Category Archives: Uncategorized

In surprise move, Central Bank of Hungary announces 10-fold jump in its gold reserves

In one of the most profound developments in the central bank gold market for a long time, the Hungarian National Bank, Hungary’s central bank, has just announced a 10 fold jump in its monetary gold holdings. The central bank, known as Magyar Nemzeti Bank (MNB) in Hungarian, made the announcement in Budapest, Hungary’s capital.

The details of Hungary’s dramatic new gold purchase are as follows:

  • Before this month, Hungary’s central bank held 3.10 tonnes of gold.
  • During the first two weeks of October, the Hungarian National Bank purchased 28.4 tonnes of gold.
  • This gold purchase raised the central bank’s gold holdings from 3.1 tonnes to 31.5 tonnes, i.e. a 1000% or 10-fold increase.
  • The Hungarian central bank had not altered its gold reserves since 1986, i.e. 32 years ago.
  • The 28.4 tonnes of gold was purchased in ‘physical form’, and ‘its repatriation has already taken place‘ to Hungary.
  • Interestingly, Hungary now holds the same amount of gold as it held 70 years ago.
Some of the newly purchased gold bars of the Hungarian central bank. This gold has also been repatriated to Hungary.

In conjunction with today’s announcement in Budapest, the Hungarian National Bank put together a very interesting press release on its website (in Hungarian), which I have translated and edited, and which I think is worth reading in its entirety. Therefore, I have replicated it below, adding some bold and underlining in places. The press release is as follows:

“Budapest, October 16, 2018 – In view of the long-term national and economic strategy goals, the Monetary Council of the National Bank of Hungary has decided to increase the gold reserves of the country.

As a result, in October 2018 the Bank’s precious metal holdings were raised from the previous 3.10 tonnes to 31.5 tonnes, a tenfold increase. This is the first time that the Hungarian National Bank has bought gold since 1986.

Following the substantial increase in the Bank’s gold reserves in physical form, its repatriation has already taken place. The possession of precious metal within the country is in line with international trends, supports financial stability and strengthens market confidence in Hungary.

In keeping with the historical role of gold, gold remains one of the safest instruments in the world, and, even under normal market conditions, provides a stability and confidence-building function.

With current holdings of 31.5 tonnes gold reserves, valued at approximately $ 1.24 billion, this size of holdings approaches the historical level that was held by our country at the time of the “golden train”. Within the overall international reserves of the Bank, the share of gold reserves has now risen to 4.4%, which corresponds to the average of non-euro area Central and Eastern European countries.

The role of gold reserves in the nation and in the nation’s economy strategy is becoming more and more appreciated while both the possession and the increase of nations’ precious metals holdings appears to be decisive international trends.

This gold purchase process, based on the strategic decision of the Hungarian National Bank, has increased the domestic gold reserves to 31.5 tonnes. The raising of the gold reserve and the returning of the gold in physical form to Hungary took place in the first half of October 2018.

Increasing and repatriating gold reserves can be considered a significant step in economic history. Since the founding of the Hungarian National Bank in 1924, gold reserves have been maintained, but the stock of that gold has fluctuated considerably over the decades, depending on the purpose of why it was held.

At the end of World War II, Hungary received some 30 tonnes of gold bars and gold coins on the MNB’s legendary “gold train” in the Spital am Pyhrn in Austria. This amount was fully returned to the country after the war while providing cover for the introduction of the new currency of the country, the Forint, thus supporting financial consolidation and the stabilization of the post-war Hungarian economy.

At the end of the eighties, Hungary’s gold reserves, driven by short-term investment objectives, fluctuated between 40 and 50 tons and then, at the time of the change of regime (between 1989 and 1992), the ruling central bank executives decided to reduce to a minimum level of about 3.1 tons, which was the level at the end of September 2018.
With the decision of the MNB today in October 2018, the holdings of 31.5 tonnes of gold reserves is now the same as the level of the stabilization period of 1946.

Gold reserves are held for short-term investment and / or long-term stability purposes by national central banks. The current decision of the Hungarian National Bank was led by the goal of stability, and there are no investment concerns behind the holding of gold reserves.

Gold is not only for extreme market environments, structural changes in the international financial system, and deeper geopolitical crises. Gold also has a confidence-building effect in normal times, that is, gold can play a role in stabilizing and defending.  

Gold is still considered to be one of the world’s safest assets, whose characteristics can be attributed to gold’s unique properties such as finite supply of physical gold, and lack of credit and counterparty risk given that gold is not a claim against a specific partner or country.

Over the past few years, more and more countries have decided to continue to play a decisive role in the use of gold as a traditional reserve asset, and have raised their gold reserves. This course of action was followed by Poland [a neighbor of Hungary], in spite of the fact that Poland had already one of the highest gold reserves in the region.

When raising domestic gold reserves to 31.5 tonnes, the MNB also paid attention to the international and regional role played by gold in central bank reserves. As a result, the Hungarian gold reserve have now increased to 4.4% which is in line with average international reserve ratio for gold for the Central Eastern European region central banks. This move from the end of the international rankings to the middle of the rankings has progressed, both in terms of size and proportion of gold reserves.

On the occasion of the announcement, the National Bank of Hungary has also published a “Golden Book”, which gives an insight into decisive historical periods of Hungary’s gold, such as centuries of golden coins, the rescue of our national treasures by gold trains, and the recent homecoming of the country’s gold reserves.”

