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New Gold Pool at the BIS Basle: Part 2 – Pool vs Gold for Oil

This is Part 2 of a two-part series. The series focuses on collusive discussions and meetings that took place between the world’s most powerful central bankers in late 1979 and 1980 in an attempt to launch a central bank Gold Pool cartel to manipulate and control the free market price of gold. The meetings centered around the Bank for International Settlements (BIS) in Basle, Switzerland.

Part 2 takes up where Part 1 left off, and begins by looking at developments in the BIS Gold Pool discussions during January 1980, a month in which the US dollar gold price rocketed more than 60% during a three-week period to reach a then record of $850 per ounce. Part 2 then looks at how the discussions involving these central banks evolved over the remainder of 1980 and 1981 as key high level central bankers continued to call for intervention into the gold market.

Part 2 also looks at evidence that central bankers party to the discussions began advocating gold for oil exchanges between the West and the Saudis, exchanges which would provide real wealth (gold) to the Arabs in exchange for oil flowing to the West, while simultaneously keeping a lid on the gold price.

Summary of Part 1

The first article in the series, published on 16 May and titled “New Gold Pool at the BIS Basle, Switzerland: Part 1”, concentrated on events and developments in late 1979 and revealed, among other things, that:

  • A series of meetings of the world’s most powerful central bank governors were held in late 1979 at the Bank for International Settlements (BIS) office of BIS Chairman and President Jelle Zijlstra in Basle, Switzerland. The objective of the meetings was discussion of a central bank consortium that would operate a collusive Gold Pool to manipulate the price of gold. Note that this was more than 11 years after the London Gold Pool had collapsed in March 1968.
  • At the IMF annual conference in Belgrade in early October 1979, the US monetary authority delegation in the form of Paul Volcker, William Miller, Tony Solomon, and Henry Wallich approached Fritz Leutwiler, Chairman of the Swiss National Bank, and discussed a proposal to launch a joint central bank gold selling operation.
  • During the discussions at the BIS and between the central bankers at various locations, Zijlstra, who was BIS President until the end of 1981, and Leutwiler, who became BIS President in January 1982, were both strongly in favour of launching a new joint central bank gold pool to manipulate the gold price.
  • The oil-producing cartel OPEC was at that time, “increasingly concerned that gold was outpacing oil”, but Al Quraishi, Governor of the Saudi Arabian Monetary Authority (SAMA) had made an assurance that the Saudi’s “would not rock the boat” and buy gold on the market if a new gold pool was activated. However, Al Quraishi and SAMA were still eager to “diversify” the reinvestment of the Saudi oil revenues into gold.
  • The Bank of England recorded market intelligence in October 1979 that the “USA was planning to sell 10 million ounces of gold in four separate unannounced operations” before the end of 1979 so as to “placate the Saudi Arabians.
  • The Bank of England’s foreign exchange and gold specialist at that time, John Sangster, thought that there was “a need to break the psychology of ‘the market can only go one way and that is up’.” 
  • Sangster’s view was also that there was “no question of any permanent stabilisation of the gold price, merely at a critical time holding it within a target area”, an operation he called asmoothing operation”.
  • A meeting to discuss a new collusive gold pool took place in the BIS office of Zijlstra on Monday 12 November 1979, whose invitees (in addition to Jelle Zijlstra) were Gordon Richardson, Governor of the Bank of England, Cecil de Strycker, Governor of the National Bank of Belgium, Fritz Leutwiler, Chairman of the Swiss National Bank, Bernard Clappier, Governor of the Banque de France, and Otmar Emminger, President of the Bundesbank.
  •  A follow-on meeting about the collusive new gold pool took place in the BIS office of Zijlstra on Monday 10 December 1979, attended by Zjilstra, Kit McMahon of the Bank of England, Otmar Emminger, outgoing President of the Bundesbank, Karl Otto Pohl, incoming Bundesbank President, de la Geniere, the incoming Governor of the Banque de France, de Strycker, Governor of the Belgian central bank, Leutwiler, Chairman of the Swiss National Bank, and Rene Larre, BIS General Manager.
  • The December meeting, which was facilitated by BIS general manager Rene Larre, also revealed that “European central banks would intend to buy back in due course any gold they sold”, that the Gold Pool could be funded by buying gold first so as to create an inventory of physical gold to use for selling operations, and that in McMahon’s words “if the scheme were to be simply a BIS one, publicity would not necessarily, or perhaps desirably, arise”
  • Based on the detailed briefing of the content of that meeting at the BIS on 10 December, which was written by the Bank of England’s Kit McMahon for the benefit of the Bank of England Governor Gordon Richardson, the proposed new gold pool, among other things, would sell gold “only when gold was relatively strong and the dollar relatively weak and [buy] only in the reverse circumstances.”
  • In the 10 December 1979 meeting at the BIS, the Bundesbank was against the Gold Pool plan due to what Bundesbank President Otmar Emminger attributed to opposition from the Bundesbank Central Bank Council. However, the Bundesbank was thought, by the Bank of England’s Sangster, to be against the Gold Pool primarily as a tactical way to force the US Fed to address the underlying problems of a weak US dollar and high inflation.
  • The Banque de France, which had been in favour of the Gold Pool scheme prior to October 1979, also came out in the 10 December meeting as being against the scheme due to what Banque de France governor De la Geniere described as “great political dangers…of selling any French gold” indirectly through a Gold Pool. However, Sangster also thought the Banque de France was more likely to be tactically backing the Germans so as to put pressure on the Fed to first address inflationary problems. 

As per Part 1, a number of internal documents from the Bank of England are cited below. These documents provide a unique road map on the evolution of the collusive discussions at the BIS and the thinking of the Bank of England executives involved in and supporting the discussions. Documents are rendered in blue text and italics, with bold, underlining, and a few cases of red text added where appropriate.

January 1980 BIS Gold Pool Meeting

Following the Gold Pool meeting at Zjilstra’s office in the BIS headquarters on 10 December 1979, the central bank governors next met at the BIS in Basle on 7 January 1980 during their monthly scheduled ‘Basle Weekend’. The afternoon London Gold Fix was set at $431 on 10 December 1979, but by 4 January 1980 it was already 36% higher at $588.

gold price to 30 April 1980
Gold Price in US Dollars, September 1979 to April 1980. Source: BullionStar Gold Charts

In preparation for the January meeting about the proposed Gold Pool, which took place on Monday 7 January 1980, John Sangster, the Bank of England’s foreign exchange and gold specialist, wrote the following briefing document titled “SECRET” to the attention of the Governor’s Private Secretary (G.P.S.) as well as to the attention of Bank of England Executive Director Kit McMahon. The Governor of the Bank of England at that time was Gordon Richardson.

To recap from Part 1, Christopher McMahon, known as ‘Kit’ McMahon, became Deputy Governor of the Bank of England on 1 March 1980, taking over that position from Jasper Hollom. Prior to becoming Deputy Governor, McMahon was an executive director at the Bank of England from 1970 to 1980. McMahon signed his internal Bank of England memos and correspondence with the initials ‘CWM’, short for Christopher William McMahon. McMahon left the Bank of England in 1986 to take up the role of Chief Executive and Deputy Chairman of Midland Bank. Midland Bank was taken over by HSBC in 1992. See profiles of McMahon here and here.

Gordon Richardson was Governor of the Bank of England for 10 years from 1973 to 1983. Before that, he was a non-executive director of the Bank of England between 1967 and 1973. Richard was chairman of J. Henry Schroder Wagg from 1962 to 1972, and chairman of Schroders from 1966 to 1973. After leaving the Bank of England, Richardson went on to be a director of Saudi International Bank in London. He also headed the influential Group of Thirty (G30) central bank lobbyist group, and was chairman of Morgan Stanley International.

John Sangster’s full name was John Laing Sangster, hence he signed his internal Bank of England memos and analysis with the initials ‘JLS’.

G10 plus Switzerland

Sangster’s secret memo to McMahon and Richardson was written on Friday 4 January 1980, a day on which the afternoon Gold Fix came in at $588 per ounce. The memo addressed developments in the gold price and discussed potential joint central bank intervention into the gold market. Hand written at the top are the words “The Governor has seen : copy in Basle Dossier JB 7/1“. JB is the Bank of England’s John Balfour who was also copied on the document, and who was a Bank of England alternate director at the BIS at that time.

The memo has 6 numbered paragraphs, paragraphs 5 and 6 of which are most interesting:

SECRET

4.1.80

G.P.S.

                                                                            Copies to : Mr McMahon, Mr Balfour, Mr Byatt

GOLD

5. Since the market has further extended itself, any central bank operation would now have greater chance of success. But it would have to be a co-operative effort preferable on a G.10 plus Switzerland basis. Obviously the contributors, with the possible exception of the USA, would go into the operation in the hope and intention of subsequently recapturing their gold. But I think the new “pool” must face the possibility that they might not recapture some or all of their gold – in which case they would have to envisage the operation as a general contribution to the struggle against inflation.

6. If a G.10 plus Switzerland operation were mounted on a pro rata basis, our share would be just under 3%. If the Italians (who sometimes talk as if the loss of one ounce of their gold would mean the end of the world) and the Swedes (very low gold holders) dropped out, our share would be about 3 1/4 %. If the Japanese declined on the excuse of a very low gold proportion, then I think we could do so too.

4th January 1980

JLS

 JLS 4 Jan 1980 topJLS 2 4_1_80 G

The G10 that Sangster mentions refers to the Group of 10 highly industrialised nations which consisted of the USA, UK, France, West Germany, Netherlands, Belgium, Italy, Canada, Sweden, and Japan. The G10 as a grouping was formed in 1962 when these 10 countries participated in the IMF’s General Arrangements to Borrow (GAB) plan. Switzerland became associated with the GAB in 1964 but the name remained the G10. The G10 also participated in the Smithsonian Agreement in December 1971, with all other members agreeing to peg their currencies against the US dollar.

As readers will recall from Part 1, this list of 11 countries, as represented by their central banks, comprised the group of central banks that either advocated the gold market intervention meetings in late 1979 (the US), were present in the BIS Gold Pool meetings in November and December 1979 (Switzerland, West Germany, France, Netherlands, Belgium), or that were to be consulted after the December meeting. As per the December 1979 meeting:

“The meeting ended with Leutwiler saying he would approach the Canadians and Japanese to see how they felt about the idea while Zijlstra would talk to the Italians. All would then think further about it and revert in January.

No mention of the Swedes, but, based on Sangster’s comment above, the Swedes were considered to be “very low gold holders“.

As per the 12 November 1979 Gold Pool meeting, there are no meeting minutes in the public domain for the 7 January 1980 Gold Pool meeting, with the BIS Archives office claiming it did not have such minutes. When asked about minutes from a 7 January 1980 meeting, the BIS Archives deflected the question and misdirected the answer, saying only that:

“The Gold Pool came to an end in 1968, so I take it that you are referring to meetings of the Gold and Foreign Exchange Committee. We do have some minutes for this meeting, but unfortunately not for the period which interests you.”

However, London Times correspondent Peter Norman, in Basle that day to cover the “Basle Weekend”, did write a report on the outcome of the BIS governors’ January meeting on gold. In his article titled “Bankers Rule Out Sale of Reserves to Hold Back Rush into Gold”, dated Monday 7 January 1980 (a day on which the gold price closed at $634), Norman wrote:

“Western central bank governors today ruled out any concerted sales of gold from reserves to quell the speculative rush of funds into the metal on the world’s bullion markets.

The idea, which has been suggested at various times in the past few months by Herr Fritz Leutwiler, the Swiss National Bank president, foundered when it became apparent that it would receive no support from the West German Federal Bank and the Bank of France. As these central banks have the second and third largest gold reserves in the Western world, their agreement was crucial to the launching of a concerted sale.”

“It appears that the gyrations of the gold markets were discussed at some length yesterday at the regular monthly meetings of central bankers here.”

“Behind the decision not to introduce a concerted programme of gold sales lies a hope that the speculative fever of the past few days will burn itself out and that the price will fall sharply of its own accord to administer a salutary shock to speculators.

There is also the sober consideration that nobody knows how much gold would need to be dumped on the market to achieve the desired result.

Norman only refers to ‘sales of gold’ and not a Gold ‘Pool’ since knowledge of the Gold Pool discussions was not in the public domain at that time. The reference in the London Times’ January 1980 report to the West German and French central bankers still being against the launch of a gold intervention operation gels with the view attributed to the Bundesbank and Banque de France  during the December 1979 BIS meeting.

The G5 Gold Meeting – Washington

However, this did not stop further discussions on gold market intervention, since exactly one week later on Monday 14 January in Washington DC, the deputy finance ministers of the G5 convened a secret meeting to also discuss a plan for joint central bank gold sales. In the 1970s, the G5 (Group of 5) referred to the world’s then five largest economies i.e. US, UK, Japan, West Germany and France.

This meeting was covered by a New York Times report, titled “Concerted Gold Sales Discussed” and filed in Washington DC on Wednesday 16 January 1980, a day on which the PM Gold Price closed at $760:

The possibility of concerted sales of gold by central banks from the leading industrial nations was discussed at a secret meeting in Washington last Monday by deputy finance ministers from the United States, West Germany, France, Britain and Japan.

The United States Treasury, confirming reports of the meeting that have just leaked out, said discussions were not confined to gold, and that discussions covers a ‘ wide range’ of international monetary issues.

European sources reported that there was as yet no consensus on the gold sales, with France and Germany opposed and the United States, Britain and Japan in favour, but with varying degrees of enthusiasm.”

As per the London Times report on 7 January,  the New York Times report of 16 January referred to sales of gold but not to the secretive Gold Pool discussions. The New York Times also recorded the West Germans and French as being non-cooperative about joint gold market intervention.

On Thursday 17 January 1980, the London Times, in an article titled “Gold at $755 after biggest jump ever” also commented on the secret Washington DC meeting, which it said was “chaired by Anthony Solomon, Under-Secretary of the United States Treasury for Monetary Affairs“, and that “apparently there was general agreement at the meeting that political factors were totally dominating the gold markets and that there was little point in any central bank selling gold.”

