrastructure to support these services such as a submission interface, trade repository and data warehouse etc.
These services, including trade reporting, would, according to the LBMA press release, “be launched later in 2016”, and more specifically had a “target delivery date in the second half of 2016”.
Then a FEMR Implementation Report from July 2016 made note of the fact that the “LBMA had launched a specific ‘Request for Proposal’ focusing on trade reporting as a priority in response to the market commitment by LBMA members to enhance transparency.”
But strangely, even though the LBMA said in February 2016 that it would launch trade reporting ‘later in 2016’, and even though the July 2016 FEMR noted that ‘trade reporting was a priority’, it was only on 12 October 2016 that the LBMA actually announced the winning entry in the RfP process.
This winning entry was awarded to a joint bid by financial technology service providers Autilla and Cinnober’s Boat Services Ltd. On the same day, the LBMA pushed out the launch date of trade reporting even further into the future and said that “in the first quarter of 2017, the LBMA together with Boat…will launch a trade reporting service”.
At the LBMA annual conference in Singapore on 17 October 2016, the LBMA CEO Ruth Crowell also said in her speech that:
“Now, what are these New Services? First and foremost, Phase One will focus on reporting and will launch in Q1 2017. This reporting covers all Loco London Spot, forward & option trading.”
“Reporting will not only make us more transparent and professional as a market….it will also demonstrate of the size and liquidity of the market for clients, investors and regulators.”
Also, at the same conference In October 2016, Jamie Khurshid, CEO of Boat Services Ltd provided a timeline for the roll-out of the LBMA’s trade reporting, which included the following:
November 30 2016: Completion of design phase & engagement with member firm technology organisations
Q1 2017: Implement customization and configuration of solution
End Q1 2017: Complete on-boarding, certification & training
April 2017: Soft Launch to manage member flow exposure risk
“LBMA-i will be ready to start collecting data in the second quarter” (2017)
“The data will then be vetted before being published later in the year” (2017)
However, in the May 2017 issue of the LBMA’s magazine, The Alchemist, the LBMA had already shifted the trade reporting dates even further out, with the LBMA CEO saying that:
“Reporting will begin later this year in a phased approach and, following a period of quality checking the data, it is expected that it will be published in early 2018.“
Then in the August 2017 issue of the LBMA’s Alchemist, LBMA Chainrman Paul Fisher stated that:
“Market Makers are expected to start reporting in the coming months, followed by other members later in 2017. After a period of quality checking, it is expected that the first data will published in early 2018.“
At the LBMA’s next annual conference in October 2017 in Barcelona, there were a few additional references to trade reporting with the LBMA’s legal counsel saying that:
“From September this year (2017), Market Makers and some full trading Members have started to report trade data into the LBMA-i. The LBMA-i is the reporting hub that is provided by Boat and Autilla.“
“the data is sufficiently anonymous without giving away the underlying client. The data will then be aggregated and published but not until Q1 2018. This is to provide the time to analyse the data and again work with the market to understand what we need to be publishing.“
In this extremely long drawn out exercise by the LBMA, it must be clear by now that the LBMA and its trading members are engaging in this trade reporting project on their own terms, and with little regard for the spirit and recommendations of the Fair and Efficient Markets Review. There is also a trend of missed deadlines, broken promises, and a lack of explanation for the delays. Trade reporting data is being sent internally, analysed heavily, and filtered and scrubbed and sanitized. Nothing as yet has been published, and promised publication dates have been continually pushed out.
The LBMA doesn’t even try to hide this, saying in one of its conference presentations that the “decision to publicise anonymous, aggregate data sits with LBMA and Member firms” and that it requires “a minimum of 3 months to analyse data and agree parameters for public deferral”.
In all of this, gold investors of the world are getting the usual run around. The LBMA’s agenda for implementing trade reporting has far less to do with providing gold trade data to the investing public and the global gold market, and a lot more to do with influencing lobbying efforts with regulators and placating the woolly recommendations of soft touch regulators.
There isn’t even any clarity on what level of trade date will be made available to the public when and if it is finally released. The LBMA claims that the reporting by its trading members is mandatory and covers “all four metals” (gold, silver, platinum and palladium) in “spot, forward, options, deposits, loans and swaps, whether Loco London, Loco Zurich or other locations.”
If so, they should release all of this data, in granular format by category, showing for each metal, trade volumes by transaction type across spot, forward, options, deposits, loans and swaps. Transparency also calls for data that is useful for analysis, like the full suite of trade data that is reported by the world’s securities exchanges, where all trades would be reported, showing price, quantity, trade type (spot, option etc), transaction type (ETF, consignment etc), client counterparty types (central bank, broker, commercial bank, hedge fund, refinery, miner etc).
The LBMA’s reporting when published should also reveal the size of the physical gold market relative to the non-physical (paper) gold market. As the LBMA’s submission letter to FEMR in 2015 said:
“Reporting in the physical market, which currently does not happen, will need to consider market pricing factors such as premiums, shipping/storage, taxes and duties.“
So, yes, its possible that this information on the physical market can be reported. Technically there is nothing preventing this. But will it be reported? Likewise, will the trade data that is published reveal the magnitude of fractionally-backed unallocated gold trading that accounts for over 95% of daily London gold market turnover?