Note that Hungary is a member of the European Union (EU), and therefore the Hungarian National Bank is a member of the European System of Central Banks (ESCB). However, as Hungary is not a member of the Eurozone and does not use the Euro, the Hungarian National Bank is not a member central bank of the European Central Bank (ECB). With Hungary recently under attack from the European Parliament in September, the timing of this new gold purchase by Hungary’s central bank in early October is very interesting, to say the least.

Magyar Nemzeti Bank (MNB)

Poland, Austria, Germany, Netherlands, and now Hungary

In addition to this new Hungarian gold purchase, Reuters is reporting that updated data from the IMF shows that Poland continued to increase its gold purchases in September 2018, raising its gold reserve holdings by 4.4 tonnes during the month to 117 tonnes. This follows similar gold purchases that the Polish central bank made in the summer, when the bank bought two tonnes of gold in July and seven tonnes of gold in August.

With almost all of Poland’s gold held at the Bank of England, a relevant question now is how long before Poland also sees fit to repatriate its gold in physical form away from the fractionally-backed LBMA controlled gold trading centre of London. Another of Hungary’s close neighbors, Austria, has itself spent the last 3 years repatriating 140 tonnes of its gold from the Bank of England in London and has nearly completed this repatriation operation now.

Add to this the high-profile Germany Bundesbank gold repatriation program in recent years, and a similar gold repatriation exercise from the Netherlands central bank, and the trend is clear: central banks in Europe have been flocking to shore up their international reserves with gold, because, as in the words of the Hungarian central bank “Gold is still considered to be one of the world’s safest assets”.

Skepticism reigns about the True state of Chinese central bank gold reserves

One of the most mysterious and unresolved questions in the gold world centers on how much gold reserves the Chinese State, through the Chinese central bank, actually holds. Since October 2016, the People’s Bank of China (PBoC), China’s central bank, has continued to announce unchanged gold reserves each month and persistently claims that its official gold reserves remain static at 1842 tonnes.

That reporting comes through China’s State Administration of Foreign Exchange (SAFE) and is also reported by China to the International Monetary Fund (IMF), as part of the IMF’s International Reserves and Foreign Currency Liquidity (IRFCL) project which collects and disseminates official reserve asset data of the world’s central banks.

This IMF official reserve asset data includes monetary gold holdings, foreign currency reserves, and IMF Special Drawing Rights (SDRs) etc. As can be seen in the below table extracted from the IRFCL database on the IMF website, the figure for China’s monetary gold holdings, which is stated in fine troy ounces, is 59.24 millions, (i.e. 1842.61 metric tonnes). This is also the same gold holdings data that the World Gold Council then extracts from the IMF database and publishes on its own website.

However, as the IMF notes, “Countries participating in this endeavor [IRFCL reporting] do so on a voluntary basis“. The IMF also adds a disclaimer to the data stating “Please note that the re-dissemination of the template data by the Fund (IMF) does not constitute endorsement of the quality of the data by the Fund.”

What China reveals to the IMF – China’s official reserve assets, August 2018

A Leopard doesn’t change its Spots

China has a long track record of being cagey about providing information on the true state of its monetary gold reserves. For example, in April 2009 it announced that its gold holdings had jumped from 600 tonnes to 1054 tonnes, a figure it had not updated since 2003. No one would believe that China had suddenly just bought 454 tonnes in April 2009. The reality was that China was buying on the quiet, under the radar. As Reuters noted at the time on Friday 24th April 2009:

China disclosed on Friday that it had secretly raised its gold reserves by three-quarters since 2003, increasing its holdings to 1,054 tonnes and confirming years of speculation it had been buying.

Again in July 2015, China made a surprise announcement, revealing (or claiming) that its gold reserves had increased from 1054 tonnes to 1658 tonnes. As the Financial Times commented in an aptly titled article “China breaks 6-year silence on gold reserves“, saying that

China ended years of speculation about its official gold holdings by revealing an almost 60 per cent jump in its reserves since 2009.”

So CHina had broken a 6 year silence, and not suddenly bought 604 tonnes of gold. In July 2015, the PBoC confirmed that it would begin following  the IMF’s Special Data Dissemination Standard (SDDS) international reserves reporting template which requires contributing countries to provide updated gold reserve data to the IMF on a regular basis. For a while from July 2015, the PBoC reported monthly increases in its gold reserves each and every month.

However, these monthly updates (of constant monthly gold buying) mysteriously came to a halt in October 2016, after which the PBoC claimed each and every month since then to still hold 1842 tonnes of gold. It has now been a full two years since the Chinese State has claimed to have purchased any gold for its strategic gold reserves. In other words, the Chinese have gone silent again.

Is it naive to believe that a secretive nation which has a long track record of buying gold under the radar only to announce the buying later would suddenly stop this practice? Why would China sign up to providing regular updates to the IMF about its gold buying only to back-track 15 months later and put a lock-down on updates? What to believe?

The Survey Said…

We therefore decided to do a Twitter survey via the BullionStar Twitter account  (@BullionStar) to find out what percentage of people actually believe the official Chinese story? As it turns out, pretty much no one believes the official Chinese line, but the results are surprising in what they do show.

In the Twitter poll we asked “How much gold does the Chinese central bank (PBoC) really hold?” and provided four options….:

  • 1842 tonnes as it claims
  • more than 1842 tonnes but less than 4000 tonnes
  • more than 4000 tonnes
  • less gold than it claims i.e. less than 1942 tonnes[

Although the 4000 tonnes level might seem like an arbitrary number, it took into account that if China, the world’s second biggest economy, wanted to be towards the top of the major league of the world’s central bank gold holders, then it would need to hold more gold than the claimed gold reserves of major central bank gold holders such as Germany (3373 tonnes), Italy (2451 tonnes) and France (2436 tonnes), as well as at least half the amount of gold that the US Treasury ‘claims’ to hold (which is 8133 tonnes).