Sangster’s G5 Gold Briefs

The day after this Times report, on Friday 18 January, when the gold price closed in London at $835 per ounce, John Sangster at the Bank of England sent a confidential memorandum to Kit McMahon and to the attention of the Governor Gordon Richardson, commenting on the “G5 gold briefs“, i.e. the G5 gold discussions in Washington DC between the US, UK, France, West Germany and Japan. Sangster’s memo was as follows:

Confidential

18.1.80

MR. McMAHON,

Copies to Mr. Kirbyshire, Mr. Byatt, Governors’ Private Secretary

Just a few glosses on the G5 gold briefs.

1. Whereas the earlier rise in the gold price had definitely been a factor in the dollar’s weakness, since early in the New Year the dollar has detached itself from gold.

2. But gold has been a factor in the rise in the price of other commodities. part of that rise is obviously due to the increase in international tension, but the meteoric rise in gold has almost certainly exacerbated it.

3. Now that international tension is the main factor in the gold market, any central bank action would probably be ineffective.

4. If tension eased substantially, however, central bank action need not then be unnecessary. With greater chance of success, it could be helpful in further cooling the inflationary environment.

5. I am suspicious of the thesis that any future gold pool must start with purchases. When the price starts to rise there will be too strong an inducement, and probably many would present arguments not to sell.

6. All of which seems to suggest that the only gold policy central banks could be said to have is – afraid to sell but hoping to buy in the next bear phase. Realistic perhaps, but not very satisfying.

18th January 1980
(Dictated by JLS and circulated in his absence)

The ‘international tension’ referred to in Sangster’s note above most likely refers to the Soviet invasion of Afghanistan in December 1979 and the Iranian hostage crisis that began in November 1979.

While John Sangster’sglosses on the G5 gold briefsmemo from 18 January 1980 may have given the impression that gold market intervention was off the cards for the time being, no one told this to Fritz Leutwiler, chairman of the Swiss National Bank, because less than 2 weeks later, Leutwiler was again stirring for “central bank intervention in the gold market”.

SNB’s Leutwiler

According to Peter Norman in an article for the Times titled “Swiss call for banks to dampen gold price”, dated 31 January 1980 , a day on which the US dollar gold price closed at $653:

Dr Fritz Leutwiler, president of the Swiss National Bank, has once again advocated central bank intervention in the gold market to curb wild price movements.

In today’s issue of Handelsblatt, the West German business daily, Dr Leutwiler was quoted as saying that central banks should exercise control over the gold price to dampen down inflationary expectations and prevent speculation on the gold market from spreading on to foreign exchange markets.”

What has provoked Dr Leutwiler to raise the issue of central bank intervention in gold at this time remains a mystery. Neither he nor his spokesman were available for comment in Zurich today.

He has suggested central bank intervention in the gold market before, at the meeting of the International Monetary Fund in Belgrade last autumn and again to foreign journalists in Geneva last December. However, at the meeting of central bank governors in Basle last month [December 1979], the issue was quickly disposed of once it became apparent that neither the French nor West German central banks would support the idea.

Note that after working for the London Times, Peter Norman subsequently moved to the Financial Times in 1988 and was the FT’s economic editor from 1992 to 1995, as well as later becoming the FT’s chief EU correspondent. Norman’s profile can be read here.

After gold in US dollars hit a peak of $850 in January 1980, the price came off but still ended January 1980 at over $700 per ounce. By the end of February 1980, the US dollar gold price was trading in the $640 range, and by March and April 1980 it was trading in the $500 range, as the Paul Volcker led US Fed’s interest rate hikes began to take effect. But by the end of June 1980, the gold price was again above $600 per ounce, and in late September 1980 gold was trading above $700 per ounce.

gold price to 30 October 1980
Gold Price in US Dollars, November 1979 to October 1980. Source: BullionStar Gold Charts

Exchange of Gold for Oil while the World Adjusts

In September 1980, the Bank of England Governors (the Governor and Deputy Governor) and senior executives again went on record addressing the gold price and possible coordinated central bank interventions into the gold market. The following detailed commentary document was written by the Bank of England’s John Sangster (JLS) on Wednesday 17th September 1980, a day on which the US dollar gold price closed at $673.

Although JLS addressed the September 1980 memorandum to “The Deputy Governor” and to “Anthony Loehnis”, it was also sent to the Governor, Gordon Richardson, because Richardson, along with McMahon and Loehnis, all replied to the memorandum by writing signed notes in pen on the actual circulated document, as was the convention at the time.

In the document, “Mr Loehnis” refers to Anthony Loehnis. At that time in 1980, Loehnis was an Associate Director of the Bank of England. In 1981, he became an executive director of the Bank responsible for overseas affairs. Loehnis had previous worked for the Bank of England Governor Richardson from 1977 to 1979, and Richardson had actually brought Loehnis into the Bank of England from J henry Schroder Wagg & Co, where Richardson had been chairman. Loehnis moved to SG Warburg in 1989. Loehnis’ full name was Anthony David Loehnis and hence he signed his internal Bank of England memos and correspondence with the initials ‘ADL’. See profile of Loehnis here.

Gold for Oil

 

SECRET

17. 9. 80

MR LOEHNIS,
THE DEPUTY GOVERNOR

Central Banks and Gold

1. Last year when there was some discussion of a possible revival of the central bank gold pool, sceptics outnumbered advocates. Subsequent events justified the sceptics, although international political events played more of a part than any can have foreseen. Nevertheless a general but unspecified wariness of political disasters may be a part of the general background to scepticism in this area. The sceptic may also now point to the gold price occasionally threatening $700 again even though international tension is significantly reduced.

2. Nevertheless the price of gold is telling us something, and I do not think that we can dismiss it as merely a symptom to be ignored while continuing to concentrate on fundamentals.

3. The world is in competition for a relatively few “inflation-proof” assets, of which gold is reckoned to be chief. Its supply has been sharply reduced over the past year and the bulk of its stock is largely and firmly held by the G10 (and Switzerland).

4. In these circumstances the competition for the reduced supply – much sharpened by OPEC appetite which was not markedly present in 1973/74 – is having a disproportionate effect on the price. I well realise that if this continues for long, gold may not be such a good hedge in the short-run thereafter.

5. But the damage to inflationary psychology will by then have been done; not only in the developed countries but with OPEC, where the escalating price of this, one of the few inflation-proof assets could become an element in their price determination. Moreover, gold seems to exercise some influence on many “hard” commodities irrespective of fundamentals. The “symptoms” may therefore be having an independent effect on price levels.

Page 2

6. It is not of course for us with our relatively low gold holding, compared with many of the G10 countries, to preach a new gold pool. We can question however whether it is helpful in the longer run for the G10 countries to continue to sit pat on all their gold (in just another manifestation of the perversity of the adjustment process) and complacently accept the effects of the rising price of gold.

7. If any operations were ever contemplated, it would have to be geared at some concept of the developing real price of gold and not attempt to hold any particular nominal level. It would almost certainly not be a “pool” with any significant potential for recovery of gold sold. Rather it would enable OPEC to acquire some modicum of the chief inflation-proof asset without an excessive rise in the price. The aim would be to prevent gold making its own particular contribution to inflation while the developed world was attempting to bring inflation down and so reduce gold’s own peculiar attraction.

8. This is not to advocate gold for oil directly; the price haggling would be too acrimonious. Market intermediation should allow the G10 to move with the price while attempting to control its pace as well as break off the experiment when possible or necessary. A positive policy for gold could be a sign of confidence on the broader issue of inflation. But I fear the general opinion will be that the risk of comparative failure is too high to warrant such action on gold.

The actual memorandum from John Sangster (JLS) to McMahon and Loehnis (and Richardson) can be seen here: Page 1 and Page 2. The links may take a little while to load first time. Since this is an extremely important document, it can also be viewed below:

John Sangster memorandum to Anthony Loehnis, Kit McMahon and Godrdon Richardson, 17 September 1980 page 1
John Sangster memorandum to Anthony Loehnis, Kit McMahon and Gordon Richardson, 17 September 1980, page 1
JLS_17_9_80_2
John Sangster memorandum to Anthony Loehnis, Kit McMahon and Gordon Richardson, 17 September 1980, page 2

There are a number of intriguing aspects to Sangster’s Bank of England document, namely that:

  • Gold was reckoned to be the chief “inflation-proof” asset
  • The bulk of the available gold stock was firmly held by the G10 (and Switzerland)
  • Gold demand by OPEC countries was impacting the gold price due to limited supply
  • The escalating price of gold was feared by Sangster to have the potential to affect OPEC’s price determination of oil
  • Sangster’s posed the question whether “in the longer run” the G10 countries should “sit pat on all their gold
  • Sangster’s vision was for central bank operations to target the movements of the real price of gold in a moving fashion
  • Sangster’s did not necessarily envision a central bank Gold Pool in the traditional sense but a Pool that would “enable OPEC to acquire some modicum” of Gold “without an excessive rise in the price”. Modicum is a word which means a small quantity of something.
  • Sangster also wanted to “prevent gold making its own particular contribution to inflation” (i.e. to sabotage what gold does best – signal inflation) and hilariously, in typical central banker fashion, he referred to the interest in real money (gold) as a “peculiar attraction” that should be targeted.

There are 3 hand-written notes on the document. The first note at the top of page 1 in blue pen was written by Anthony Loehnis. The second note which starts at the top left of page 1 and continues at the bottom of page 1 in black pen was written by the Deputy Governor Kit McMahon. The 3rd note at the bottom of page 2 in black pen was written by the Governor Gordon Richardson.

Note from Anthony Loehnis:

“An interesting but difficult proposal. The case for rising gold prices as a locomotor rather than a manifestation of inflation would need to be made very persuasively. And I have difficulty with “the developing real price of gold”. It may nonetheless be an idea worth touring around in Basle and elsewhere, although I share the doubt in JLS’s final statement. AOL 19.9

Note from Kit Mc Mahon:

 “I have always been one of the sceptics in this area, & I am afraid I remain one. If the US would declare official convertibility buying and selling to CMIs without limit – at say $700, I believe it would be an enormously beneficial development for the international monetary system and especially for the US. But I see not the faintest chance that this will ever happen. In the absence of such a move I think it would be weak and dangerous for a group of central banks to try ad hoc to influence the priceCWM 24/9.

Note from Gordon Richardson:

It is surely impossible for any country to fix a gold price in present circumstance. What I am looking towards is some exchange of gold for oil while the world adjusts – although not very hopefully! G

Notes on JLS 17 9 80
Hand-written notes from Anthony Loehnis and Kit McMahon
Notes on JLS 17 9 80 2
Hand-written note from Kit McMahon
Notes on JLS 17 9 80 3
Hand-written note from Gordon Richardson

Again, there were some intriguing comments in the these hand-written notes.

  • Loehnis recommended sharing around Sangster’s proposals in Basel (BIS) and elsewhere.
  • McMahon advocated that the US Government declare official convertibility between the US dollar and gold at $700 per ounce. This was based on a calculation of US overseas dollar liabilities tallied in a separate document. A similar calculation today would put the US dollar gold price in the many thousands.
  • Richardson was ‘looking towards an exchange of gold for oil’ between the gold holders (Western central banks) and the gold producers (OPEC, the most important member of which was the Saudis).

In the Bank of England Archives, there do not seem to be any relevant files relating to Gold Pool discussions or gold market intervention after the year 1980. Likewise, BIS Archives claim not to have any material whatsoever about the 1979-1980 BIS Gold Pool discussions, despite the fact that there are numerous files in the Bank of England archives proving that these discussions took place. We therefore need to look at relevant material from other sources covering the period after 1980.

Zjilstra’s Per Jacobsson lecture – September 1981

Just over 1 year after John Sangster had written his document dated 17 September 1980 to Kit McMahon, Anthony Loehnis, and Gordon Richardson, in which he envisioned a scheme that would “enable OPEC to acquire some modicum” of gold “without an excessive rise in the price”, the BIS President Jelle Zijlstra was again proposing joint action to control the gold price.

On Sunday, 27 September 1981 in Washington DC, Zjilstra gave the main speech at the IMF’s annual “Per Jacobsson Lecture”. Zijlstra was chosen to give this speech to mark the fact that he was scheduled to retire at the end of 1981 from his role as President and Chairman of  the BIS and as President of the Dutch central bank, De Nederlandsche Bank (DNB). Note that Fritz Leutwiler of the Swiss National Bank (SNB) became BIS President and Chairman from January 1982 onwards, while Wim Duisenberg became President of the Dutch central bank in January 1982.

In his “Per Jacobsson Lecture” which was titled “Central Banking with the Benefit of Hindsight”, and which was given while the gold price had last traded that week at $450 per ounce, Zijlstra candidly told his Washington DC audience of fellow central bankers that:

I feel that it is necessary for us, within the Group of Ten and Switzerland, to consider ways to regulate the price of gold, admittedly within fairly broad limits, so as to create conditions permitting gold sales and purchases between central banks as an instrument for a more rational management and deployment of their reserves.

On the occasion of the annual meeting of the IMF in 1979 this was brought up, but regrettably, insufficient agreement could be reached to make even a modest start with regulating the gold price in the free market.

It is my firm conviction that relatively small-scale interventions, though not forestalling the subsequent explosion of the gold price, would at least have reduced it to more manageable proportions.

Now that the turbulent emotions seem to have quietened down, we would be wise to reflect anew and without prejudice on these subjects.

These quite extraordinary statements from Zjilstra while still BIS President illustrate that the desire of the BIS head to intervene in the gold market had not dwindled between early 1980 and the end of 1981. In fact, Zjilstra seemed to be indicating that the lower volatility in the gold price towards the end of 1981 provided a perfect opportunity to revisit the discussions with more chance of success in controlling the gold price.