Another area critical for trade reporting report is central bank gold trades and central bank gold lending and gold swap related trades. Will central bank trades be reported as a grouping? Highly unlikely, as the LBMA already said that “the role of the central banks in the bullion market may preclude ‘total’ transparency, at least at public level.
But as I see it, almost none of the above will be reported by the LBMA, and the most we can expect per metal is a gross trade turnover figure rolled up by month, which is a figure that is practically useless in revealing anything about the real workings of trading in the London precious metals markets.
The LBMA Guide to the OTC Precious Metals Market
In early November 2017, the LBMA published an updated “Guide to the Global OTC Precious Metals Market”. The guide in pdf format can be opened here. The relevant LBMA press release is here. The guide is edited by Jonathan Spall, consultant to the LBMA, with input also from Aelred Connelly PR Officer to the LBMA.
On first reading, although well presented, it becomes apparent that this new Guide does not contain very much new information at all, with most of the information in the guide either already on the LBMA website, or taken from other LBMA publications and tweaked slightly. More recent developments such as London vault reporting or the LBMA Gold Price are included, but only the type of content that was already in the associated LBMA press releases.
If you didn’t know anything about the London gold market, this guide might provide some introductory detail, but other than that, it’s like a standard reference text which would be found in a reference library.
Unbelievably, this updated LBMA guide claims that it seeks to “make the moving parts of the market transparent”. However, in reality, it provides very little detail on transparency, so this claim rings hollow.
There is nothing revealed in the guide as to how the market really works, who the influential players are, and no data that would reveal the real state of the market, i.e. the fractional backing of unallocated accounts, the level of outstanding gold lending, the working of the gold vaults, how gold ETFs are allocated to and from what sources they are allocated from, how the Bank of England interacts with the commercial bullion banks and its client central banks, the trading volumes in the market and what transaction types they refer to etc.
This is a pity and a missed opportunity, since if it wanted to, the LBMA could have revealed how the moving parts of the market really work. But it is not surprising, since in its public and media interactions, the LBMA essentially acts as gatekeeper, regulating and filtering the information that it allows to be disclosed about the London gold market.
Structure of the Guide
Excluding the introduction and appendices, there are 22 sections in the guide. As well as gold and silver, the guide also covers the London Platinum and Palladium Market (LPPM), and the good delivery system for platinum and palladium.
TABLE OF CONTENTS
London Bullion Market Association
London Platinum and Palladium Market
London Good Delivery – Gold and Silver
Good Delivery – Platinum and Palladium
London Precious Metals Clearing Limited
Precious Metal Accounts
Lending and Borrowing Metal
Precious Metal Benchmarks
Bank of England
Futures Markets and Exchange
Key Facts about Precious Metals
Market Trade Statistics
Central Bank and Governmental
Ownership of Gold
Properties of Precious Metals
Frequently Asked Questions
Looking at the table of contents, the sections which would appear to be of particular interest and worth scrutinizing to see if they provide any new information are as follows:
Section 4: The Price
This section has short discussions of things like characteristics of the price (troy ounce, fineness etc), that are mostly taken from a page on the LBMA web site. Most importantly, this section does nothing to illuminate important questions about ‘price discovery’ or ‘where does the internationally quoted gold price come from?’.
There is nothing in this section about price discovery or that the prices on COMEX and the London OTC market create the international gold price. COMEX is mentioned elsewhere in the guide not in relation to price discovery.
You have to read between the lines to see how the guide addresses the issue of trading and price. It first says that it’s a wholesale market price [true]. It then mentions delivery location of London – i.e., ‘loco London’. All it says is as follows:
“The standard delivery location of gold and silver is London – Loco London. This is ultimately an account held with a clearing bank for precious metals and backed by metal held in a vault in London that forms part of the clearing system.”
However, this paragraph fails to mention that these are fractionally-backed unallocated positions, and that the position in the account with a clearing bank is a synthetic cash-settled gold derivative and really not backed by gold. The ‘backed by metal held in a vault in London’ is therefore misleading and disingenuous, since there is not necessarily any gold backing an ‘account held with a clearing bank’.
Section 4 then ends with a baffling and confusing paragraph which looks deliberately designed to mislead with a title of “The Metal’ Not the Account”, which says:
“Clearly, gold, silver, platinum and palladium are all traded metals. It is an important distinction that it is not unallocated or allocated metal that is traded, but the metal itself.
The terms ‘allocated’ and ‘unallocated’ simply reflect the type of account over which the metal clears post trading of the underlying metal.”
This line, that “it is not unallocated or allocated metal that is traded, but the metal itself” looks like an attempt by the author to try to justify that all trading in the London market is trading of underlying metal. However, when an unallocated position is traded, it is just a claim on a bullion bank that is being traded. There is no specific metal. Its is just a liability to a bullion bank that is traded. And since these positions are fractionally-backed, it is not metal which is being traded. So, its mischievous to say that “the metal itself” is being traded. Perhaps the LBMA should be asked “Show me which underlying metal is being traded?”