The Twitter survey ran for 2 days and had a substantial 2337 respondents casting a vote, which is arguably quite a lot as Twitter surveys go. A full 91% of respondents (2127 votes) do not believe the official figure put out by the Chinese central bank, with only 9% of respondents (210 votes) thinking that the PBoC has 1842 tonnes of gold as it claims.

A very large 40% of respondents (935 people) thought the PboC holds more than 4000 tonnes of gold. Another 15% (351 people) think that the Chinese central bank has more than 1842 tonnes of gold but less than 4000 tonnes. This means that 55% (1286 people) of the respondents thought that the PBoC has more gold than it claims to have.

But equally interestingly, a sizable 36% (841 people) of the twitter poll respondents think that the Chinese State (through the PBoC) has less gold than it claims, i.e. less than 1842 tonnes. This is interesting because the major alternative view of Chinese State gold accumulation is that the Chinese are bound to have more gold than they claim to have because they are stealthy accumulating it, so as to at some point in the future reveal another large jump in its reserves at a time of its choosing, for example, a jump from 1982 tonnes to 3000 tonnes or more.

But the survey shows that while nearly everybody is skeptical about China’s official gold holdings numbers, in addition to being skeptical on the upside, a lot of people are also skeptical on the downside and think that the PBoC doesn’t even have the amount of gold that it claims to have. This, if it was true, would arguably be more newsworthy than the scenario in which the PBoC has more gold than it claims to have, and is something that hasn’t really been discussed anywhere on the Blogosphere  or Twittersphere or in the mainstream financial media, as far as I can recall.

 

Since China is well-known for overstating numbers related to economic data and quantities of all sorts, then it is possible that the Chinese gold has less than 1942 tonnes of gold. Nobody knows. The reason that nobody knows is that neither Chinese, nor any of their central bank contemporaries around the world, ever allows any independent audits of their gold reserves.

Nations’ monetary gold reserves are in nearly all cases treated as state secrets and are often exempt from Freedom of Information Requests. As Chris Powell of GATA is fond of saying, the size and disposition of national gold reserves is a more closely guarded secret than even the existence and location of nations’ nuclear weapons, such is the secrecy that surrounds the topic of monetary gold reserves.

Some reasons why the Chinese State probably hold more than 4000 tonnes of gold. Click to enlarge. Source: BullionStar here

Conclusion

My personal opinion is that the Chinese State has a lot more monetary gold reserves than 1842 tonnes, and even more than 4000 tonnes, that they are constantly accumulating gold. For example its known that the Chinese State buys gold on the London gold market and flies it in their own airplanes to Beijing.

I also think the Chinese have even been receiving large quantities of gold from other central banks behind the scenes in a formal but secret redistribution, for example Banque de Italia sells x tonnes to PBoC (which may sound strange but I heard that this had happened). I also believe China most likely purchased IMF gold in 2010 in the IMF’s secretive ‘on-market’ gold sales, using the Bank of International Settlements (BIS) to price the transfer. Some of the Swiss central bank gold sales in the early 2000s (which look to have actually been executed in the late 1990s and then squared off) are also candidates as surreptitious gold transfers from Western central banks to the Chinese state. Some of these transfers would also point to the probability that China holds some of its gold reserves in the gold vaults of the Federal Reserve Bank of New York (FRBNY) in Manhattan.

So there you have it. A full 91% of survey respondents do not believe the official Chinese position that the Chinese central bank has 1842 tonnes of gold. What to you think? Feel free to leave a comment below with your view.

Paulson’s Shareholders Gold Council finally launches after initial delays

In September 2017, news emerged of a plan to launch a broad-based “Shareholders’ Gold Council” to address poor shareholder returns and under-performance in the gold mining sector. This plan was spearheaded by well-known hedge fund Paulson & Co and its founder John Paulson. Initially earmarked for a launch in June 2018 or early July, BullionStar covered this new Council in detail in a late June article titled “The Shareholders Gold Council (SGC) – “Just don’t mention the Gold Price”.

The aims of the new Council include shareholder representation on company boards, company accountability to shareholders, the removal of poor performing CEOs and board members, and the alignment of CEO compensation with share price performance. All of these aims, it should be noted, seek to reduce the cost base of miners and have little effect on top line revenue or the price that a gold mining company can sell its output for.

Presentation by Paulson & Co to Denver Gold Forum, September 2017, that kicked off the idea for the new Shareholders Gold Council

The new shareholder coalition will also make recommendations on board appointments, CEO pay, company takeovers, and make recommendations on AGM and EGM voting decisions, similar to the myriad reports that are churned out daily by proxy advisory firms Institutional Shareholder Services(ISS) and Glass, Lewis and Co.

16 Members, 4 of which are Anonymous

Throughout the summer, there was no news flow whatsoever about the new Council and the launch appeared delayed. The existence of such a delay was officially confirmed this week when Bloomberg ran a story confirming that the grouping has just been launched. The delay, according to the head of the new Council, Christian Godin, was “because of compliance issues and housekeeping challenges dealing with 16 institutions and back-office teams“. Godin joins to head up the Council from Canadian investment management company Montrusco Bolton Investments.

Christian Godin, appointed head of the new Shareholders Gold Council

According to Bloomberg’s story which is titled  ‘Paulson Joined by 15 Investors in Council to Oversee Gold Miners’, the new Shareholder’s alliance, in addition to founding hedge fund Paulson & Co, includes institutional and hedge fund firms Delbrook CapitalTocqueville Asset ManagementLivermore PartnersKopernik Global Investors, Apogee Global Advisors and Equinox Partners. Other named members of the alliance are Adrian Day Asset Management, Swiss based AMG Fondsverwaltung AG, Equity Management Associates, Luxembourg based La Mancha (Naguib Sawiris), and privately-held Sun Valley Gold LP.