  • Zjilstra “regretted” that “insufficient agreement could be reached” by the G10 and Switzerland on considering “ways to regulate the price of gold” in late 1979
  • Zjilstra was also convinced that “relatively small-scale interventions” would have reduced the gold price moves in January 1980 “to more manageable proportions
  • Zjilstra advocated revisiting the topic of gold market intervention (“reflecting anew and without prejudice on these subjects“) sensing that the turbulent emotions seem to have quietened down”.

This view of Zjilstra’s resonates with John Sangster’s comment in his 18 January 1980 report about the G5 Gold Briefs in which Sangster said:

If tension eased substantially, however, central bank action need not then be unnecessary. With greater chance of success, it could be helpful in further cooling the inflationary environment.”

Given that Fritz Leutwiler of the Swiss national Bank took over the reins as BIS President in January 1982, and given that Leutwiler was arguably the most prominent of all the BIS governors as an advocate of a new BIS Gold Pool (see above and Part 1), then it would not be surprising if, under Leutwiler’s stewardship, the BIS inner club of Governor’s recommenced discussions of a BIS Gold Pool during the 1982 – 1983 timeframe.

First, there is the Meeting on the Gold Pool – 1983

During that time, Gordon Richardson was still Bank of England Governor, Karl Otto Pohl was still Bundesbank President, Fritz Leutwiler was still Swiss National Bank Chairman, and Paul Volcker was still Chairman of the US Federal Reserve. So, is there any evidence of a Gold Pool mentioned during this timeframe?

Fascinatingly, there is:

“Over A bratwurst-and-beer lunch on the top floor of the Bundesbank, Karl Otto Pohl, its president and a ranking governor of the BIS, complained to me in 1983 about the repetitiousness of the meetings during the “Basel weekend.” First, there is the meeting on the Gold Pool, then, after lunch, the same faces show up at the G-10, and the next day there is the board which excludes the U.S., Japan, and Canada, and the European Community meeting which excludes Sweden and Switzerland.”

Edward Jay Epstein,  “The Money Club” – An Essay,  HARPER’S  November 1983

In 1983, investigative journalist Edward Jay Epstein was given privileged access to the Bank for International Settlements and some of its inner sanctum central bank governors while he was writing an article on the BIS (“The Money Club”) for US magazine Harper’s.

In his Money Club article, Epstein writes:

“Artfully concealed within the shell of an international bank, like a series of Chinese boxes one inside another, are the real groups and services the central bankers need-and pay to support.

The first box inside the bank is the board of directors, drawn from the eight European central banks (England, Switzerland, Germany, Italy, France, Belgium, Sweden, and the Netherlands), which meets on the Tuesday morning of each “Basel weekend.

To deal with the world at large, there is another Chinese box called the Group of Ten, or simply the “G-10.” It actually has eleven full-time members, representing the eight European central banks, the U.S. Fed, the Bank of Canada, and the Bank of Japan. It also has one unofficial member: the governor of the Saudi Arabian Monetary Authority.

“This powerful group, which controls most of the transferable money in the world, meets for long sessions on the Monday afternoon of the “Basel weekend.”

[Karl Otto Pohl] concluded: “They are long and strenuous-and they are not where the real business gets done.” This occurs, as Pohl explained over our leisurely lunch, at still another level of the BIS: “a sort of inner club.

“The inner club is made up of the half dozen or so powerful central bankers who find themselves more or less in the same monetary boat: along with Pohl are Volcker and Wallich from the Fed, Leutwiler from the Swiss National Bank, Lamberto Dini of the Bank of Italy, Haruo Mayekawa of the Bank of Japan, and the retired governor of the Bank of England, Lord Gordon Richardson (who had presided over the G-10 meetings for the past ten years)”

Bundesbank President Karl Otto Pohl is clearly on record in 1983 as stating that First, there is the meeting on the Gold Pool during the “Basle weekend“.  But the only publically known gold pool was the London Gold Pool which operated from November 1961 to March 1968.

Epstein interviewed the Bundesbank’s President Karl Otto Pohl in 1983, more than 15 years after the London Gold Pool had collapsed. Pohl only joined the Bundesbank in 1977, and he would not, in 1983, have used the term ‘Gold Pool’ for a meeting that had not discussed a gold pool since 1968, i.e. 15 years earlier. So what does this term ‘Gold Pool’ refer to?

Often Outnumbered, never Outgunned

In 2012, German investigative journalist Lars Schall asked this very question to the Bank for International Settlements. Schall asked:

“What is the ‘gold pool’ cited by BIS board member and Bundesbank President Karl Otto Pohl in his interview with the financial journalist Edward Jay Epstein published in the November 1983 edition of Harper’s magazine?”

The BIS initially responded to Schall with a classic ‘deflection and avoid answering the question’ response. The BIS wrote:

“Many thanks for your phone call and e-mail enquiry…

A detailed history of the Gold Pool, which operated between 1961 and 1968, can be found in Toniolo, Gianni (2005), ‚Central Bank Cooperation at the Bank for International Settlements,‘ Cambridge: Cambridge University Press, pp. 375-81 and 410-23. This book should be available from most academic libraries covering finance and economics.”

Schall responded:

“Thank you for your response. However, it seems that you have not answered my question as to the ‘gold pool‘ that Mr. Pohl cited in his interview with Edward Jay Epstein. That interview took place many years after the London Gold Pool disbanded and it must have been the BIS‘ own gold pool.

Therefore, once again: what is the ‘gold pool‘ that Mr. Pohl was talking about in 1983?”

The BIS then replied again as follows:

“After further in-house research the following can be said about references to the’‚Gold Pool':

The ‘Gold Pool‘ Mr Pohl referred to in the 1983 interview is clearly a bit of a misnomer. The (London) ‘Gold Pool‘ as such – i.e. as a mechanism to intervene actively in the gold market by buying and selling gold on behalf of the central banks – operated only between 1961 and 1968.

Out of the regular meetings of central bank gold and foreign exchange experts organized at the BIS between 1961 and 1968 to discuss the operations of the London Gold Pool grew the so-called G10 Group of Gold and Foreign Exchange Experts, which continued their regular meetings at the BIS after the London Gold Pool had been abandoned. But for quite some time after 1968 this group was still being referred to by some as the ‘Gold Pool’, although it didn’t have the operational role the London Gold Pool had. This forum still exists today — it was re-named the Markets Committee in 1999.

Thus, it should be clear that after 1968 the mandate of this Gold and Foreign Exchange Committee was no longer to discuss and agree on direct interventions on the gold market, but simply to monitor and discuss developments on the financial markets generally. This is the ‘Gold Pool‘ Mr Pohl refers to in his 1983 interview.

Frankly, this BIS response is risible and fabricated since Karl Otto Pohl only joined the Bundesbank in 1977 and had no dealings whatsoever with the 1960s gold pool so would never have referred to a meeting which had nothing to do with a gold pool as “the meeting  on the Gold Pool“.

As former Luxembourg prime minister Jean-Claude Juncker famously said: “When it becomes serious, you have to lie“. The BIS response to Schall is also as hollow and misleading as a similar response the BIS sent to me when I asked for BIS documents on the Gold Pool discussions which took place in Jelle Zjilstra’s office in November and December 1979, meetings which are proven to have taken place. As a reminder, the BIS told me:

“The Gold Pool came to an end in 1968, so I take it that you are referring to meetings of the Gold and Foreign Exchange Committee. We do have some minutes for this meeting, but unfortunately not for the period which interests you.”

gold chart to end of 1985
Gold Price in US Dollars, July 1979 to December 1980. Source: BullionStar Gold Charts

Many Modicums of Gold for the Saudis

Therefore, what sort of Gold Pool would the early 1980s gold Pool have been? Bank of England Governor, Gordon Richardson, a member of the BIS inner club of governors, was calling for some exchange of gold for oil while the world adjusts”.

Bank of England gold and foreign exchange specialist John Sangster recommended a pool that would not have significant potential for recovery of gold sold, but that would enable OPEC to acquire some modicum” of gold “without an excessive rise in the price.” It would involve “market intermediation” which would “allow the G10 to move with the price while attempting to control its pace.”

OPEC was “increasingly concerned that gold is outpacing oil”, and while Al Quraishi, Governor of the Saudi Arabian Monetary Authority (SAMA) said that the Saudi’s “would not rock the boat” and buy gold on the open market if a new gold pool was selling, the Saudi’s still wanted to“diversify” into gold.

Incoming BIS President, Fritz Leutwiler “advocated central bank intervention in the gold market. Outgoing BIS President Jelle Zjilstra wanted the G10 and Switzerland to “consider ways to regulate the price of gold, so as to create conditions permitting gold sales and purchases between central banks.

Soviet – Kuwait Gold for Oil Deals

Gold for Oil sales were not just in the realm of theory even in 1979. They were fact. On 4 October 1979, the Governor’s office at the Bank of England wrote the following Secret briefing to the Bank of England Deputy Governor about Russian gold being exchange for Kuwaiti oil:

SECRET

4.10.79

THE DEPUTY GOVERNOR

Sir George Bolton phoned and asked me to mention to you that he had heard the following story from Washington.

It was attributed to the State Department and has two strands.

The Russians have sold one hundred tons of gold to Kuwait against payment in oil.

The Russians have suggested to the Government (?Central Bank) of Kuwait that they should act as agents for the Russians in buying oil against gold.

P.W.F. Ironmonger,

Governor’s Office

4th October 1979

 Bolton 4 October 1979

Handwritten 1 DAHB / JGH only. 2 back to JLS please. Handwritten “Mr McMahon,  Mr Sangster,  Mr Walker”    “for what it may be worth”.

The day before this Secret memo was written, the New York Times reported from the IMF conference in Belgrade on 3 October 1979 in an article titled “Saudis Hint Oil Output May Drop – Dollar’s Eroding Value Cited at IMF Meeting” that:

Saudi Arabia’s finance minister told a forum of international monetary officials and private bankers today that his country was considering new cutbacks in oil production because of the eroding value of the dollar.”

It would be naive to pretend that a continuous erosion of our financial resources, through inflation and exchange depreciation, could not evoke reactions,” Sheik Abalkhail said.

“We have done this to maintain more orderly conditions in the oil market and to promote a higher level of sustained growth of the world economy. We are finding it increasingly difficult to continue our policies under prevailing instabilities in exchange markets, coupled with high levels of inflation in industrial countries.”

On 4 October 1979, the New York Times again reported from the IMF conference in Belgrade in an article titled “Historical Linkage Cited For Gold and Oil Values” that:

“South Africa’s finance minister suggested today that there was a rough historical relationship between oil and gold prices.”

“Of the relationship between gold and oil, [Oren] Horwood declined to provide any explanation, saying ‘I simply note the fact’. The reaction of bankers here was that the relationship showed a constancy of real values against the background of gyrations in currencies.”

“Mr Horwood said that, as tracked over the last half-century, the price of gold per ounce was generally 15 times greater than the price of oil per barrel.”

Prior to the 1970s, the gold oil ratio was more static than the gold oil ratio since the 1970s for the simply fact that the gold price was fixed for a large period of time prior to the 1970s. However, the Gold to Oil ratio since 1970 has moved in a range of about 10 to 35, with a lengthy period during the 2000s when the ratio dipped below 10.

G to O ratio 1970 - 2017
Gold to Oil Ratio – 1970 to date. Source: http://www.macrotrends.net

Conclusion – The BIS, Where Noone Can See

To me, the evidence suggests that a Gold Pool did evolve at the BIS in the early 1980s but that it has been extremely well hidden. If it did evolve, was its intent to control the gold price so that Saudi & Co could acquire gold on the open market without driving up the gold price, or was it a dual purpose operation of Western central banks to quell inflationary signals, while in the background transferring a portion of their substantial gold holdings to Saudi & Co in secretive BIS administered transactions? And did it fix the gold / oil ratio or attempt to target a range, while allowing the dollar price of gold and oil to seemingly fluctuate randomly? And where was the gold that was being provided to Saudi & Co coming from, central bank sales from the large western central bank gold holders?

The Bank of England’s Sangster said he did not want toadvocate gold for oil directly” but was advocating that OPEC “acquire some modicum” of gold “without an excessive rise in the price.” And Bank of England Governor Gordon Richardson was “looking towards some exchange of gold for oil while the world adjusts“. Remembering that given that the Governor of the Saudi Arabian Monetary Authority (SAMA) was an unofficial member of the G10 at the BIS, then it is not implausible that the Saudis got what they wanted i.e. a chance to acquire real money in the form of gold in return for continuing to supply oil to the advanced Western economies.

Anyone familiar with the writings of “Another” on the USAGold website which appeared starting in October 1997 will recognise that this is exactly what “Another” said happened at the BIS, i.e. that the BIS fixed the gold/oil ratio so as to allow the Saudis to acquire gold even as they were receiving US dollars in payment for their oil exports.

In other words, that one leg of the BIS transactions took the form of behind the scenes gold transfers that flowed to Saudi & Co as subsidised payments for oil, thereby allowing the Saudis to receive payment in the ultimate money of gold in addition to fiat US dollars, while the other leg of the transactions allowed oil to continue to flow to the West. And lastly, that these arrangements, by also targeting the gold price, kept gold at an artificially low level which prevented gold fulfilling its traditional role of inflationary baramoter.

Anyone who reads ‘Another’ will see intriguing sentences such as follows, which just so happen to resonate with what BIS discussions and Bank of England documents were alluding to:

  • It was once said that “gold and oil can never flow in the same direction”
  • The BIS, instead of taking [gold] outright, places it where it’s needed!
  • In effect the governments are selling gold in any form to “KEEP IT” being used as ‘REAL MONEY” in oil deals!
  • Make no mistake, the BIS knows gold in the many thousands.
  • Not all oil producers can take advantage of this deal as it is done “where noone can see”.
  • Westerners should not be too upset with the CBs actions, they are buying you time!
  • Oil went from $30++ to $19 + X amount of gold! Today it costs $19 + XXX amount of gold (which according to some ‘Another’ experts, is a reference to the gold for oil agreement of the 1980s being renewed in the earlier 1990s at more favourable terms to the Saudis after the invasion of Kuwait)

All of this is presented in highly stylised but cryptic and ‘vague’ detail by Another & Friend of Another (FOA) on the USAGold website for those interested in reading it. I would tend to agree with what “Another” says, especially after having seen all of the discussions that took place at the BIS from the late 1970s onwards. The only question I would have is if the gold for oil deals are true, then “why the secrecy?”  Why not make it public, and let the world adjust?