Section 7: London Precious Metals Clearing Ltd (LPMCL)
The LPMCL is one of the most important components of the London gold and silver markets since all trades that flow through these markets are cleared through LPMCL. But strangely, this section say very little about LPMCL and there is no discussion of the London precious metals clearing statistics or what they represent. This section merely says that LPMCL is a:
“daily clearing system of paper transfers whereby LBMA members offering clearing services utilise the unallocated precious metals accounts they maintain between each other” and that LPMCL lies at the heart of the Loco London (OTC) system”
This section could have actually provided real detail in LPMCL. But it didn’t. It just takes some text from the LPMCL website. The LPMCL subsection also has no explanation of the AURUM system and the fact that it its unallocated metal that is being cleared.
In fact, this entire LPMCL section is misleading because the section is titled “London Precious Metals Clearing Limited” and apart from a few introductory paragraphs about LMPCL, the rest of the section is devoted to physical gold vaulting, with sub-section headings such as” Vault Managers”, “Vault Operators Accreditation Scheme”, “Weighing Gold”, “Weighing Silver”, “Traditional Weighing”, “Weighing Platinum and Palladium”, “Scales”.
But clearing of paper transfers (which LPMCL’s AURUM processes) is not related to vaulting of physical metal. Allocating metal is distinct from the clearing of trades in AURUM. It’s a separate step. Notably, this section also doesn’t mention who the member banks of LPMCL are. They are HSBC, JP Morgan, Scotia, ICBC Standard, and UBS. Could it be trying to draw attention away from the names (the bullion banks) that actually run the LBMA?
Notably also, in the LPMCL website under Definitions, there is a definition for Paper Gold:
“A term used to describe gold contracts such as loco London deals and future contracts which do not necessarily involve the delivery of physical gold.”
Section 8: Precious Metal Accounts
This section begins with the strange, and misleading comment that “it’s the metal that’s being traded”:
“The Metal not the Account
Clearly, gold, silver, platinum and palladium are all traded metals. It is an important distinction that it is not unallocated or allocated metal that is traded, but the metal itself.”
Given that the LPMCL website definition of unallocated metal is an “amount of that Precious Metal which we have a contractual obligation to transfer to you”, the “metal not the account” statement above makes little sense and is illogical.
Section 9: Lending and Borrowing
The first subsection of section 9 is titled “Deposits and Leases”, but there is no mention that bullion banks predominantly do the borrowing or that the central banks predominantly do the lending, nor of the level of outstanding loans from central banks to bullion banks.
In a subsection called “Lending Allocated Metal”, it mentions official central bank holdings of 33,399.2 tonnes in July 2017, but makes no attempt to comment on how much of this metal is lent out:
As of July 2017, it has been calculated by the World Gold Council (using data from the International Monetary Fund’s International Financial Statistics) that the world’s central banks hold 33,399.2 tonnes of gold. A listing appears in section 22.
But the question must be asked, why does the LBMA need to resort to quoting figures from the WGC which are in turn just figures reported to the IMF when the LBMA can get lending info from its member firms about gold lending activity, and from the Bank of England.
This subsection also states that central banks lends to commercial banks. But there is no mention of which central banks and commercial banks are involved, or the level of gold lending by central, or the length of deposits, or whether they roll over the loans and for how long.
Interestingly, the same subsection confirms that if a central bank lends out its allocated gold bars, it doesn’t get back the same bars. As the text says:
“Therefore, allocated metal becomes unallocated when it is lent but can be returned as allocated. Albeit, it will be returned with different bars and will likely be of a (slightly) different weight.
‘’…it’s not possible to lend allocated metal. Allocated metal is associated with specific bars in an account and, clearly, it is not possible to lend specific bars and expect to get the same ones back while receiving a return”
Section 12: Bank of England
There is nothing new in this section, and only vague references of how central banks in the London gold market lend and swap gold with bullion banks.
“The Bank provides safe custody for the United Kingdom’s gold reserves (owned by Her Majesty’s Treasury) and for other central banks. This supports financial stability by providing central banks with access to the liquidity of the London gold market. It also provides gold accounts to certain commercial firms (including members of the LBMA) that facilitate access for central banks to the global OTC gold market.”
Section 14: Physical Market
This section is short and only addresses consignment stocks and inventory financing. Its quite telling that a Guide to the London OTC gold market only has one section (out of 22) about a ‘Physical gold market”. In a real, specialized physical gold market (not London), this would takes many pages to cover. The intro to this section even tacitly admits that loco London trading has nothing to do with the physical gold market:
” However, unlike Loco London trading, the physical market can require knowledge of a myriad of specific country requirements, the logistics and costs of moving precious metal around the world in various forms prior to fabrication, the manufacturing costs at the various refineries and sourcing refining/manufacturing capacity.”
Section 21: Market Trade Statistics
This section is as good as blank given that there are no gold market trade statistics. This page just gives some sketchy information about the delayed gold trade reporting project (see above).
Section 22: Central Bank and Government Ownership of Gold
For such a promising sounding section, based on the title, this section is a real letdown and has nothing in it except a short introduction followed by a replicated table of World Official Gold Holdings sourced from the World Gold Council.