According to Bloomberg, there are also four institutional members of the new Council who wish to remain anonymous, bringing the total number of institutions involved to sixteen. Previous coverage of the Shareholders Gold Council mentioned names such as Vanguard, State Street Global Advisors, Blackrock and Van Eck, so these could be some or all of the four that do not want their identities revealed. This preference for anonymity by four  institutional shareholders of gold mining companies is itself worrying, because it begs the question that if they haven’t even got the courage to publicly identify themselves, then how committed and motivated are they really to effect change within the gold mining companies that they invest in.

Don’t Mention the Gold Price

But as detailed in BullionStar’s article in June, there is one topic that this new Shareholders Gold Council could research and investigate, but has blatantly chosen not to. This is the issue of the gold price, an issue that goes to the heart of a gold mining company’s operations and the performance of its share price, including as we explained in June:

“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.”

The gold price as it relates to the health and performance of gold mining companies and their shares (common equity) is also a topic that is of interest to the Gold Anti-Trust Action Committee (GATA). GATA is a US-based educational and civil rights organization that was established 20 years ago to, in its own words “expose, oppose, and litigate against collusion to control the price and supply of gold and related financial instruments“.

Letter from GATA to John Paulson, dated 21 September 2018

GATA has even gone so far as to write a letter to John Paulson at the Paulson & Co headquarters in Manhattan, requesting that it be allowed to make a presentation to the Shareholders Gold Council “about the longstanding policy of Western governments and central banks to intervene in the gold market surreptitiously to suppress the monetary metal’s price“. GATA’s letter, dated 21 September 2018, can be read in pdf format here.

GATA’s letter to Paulson refers to:

“the largely surreptitious manipulation of the gold market by governments and central banks, usually undertaken through intermediary brokers and the bank for International Settlements.”

While making references to the fact that GATA has:

found that gold price suppression is actually longstanding Western government policy, acknowledged in government archives and the writings and public comments of many central bankers themselves but seldom reported by financial organizations“.

Conclusion

As someone who has found some of the government archives, writings and comments of central bankers that GATA refers to above, I would have to agree with the statements in GATA’s letter to Paulson. That is why it will be very interesting to see how John Paulson responds to the GATA letter, if indeed he responds at all.

GATA has also asked Paulson if it can join the Shareholders Gold Council, another possibly tall order for Paulson’s new grouping to fulfill, especially since the new coalition is already opaque with four large institutional members not having the courage to publicly put their names on record.

So, will this Wall Street centric New Shareholder’s Gold Council investigate the gold price as part of its remit? Or will it, like its similarly named World Gold Council, not bother to really care what goes on in the central bank gold world. It remains to be seen, but the best answer currently would be “Don’t hold your breath!”

Chinese Gold Panda Coins now trading on the Shanghai Gold Exchange (SGE)

In an interesting development on Wednesday 12 September, the Shanghai Gold Exchange (SGE) launched trading of a new Chinese Gold Panda Coin contract on the SGE trading platform. With the addition of this listing, the SGE now offers physical trading of these famous Chinese gold bullion coins alongside its extensive range of physical gold bar and ingot trading contracts. As a reminder the Shanghai Gold Exchange is the largest physical gold exchange in the world, and nearly all gold in the Chinese gold market passes through the SGE.

Ji Jiayou from the Chinese central bank at the SGE’s Gold Panda contract launch

The trading unit of the new Gold Panda coin contract is 30 grams which corresponds with the current weight of the largest denomination of the Gold Panda coin, i.e. 30 grams.

SGE Trading to facilitate Price Discovery

Launched in 1982, the Chinese Gold Panda used to be produced in troy ounce weight denomination up until 2015 (such as 1 troy ounce and 0.5 troy ounce weights). Then from 2016 onwards, the Gold Panda switched to using metric weights, and  is now produced in a 30 gram weights, 15 grams, 8 grams, 3 grams and down to a 1 gram weight. All Gold Panda coins have a gold purity of 99.9%. Chinese Gold Panda coins are produced by China Gold Coin Corporation which is fully-owned by China’s central bank, the People’s Bank of China. The actual fabrication of the Gold Panda coins takes place in Shenzhen Guobao Mint which is owned by China Gold Coin Corporation. China Gold Coin Corporation also coordinates marketing and distribution of gold panda coins on the international market.

Chinese Gold Panda coins are simultaneously legal tender in China as well as being known as commemorative coins. As the SGE said in its announcement announcing the new Gold Panda contract listing:

“The Chinese Panda Gold Coin is the legal currency of the People’s Republic of China issued by the People’s Bank of China (PBoC). It has the dual attributes of national authority and product investment.”

According to the SGE, trading of this new gold panda contract will expand the overall customer base of the Gold Panda, allow the Gold Panda coin to play a greater role in China’s investment gold market, and provide diversification benefits for investors, as well as centralise and improve price discovery for the coin. It will also crucially integrate the gold panda coin market into the wider Chinese gold market through the SGE.