An update on SGE Vault Withdrawals and SGE Price Premiums

In 2016, withdrawals of gold from the Shanghai Gold Exchange totalled 1970 tonnes, the 4th highest annual total on record. This was 24% less than SGE gold withdrawals recorded in 2015, which reached a cumulative 2596 tonnes (See Koos Jansen’s  6 January 2017 blog at BullionStar “How The West Has Been Selling Gold Into A Black Hole” for more details of the 2016 withdrawals).

SGE gold withdrawals are an important metric in the physical gold market because SGE gold withdrawals are a suitable proxy for approximating Chinese wholesale gold demand. This proxy functions well because China’s domestic gold mining production, Chinese gold imports, and most Chinese gold scrap are all sold on the Shanghai Gold Exchange. As a reminder, gold withdrawals from the SGE means actual physical gold bars withdrawn from the SGE’s network of 62 approved precious metals vaults in 35 cities across China. (See “The Mechanics Of The Chinese Domestic Gold Market” for a discussion of why this proxy works).

2017 SGE Gold Withdrawals

Year-to-date, which now includes the first four months of 2017, SGE gold withdrawals have reached 727 tonnes, which annualized equals 2181 tonnes, and would make 2017 the 3rd highest SGE vault withdrawal year on record, and only slightly behind the 2197 tonnes of registered withdrawals from the Exchange’s vaults in 2013. And since SGE gold withdrawals are a suitable proxy for wholesale Chinese gold demand, it would point to 2017 shaping up to be one of the strongest years ever for physical gold demand in the Chinese gold market.

SGEDeliveries01y

SGE Gold Withdrawals 2008 – 2017. The 2017 figure reflects January – April inclusive. Source:www.GoldChartsRUS.com

With two-thirds of the year still to play out, annualised estimates of year-to-date gold withdrawal figures will always be approximations and will change when each successive month’s figure is added.

For example, January 2017 gold withdrawals of 184.4 tonnes suggested an annualised withdrawal figure of 2213 tonnes. February’s withdrawals as per published SGE data came in at 179.2 tonnes, implying an annualised figure of 2182 tonnes. As monthly withdrawals increased in March to 192.2 tonnes, this edged the annual estimate up to 2224 tonnes. But coincidentally, April’s SGE gold withdrawal figure brought the annual estimate back to ~2182 tonnes. This was so because combined gold withdrawals for January and February exactly equaled combined withdrawals for March and April, in both cases 363 tonnes over the two consecutive two month periods.

January + February = 184+179 = 363 tonnes

March + April = 192+171 = 363 tonnes

Discrepancy

There is also a data discrepancy worth pointing out with the Shanghai Gold Exchange’s gold withdrawal figures for 2017. This discrepancy relates to the fact that the monthly withdrawal numbers for the 4 month period from January to April do not add up to the cumulative gold withdrawal figure for 2017 as published elsewhere on the Exchange’s website.

SGE gold withdrawals for January to April inclusive summate to exactly 727.073 tonnes.

However, in the latest (April) edition of the SGE’s monthly “Data Highlights” report, which is published in English, it states that cumulative withdrawal volume inclusive of April totalled 771.973 tonnes, which is 44.9 tonnes higher than the figure implied by the summation of the 4 individual months’ figures.

April withdrawals
SGE Gold Withdrawals – April 2017: Source: SGE Data Highlights report

This data discrepancy has been present in the ‘Data Highlights’ report each month since February. For example, at the end of February 2017, the combined monthly withdrawals of January (184.412 tonnes) and February  (179.237 tonnes) were 363.649 tonnes, but the ‘Data Highlights’ report for February stated that the cumulative withdrawal total for those two months was 378.649 tonnes. This is exactly 15 tonnes more than the two months combined would suggest. So, it seems that there is a data issue somewhere in SGE record keeping, especially given the rounded figure nature of the discrepancy number.

February withdrawals
SGE Gold Withdrawals – February 2017: Source: SGE Data Highlights report

The SGE March report also had an error when the monthly totals for January – March pointed to gold withdrawals of 555.899 tonnes , while the March ‘Data Highlights’ listed cumulative gold withdrawals of 524.899 tonnes, in this case exactly 31 tonnes less than the summation of the 3 monthly figures would suggest. Again, the rounded figure nature of the discrepancy number suggests a data issue somewhere in the SGE reporting system.

March withdrawals
SGE Gold Withdrawals – March 2017: Source: SGE Data Highlights report

Until the SGE clarifies the discrepancy, its best to go with the summation of the individual month’s withdrawal figures while awaiting feedback from the Exchange.

SGEDeliveries4yearM
SGE Gold Withdrawals – Cumulative Withdrawals Months 1 – 4, 2008 – 2017. Source:www.GoldChartsRUs.com

The above chart plots cumulative gold withdrawals for the 4 months to end of April compared to similar periods in previous years, and again shows that 2017 looks set to be one of the strongest years for Chinese gold demand on record. The cumulative gold withdrawals of 727 tonnes for the January to April timeframe are the 2nd highest ‘Month 1-4′ cumulative figure on record, with only 2015 higher, when the similar figure came in at 821 tonnes.

SGE Premiums

Beginning last November and persisting into December 2016, the SGE gold price and the International gold price (as expressed in Yuan) began to diverge with the SGE gold price trading significantly higher. This created a noticeable and rapidly rising premium in the SGE gold price, and at one point in mid December this premium was $40 per ounce higher than, or over 3% above the international gold price.

This phenomenon was at the time attributed to the introduction by the Chinese authorities of more stringent restrictions on gold imports in an effort to reduce currency outflows. For example, Reuters, citing trader sources, wrote on 9 December 2016 that China was “curbing gold imports in [a] bid to limit yuan outflow”.

There were also rumours in the gold market at that time that a number of banks that had been authorised to import gold into China had lost their import licences (or that their licenses had not been renewed), and that the People’s Bank of China was also becoming stricter on the quotas of gold that it would allow banks to import in a given consignment. However, when BullionStar asked the SGE about this in December, the SGE did not reply.

Only 13 banks are authorised to import gold into China, 10 of which are local Chinese banks, and the other 3 of which are the foreign banks HSBC, ANZ and Standard Chartered.

In theory, an expansion in the SGE price premium could have been caused by a combination of limited supply or higher demand, or both. The below chart for 2016 (lower panel) illustrates the emergence of this premium in early November, with the premium rising rapidly from less than 0.5% at that time to nearly 3.5% at one point in December, but still ending the year in the 2% range. The upper panel of the chart show that same phenomenon only in terms of the relative prices of the SGE and International gold prices.

In contrast, for the 10 months of 2016 that preceded November, the premium of the SGE price to the International price was persistently very low and static from January to October 2016.

SGEPremiumsAUp2016
Percentage Premiums: SGE Gold Price vs International Gold Price, 2016: Source:www.GoldChartsRUs.com

Fast forwarding to 2017, the most interestingly observation of the SGE premium since the November-December timeframe is that although the premium dropped sharply in January from the 2% range down to the 0.4% range by January month-end, it resumed a uptrend in February before spiking up noticeably again during March to levels approaching those seen in November and December.

In the case of March, it appears that premiums rose again for the very same reason that was attributed to the sharp rise in late 2016, i.e. the re-emergence of supply constraints brought on by more stringent gold import restrictions. According to Reuters in an article on the subject dated 17 March in which it quoted a Hong Kong based trader saying that:

“imports are happening, but with some restrictions. The government has been doing this since November to control the capital outflows. Now, it is becoming a bit aggressive with stringent reviews”

“The quotas are reviewed regularly and extended on a case by case basis.”

SGEPremiumsAUp2017
Percentage Premiums: SGE Gold Price vs International Gold Price, 2017 Year-to-Date: Source:www.GoldChartsRUs.com

Although premiums shrank after mid-March and returned to the 1% level, they oscillated in the 1% to 0.5% range until mid-April and since then have resumed a steady rise to the 1% level, which is a very different chart to the one that persisted for most of 2016.

It therefore seems that the impact of tighter import restrictions that appeared in November and December of last year and which the rising premiums reflected was not a transitory phenomenon but instead has become a persistent feature of the Chinese gold market.

And what does this say about the Chinese authorities’ plans to liberalise the Chinese gold market since more restrictive import quotas and rules appear to be doing the opposite by undermining some of the liberalisation steps that had already been underway?

New Gold Pool at the BIS Basle, Switzerland: Part 1

In the Governor’s absence I attended the meeting in Zijlstra’s room in the BIS on the afternoon of Monday, 10th December to continue discussions about a possible gold pool. Emminger, de la Geniere, de Strycker, Leutwiler, Larre and Pohl were present.”     

13 December 1979 – Kit McMahon to Gordon Richardson, Bank of England

Introduction

A central bank Gold Pool which many people will be familiar with operated in the gold market between November 1961 and March 1968. That Gold Pool was known as the London Gold Pool.

This article is not about the 1961-1968 London Gold PoolThis article is about collusive central bank discussions relating to an entirely different and more recent central bank Gold Pool arrangement. These discussions about a second Gold Pool began in late 1979, i.e. more than 11 years after the London Gold Pool had been abandoned. This article is Part 1 of a 2 part series. Part 2 will be published shortly.

These discussions about a new Gold Pool arrangement took place in an era of soaring free market gold prices and in the midst of the run-up in the gold price to US$850 in January 1980.

The discussions and meetings about a new Gold Pool  in 1979 and 1980 and beyond which are detailed below, occurred at the highest levels in the central banking world and involved the world’s most powerful central bankers, some of whose names will be familiar to readers. The aim of these central bank discussions and meetings was to reach agreement on joint central bank action to subdue and manipulate the free market gold price in the early 1980s. Many of these collusive meetings were private meetings between a handful of Group of 10 (G10) central bank governors, and took place in the actual office of the president of the Bank of International Settlements in Basle, Switzerland.

Above all, these central bank meetings show intent. Intent by a group of powerful central banks to manipulate a free market gold price so as to distort free market gold pricing signals. So these documents are timeless in that regard. The documents also illustrate the concern that a rising gold price in the free market creates for senior central bankers, and importantly, also shows that these same central bankers have no qualms, at least from a legal or moral perspective, of intervening to manipulate a gold price when they see it as a threat to their fiat currency monetary system.

The 1961-1968 London Gold Pool was a collusive arrangement between 8 major central banks to attempt to keep a lid on the official gold price at US $35 per ounce. That Gold Pool was instigated at the headquarters of the Bank for International Settlements (BIS) in Basle, Switzerland and monitored at the BIS by the governors of the Pool’s member central banks. However, day-to-day activities of the 1961-1968 Gold Pool were executed by the Pool’s agent, the Bank of England in London. Hence it was dubbed the London Gold Pool. Famously, this London Gold Pool collapsed on Thursday 14 March 1968 when speculative buying in the London Gold Market overwhelmed available Gold Pool supplies from member central banks.

Whereas the members of the 1961-1968 London Gold Pool consisted of the central banks of the United States, United Kingdom, West Germany, the Netherlands, Switzerland, France, Belgium and Italy, the discussions about a new Gold Pool that took place in 1979, 1980 and beyond, involved the very same central banks.

The 1961 -1968 Gold Pool was both a selling syndicate, where the members pooled their gold reserves to intervene in the London gold market, and a buying syndicate where the member central banks attempted to replenish gold that had been used in the gold price capping operations. Similarly, as you will see below, the discussions on a new Gold Pool in 1979 and 1980 involved participant West European central banks which on the whole wished to be able to buy gold for the Pool as well as sell gold from the Pool.

Central to illustrating how the most powerful central bankers in the world colluded to attempt to establish a new Gold Pool are a number of internal documents from the Bank of England which provide a detailed blueprint on the evolution of these collusive discussions at the BIS, as well as providing detailed insights into the thinking of the senior Bank of England executives involved in the meetings. These internal correspondence documents from 1979 and 1980 can be thought of as the equivalent of internal emails in the era before corporate email systems.

As you will see below, so many names of high level central bankers crop up in the discussions and documents, that to provide context, this necessitated some short background summaries on who these people were and what roles they occupied. It is also necessary to provide some brief context on gold price movements during the period under discussion.

Bank for International Settlements - Basle Gold Pool
Bank for International Settlements – Basle, Switzerland – Gold Pool

The Gold Price Run-up during 1979 and 1980

When the London Gold Pool collapsed in mid-March 1968, a two-tier gold market took its place, with the private market gold price breaking higher, while central banks continued to trade gold with the Federal Reserve Bank of New York (FRBNY) and US Treasury at the official price of US$ 35 per ounce. However, in August 1971, Nixon closed this FRBNY / Treasury ‘Gold Window’ by ending the convertibility of US dollar liabilities into gold that had been an option for foreign central banks and foreign governments. This was the birth of the free-floating gold price.

By the end of 1974, the US dollar gold price had soared to $187 per troy ounce. Following this, the next 3 years saw the gold price first trade down to near $100 during August 1976 before resuming its uptrend. Year-end gold prices over this period were in the $135 – $165 range. In 1978, the price again broke to a record high and finished the year at $226 per ounce. See chart below.

Gold Price January 1971 to January 1980

Gold Price January 1971 to January 1980. Source: BullionStar charts

But it was in 1979 that the US dollar gold price really took off, setting record after record. In July 1979, the $300 level was breached for the first time. During October 1979, the gold price then took out $400 for the first time. During December 1979, the gold price hit $500. While these late 1979 price increases were in themselves phenomenal, what then occurred in January 1980 was even more striking, for in the space of a few weeks, the price rocketed up first through $600, then $700, and then through the $800 level before peaking in late January 1980 at a then record of $850 per ounce. See chart below.