This new updated LBMA Guide is in some ways similar to a ‘Limited Hangout’ as the term is used in the intelligence community, i.e. revealing partial truth while keeping the main body of information hidden, and acting as gatekeeper to drip feed some information.
In other words, some information is ‘hung out’ while the main body of information is kept hidden. The public see the information that is offered and thinks “this is useful, this source is credible” but then the public inquires no further. The LBMA can point to the fact it is ‘transparent’ about the gold market, while actually not revealing anything at all important about the real workings of said market. The LBMA has drip fed some information to the public while actually acting as gatekeeper and preventing any critical information from reaching the market.
One of the characteristics of a limited hangout is that nothing new is really revealed about the subject matter being discussed. This is exactly what the LBMA guide is. All of the information contained in the guide is already on the LBMA website or else within LBMA press releases.
There is also a failure to discuss the most important areas of the London Gold Market including the fractional reserve nature of unallocated gold accounts, what the daily gigantic trade volumes in gold and silver are based on, how the London OTC gold market that trades huge quantities of synthetic gold positions continues to set the international gold price, the extent of gold lending in the London market and who are the lending central banks and who are the borrowing bullion banks, the real role of the Bank of England in the London market and the lending market, how the LMPCL clearers maintain gold accounts at the Bank of England.
This goes back to the theme of transparency and secrecy that I discussed in a presentation in Singapore October 2016 titled “The Gold Market – Where Transparency means Secrecy”, a transcript of which can be read here.
This also relates to the topic of market efficiency and availability of market data and information. Because, a market which is secretive and which is not transparent, such as the London Gold Market, cannot be efficient, because some market participants, namely bullion banks and central banks, have an informational advantage over other participants.
And remember that the London Gold Market creates the international gold price, so the transparency of this market is not just a theoretical issue, it has real world implications for everyone who owns and transacts in physical gold around the world.
Vault Holdings Reporting
Last year in 2017, both the Bank of England and the London Bullion Market Association (LBMA) for the first time began publishing monthly data showing the quantities of physical gold and silver held in the wholesale precious metals vaults in London.
The Bank of England data covers monthly gold holdings held by its central bank and commercial customers in the Bank of England’s gold vaults. Note that the bank of England does not store any silver. The LBMA publishes monthly data on both the gold and silver held in the vaults of the 8 commercial vault operators which comprise its vaulting network.
Both sets of data are published on a 3-month lagged basis. The Bank of England began to independently publish its monthly gold vault data at the end of the first quarter 2017, and the first month’s figures for the end of December 2016 revealed that the Bank’s gold vaults held 5102 tonnes of gold. See “Bank of England releases new data on its gold vault holdings” for more details. Prior to 2017, the Bank only published gold vault holdings data once a year in its annual report.
The LBMA began publishing its vault data at the end of July 2017. Prior to that the LBMA had never published any data addressing precious metals holdings in its London vaulting network.
When the LBMA published its first set of data at the end of July, it stated that as of 31 March 2017 there were 7449 tonnes of gold and 32078 tonnes of silver in the vaults of the 8 commercial vault operators that comprise its vaulting network. See “LBMA Gold Vault Data – How low is the London Gold Float?” from 2 august 2017 for more details.
For some reason, the first set of LBMA was on a 4-month lagged basis, however, since then they have since caught up to reporting on a 3-month lagged basis.
Since it’s now 6 months since the LBMA first released its vault data, it’s timely to do a short update on the more recently published vault data from both the LBMA and the bank of England, starting from the end of March 2017.
At the end of March 2017, the Bank of England was storing 5081 tonnes of gold in the vaults under its headquarters building in London. As of September 2017 (the latest month published), the Bank of England was storing 5220 tonnes of gold. Therefore in that 6 month period, net gold holdings in the Bank of England’s vaults increased by 139 tonnes, or 2.73%. There were net additions of gold to the Bank’s vaults in 5 of those 6 months, but nothing really significant stands out. A net 43 tonnes were added in April, 33 tonnes in June, there was a net decline of 8 tonnes in July, and a net addition of 56 tonnes in September.
See chart below for a graphical representation of these Bank of England vault holdings changes.
Over the 6 month period from month-end March 2017 to month-end September 2017, the LBMA precious metals vaults saw a net inflow of 294 tonnes of gold, or a 3.95% increase. There were net additions over the same 5 months as the Bank of England witnessed. On an aggregate basis, total gold holdings rose from 7449 tonnes to 7743 tonnes with large net inflows of gold bars appearing in the LBMA vaults in April with 47 tonnes added, 45 tonnes added in June, 86 tonnes added in August, and September saw the highest inflow with 157 tonnes of gold added. Only July 2017 saw net outflows of 59 tonnes of gold bars.
See chart below for changes to these LBMA vault holdings totals.
Adding the gold inflows of 294 tonnes in the LBMA vaults to the gold inflows of 139 tonnes in the Bank of England vaults, this means that over the 6 month period being discussed, the total amount of gold stored in all the London wholesale gold vaults increased by 433 tonnes, which is the equivalent of just under 35,000 Good Delivery gold bars, each weighing approximately 400 ounces. Gold-backed ETFs which store their gold in London only added about a net 40 tonnes of gold over the same period, so could only explain a small part of the total increase.