Launch of the Gold Panda coin contract on the SGE: 12 September 2018

Trading of the 30 gram Gold Panda Coin

Trading details of the new Chinese Gold Panda coin contract are as follows. The contract is a spot trading contract with a trading unit of 30 grams. The price is denominated in Yuan per gram. The minimum price movement is 0.01 yuan /gram. The lot size is 1 unit. The largest single bid quantity is 1000 lots. Delivery method is physical delivery, and delivery time is T+0, i.e. same day. Transactions are executed by matching the prices of buyers and sellers. Trading times for the Gold Panda contract are the same as SGE’s standard trading hours which as  9:00 – 11:30 (morning), 13:30 – 15:30 (afternoon), and a night trading session of 20:00 – 02:30 (i.e. 2.30 am the next morning).

Given that the new contract has a trading unit of 30 grams (which was the trading unit approved by the People’s Bank of China), this means that only the standard Gold Panda coins produced in either 2016, 2017 or 2018 would be eligible for trading, and only in the 30 gram weight. But for this contract listing, there are no different between release years, editions or imagery on the coins (2016, 2017 or 2018), and they are traded under the same contract.

Hall of Prayer for Abundant Harvests in the Temple of Heaven, Beijing

Coins produced in 2015 or earlier, which were manufactured as 1 ounce Gold Pandas would not be eligible. Each year the Chinese Gold Panda bullion coins feature different imagery of pandas on the coin’s reverse of the coin, but with a consistent image of the obverse face of the coin, which is the Hall of Prayer for Abundant Harvests in the Temple of Heaven in Beijing. Examples of the 30 gram Chinese Gold Panda coin designs can be seen on the BullionStar website from 2018, from 2017 and from 2016.

Another factor which facilitated and eased an exchange listing, according to the SGE, is the fact that since 2012,Gold Pandas transactions have been exempt from VAT in China. For trading the new Gold Panda contract, this in practice means that those who are qualified for the Gold Panda’s tax exemption, including individual customers and institutional clients of the SGE can participate. Clients without such as tax exemption, can, according to the SGE, apply to China Gold Coin Corporation for tax exemption.

The first transaction in the new Panda Gold Coin 30g spot contract came in at 278.8 Yuan/gram when trading opened on 12 September. Trading data for the new contract, under the contract symbol ‘PGC30g‘ can be seen in the Daily Trading Report on the SGE website. An impressive 275 kgs of gold panda coins were traded on the first trading day 12 September, with a more modest 43 kgs of coins traded on the following day 13 September.

A Full Launch Ceremony – Chinese Style

On launch day, 12 September, the SGE and China Gold Coin Corporation held a full launch ceremony in Shanghai with speeches from senior PBoC, and SGE staff in front of 200 guests and assorted dignitaries from the Chinese government, Chinese commercial banks and representatives of the Shanghai Free Trade Zone. Short videos of 3 Chinese news reports covering the SGE’s launch ceremony for the Gold Panda contract can be seen on the SGE website’s media page, here and here.

Speakers at the Gold Panda coin contract launch, 12 September in Shanghai

Interestingly, one report on the launch ceremony, (translated from Chinese), concludes with the following paragraph:

“After the ceremony, the Shanghai Stock Exchange, the Shanghai Gold Exchange (SGE) and China Gold Coin Corporation signed a memorandum of cooperation on the development of the Panda General gold coin ETF. The Shanghai Stock Exchange and the Shanghai Gold Exchange signed a memorandum of understanding on Shanghai gold development cooperation.”

Does this mean a new Gold Panda backed Exchange Traded Fund (ETF) is in the works to be launched by the Shanghai Stock Exchange, Shanghai Gold Exchange (SGE) and China Gold Coin Corporation? It looks possible.

Two weeks prior to the launch on 29 August, the SGE also held a training seminar for the Gold Panda coin’s listing which was attended by 79 SGE member companies including commercial banks, securities dealers and bullion companies, which covered trading rules, delivery procedures for the coin (since it’s a physically delivered contract), and tax policy / tax exemption.

Lastly, a number of media reports about the new Gold Panda SGE contract claims that it’s the “only gold coin product in the world to be traded on an exchange market“. For example a report from China focused website GBTimes here states that. However, this is not true. In South Africa, the famous Krugerrand gold bullion coin is listed and trades on the Johannesburg Stock Exchange (JSE) for a long time now. As the JSE website states:

“The JSE offers trading in Krugerrands through a well-regulated secondary market and are traded in the same way as any listed Equity Market instrument, with prices being quoted on the various types (weights) of coin.”

Trading of Krugerands on the JSE is also documented in the South African gold market page of BullionStar’s Gold University gold market profiles.

So although the Gold Panda is not the first gold coin to be traded on an organised exchange, it is one of the few, and given the immensity of the Chinese Gold Market and the importance of the SGE, this development – of gold coin trading on the world’s largest physical gold exchange – is another evolution to watch in China’s constantly evolving physical gold market and should heighten the global profile of Gold Panda coins in other markets around the world.

As Emerging Market Currencies Collapse, Gold is being Mobilized

In recent weeks, global financial markets have been increasingly spooked by an intensifying crisis in emerging market currencies including those of Turkey and Argentina. Add to this the ongoing currency crisis in Venezuela and the currency problems of Iran. While all of these countries have economy specific reasons that explain at least some of their currency weakness, there are some common themes such as a stronger US dollar, high domestic inflation rates, economic mismanagement, reliance on foreign borrowing, and in some cases economic sanctions imposed by the US.

As one currency plummets, this intensifies emerging market risk across the entire asset class, and it’s not unreasonable at this time to at least speculate whether the contagion could spread. The Brazilian Real and South African Rand have come under pressure and in Asia, the Indonesian Rupiah and Indian Rupee are also now weakening against the US Dollar.