Gold Price January 1979 to June 1980
Gold Price January 1979 to June 1980. Source: BullionStar Charts 

The mid-1970s saw a flurry of official gold sales to the market which although strategically designed in part to subdue the gold price, in practice didn’t achieve that goal over the medium term. Between June 1976 and May 1980, the International Monetary Fund sold 25 million ounces (777 tonnes) of gold in 45 public auctions. Between May 1978 and November 1979, the US Treasury sold 8.05 million ounces of high grade gold (99.5% fine) and 7.75 million ounces of low grade gold (90% fine) in 23 auctions to the private market. That’s just over 15 million ounces (466 tonnes) of gold in total auctioned by the Treasury. The last US Treasury auctions were on 16 October 1979 when 750,000 ounces of low grade coin bars were auctioned, and then on 1 November 1979 when the Treasury implemented a variable sales quantity approach and auctioned 1,250,000 ounces of low grade coin bars. On 15 January 1980, the US Treasury Secretary announced an official end of US gold sales.

As the 1980 annual report of the bank for International Settlements noted when reviewing the 1979 gold market:

“The further increase in [gold] supplies was overshadowed by the dramatic rise in the demand for gold which, in the space of little over a year, caused the London market price to increase more than fourfold to a peak of $850 per ounce in January 1980.”

“In addition to its sheer magnitude, last year’s [1979] gold price rise had three other remarkable features: firstly,  it took place against all major currencies, including those whose value had increased most during the 1970s. Secondly, it took place at a time of generally rising interest rates in the industrialised world, one effect of which was to increase the cost of holding gold. Thirdly, it took place at a time when, by and large, the dollar was strengthening in the exchange markets.”

It is against this background of surging  gold prices, pre-existing gold auctions, turmoil in currency markets, slow growth and high inflation, that the first of the collusive Gold Pool discussions took place between September 1979 and January 1980 at the BIS.

Gold Pool Revival

There now follows a series of confidential memorandums and briefings from the Bank of England, the first of which, marked ‘SECRET‘ was an analysis written by the Bank of England’s John Sangster to the attention of the Bank of England’s Christopher McMahon. Documents are in blue text and italics, with bold and underlining added where appropriate. A lot of the text in the documents is self-explanatory and the underlying and bold text just draws attention to sections of particular interest.

Christopher McMahon, known as ‘Kit’ McMahon, was an executive director at the Bank of England from 1970 to 1980, before becoming Deputy Governor of the Bank of England on 1 March 1980. Prior to McMahon’s promotion, Jasper Hollom was Deputy Governor of the Bank of England. Kit McMahon’s full name is Christopher William McMahon, hence he signed his his internal Bank of England memos and correspondence with the initials ‘CWM’.

McMahon left the Bank of England in 1986 to take up the role of Chief Executive and Deputy Chairman of Midland Bank. In 1987, McMahon was also made Chairman of Midland Bank. McMahon left Midland in 1991. Since 1974, Midland Bank had also owned Samuel Montagu, one of the five traditional bullion firms of the London Gold Market. HSBC acquired full ownership of Midland in 1992 after acquiring a 15% stake in 1987 when McMahon was Chairman and Chief Executive of Midland. See profiles of McMahon here and here.

John Sangster’s full name was John Laing Sangster, hence he signed his internal Bank of England memos and analysis with the initials ‘JLS’.

During the 1970s and early 1980s, Sangster was the Bank of England’s foreign exchange and gold specialist. In March 1980, Sangster became one of six newly appointed assistant directors at the Bank of England. To give some idea of the senior level at which Sangster was operating at that time at the Bank, when he was promoted to assistant director in March 1980, two of Sangster’s contemporaries that also made assistant director at the time were Eddie George (gilt-edged operations area) and David Walker (economics area). Sangster retired from the Bank of England in 1982. Eddie George went on to be Governor of the Bank of England from 1993 to 2003. David Walker went on to head a whole host of institutions in the City of London including the chairmanship of Barclays Bank.

The first document which follows was written on 21 September 1979 when the gold price closed at $376.41.

SECRET

                                                                                                                                                         21.9.1979

Mr McMahon                                                                                                               Copy to Mr  Byatt           

Gold

It is just possible that over the next few weeks some central banks may try to discuss a possible revival of the gold pool. Rather like the sterling credit of June 1976, a number of people could spontaneously be thinking that the time is ripe for some joint action.

The main arguments would be: -

(a) gold is even now so much part of the international monetary system that its present performance is a significant element in general currency instability;

(b) whereas previously the weakness in the dollar had been boosting gold, latterly the strength of gold has itself contributed to the dollar’s renewed weakness;

(c) the market now looks overbought, and there is a need to break the psychology of “the market can only go one way and that is up”. Such an attitude has obvious dangers in any market but given gold’s residual monetary connections, there must be a danger that financial institutions could become over exposed in this area;

(d) a joint demonstration by central banks would be all the more salutary since the market firmly believes that central banks are only interested in putting a floor under the price and that none wishes to stem its rise.

(e) it could flush out more Russian selling

There would obviously be no question of any permanent stabilisation of the gold price, merely at a critical time holding it within a target area.  Such an operation could be mounted alongside the existing US auctions, although it is arguable that these have become too predictable and could, for the time being at least, be better subsumed in a new gold pool arrangement.   As far as I know, nothing has yet been mooted to or by the FRBNY, and if there is no American interest the matter would be dropped.   Nor would others consider the proposal, if there were no provision for the recapture of gold, were the market temporarily mastered.

There is nothing for us to do at the moment but be aware of the potential for discussion.. If the idea got off the ground and given the comparative paucity of our gold holding, it would obviously [page 2] be preferable to ensure that contributions were made in proportion to gold holdings rather than on any other basis.

21st September 1979

JLS

The actual memorandum from JLS to McMahon can be seen here: Page 1 and Page 2. The links may take a little while to load first time.

Not surprisingly, as the Bank of England’s gold and foreign exchange specialist, Sangster was privy to the views and conversations of other central banks in this area at that time, for he correctly predicted that a group of central banks were about to embark on discussions about a new Gold Pool.

Sangster also correctly predicted that the European central banks’ preferred structure of the interventions be in the form of a Pool in which the gold used could be recaptured. Notably, Sangster’s assessment of the need for American buyin to the scheme also proved accurate.

It was convention in that day at the Bank of England for internal correspondence to be circulated to the recipients who then read it and added hand-written notes which they signed with their initials before returning the original circulated pages to the author. This was in the time before the advent of corporate email.

Notes on JLS 21 9 79Hand-written note on JLS memorandum to Sangster, 21 September 1979

In the above memorandum, a hand-written note by Kit McMahon signed with the initials CWM at the top of page 1 reads as follows:

Paul Jeanty told me that Zijlstra had told him personally a couple of weeks ago that he would now be in favour of a central bank operation to stabilise the price within a moving band. Leutwiler (frequently) and Clappier have said this to him in the past and he believes (I do not know on what evidence) that de Stryker and Baffi would go along with such a plan. All recognise, however, that Emminger has no disposition to support.

CWM 29/9″

As above, there will be many famous names throughout this article, each of which needs to be briefly profiled so as to add context.

At the time of this correspondence, Paul Jeanty was Deputy Chairman of Samuel Montagu & Co, one of the five bullion dealers in the London Gold Market. Samuel Montagu & Co had been a wholly owned subsidiary of Midland Bank since 1974.

A Who’s Who of Central Bankers

Zijlstra refers to Dr. Jelle Zijlstra, Chairman and President of the Bank for International Settlements (BIS) from 1967 to December 1981. Zijlstra was also simultaneously President of the Dutch central bank, De Nederlandsche Bank (DNB) from 1967 until the end of 1981. Notably, Zijlstra was also Dutch Prime Minister for a short period during 1966-67.

Leutwiler refers to Fritz Leutwiler, Chairman of the Swiss National Bank (Switzerland’s central bank) from May 1974 to December 1984. Leutwiler was also a member of the board of the BIS from 1974 to 1984, and served as President of the BIS  between January 1982 and December 1984, as well as Chairman of the Board of the BIS from January 1982 to December 1984.

De Stryker refers to Cecil de Strycker, Governor of the National Bank of Belgium from February 1975 to the end of February 1982. At that time, De Stryker was also president of the European Monetary Cooperation Fund and then president of the Committee of Governors of the Central Banks of the Member States of the European Economic Community.

Clappier refers to Bernard Clappier, Governor of the Banque de France from 1974 to 1979. Clappier was also vice-governor of the Banque de France from 1964 to 1973.

The reference to Baffi is Paolo Baffi, Governor of the Banca d’Italia from July 1975 until October 1979, and also a board member of the BIS since 1975. Baffi became Vice-Chairman of the BIS in 1988.

Emminger refers to Otmar Emminger, President of the Deutsche Bundesbank from 1 June 1977 to 31 December 1979. Emminger was one of the principal architects of the IMF’s synthetic Special Drawing Right (SDR) in 1969 which was designed to be a competitor of and replacement for gold.

The next document below, from 18 October 1979 contains references to the above people and also references to other important central bankers, so it is best, at this stage, to explain these additional names also.

THE GOVERNOR of the Bank of England - Gordon Richardson. Richardson was Governor of the Bank of England for 10 years from 1973 to 1983, and a non-executive director of the Bank of England between 1967 and 1973. He was chairman of J. Henry Schroder Wagg from 1962 to 1972, and chairman of Schroders from 1966 to 1973. Richardson was also a director of Saudi International Bank in London. Saudi International Bank was formerly known as Al Bank Al Saudi Al Alami when it was incorporated in London in 1975, and is now known as Gulf International Bank UK Limited.

Ciampi refers to Carlo Ciampi. Ciampi was Governor of Banca d’Italia from October 1979 to April 1993, and also Vice-Chairman of the Bank for International Settlements between 1994 and 1996. Notably, Ciampi was also Prime Minister of Italy from April 1993 until May 1994, and President of Italy from May 1999 until May 2006.

Schmidt refers to Helmut Schmidt, Chancellor (head of state) of the Federal Republic of Germany (West Germany) from 1974 to 1982.

Guth refers to Wilfried Guth, Chairman of the Board of Deutsche Bank (the commercial bank) from 1976, and from 1985 Chairman of the Supervisory Board of Deutsche Bank until 1990.

Al Quraishi refers to Abdulaziz Al-Quraishi. Al-Quraishi was Governor of the Saudi Arabian Monetary Agency (SAMA) from 1974 to 1983. He was also Chairman of Saudi International Bank in London from 1987 to 1996, and was on the Board of Saudi International Bank at the same time as Gordon Richardson.

The Americans: Miller, Solomon, Volcker and Wallich

Miller refers to William Miller. Miller was US Secretary of the Treasury from August 1979 to January 1981. Before that, he was chairman of the Board of Governors of the Federal Reserve System from March 1978 to August 1979.

Solomon refers to Anthony Solomon. From March 1977 to March 1980, Solomon was US Undersecretary of the Treasury for Monetary Affairs. In April 1980, he became President of the New York Fed and stayed in that position until the end of 1984.

Volcker refers to Paul Volcker. In August 1979, Volcker took over from Miller as chairman of the Board of Governors of the Federal Reserve System. Prior to that, Volcker was President of the New York Fed from 1975 to 1979. Volcker had also been Undersecretary of the Treasury for Monetary Affairs 1969 to 1974.

Wallich is a reference to Henry Wallich. Wallich was an economist, who among other things, was a member of the Board of Governors of the Federal Reserve System from 1974 to 1986. He was also a member of the Congressional Gold Commission in 1981-1982.

Gold Pool Discussions in Belgrade

This second document below was written by Kit McMahon on 18 October 1979 and addressed to the Bank of England Governor, Gordon Richardson. On 18 October 1979 the gold price closed at $386.84. The reference to Belgrade refers to the annual conference of the International Monetary Fund and World Bank which took place at the beginning of October 1979 at the Sava Center in Belgrade, the capital of the former Yugoslavia. Finance ministers and central bankers from 138 countries attended this IMF annual conference in Belgrade.

 

SECRET

                                                                                                                                                18.10.79

THE GOVERNOR O/R

Gold

Paul Jeanty came to see me this afternoon to report on a conversation be had with Leutwiler the other day in Zurich.

Leutwiler told him that the Americans had come to see him in Belgrade (the whole team of them – Miller, Solomon, Volcker and Wallich).  To Fritz’s great surprise they had asked him whether he might organise a gold selling operation (it was mainly Volcker and Solomon who did the talking).  They had apparently mentioned the possibility of being prepared to sell 10% of official reserves and were apparently prepared to join in themselves.

Fritz had replied that if an operation was mounted, nothing like 10% of reserves would be necessary; but that any gold that he sold he would want to buy back later on at a lower price.  Again to his surprise the Americans had not demurred at this – a very big change from previous attitudes.

Fritz had told Jeanty, what Jeanty already knew, that Zijlstra would be interested; however, apparently Clappier indicated that he was against.   This was a reversal of view which Leutwiler attributed to pressure from the Élysée which was itself influenced by the Germans.   Leutwiler had also said that whereas Baffi had been in favour he had no knowledge of Ciampi’s attitude.

Emminger continued to be strongly against.  Apparently, however, some attempt had been made to persuade Schmidt of the value of this idea. According to Leutwiler, Guth had urged it on him, but Schmidt does not appear to be prepared to oppose the Bundesbank.

There seems to be some disposition among those in favour to believe that OPEC are increasingly concerned that gold is outpacing oil and increasingly prepared to use this as an argument for higher oil prices.   Jeanty asked Leutwiler whether he was sure that Al Quraishi would not rock the boat

Page 2

and start buying if other central banks sent the price down. Leutwiler had assured him that he had often discussed it with Quraishi and that there would be no problem there.   He then apparently gave a very interesting piece of information that Quraishi and Zijlstra are meeting with Emminger in Frankfurt next Tuesday – though not necessarily on this subject. Jeanty suggested it might be a plea to be allowed to diversify.