The LBMA vaults on an aggregated basis added 1794 tonnes of silver over the same 6 month period to the end of September 2017. Total silver holdings rose from 32078 tonnes to 33873 tonnes. This was a net increase of 5.6% in the total silver quantity held in the vaults. The largest net inflows were in April with 749 tonnes added, and June with 658 tonnes of silver added. Silver-backed ETFs which hold their silver in London actually saw net outflows over the 6 month period in question, so these movements do not explain the large 1794 tonnes of silver added to the London vaults over this time.
Recently, Russian television network RT extensively quoted me in a series of articles about the US Government’s gold reserves. The RT articles, published on the RT.com website, were based on a series of questions RT put to me about various aspects of the official US gold reserves. These gold reserves are held by the US Treasury, mostly in the custody of the US Mint. The US Mint is a branch of the US Treasury.
As the subject matter of US gold reserves is broad and wide-ranging, the RT questions and my answers and opinions covered a lot of material and RT therefore decided to divide it’s coverage into 2 articles. The first RT article covered the lack of transparency into the US gold reserves, the fact that has never been any of independent audits of the gold, and the fact that a lot of gold bars that the US claims to hold are actually low purity gold bars which do not conform to international industry standards on tradable wholesale gold bars (i.e. Good Delivery standards).
The first article also touched on the international reaction to and the effects on the US dollar that might unfold if the US gold reserves were found to be less than they are claimed to be.
The second RT article looked at the gold holding strategies of China and the Russian Federation, where the central banks of both nations have been actively accumulating their national gold reserves over the last 10-15 years, and where both central banks have been vocal about this monetary gold accumulation, possibly in preparation for a future return to a gold-backed monetary standard.
The second RT article also explored the scenario under which both China and Russia could have significantly more gold accumulated than they have publicly divulged, a situation which if revealed would put the spotlight back on to the claimed gold holdings of the US Treasury.
Following the RT articles, on 11 January, Beijing-based Chinese business and financial website BWChinese picked up on my quotes in the second RT.com article, and in a geo-political article about oil, the Renminbi, the US Dollar and gold (written in Chinese), the Chinese website linked the gold accumulation of China and Russia to part of a strategy of moving away from the dominance of the US dollar. The BWChinese article (in Chinese) can be seen here.
Then finally on 16 January, Moscow headquartered Sputnik news agency, in an article titled “Chinese Media Explain How Russia & China Can Escape ‘Dollar Domination”, profiled the BWChinese article, and essentially (and conveniently) summarized the entire Chinese article back into English. Interestingly, there was therefore coverage of the topic of official US gold reserves from Moscow across to Beijing, and back to Moscow again, all within the space of a week and spanning 3 media publications, namely RT, BWChinese and Sputnik.
As background to this media coverage, this blog post looks at the topics covered in the RT.com articles, and details the opinions and material that formed the basis to the original RT articles.
The claimed physical gold held by the US Government
The US Government claims to hold 8133.5 tonnes of physical gold in its official reserves. However its impossible to verify this number because the entire story around the US gold reserves is opaque and secretive. Therefore, it’s impossible to say how much, or how little, physical gold the US actually has. This is so because there has never been a full independent audit of the US gold reserves, and the custodians of the gold (the US Mint and the Federal Reserve of New York) will not let anybody into the vaults to view the gold or to count it.
Even the details that have been provided on the supposed US gold holdings show that a majority of the gold bars are low purity and in weights that don’t conform to industry standard ‘Good Delivery” gold bar specifications.
The US Government gold reserves are held in the name of the US Treasury and are supposedly held in Fort Knox, Kentucky, and West Point, New York, and in the US Mint in Denver. And further small amount of US Treasury gold (5%) is supposedly held in the vaults of the Federal Reserve bank of New York (FRBNY). The US Treasury reports on this gold in a monthly report called “Status Report of U.S. Government Gold Reserve”.
Of the 8133.5 tonnes, this means, based on the official reporting, that:
58% is allocated to Fort Knox, Kentucky: 4583 tonnes
20% is allocated to West Point, New York State: 1682 tonnes
16% is allocated to US Mint Denver, Colorado: 1364 tonnes
5% is allocated to the NYFED: 418 tonnes
Afur ther 1% of the US gold reserves are listed by the US Treasury as being in working stock of the US Mint (a figure which never changes), which is 86 tonnes (or 2,783,218 ounces). This working stock probably represents a loan of gold that the US Mint took from the gold stock, that is now a liability of the US Mint to the US Treasury. So overall, 7629 tonnes of the gold is supposedly held between Fort Knox, West Point and Denver, and these holdings are said to be held over 42 gold storage compartments.
Interestingly, both the Fort Knox depository and the West Point facility are adjacent to US army bases. But the US Mint facility in Denver is not. Notably, the US Mint website was recently updated and no longer claims that any US gold is stored in Denver. See BullionStar blog “Is there any gold bullion stored at the US Mint in Denver?” for more details.