It is against this backdrop that physical gold is being increasingly mentioned within these emerging economies, with gold coming to the fore as it always does in times of crisis. It is for this reason that its interesting to take a look at a number of these currencies and examine how gold is playing the role of safe haven for these countries’ citizens as well as creating a challenge for these nations’ leaders and central banks.

Buying up Gold as the Turkish Lira Plunges

With ongoing currency and external debt problems, Turkey, with a population of 90 million, has played a central role in the current currency crisis and remains a catalyst for potential risk contagion across other troubled emerging market currencies.

Turkey’s currency woes come against a backdrop of a stronger US dollar, domestic inflation of 15%, increasing default risk, market skepticism about the independence of Turkey’s monetary policy, and a series of US sanctions against the Turkey economy.

Although the Turkish Lira was already weakening during the early part of the year (falling 6.4% against the US Dollar from January to April), things took a turn for the worse in May with the Lira falling by a further 9% against the dollar during that one month. Another 6% drop in the Lira followed during July. But it was in August that the Turkish currency crisis really accelerated, with the Lira depreciating 28% against the US dollar in an environment of US sanctions and rating agency downgrades of Turkey’s debt.

During the same time frame, the gold price in Turkish Lira rose by approximately 60%, from just under TRY 5000 per troy ounce at the beginning of January, to TRY 7860 per troy ounce at the end of August. This rising local gold price spurred an increase in physical gold demand in the Turkish Gold Market, as reported by Bloomberg at the end of May with “a jump in demand for gold coins” and Turks “buying up gold as the lira plunges in the latest currency crisis

“Gold priced in lira is more expensive than ever, that’s not deterring buyers, who are looking for a safe haven

“‘Turkish people have an interesting behavior – they buy gold when the prices are rising, they think it’s gonna rise more,’” said Gokhan Karakan who runs a gold exchange office in the heart of Istanbul’s Grand Bazaar. “People think there is a trend here and choose to buy gold until uncertainty is out of the way.”

Perversely, in August while the Turkey Lira was in free fall, Turkey’s president Erdogan (who is against raising Turkish interest rates) made a nationalistic call for the Turkey public to sell both gold and US dollars and buy Turkish Lira. In a speech to a crowd in the Turkish city of Bayburt on 10 August, Erdogan advised:

“If there is anyone who has dollars or gold under their pillows, they should go exchange it for lira at our banks. This is a national, domestic battle.”

Although not surprisingly the presidential bid to support the Turkish Lira by selling gold did not work (as the local gold price continued to rise), the lesson from Erdogan’s call is clear. Gold is a safe haven and retains its value in times of crisis. Unfortunately Erdogan’s motivations were political, with an irresponsible call to sell one of the only assets that can provide a shelter from the eroding value of the Lira.

Iran – Investing in Safety as the Crisis Intensifies

Iran’s currency, the Rial, has fallen heavily in value against the US dollar this year, losing approximately 60%, from an unofficial rate of about 43,000 Rial at the beginning of January to 110,000 to the US dollar at the end of August. The currency crisis even led to the head of the Iranian central bank, Valiollah Seif, being fired by the Iranian president during July.

This slow motion but steady collapse of the Rial had been ongoing for sometime due to a weak economy, inflation of more than 19%, and economic uncertainty brought on by the fear of US sanctions (such as in April), but accelerated in May when the US administration pulled out of a multilateral nuclear deal on Iran (JCPOA), and subsequently announced two new sets of sanctions against Iran.

The first set of these sanctions, which came into effect on 7 August, included restrictions on Iran’s trade in gold and other precious metals and on Iran’s trade in US dollars. The run up to the first set of sanctions also saw heightened gold accumulation in Iran. The second set of sanctions, which come into effect on 4 November, focus on the Iranian energy and financial sectors, including doing business with the Iranian central bank.

Iranians rush to exchange the Iranian Rial for Gold Coins

Over the year-to-date as the Rial slid amidst fear of sanctions and then the subsequent reality of those sanctions, the Iranian public (Iran population 82 million) rushed to the safe haven of physical gold, hoarding gold coins and gold bars and pushing demand for physical gold to a 4 year high. As the World Gold Council noted in August when discussing second quarter Iranian gold demand:

“Faced with renewed economic sanctions and a collapsing currency, which caused a huge rise in the local price [of gold], demand for gold jewellery slumped. Instead demand was channelled into gold investment products (which, unlike gold jewellery, are VAT-exempt), pushing demand for bars and coins to a four-year high.

This was reiterated on the ground in Iran’s Gold Market, as Bloomberg noted at the beginning of August:

“Demand for physical gold is very high and has been as the currency’s been weakening,” said Massoud Gholampour, an analyst at Novin Investment Bank in Tehran. “People want to invest in something that’s safe if they think that a crisis may be on the way.”

Some of this physical gold demand was met by the Iranian central bank. Triggered by the currency collapse and a rising local gold price, the central bank decided to introduced a gold coin presales scheme designed to dampen down the local gold price, offering 7.6 million gold coins to applicants, over time horizons from 1 month to 6 month maturities. For example the delivery phase of the 6 month maturity presales scheme is active until November.

The Rial’s collapse and eroding value also brought gold to the fore for larger payment transactions in Iran, such as real estate rentals, where for example, one landlord was “asking prospective tenants to pay two gold coins to rent a 95 square metre apartment for one month.

“I know that many may not be able to afford it….but when I see that the currency I may get from my tenants would have less value compared to the previous month, then that leaves me with no choice. If I continue to rent out my apartment in return for rials, then I would face financial loss.”

Maduro plays the Gold Card as Hyperinflation Reigns

In the hyperinflationary economy of Venezuela, where inflation is now running at nearly 65,000% and is predicted by the IMF to reach 1 million percent before the end of the year, the Venezuelan currency in its various forms continues to hit the headlines.