Finally, according to Jeanty, Fritz had asked if he would be likely to be seeing me, making it fairly clear that he would like the gist of these conversations to get to us.    He knew that our reserves are small but he hoped that we might provide moral backing for an initiative to put pressure on Emminger.

I applied to all this, as I have to similar discussions on previous occasions, in a rather discouraging way, saying that while I disliked the instability of the gold price, I thought it was symptomatic more than causal of currency problems and that their would be a sharp fall if and when Volcker’s policy succeeded.   Moreover, while it would be easy and nice for central banks to force the price down too hard and quickly, thereafter – and particularly when they started buying back, they could well find that they were riding a tiger.

I would have said this to Jeanty whatever my views, but in fact I remain extremely doubtful about the wisdom of any enterprise of this kind – at least divorced from much more wide-ranging agreements about currency stability.   However, I thought the conversation was of interest in a number of ways not least in providing further evidence of the way central bankers will talk to major operators in the gold market. I imagine you might want to have some further conversations on this subject with your colleagues in Basle.

CWM

18th October 1979

The above memorandum from McMahon to Richardson can be seen here: Page 1 and Page 2. The links may take a little while to load first time.

The following key points are notable from McMahon’s analysis. Zijlstra, as BIS President and as president of the Dutch central bank was in clear favour of the Gold Pool idea.

At the IMF conference in Belgrade at the start of October 1979, the representatives of the US Treasury (Miller and Solomon) and of the Fed Board of Governors (Volcker and Wallich) approached Fritz Leutwiler, chairman of the Swiss National Bank to discuss coordinated gold sales.

At the time, this was alluded to within the financial media, but only in a very general way and there was no mention of a Gold Pool. On 2 October 1979, the New York Times wrote:

“The United States Government, weighing new plans to stabilize the dollar on exchange markets, suggested today that it might increased the amount of gold it offers at monthly auctions and that it was considering the possibility of internationally coordinated bullion sales.

Anthony M Solomon, Treasury Secretary for Monetary Affairs, said the international effort had been discussed with ‘various’ Government representatives on the fringes of the Belgrade annual meeting of the IMF and World Bank.”

The Americans appear to have had a change of mind by the time they met in Belgrade since they were by then comfortable with the notion of recapturing any gold used in price manipulation operations. i.e. a Gold Pool, but by implication they had previously not been in favour of trying to recapture any gold sold.

Note that Volcker and Miller had also met with Helmut Schmidt and Otmar Emminger in Hamburg on their way to Belgrade when they held a meeting to discuss how best to defend the US dollar on the currency markets.

Bernard Clappier, governor of the Banque de France, was by then less in favour of a Pool due to political pressure from the Élysée, which in this context refers to the French Council of Ministers who meet at the Élysée Palace, home of the French president. But that French reluctance was attributed to influence from the Bundesbank which was itself reluctant to engage in the scheme, but as revealed below, this was more due to the Bundesbank’s desire that the US monetary authorities fix the larger currency / dollar issues of the day in parallel with engaging in any Gold Pool operations.

Volcker Headed back to Washington for FOMC Meeting

During the Belgrade IMF conference, Paul Volcker had unexpectedly and suddenly left Belgrade on Tuesday 2nd October and headed back to Washington. He did this to convene a special secret and previously unscheduled meeting of the Fed’s FOMC which occurred on Saturday 6 October 1979. It was at this meeting that Volcker announced the now famous change in Fed policy that saw it shift its focus to monitoring and managing the volume of bank reserves in the financial system as opposed to trying to micro manage the federal funds rate level, and which ushered in much higher interest rates and a recession in an attempt to rein in inflation.

But there are also some interesting references in the transcripts of that 6 October FOMC meeting and in a transcript of a 5 October FOMC conference call preparatory meeting, that make reference to the discussions on gold that Volcker, Miller, Solomon and Wallich had with their European central banker peers while in Belgrade. In the 5 October FOMC conference call meeting Volcker said:

“Let me summarize some of this by saying that late last week–actually beginning before then but particularly late last week and in the very early part of this week–these markets, by which I mean the gold market very obviously and the foreign exchange markets, were “depressed.” I guess that’s the right word. And the atmosphere was very nervous. I think that has been largely turned around by an expectation that there will be some action.

In its 6 October 1979 FOMC meeting, Volcker makes reference to the soundings which the Americans made in Belgrade with other central bankers:

“The possibility of gold sales has been canvassed up and down. “

“The question has been debated up and down and I think it is essentially unsettled. There is a possibility [of gold sales], particularly if the gold market acts up again, but there has been no firm consensus reached on that point simply because in our mutual discussions some concern was expressed about whether they are effective or not effective over a period of time. They might be effective immediately. But if the gold sales have a nice effect immediately and we test it a little while later and the gold price goes up again, the question arises: Is it confidence inspiring or is it not?

Or is it really better over a period of time just to leave the [gold] market alone? I think that question has to be left on that basis for the time being.”

We will have cooperation, I think, from our foreign partners either on gold or on intervention to the degree that they feel that we have done something here; that is an essential part of setting the stage. We will get that kind of cooperation, I suppose, with the limitations of enthusiasm that are inherent in my earlier comments. I don’t mean to suggest that that type of activity is “out” if we mutually think it is advantageous. On the contrary, it is ‘”in” over a period of time with an appropriate background. But it is not “in” in the sense of announcing an international package of that type this weekend.”

 

Interestingly, on the same day, 18 October 1979, a former Bank of England executive, George Bolton, rang the Bank of England to relay news about rumoured clandestine gold sales by the US to the Saudis:

18.10.79

THE DEPUTY GOVERNOR                                   Copies to DAHB and JLS

Sir George Bolton rang to say that he had heard from a reasonably reliable source of a story current in both Washington and New York. This was to the effect that the USA were planning to sell 10 mn. ounces of gold in four separate unannounced operations before the end of this year. He said that it was being  undertaken to placate the Saudi Arabians.

P.W.F. Ironmonger,
Governor’s Office
18th October 1979

Sir George Bolton had been an executive director of the Bank of England in the 1950s and a non-executive director of the Bank of England in the 1960s, and is attributed as having playing an important role in the development of the Eurodollar market in London. It is not clear why Bolton was still relaying market intelligence to the Bank of England in 1979. Perhaps he did this on an informal basis for the Governors.

George Bolton view on US selling 10 million ounces of gold to the Saudis

However, it is very interesting that Bolton said that the Americans were selling 10 million ounces (311 tonnes) of gold to the Saudis to placate them, and this ties in with McMahon’s comments to Richardson that “OPEC are increasingly concerned that gold is outpacing oil”, but that Al Quraishi of the Saudi Arabian Monetary Authority (SAMA) “would not rock the boat” and buy gold on the market if a new gold pool was selling, but that at the same time  Leutwiler thought that Al Quraishi and SAMA were eager to “diversify” i.e. reinvest their oil revenues in a more diversified way including in physical gold.

Since the last US Treasury gold auction was on 1 November 1979 for 1.25 million ounces of low grade coin bar gold, were 10 million ounces of gold sold directly to the Saudis out of US gold stockpiles, 10 million ounces which were never reported to the market? Or did the US use another central bank’s gold as part of a gold swap to ‘placate’ the Saudis with? These questions remain unanswered, but its important to remember the gold and oil connection and the importance to which the Western European and US monetary authorities attached to ‘keeping the Saudis happy’. More on these oil and gold connections in Part 2.

First Gold Pool Meeting – 12 November 1979

In the above memorandum dated 18 October 1979 that Kit McMahon sent to Govenror Gordon Richardson about the Belgrade discussions and the establishment of a new Gold Pool, there is a hand-written reply in red pen from Richardson to McMahon written on 4 November 1979, as follows:

CWM,

Thank you for this interesting note which I read some days ago. I agree with your comment at X at the bottom of Page 2. I will pursue with Fritz at Basle but I wonder if it has not now died. GR 4/11

Fritz refers to Fritz Leutwiler, then Chairman of the Swiss National Bank. X refers to “conversation was of interest in a number of ways not least in providing further evidence of the way central bankers will talk to major operators in the gold market”. A hand-written reply from McMahon to Richardson reads “possible but still worth raising, CWM”.

There is also another handwritten note at the top of page 1 which reads “Copy for November Basle Dossier”.

However, the Gold Pool initiative did not die as Richardson thought it might, for on Tuesday 6 November 1979, Zijlstra called a meeting for the following Monday 12 November to take place at his office at the BIS, and invited the central bank governors of the Bank of England, the Bundesbank, the Banque de France, the Swiss National Bank, the Belgian central bank, and of course, the Dutch central bank which was represented by Zijlstra himself.

CONFIDENTIAL

NOTE FOR RECORD

Copies to: The Governor, The Deputy Governor, Mr McMahon, Mr Payton, Mr Balfour, Mr Sangster

Dr. Zijlstra telephoned the Governor to say that he is holding a meeting in his room at the BIS at 10:30am on Monday 12th November.   Others invited to attend are de Strycker, Leutwiler, Clappier and Emminger or Pohl.  Dr. Zijlstra said that the subject would be that about which the Governor and he spoke while in Belgrade (possibly gold).”

L.C.W Mayes,
Governor’s Office
6th November 1979

Handwritten on the note was “Basle Dossier“, and the initials GR in red (for Gordon Richard) with the date 8/11.

The last few months of 1979 was a period that witnessed new governors being installed at both the Banque de France and Banca d’Italia and a new president at the Bundesbank. At the Banca d’Italia, Paolo Baffi resigned on 7 October 1979, and Carlo Ciampi (then deputy governor) became governor. At the Banque de France, Bernard Clappier stepped down as governor on 23 November 1979 , and Renaud de La Genière took his place. At the Bundesbank, Otmar Emminger retired in December 1979, and Karl Otto Pohl became President.

This explains why the meeting invitation above says “Emminger or Pohl” because November and December 1979 was a transition time at the Bundesbank between Emminger and Pohl. Pohl only joined the Bundesbank in 1977, first serving as vice-president between 1 June 1977 to 31 December 1979. Pohl then became president of the Bundesbank on 1 January 1980 and remained as Bundesbank President until 31 July 1991.

This adhoc Gold Pool discussion meeting by a subset of G10 central bank governors at the BIS in Basle, Switzerland, was the first of 3 such meetings that took place on 12 November 1979, 10 December 1979, and 7 January 1980, respectively, and variously involved G10 central banker governors Zijlstra, Leutwiler, Richardson, Emminger, Pöhl, McMahon, de Strycker, de la Genière, Clappier, as well as René Larre, the BIS General Manager.

12 Nov meeting small

The Bank of England archives only have a summary of the meeting which took place on 10 December 1979 (which is covered below). The very fact that there is a record of the 10 December 1979 meeting is itself a streak of luck since Kit McMahon attended the meeting that day in the place of Gordon Richardson, since, according to the Governor’s Diary for that day, Richardson had to leave the BIS early on 10 December to return to London in order to attend a meeting with the Prime Minister Margaret Thatcher at 10 Downing Street.

Additionally, when asked for minutes of these 3 meetings from 12 November 1979, 10 December 1979, and 7 January 1980 where the attendees were the above governors, the BIS Archives claimed it did not have such minutes and responded:

“The Gold Pool came to an end in 1968, so I take it that you are referring to meetings of the Gold and Foreign Exchange Committee. We do have some minutes for this meeting, but unfortunately not for the period which interests you.”

Preparing for the 12 November Gold Pool Meeting

Hand-written on the invitation notice for the 12 November meeting is a note from McMahon to Sangster which says: JLS, Can you provide a short brief & factual background and thoughts on the advisability of any form of central bank action?  (see attached note of a conversation with Jeanty)”. [This is the ‘Paul Jeanty came to see me‘ memorandum from above].

Sangster saw this note from McMahon on 7 November and responded as follows (remember that Sangster had read the “Paul Jeanty – Leutwiler” memorandum). Below is the third main document of the series. It was written by John Sangster on 7 November 1979, a day on which the US dollar gold price closed at $382.92.

 

SECRET

Mr McMahon                                                                                Copies to: Mr Byatt

(handwritten: ‘Copy to the Governor’)

POSSIBLE GOLD POOL

This heat may be now off this question although on a longer term view gold still looks substantially overpriced, unless oil-producing countries are determined to pre-empt a large proportion of current supplies.

  •                                                 $ per fine ounce
  • End 1974                              almost 200
  • September 1976                almost back to 100
  • July 1978                              through 200
  • July 1979                              through 300
  • October 1979                      through 400

There could obviously be endless argument about when the price was right.   One can perhaps say no more than that 200 was obviously too high at end of 1974, as 100 was too low almost two years later.   If these brackets are omitted, it seems difficult to justify a price over 300 now. I should certainly be reluctant to recommend purchases, other than for the jobbing book, at above this price.

It is largely possible that German opposition to any thoughts of a revived ad hoc gold pool was largely tactical. They did not wish to give the US the excuse for further delay by diverting attention with another attack on symptoms, when a fundamental policy appraisal was under way.   This would be rather like the general opposition to the third sterling balance arrangement in 1976 before the IMF deal was complete.   If this view of the German opposition were correct, the discussion could now revive with more chance of success – particularly as the gold price has become a reflection on currencies in general and not just on the dollar in particular. If it is thought that the US has now got its policy right the action on the gold price could bring the sort of success that would sustain faith while waiting for the important result to come through.   Would such an action be any more than the correction of erratic fluctuations which we all advocate in a greater or lesser degree in currencies, but in a market more notoriously subject to violent swings.

Of course the action might fail when it comes to the other leg of the smoothing operation in that the pool might not succeed in buying back at lower levels all that it had previously sold. That is a risk that would have to be accepted from the outset: there should be no question of chasing the price back beyond the level at which the selling operation started.

Page 2

Given that the US auctions are now discretionary it would obviously be advisable for such sales to be subsumed in any general pool arrangement.