A “Good Delivery” gold bar, as traded and accepted on the international wholesale gold market, and as generally held by central banks across the world, has to satisfy the following criteria:
Have a minimum gold content of 350 fine troy ounces (approx 10.9 kilograms) and a maximum gold content of 430 fine troy ounces (approx 13.4 kilograms).
Have a minimum acceptable fineness is 995.0 parts per thousand fine gold
US Official Gold Inventories – Low Purity Bars
Surprisingly, there are gold bar weight lists in the public domain detailing all of the gold bars that the US Treasury claims to hold. These weight lists were included as part of a submission to a June 2011 US House Committee on Financial Services hearing on oversight of US gold holdings.
The US Treasury gold claimed to be stored at the Federal bank of New York (FRBNY) vaults is listed in another weight list which can be seen here (http://financialservices.house.gov/uploadedfiles/112-41.pdf) starting on page 132 of the pdf (or page 128 of the document). According to this inventory statement, about 5% of the US Treasury’s gold is held at the FRBNY in the form of 31,204 bars stored in 11 compartments (listed as compartments A – K). See BullionStar blog post “The Keys to the Gold Vaults at the New York Fed – Part 3: ‘Coin Bars’, ‘Melts’ and the Bundesbank” for screenshots of the actual weight list of US Treasury gold listed as being at the FRBNY. You will notice that a lot of the gold bars, about 50 tonnes worth, are very old bars, and are listed as being in the form of low gold purity coin bars, bars that were fabricated from melting down gold coins.
These weight lists states that there are just under 700,000 gold bars in Fort Knox, West Point and Denver combined, and 31,000 bars held with the NY Fed vaults in New York.
Two short tables summarising the weight and purity of the US Treasury’s gold bar weight lists can be seen at the Goldchat blog site in an article titled from March 2014 titled “US deep storage gold reserves bar list made public“. These tables are as follows:
However, the Fort Knox – West Point – Denver weight list shows that nearly all the gold bars in Fort Knox and Denver are “coin bars”, again gold bars that were produced from melting down gold coins. Many of the gold bars listed as being in West Point are also coin melt bars. Around half of the US Treasury’s gold bars at the Federal Reserve Bank of New York are also in the form of coin bars.
In general, most of the US Treasury gold comprises bars that are either smaller and larger than the weights of Good Delivery bars and that are of low-grade purity bars (below the required purity of Good Delivery bars); e.g. a lot of the gold bars that the US treasury claims to hold have gold purity of 0.90 or 0.9167. Overall, less than 20% of the gold supposedly held between Fort Knox, West Point and Denver is Good Delivery Gold.
Without looking at a US Treasury weight list of claimed gold bar holdings, there are other data points which collaborative that the US official gold stock contains a lot of coin bar gold and other non-industry acceptable gold.
In March 1968, the London Gold Pool collapsed primarily because the US Fed and US Treasury did not have any Good Delivery Gold to supply to the London market. Bank of England memos at that time make this very clear as they say that:
“It has emerged in conversations with the Federal Reserve Bank that the majority of the gold held at Fort Knox is in the form of coin bars, and that in certain cases these bars have a gold content of less than 350 fine ounces. If the drain on U.S. stocks continues it is inevitable that the Federal Reserve Bank will be forced to deliver what bars they have.
Capacity to further refine coin bars to the current minimum fineness of .995 in the United States is entirely inadequate to cope with conversion on the scale that would be required if the Americans wished to continue to deliver bars assaying .995 or better. Equally the capacity in the U.K. is inadequate for this task.”
“it would appear that the circumstances might well be such that very few bars of the current acceptable fineness could be found” (by the Americans).
Additionally, nearly half of the US Treasury gold auctions over 1978-1979 were of coin bars, suggesting that the US Treasury did not have sufficient access to good delivery gold even back then, and that it had ran out of good delivery gold by 1979.
Between May 1978 and November 1979, the US Treasury engaged in 23 gold auctions, and started by selling 8.05 million ounces of high grade gold (99.5% fine) before switching to selling 7.75 million ounces of low grade gold (90% fine). That was over 15 million ounces (466 tonnes) of gold in total auctioned by the Treasury. The last US Treasury auctions were on 16 October 1979 when 750,000 ounces of low grade coin bars, and finally on 1 November 1979 when the Treasury auctioned 1,250,000 ounces of low grade coin bars.
Note, that Deutsche Bundesbank ‘officially’ holds some of its gold in the vaults of the New York Fed, and has never been on record as having held gold in the US Mint’s Fort Knox depository. But the delays on the Germans repatriating their gold from the US to Germany in 2013 – 2014, and the fact that a lot of bars had to be smelted into new bars suggests that whatever source it came from, it was from a source that supplied low-grade gold coin bars. Could it have been Fort Knox?
Impact on US position in global economy due to Russia and China increasing their official gold holdings
China and Russia have both been aggressively accumulating their official gold reserves over the last 10-15 years. The Bank of Russia, on behalf of the Russian Federation, claims to now hold 1828 tonnes of gold. The People’s Bank of China (PBoC), on behalf of the Chinese state, claims to hold 1842 tonnes of gold.