On 20 August, Venezuela began the replacement of its existing fiat currency, the Bolivar fuerte (strong bolivar), with a new Bolivar Soberano (sovereign Bolivar) at a rate of 1 Bolivar soberano for every 100,000 Bolivar fuerte, effectively knocked five zeros off the fiat currency. This exercise is ostensibly meant to tackle hyperinflation but will, like all previous Venezuelan currency experiments, most likely not be effective and will probably exacerbate hyperinflation.

At the same time, the new Bolivar soberano was decreed to be linked to a murky and opaque state issued cryptocurrency called the Petro, at a rate of 3600 Bolivar soberanos to 1 Petro. This Petro is claimed to be backed by Venezuelan oil but there is scepticism that the Petro doesn’t really exist or at least doesn’t exist as a functioning currency.

All of the above sets the new official rate at 1 USD = 60 Bolivar soberano (or 1 USD = 6 million Boliar fuerte), and effectively devalues the Venezuelan currency by 95.8% since the previous official rate was 1 USD > 248,000 Bolivar fuente. The Bolivar fuente in its short life (launched in January 2008) itself had experienced many official devaluations against the US dollar, all the while trading on the black market at far lower values than the official rate. Even the new Bolivar soberano less than a few weeks old is already trading at 87 to the USD, far weaker than the official rate (see https://dolartoday.com).

It was into this tumultuous economic environment that Venezuelan president Maduro last week announced a national gold savings plan for workers, retirees and savings banks (Venezuela population 32 million) that will be launched on 11 September. Although the gold savings plan looked half-baked and flawed (as do most of Venezuela’s recent forays in economic interventionism), the fact of the matter is that yet again, physical gold makes an appearance in the midst of a currency crisis.

Maduro explains his ‘Lingotico’ Gold Savings Plan at a party conference 26 August: Source: EL PAÍS

Maduro’s new plan, known as ‘lingotico’, aims to issue gold backed certificates, backed by small gold bars of 1.5 gram and 2.5 gram weights. The gold will be available for ‘purchase’ by Venezuelans at 3,780 bolivars for the 1.5 gram gold bars and the 2.5 gram gold bars will sell for 6,300 bolivars. However, according to Bloomberg, buyers will receive gold certificates, not the actual gold bars.

Maduro said that the gold for this saving program is sourced from the eastern Guayana region of Venezuela (not to be confused with the neighbouring country of Guyana), which he said the BCV, Venezuela’s central bank had sourced from local gold mines. Interestingly, the gold for this scheme is not being sourced from Venezuela’s central bank gold reserves, as they have either been most likely already sold off are under claim in various gold loans / gold swaps.

In the two short videos below (in Spanish), Maduro, with small gold bars in hand in sealed packaging with the BCV central bank logo, outlines how the scheme will allow Venezuelans to save in gold, and to protect their savings from inflation. The first video was filmed at a Maduro party conference on Sunday 26th August.


Maduro launches the Gold Savings Plan at Casa de la Moneda in Aragua, Venezuela: Source Venezolana de Televisión (VTV)

The second video, the official launch of the gold savings plan, was filmed at the Casa de la Moneda in Aragua, Venezuela (a BCV banknote and coin facility) and again shows Maduro with a gold bar in hand and ironically is set against a backdrop of huge quantities of Bolivar bank notes, and in the background somewhat bizarrely BCV employees paging through huge quantities of printed banknotes.

The Contagion Spreads

Staying in South America, the emerging market currency crisis has now rippled through to Argentina and to a lessor extent Brazil, with the Argentine Peso plummeting in double digits last week against the US dollar on news that the Argentine government had requested an early activation of an IMF loan, fanning market fears that the Argentine economy will have imminent problems repaying foreign denominated debt.

The Argentine peso has lost more than 50% against the US dollar during 2018 and is now 2018’s worst performing currency. The peso’s plummet during the week forced the Central Bank of Argentina (BCRA) to hike official interest rates to 60% to try to stop the peso selloff, and Argentina,where inflation is running at over 25% per annum, now has the embarrassing distinction of having the highest interest rates in the world.

Elsewhere in South America, the Brazilian Real and Chilean Peso have also begun declining notably in value against the US Dollar, with the Real down more than 20% against the US dollar year-to-date. Further afield, other emerging market currencies are now experiencing possible contagion effects, with the Indonesian Rupee now at its lowest level against the US dollar since the Asian crisis of 1998, and the Indian Rupee now below 71 to the US dollar for the first time ever. Expect to see gold linked to currency stories in these economies as the emerging market crisis continues to brew.

Physical gold takes centre-stage in times of crisis precisely because it has tangible value, is not issued by any central bank, monetary authority or government, cannot be debased and has no counterparty or default risk. The fact that sophisticated physical gold markets exist in most if not all of the economies currently stricken by currency weakness also allows gold, with its deep liquidity, to be quickly harnessed.

Annual Mine Supply of Gold: Does it Matter?

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?

Cumulative Global Gold Production: 1835 to present day. Source: www.goldchartsrus.com 

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.

As the USGS explains in its Reserves and Resources definitions:

“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.

As a World Gold Council paper from 2003 titled “Why is gold different from other assets?” states:

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.

LBMA at the Movies: Golden Turkeys

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.” 

Links: LBMA website. LBMA YouTube channel.

  • 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.

Links: LBMA website. LBMA YouTube channel.

  • How the Market Works – Five Elements (2:01 minutes)

… in which Jonathan Spall, LBMA Head of Communications “highlights how LBMA  plays a crucial role in the five main elements that allow the smooth functioning of the global OTC market.”