By way of illustration, should we become involved in a G.10 plus Switzerland co-operative endeavour and contributions were clearly in proportion to total gold holdings, our share would be just under 2 7/8%

7th November 1979

JLS    

The pages of this memorandum from Sangster to McMahon can be seen here: Page 1 and Page 2. The links may take a little while to load first time.

Second Gold Pool Meeting – 10 December 1979

Since there are no records available from the BIS nor elsewhere as to what transpired at the first Gold Pool meeting on 12 November, the best way to glean the thinking from the participants of that meeting is by examining the discussions that took place in the 2nd Gold Pool meeting on 10 December 1979, a meeting for which there is a detailed summary, courtesy of a briefing memorandum from Kit McMahon to Gordon Richardson.

 

The invitation for the 10 December meeting at Zijlstra’s office at the BIS in Basle was relayed to the Governor’s office at the Bank of England on 6 October 1979 and was, probably not surprisingly for that time, scrawled as a short note on some small blue paper:

The Governor,

President Zijlstra’s secretary rang yesterday to invite you to a meeting he is intending to hold on Monday 10th December from 10.00am. This meeting follows the one held on 12th November. The subject will be the same – gold.

I said I would revert if you were unable to attend.

[Initials illegible]  6/12/79

Gordon Richardson saw and acknowledged this note with his initials GR in red pen on the note, and the date 6/12 – see below.

10 December meeting note

The following document is the fourth main document in the Bank of England series covered here. This document is the briefing letter from Kit McMahon to Gordon Richardson referring to the Gold Pool discussion meeting which took place in the office of the BIS President Jelle Dijlstra on Monday 10 December 1979. This is probably the most important documented featured in Part 1 of this two part article series, since it provides an in-depth insight into one of the collusive Gold Pool discussion meetings which the most powerful central bank governors of the time attended discussing the creation of a syndicate to manipulate down the free market price of gold. On 10 December 1979, the gold price closed at $428.14.

In the meeting document, the name Larre refers to René Larre, General Manager of the BIS. Larre was BIS General Manager from May 1971 to February 1981.

De la Geniere refers to Renaud de La Genière, Governor of the Banque de France from 1979 to 1984.

The other participants at the 10 December meeting were BIS President Jelle Zijlstra, Chairman of the Swiss National Bank Fritz Leutwiler, Bank of England executive director Kit McMahon, outgoing Bundesbank President Otmar Emminger, incoming Bundesbank president Karl Otto Pohl, and Governor of the National Bank of Belgium Cecil de Strycker.

 

SECRET

[From McMahon]

To: The Governors               Copies to : Mr Payton, Mr Balfour, Mr Sangster , Mr Byatt  only

GOLD POOL

In the Governor’s absence I attended the meeting in Zijlstra’s room in the BIS on the afternoon of Monday, 10th December to continue discussions about a possible gold pool. Emminger, de la Geniere, de Strycker, Leutwiler, Larre and Pohl were present.

Larre began by outlining a way in which a possible gold pool might be handled. The BIS could undertake all the operations on behalf of a group of central banks on the basis of rather general criteria which would be reviewed monthly.  The criteria would take into account not merely the developments of the price of gold but the affect any such developments appeared to be having on the dollar.   Thus they would envisage selling only when gold was relatively strong and the dollar relatively weak and buying only in the reverse circumstances.   They thought that they at least might start with a sum of around 20 tons (equals around $300 million at present prices).   They could take running profits of losses on their books for a considerable period and though participating central banks would have to envisage the possibility of an ultimate loss or gain in gold, in practice all that might be involved would be a loss or gain in dollars.    On this point both Zijlstra and Leutwiler emphasised that they were already liable to suffer substantial losses on their dollar reserves and would not be worried by the potential losses that they might they might sustain on this scheme.

In answer to a question from me, Zijlstra confirmed that the US realised that if any gold pool were developed, the European central banks would intend to buy back in due course any gold they sold. He said they were unhappy that the Europeans were not prepared to sell gold outright but they accepted it.    Larre pointed out in parenthesis that Tony Solomon was probably the only American now or in the recent past that would be prepared to accept such a line. He knew that Wallich and probably Volcker was against the whole idea.

Page 2

Zijlstra and Leutwiler said they were both strongly in favour of going ahead on the basis Larre had suggested.   They then asked what the other thought.

Emminger said that he had put this proposition to his Central Bank Council who were unanimously against it.   His hands were therefore at present totally tied.

De Strycker said he was extremely doubtful about the scheme.   He thought it was neither desirable nor necessary and carried considerable dangers.   De la Geniere was also negative stressing the great political dangers for him of selling any French gold in this indirect way.

Leutwiler then suggested that they should do it the other way round:   wait until the gold price went below 400 and then start the operation by buying.   When the BIS had bought, say, 20 tons they would have a masse de manoeuvre which they could then sell.   La Geniere said that this might be easier for him and he would consider the possibility of doing something along these lines. Emminger also said, though without much confidence, that it was possible that if the operation were to start along these lines and if it appeared to be going well, it might be possible to persuade the Central Bank Council to join in.

Leutwiler and Zijlstra then said that although they did not think a very large group was necessary to undertake the operation it probably had to be bigger than Two:    specifically they really needed either the French of the Germans.    Zijlstra said that although he had formal powers to do this he did not wish to do it without carrying his Government with him.    The Government was still doubtful and would probably need to know that a number of other countries were going along with it.

At various points during the meeting there was a discussion about publicity for the operation and at an early point Zijlstra said that publicity was both inevitable and desirable if the operation was to have a maximum effect.    He brushed aside my suggestion that while the publicity for any selling operations would be helpful, that attached to the later (or on the revised scheme, earlier) buying could be rather inflammatory.   However, if the scheme were to be 

 Page 3

simply a BIS one, publicity would not necessarily, or perhaps desirably, arise.   This point was not really addressed in the discussion.

I made a number of sceptical points about the failure of commodity stabilisation schemes of all kinds in the past and the dangers of getting drawn in gradually to bigger and bigger commitments. Leutwiler said that there was no danger because the losses would be small.   I said that I envisaged political dangers.    If it got known that the central banks were involving themselves in the price of gold, however much they said it was only a smoothing rather than a stabilising operation, they would find themselves on a tiger. If the price of gold went on rising they would either have to increase their efforts or add to the upward pressure o gold by pulling out.

None of this carried any weight with anybody except perhaps de Strycker.   In any case I was not asked for any commitment from us.   There was, in fact, no discussion of whether or how contributions to the scheme would be based, but presumably it would be in relation to gold holdings so that they would not expect much from us.

The meeting ended with Leutwiler saying he would approach the Canadians  and Japanese to see how they felt about the idea while Zijlstra would talk to the Italians.   All would then think further about it and revert in January.

I must say I remain personally extremely sceptical about the desirability and efficacy of any scheme along the lines so far suggested.

CWM

13th December 1979

The pages of this meeting description from McMahon can be seen here: Page 1,  Page 2 and Page 3. The links may take a little while to load first time.

The Essence of the 10 December Meeting

The following key points are notable from McMahon’s briefing of the 10 December Gold Pool discussions meeting. McMahon opens by stating that the meeting was called “to continue discussions about a possible gold pool“. This proves there was an earlier meeting in November as per the invitation for the November meeting despite the fact that no minutes or summary exist for the November meeting.

Zijlstra and Leutwiler acted as the 2 main advocates of the proposed Gold Pool arrangement. This is important to remember because Zijlstra was the President of the BIS at that time and Leutwiler became President of the BIS at the beginning of 1982 taking over from Zijlstra. So the heads of the BIS in the early 1980s were both firm advocates of the need for a new Gold Pool. Zijlstra and Leutwiler probably also represented the two most independent central banks present at the discussions, namey the Dutch and Swiss central banks.

The following countries were represented at the 10 December meeting: UK, Switzerland, West Germany, France, Netherlands, Belgium. The following central banks were represented at the meeting:

  • Zijlstra – BIS and Netherlands central bank
  • McMahon – Bank of England
  •  Emminger – Deutsche Bundesbank
  • Pohl – Deutsche Bundesbank
  • de la Geniere – Banque de France
  • de Strycker – Belgian central bank
  • Leutwiler – Swiss National Bank
  • Larre – Bank for International Settlements

The fact that Emminger had already put the suggestion to his Central Bank Council implies that this was probably a take-away after the November meeting. According to the Bundesbank 1979 annual report, there were 18 members of the Central bank Council (including Emminger and Pohl).

The market mechanics of the proposals discussed in the meeting are also classic collusive Gold Pool tactics to torpedo the gold price by “selling only when gold was relatively strong and the dollar relatively weak and buying only in the reverse circumstances.” 

The discussion also made it clear that the preferred approach would be to operate as both a selling syndicate and a buying consortium as “European central banks would intend to buy back in due course any gold they sold.” It was even suggested that the buying could occur first so as to create an inventory of physical gold with which to use to fund the selling interventions, i.e “wait until the gold price went below 400 and then start the operation by buying. When the BIS had bought, say, 20 tons they would have a masse de manoeuvre which they could then sell.”

Given that René Larre the BIS general manager began the meeting shows that he was coordinating or spearheading this meeting in his capacity as BIS general manager. It is also very interesting that McMahon states that “the BIS could undertake all the operations on behalf of a group of central banks” that could  be “reviewed monthly”, which underlines the fact that overall, this could be viewed as a BIS led scheme, controlled and operated out of Basle.

A BIS scheme would also allow the Gold Pool to operate in secrecy, out of public view. In the words of McMahon “if the scheme were to be simply a BIS one, publicity would not necessarily, or perhaps desirably, arise“.

Following this 10 December meeting, the governors returned to their respective banks and recessed for Christmas and New Year, returning to Basle in early January where the next Gold Pool meeting took place on 7 January 1980, in a historic month in which the gold price rocket from $515 to $850 in a matter of weeks.

Conclusion

This concludes Part 1 of the series. There is a lot to digest in the above. Part 2 will continue where we left off, and will cover discussions of this new BIS Gold Pool during the period from January 1980 onwards. For now, some quotes from Part 2:

“This is not to advocate gold for oil directly; the price haggling would be too acrimonious. Market intermediation should allow the G10 to move with the price while attempting to control its pace as well as break off the experiment when possible or necessary.”     

- John Sangster to Gordon Richardson, Anthony Loenhis & Kit McMahon, Bank of England, 17 September 1980

“I feel that it is necessary for us, within the Group of Ten and Switzerland, to consider ways to regulate the price of gold, admittedly within fairly broad limits” 

- Jelle Zjilstra, BIS Chairman and President and Dutch central bank President, 27 September 1981

 

First, there is the meeting on the Gold Pool, then, after lunch, the same faces show up at the G-10″ 

- Bundesbank President Karl Otto Pohl (who only began working at the Bundesbank in 1977) to journalist Edward Jay Epstein, in a conversation at the Bundesbank in 1983

SGE Trading Volumes surged by 43% in 2016 led by OTC and Deferred Trading

The growing influence of the Shanghai Gold Exchange (SGE), the world’s largest physical gold exchange, is a topic familiar to many. So it is not surprising that trading volumes at the SGE continued their dramatic rise in 2016, with a record 24,338 tonnes of gold traded across physical delivery and deferred settlement contracts.

Volumes in 2016 were a staggering 43% higher vis-a-vis the 17,033 tonnes traded on the SGE during 2015, which itself was a strong year, since 2015 volumes were 84% higher than the 9,243 tonnes of gold traded at the Exchange in 2014. See “SGE Gold Trading Volume 2015 Up 84 % Y/Y Due To International Board” for more information about the 2015 volumes.

Therefore, in the space of three calendar years, the SGE has seen total trading volumes nearly triple, which is quite an achievement by any standard.

Shanghai Gold Exchange trading
Shanghai Gold Exchange: The world’s largest physical gold trading venue

SGE Contracts: Physical Delivery and Deferred

Overall, there are 17 contracts listed on the SGE which can contribute to the trading volumes reported by the Exchange. On top of this, the trading volume generated by the SGE’s daily Shanghai Gold Benchmark Price auction (which was launched in April 2016) is also factored into the SGE’s overall trading volume.

The 17 contracts offered by the SGE cover trading in both physical products and deferred products. Five physical products trade on the Main Board of the Exchange (domestic) and a further 3 physical products trade on the Exchange’s International Board. These 8 products are as follows:

  • Au50g (50 gram gold bar, 9999 fine)
  • Au100g (100 gram gold bar, 9999 fine)
  • Au99.99 (1 kg gold ingot, 9999 fine)
  • Au99.95 (3 kg gold ingot, 9995 fine)
  • Au99.5 (12.5 kg gold ingot, 995 fine)
  • iAu100g (100 gram gold bar, 9999 fine)
  • iAu99.99 (1 kg gold ingot, 9999 fine)
  • iAu99.5 (12.5 kg gold ingot, 995 fine)

There are also 4 deferred settlement products offered by the SGE. These 4 products only trade on the Main Board. Deferred settlement contracts trade on margin, and as the name suggests, the contracts can be settled on trading day or at a later date. Two of the four are T + D contracts, the other two are T + N contracts:

T + D contract: Non-Fixed Maturity Dates

  • Au(T+D) (1 kg per lot, delivery in 3 kg or 1 kg ingots)
  • mAu(T+D) (100 gram per lot, delivery in 1 kg ingots)   m = mini

These contracts do not have any pre-determined settlement date.

T + N contracts: Fixed Maturity Dates

  • Au(T+N1) (100 gram per lot, delivery in 1 kg ingots)
  • Au(T+N2) (100 gram per lot, delivery in 1 kg ingots)

The maturity date of the Au(T+N1) contract is 15 June.
The maturity date of the Au(T+N2) contract is 15 December.