However, a decade ago, the Bank of Russia only held 400 tonnes of gold. And in 2001 the PBoC held less than 400 tonnes. But now both these nations hold a combined 3670 tonnes of gold. See BullionStar blog “Neck and Neck: Russian and Chinese Official Gold Reserves” from October 2017 for more details.
Interestingly, both Russia and China publicize and promote their accumulations of gold and publicly refer to gold a strategic monetary asset. They make no secret of this On the flip side, the US does the opposite, and constantly downplays the strategic role of gold. China and Russia appear to view gold as the only strategic monetary asset that can provide independence from the US dollar.
So there is a shift occurring in terms of Russia and China building up their gold reserves, to maybe in future have gold-backed currencies, and to move away from the global dominance of the (unbacked by gold) US dollar.
And even if the dollar is backed by oil (petro-dollar), the gold accumulation by China and Russia can still be seen as part of a strategy to move away from international trade denominated in US dollars.
Additionally, both China and Russia could conceivably be holding a lot more gold than they declare in their official gold reserves. China through other entities such as SAFE, or the large Chinese commercial banks, and Russia through entities such as the Gokhran.
If China and Russia combined showed that they held more gold on a combined bases than the US, this would, even symbolically, be a low to the US dollar and to the position of the US in the global economy.
Is it Still Important for a Country to Hold Vast Gold Reserves
Yes. Gold is an asset of last reserve for central banks. Gold is a high-quality asset, analogous to a war chest. Countries with larger gold reserves are more immune to crises. And if gold is revalued in a new international monetary system, the countries with more gold will be more powerful monetarily.
Physical gold is highly liquid, it doesn’t have any counterparty risk, it’s a safe haven asset in times of crisis, and its an asset that can be called upon for liquidity by central banks in times of monetary crises.
Central banks can also activate gold by lending, leasing and swapping part of their gold holdings to generate a return. Most central banks value gold at market prices on their balance sheets, which creates one of the most valuable assets on most central banks’ balance sheets.
Is Holding Physical Gold becoming an Outdated Concept in the Western World
It’s true that western investors seem to now place less emphasis on ownership of physical gold relative to the past. For example, look at the huge growth of over-the-counter trading in London of synthetic fractionally backed gold positions and the huge growth of gold futures trading on venues such as the COMEX, both of which are mostly cash-settled and both of which have very little to do with any underlying physical gold holdings. The growth of gold-backed ETFs where the holders cannot take delivery of any gold is also symptomatic of this dislocation. However, these trends are in the institutional space.
Physical gold demand among retail investors is still very strong. Just look at some of the large physical gold markets such as Germany, Switzerland, Austria and the US and Canada where retail investors still know the value and benefits of holding real physical gold, as opposed to paper promises.
If the US doesn’t have as much Physical Gold as it Claims, what does it mean for the US Dollar in International Trade.
If the US was shown to have less physical gold that it claims to have, it would have a negative effect on the US dollar is indirect ways, but not through an immediate weakening of the US dollar or an immediate shift away from using the US dollar for international trade.
Firstly, proof of lower US gold reserves than claimed would add pressure for a full independent audit of all US gold reserves. It would also put the spotlight on the gold reserves of other major trading blocs such as the Eurozone and China and Russia, and open up a debate as to what is the role of gold in the international monetary system. Which is something the US government constantly tries to avoid (i.e. discussion about gold). It might also precipitate a move by nations which seek to replace the US dollar to advance their agendas in introducing an international monetary system backed by gold, knowing that the US would be on the back foot.
It would also then refocus attention on international holders of US dollars pre-August 1971 when Nixon closed the gold window, because after all those outstanding dollars held at the time by foreign central banks are still technically convertibility into gold at the official gold price of the time.
Indirectly, if the US Treasury gold holdings were seen to be falsified, it would also add pressure on the central banks that claim to hold gold at the Federal Reserve Bank of New York to prove that they too hold the amount of gold they claim to on US soil.
Can We Expect a Proper Audit of US Treasury Gold Reserves
A proper audit of the US Treasury gold reserves would be in the form of a full and independent audit of all US Treasury claimed gold reserves at the same time, i.e. across the 4 claimed storage locations. Weighing all gold bars, checking assays and publishing a full weight list in the public domain. It would have to be conducted by a fully independent auditor.
Can we expect such as proper audit of the US gold reserves? No, never. The chances of that ever happening are practically zero since the US Treasury (via the US Mint) does not even let anyone in to see the US gold reserves. Nor does the NY Fed ever let anyone in to see all of the US gold (and foreign held gold) claimed to be held in the NY Fed vaults. There has never been at any one time a full physical independent audit of all the gold which the US Treasury claims to hold.
Even a summary explanation of the US gold ‘audit’ history is confusing and convoluted. Try explaining it to someone, and they will quickly come to the same conclusion.
For example, the physical gold audit at Fort Knox in 1953 was only conducted on gold within 3 compartments and this represented only 13.6% of the gold claimed to be held in Fort Knox at that time. Anyway, this historic audit is so long ago it is irrelevant since much of the US gold was sold off in the 1950s and 1960s.