Links: LBMA website. LBMA YouTube channel.

[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.

LBMA website.  LBMA YouTube channel.

  • Responsible Sourcing (1:27 minutes)

… 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.

LBMA website.  LBMA YouTube channel.

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’.

LBMA Video Shoot. Source: Google Photos

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.

LBMA Video Shoot. Source: Google Photos
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.

Spotlight on the HUI and XAU Gold Stock Indexes

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.

HUI – NYSE Arca Gold BUGS Index, 5 year chart. Source: www.GoldChartsRUs.com

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.

HUI Components

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.

XAU – Philadelphia Gold and Silver Index, 5 year chart. Source:  www.GoldChartsRUs.com 

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.

GDX – VanEck Vectors Gold Miners ETF, 10 Years. Source: https://www.bullionstar.com/charts/

Beyond the HUI and XAU, there are many more gold mining indexes around the world, some of them global in nature, such as the S&P/TSX Global Gold Index and the NASDAQ OMX Global Gold & Precious Metals Index, and some that are exchange specific such as the Johannesburg Stock Exchange (JSE) Gold Mining Index. But the HUI and XAU are arguably the best known.

S&P/TSX Global Gold Index, 5 Year Chart, Source:  www.GoldChartsRUs.com

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.

Gold Price vs HUI 5 Year Chart. Source:  www.GoldChartsRUs.com

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.

XAU vs Gold 5 Year Chart. Source:  www.GoldChartsRUs.com

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.

Chinese Gold Market: Still in the Driving Seat

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.

Chinese Gold Market: Still Buoyant

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.

SGE Gold Withdrawals at Month 6 (YTD 2018 June): 2008 – 2018. Source: www.GoldChartsRUs.com

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.

SGE Annual Physical Gold Withdrawals, 2008 – 2017, including YTD 2018. Source: www.GoldChartsRUs.com

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.

China imported 62.1 tonnes of gold from Switzerland in June 2018, Source: www.GoldChartsRUs.com

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.

Swiss Gold Exports by Country Destination, 2017, Source: www.GoldChartsRUs.com

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.

Chinese Gold Imports from Hong Kong, Source: www.GoldChartsRUs.com

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.

SGE Premiums

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.

SGE Premiums on Gold 2018. Source: www.GoldChartsRUs.com

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.

Gold’s Price Performance: Beyond the US Dollar

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.

Brazilian Real

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.

Gold Price in Brazilian Real, January – June 2018, Source

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.

Brazilian Real per US  Dollar, January – June 2018. Source 

Swedish Krona

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.

Gold Price in Swedish Krona, H1 2018. Source

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).

Swedish Krona per US  Dollar, January – June 2018

Russian Rouble

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).

Gold Price in Russian Rouble, H1 2018. Source

Indian Rupee

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.

Gold Price in Swedish Krona, H1 2018. Source

Bitcoin

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.

Gold Price in Bitcoin, January – June 2018. Source

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.

The US Dollar has lost more than 98% of its value since 1913, while gold has retained its value.

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.

The Shareholders Gold Council (SGC) – “Just don’t mention the 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.

Denver Gold Group’s Gold Forum

 

According to an article by Reuters in early June, the nascent Shareholders Gold Council (SGC) has already garnered significant interest from major shareholders in the gold mining sector, and will, at the outset, represent more than 12 institutional and hedge fund investors, including investment institutions such as Delbrook Capital, Tocqueville Asset Management, Livermore Partners, and Kopernik Global Investors, and hedge funds Apogee Global Advisors and Equinox Partners, in addition to New York based Paulson & Co.

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.

Paulson & Co presentation to Denver Gold Forum, September 2017

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“.

To illustate, Kim in his presentation highlighted that from January 2010 to September 2017, a timeframe in which the US dollar gold price fell by 20%, the VanEck Vectors Gold Miners ETF (GDX) [which tracks the NYSE Arca Gold Miners Index] returned a negative 45%. Shareholder returns in the junior mining sector were even worse, with the VanEck Vectors Junior Gold Miners ETF (GDXJ)[which tracks the MVIS Global Junior Gold Miners Index] down by 58% over that time-frame.

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”.

Whose fault is it? Slide from Paulson & Co presentation

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.

Call to Action – Shareholders Gold Council (SGC). Slide from Paulson & Co presentation

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.

The SPDR Gold Trust (GLD) – On the NYSE

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”.

Sovereign Money Referendum: A Swiss Awakening to Fractional-Reserve Banking?

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.

Popular Initiatives

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.

Vollgeld Initiative

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.

UBS Switzerland

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.

Credit Suisse

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.

Reaction

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”.

Switzerland’s central bank

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.”

Vollgeld Campaigning

Conclusion

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.

Turkey and Russia Highlight Gold’s Role as a Strategically Important Asset

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.

New York Federal Reserve gold holdings in tonnes, 2 years to February 2018  

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.

The Bank of Russia added 9.3 tonnes of gold to its strategic gold reserves in March 2018

According to RT.com, Aksakav said this week that:

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.

Bank of Russia gold stored securely in vault in Moscow

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.

Spoofing Futures and Banging Fixes: Same Banks, Same Trading Desks

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 “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.

For a full rundown of all the directors of London Gold Market Fixing Ltd, and a timeline of the Keen – Rodgers – Vorley – Deutsche departures, see the excellent article on ZeroHedge from May 2015 titled ‘From Rothschild To Koch Industries: Meet The People Who “Fix” The Price Of Gold’.

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 2004 and 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.

Conclusion

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.