There have supposedly been audits of the US Treasury gold since 1973, but these have been partial, confusing and have dragged out over many years (continuing audits), and most importantly, these audits have never been conducted by an independent auditor.
Over October and November 1974, a physical audit was carried out on 21% of the gold held at Fort Knox. This audit was done by the General Accounting Office (GAO), in conjunction with auditors from the US Mint, the Bureau of Government Financial Operations (BGFO), US Customs, and the Treasury Department’s Office of Audit.
In June 1975, the US Secretary of the Treasury ordered a continuing audit of all US Government-owned gold, with a target of auditing 10% of US gold every year. A committee comprising the US Mint, the US Bureau of Government Financial Operations (BGFO) and the Federal Reserve Bank of New York were appointed to carry out these continuing audits. Continuing audits were undertaken between 1975 and 1986, after which the Treasury claimed that 97% of all US gold had now been audited.
By September 1982, the continuing audit program had supposedly audited 100% of the gold stored at Fort Knox. By September 1984, the continuing audit program had supposedly audited 99.9% of the gold stored at the Denver Mint.
But in 1983, the US Department of Treasury’s Office of the Inspector General (OIG) issued revised audit guidelines and more than 1,700 tonnes at Fort Knox and Denver being supposedly re-audited between July 1983 and July 1986.
Then from 1986 to 1992, the US Mint supposedly undertook additional audits of gold storage compartments that hadn’t been placed under official joint seal by the continuing audits committee.
In 1993 the OIG took over the annual audits of US Mint held gold. By 2008, all the gold held by the Mint had been placed under official seal. In 2010, the OIG claims to have renewed the joint seals on all 42 gold storage compartments at the US Mint storage facilities.
These annual audits merely consist of checking the official joint seals put on the vault compartment doors during the continuing audits from 1974 until 1986,
There should be 13 annual audit reports of the continuing audit. But 7 of these audit reports are missing and neither the OIG or the Treasury Department, or the National Archives can produce them.
Is physical gold still moving from West to East
Yes, there is a trend of physical gold moving from West to East, much of which goes to China and India. In the case of China, gold imported into the Chinese market cannot easily flow back out of China due to general prohibitions on gold exports out of China. And so it stays there and is accumulated by the Chinese population. The People’s Bank of China (PBoC) (Chinese central bank) has also been accumulating gold reserves, some of which it buys on the international gold market (e.g. in London) and transports by air to Beijing.
In the case of India, much of the gold imported into India stays there as is it horded by the Indian population. Net imports of gold into India are nearly as high as gross gold imports, since gold exports from India are quite low (mostly in the form of gold jewellery).
A final Point – Chinese gold at the NY Fed: 600 tonnes
After translating the 11 January BWChinese article from Chinese into English, I noticed that the last few paragraphs discussed Chinese gold being held at the Federal Reserve Bank of New York, and the inability of the Chinese to get this gold back. The relevant paragraphs are as follows (which I translated and re-edited):
“A BWC Chinese network report mentioned that the Federal Reserve had on several occasions rejected China’s request to ship back about 600 tonnes of gold reserves stored in underground vaults in the New York.
Some analysts said at the time that for China to overcome the sanctions imposed by the United States, it had no choice but to use gold as collateral. A report by People’s Daily’s “IFC” in December 2012, “How Much Gold Has Been Pocketed by the United States” has been confirmed:
It is reported that more than 60 countries have allocated some or most of their gold reserves hidden in the New York Federal Reserve Bank’s underground vault.
Some experts said that China once had shipped 600 tons of gold reserves to the United States and continuing its search, found that China first deposited its gold reserves with the United States in 1990.”
This is the first time I have heard of such a scenario. Perhaps its true. If its true, it could mean that the People’s Bank of China (PBoC), the agent of the Chinese State, could still be holding a significant quantity of its gold in the vaults of the NY Fed, that the Fed will not return. There again, maybe it’s not true, or my translation might be wrong. Perhaps a native Chinese speaker can read the text and translate it into English properly. The text is as follows:
Although the US is very secretive about its official gold reserves and their storage, so too are the Russians and the Chinese. But whereas the Americans downplay the role of gold as a monetary asset, the Russians and Chinese do the opposite and openly talk about the strategic importance of gold.
I find it interesting that it takes a Russian media publication and a Chinese media publication to openly discuss the state of the US gold reserves, while at the same time the mainstream US financial media will never do any serious investigative analysis of the official gold reserves in their own country.
What would Trump make of all of this? Especially since he is supposed to like the shiny stuff himself. Perhaps an enterprising US reporter can ask Trump next time they are in the same room. Perhaps trump would tell him to get “out’. Perhaps not. last word goes to Trump, who in March 2015 said the following in interview with WMUR-TV, New Hampshire, in a segment called ‘Conversation with the Candidate’,:
“In some ways, I like the gold standard and there is something very nice about it but you have to go back at the right time… We used to have a very solid country because it was based on a gold standard for it.
We do not have that anymore. There is something very nice about the concept of that. It would be very hard to do at this point and one of the problems is we do not have the gold. Other places have the gold.“
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