In addition, 3 of the Main Board physical products (Au99.99 and Au99.95) and all 3 of the International Board products also trade bilaterally Over-the-Counter (OTC) between participants, but importantly, these OTC trades still settle on the SGE. Therefore the trading volumes of the OTC trades are still captured in the SGE systems and reported as part of SGE overall trading volumes. The SGE assigns a specific prefix P’ to these OTC products, but they are also sometimes written with a prefix of ‘OTC’. These 5 products are:

  • OTC Au99.99 / PAu99.99
  • OTC Au99.95 / PAu99.95
  • OTCiAu99.99 / PiAu99.99
  • OTCAu50g / PiAu50g
  • OTCAu99.5 / PiAu99.5

Finally as mentioned, trading in the Shanghai Gold Benchmark Price auction (code SHAU) contributes to physical gold volume on the Exchange. Since SHAU was only launched on 23 April 2016, it’s volume for 2016 only represents just over 8 months worth of trading, and not a full trading year.

Shanghai Surprise

What traded in 2016?

In 2016, 13 of the 18 gold products (including SHAU) traded. These were: Au99.99, Au99.95, Au100g, iAu99.99, iAU100g, Au(T+D), Au(T+N1), Au(T+N2), mAu(T+D), OTC Au99.99, OTC Au99.95, OTC iAu99.99 and SHAU.

Five products did not trade at all in 2016. These 5 products were Au50g, Au995, iAu995, PiAu50g (OTC), and PiAu99.5 (OTC).

Furthermore, trading volume in Au100g was very low and trading volume in iAu100g was miniscule.

Au100g and Au50g (and their International Board versions) are designed for the retail market, but the lack of trading volume in the Au50g suggests that even retail players on the SGE shun these 50g contracts. Likewise, the 100g product does not generate much interest on the Main Board, and generates zero interest on the International Board (which is mostly frequented by institutional participants anyway).

The lack of trading volume in the Au995 specifications on both the Main Board (Au995 and PAu995(OTC)) and on the International Board (iAu995) also confirms that neither domestic participants nor international participants on the SGE are active in trading the large 12.5 kg wholesale gold bars (a.k.a. aka Good Delivery bars) which these contracts represent.

It also underscores that the Chinese central bank, the  People’s Bank of China (PBoC), which like all central banks has a preference for holding wholesale 12.5 kg (400 oz) gold bars, is not an active buyer on the SGE. Instead, the PBoC prefers to buy its gold bars in Good Delivery form on international  gold markets, then monetise that gold (so as to avoid it being reported in customs trade statistics). The PBoC then ships these gold bars to Beijing surreptitiously. This buying route by the PBoC has been confirmed by gold market consultancy sources in the London market.

Excluding the SGE’s 100g contracts and the non-traded 50g and Au995 variants, there were 11 contracts (including SHAU) traded in 2016 which together accounted for the bulk of SGE trading volume. The individual volumes of these contracts in metric tonnes are illustrated in the following chart:

SGE Trading Volumes 2016
SGE Trading Volumes 2016 – Across all traded Contracts

Volume was highest in the  deferred Au(T+D) contract at  9186 tonnes, followed by 7080 tonnes in the physically delivered OTCAu99.99 contract. The on-exchange physically delivered Au99.99 contract registered trading volume of 2975 tonnes. Together, the Au99.99 and OTCAu99.99 generated 10,055 tonnes of physical trading which resulted in immediate physical delivery of gold. OTC trading of the iAu99.99 (i.e. PiAu99.99)  generated trading volume of another 1511 tonnes of gold.

Looking at the volumes by category, there were just over 3200 tonnes traded on Exchange in the Main Board physically delivered contracts, 190 tonnes traded on Exchange in the International Board physically delivered contracts, 8850 tonnes traded OTC in physically delivered contracts, and 11,800 tonnes traded on Exchange in the Deferred contracts.

Year-on-Year Growth

The dramatic rise in SGE trading volumes, especially since 2012, can be seen in the next chart. In 2012, SGE trading volumes totalled 3165 tonnes of gold. By 2013, this figure had risen to 5,775 tonnes of gold. In 2014, trading volumes across physically delivered and deferred gold contracts rose by 60% and hit 9243 tonnes.

During 2015, a record 17,033 tonnes of gold was traded on the SGE. This record was again surpassed in 2016 when gold trading volumes reached 24,338 tonnes, a 43% year-on-year increase. It’s important to remember that the Shanghai Gold Exchange is a physical gold exchange which has been designed to facilitate the throughput of physical gold in the vast Chinese gold market. The immediate delivery trading contracts represent real physical gold that sits in the SGE’s network of 61 precious metals vaults in 35 cities across China and where applicable, the SGEI vault in the Shanghai Pilot Free Trade Zone. Likewise, the deferred contracts can, if actioned, lead to physical delivery in the SGE vaults.

SGE annual trading volumes : 2002 - 2016
SGE annual trading volumes : 2002 – 2016

Shanghai vs London and New York

While the SGE is not the largest gold trading venue in the world by trading volume, it is the world’s largest physical gold trading venue, since the two other larger venues, London OTC and COMEX, are predominantly not physical markets. The London Gold Market predominantly trades unallocated fractionally backed paper gold claims, while the COMEX platform trades gold futures.

As of now, the London OTC gold market does not publish trading volumes. But based on London gold clearing volumes for 2016, trading volumes in the London OTC gold market are estimated to have been in excess of 1.5 million tonnes of gold (gold equivalent). However, the vast majority of this trading was in unallocated metal, a trading mechanism which is just a set of debit and credit book entries between accounts which is removed from physical delivery.

Likewise, trading volumes of the 100 ounce COMEX gold futures contract totalled 57.5 million contracts during 2016. This is equivalent to 179,000 tonnes of gold. However, in 2016, only 222 tonnes of gold were delivered within COMEX vaults based on this 179,000 tonnes of trading, Therefore 99.99% of trading did not result in the delivery of any gold.

While estimated gold trading volumes on the London OTC gold market in 2016 were about 8.4 times higher than trading volumes in the COMEX 100 oz gold futures contract, the same London trading volumes were a staggering 61.6 times higher than the 24,338 tonnes traded at the SGE. The COMEX 100 oz contract also traded 7.4 times more volume in 2016 than total SGE gold trading volumes. It should thus be apparent that the vast majority of trading on the London OTC gold market and COMEX has nothing to do with the physical gold market and is just leveraged speculation.

Will the growth in trading volumes on the SGE continue in 2017?  The answer is maybe, but probably at a reduced pace. During the first quarter of 2017, SGE trading volumes totalled 5693 tonnes of gold. Annualised, this is 22,773 tonnes, which would be a slight reduction on 2016’s total. However, Q1 2016 was also the quietest trading period on the SGE, so the remainder of 2017 could see trading volumes higher than Q1 which would push 2017 SGE trading volumes slightly above the equivalent figure for 2016. But it might be too much to expect large double-digit growth in SGE volumes this year.

Summer of 17: LBMA Confirms Upcoming Publication of London Gold Vault Holdings

Just over a week ago I wrote an article highlighting that the Bank of England has begun publishing monthly data on the total quantity of gold bars held within the Bank of England vaults in London. See “Bank of England releases new data on its gold vault holdings”.

This new gold vault data was first released in early April 2017 and covers gold bar holdings at the Bank of England for every month-end for the last 6 years. Going forward, the Bank will publish updates to this dataset every month, on a 3-month lagged basis.

The move by the Bank of England to  publish this data was first reported by the Financial Times in February and was supposedly part of a broader gold vault reporting initiative which was to include vault holdings for all 7 of the London Bullion Market Association (LBMA) commercial precious vaults in London. These commercial vaults are run by HSBC, JP Morgan, Brinks (on behalf of itself and ICBC Standard), Malca Amit, Loomis and G4S. While the Bank of England had single-handedly gone ahead with its side of the reporting initiative, the precious metals vault holdings data from the LBMA was conspicuously absent when the Bank of England made its move. As I wrote in my article last week:

The London Bullion Market Association was also expected to publish gold vault holdings data for the commercial gold vaults in London, but as of now, this data has not been published, for reasons unknown.

While the Bank of England has now followed through with its promise to publish its gold vault holdings, the LBMA has still not published gold vault data for the commercial gold vault providers, i.e. its members HSBC, JP Morgan, ICBC Standard Bank, Brinks, Malca Amit, Loomis and G4S. Where is this data, why is there a delay, and why has it not yet been published?

However, as if by magic, the LBMA has now just issued a press release titled “LBMA to publish Precious Metal holdings in London vaults”. Coincidence, perhaps. But whatever the case, the LBMA development is timely, and the press release, which is actually a combined press release from the LBMA and one of its alter egos, London Precious Metals Clearing Limited (LPMCL), makes interesting reading, but unfortunately at the same time is still quite vague, and appears to suggest that some of the vault operators in question have been dragged kicking and screaming to the start line.

Summer of 2017

The statement from the LBMA reveals that:

from summer 2017 the LBMA will be publishing the gold and silver physical precious metals holdings of the London vaults, with the platinum and palladium holdings to be published at a later date”

The statement also clarifies that “the data only includes physical metal held within the London environs” and that it will cover “aggregate physical holdings”.

Given that the LBMA and Bank of England work very closely, its disappointing and bizarre that the LBMA didn’t coordinate the vault data release at the same time as the Bank of England, because, at the end of the day, this is just some simple holdings data we are talking about, and all the vaults concerned know precisely how much precious metal they are holding at any given moment.

As a reminder, the Bank of England was established by the LBMA in 1987, the Bank of England is an observer on the LBMA Management Committee, and the former head of the Bank of England Foreign exchange Division, Paul Fisher, is the recently appointed ‘independent‘ chairman of the LBMA Management ‘Board’ (formerly known as the LBMA Management Committee). See “Blood Brothers: The Bank of England and the London Bullion Market Association (LBMA)” for more details.

Representatives of the two large commercial vault operators in London, HSBC and JP Morgan, also sit on the LBMA Board. Additionally, representatives of the vault operators HSBC, JP Morgan, Brinks and ICBC Standard Bank also sit on the LBMA Physical Committee and all of the vault operators are represented on the LBMA’s Vault Managers Working Party.

The reference to ‘aggregate physical holdingsin the press release is also potentially disappointing as it seems to imply that the LBMA will not break out its vault reporting into how much gold and silver is held by each of the 7 individual vault operators in and around London, but might only publish one combined figure each month end.

A reporting format in which each vault/operator is listed alongside the quantity (tonnes or thousands of ounces) of gold and silver held by that vault operator would be ideal. For example, something along the lines of:

                                                   Gold (tonnes)                  Silver (tonnes)

  • HSBC                                      x                                                x
  • JP Morgan                             x                                                x
  • ICBC Standard                     x                                               x
  • Brinks                                    x                                                x
  • Malca Amit                           x                                                x
  • Loomis                                  x                                               x
  • G4S                                       x                                              x
  • Bank of England                x                                        no silver

Quantity per vault is the approach taken in the daily precious metals vault reports that COMEX releases on its approved vault facilities in and around New York, as per an example for gold here. HSBC, JP Morgan, Brinks and Malca Amit submit inventory levels to COMEX for that report. Likewise, HSBC, JP Morgan, Brinks and Loomis submit inventory levels in New York to ICE futures for its version of the gold futures inventory report.

Given that the individual vault operators based in New York report precious metals inventory to COMEX and ICE, is it too much to expect that many of the same vault operators cannot do likewise for their London vault facilities?

It remains to be seen which date ‘summer 2017” refers to. This seems like a bizarre non-committal cop out by the LBMA not to have announced a definitive date for beginning to report vault data. Summer 2017 could mean anything. Assuming they are talking about the northern hemisphere, summer could mean anywhere from May to August or beyond.

If the LBMA data is on a 3-month lagged basis in the same way that the Bank of England data is, the first tranche of LBMA vault data could neatly be released after 30 June and would cover month-end March 2017. As a reminder, the Bank of England gold vault data shows:

“the weight of gold held in custody on the last business day of each month. We publish the data with a minimum three-month lag”

Why the vault data on a platinum and palladium can’t be published at the same time as the gold and silver data is also puzzling, because the London Platinum and Palladium Market (LPPM) is now officially integrated into the LBMA following a change in the LBMA’s governance and legal structure in 2016, so both sets of data are now under the remit of essentially the same Association.

It also remains to be seen whether the LBMA data will have a 6-year historical look-back as the Bank of England data does, or whether it will just begin with a one month-end snapshot? For consistency with the Bank of England data, the LBMA vault data should ideally cover the same time period, i.e. every month beginning at January 2011. In short the LBMA press release is lacking quite a lot of detail and unfortunately invites guesswork.

Carmel

The Importance of the Vault Data

Turning quickly to why this gold vault data is important. Simply put, at the moment there is little official visibility into how much physical gold is stored in the London Gold Market, and how much of this gold is available as “liquidity” to back up the market’s huge fractional reserve gold trading volumes. Albeit for silver.

In my coverage on 28 April of the Bank of England data release, I had phrased the relationship between physical gold and gold trading in the London market as follows:

“this physical gold stored at both the Bank of England vaults and the commercial London vaults underpins the gargantuan trading volumes of the London Gold Market”

Interestingly and somewhat synchronistically, in its 8 May press release one week later, the LBMA uses very similar phraseology, as well as the identical verb ‘underpins’, when it states that:

“the physical holdings of precious metals held in the London vaults underpins the gross daily trading and net clearing in London

Another coincidence perhaps, but the LBMA is now also saying that the physical gold bars which they will report on starting in summer 2017, and which the Bank of England has just started reporting on, literally ‘underpin’ or support the massive volume of gold trading in the London Gold Market.

Net clearing” refers to London clearing volumes for gold and silver that are processed through the LMPCL’s clearing system AURUM, and that are published each month by the LBMA, a recent example of which, covering month-end March 2017, can be seen here. In March 2017, an average of 18.1 million ounces of gold (563 tonnes) and 203.2 million ounces of silver (6320 tonnes) were cleared each trading day.

Since trade clearing nets out actual trading volumes, these clearing figures need to be grossed up to reveal the true trading figures. Using a 10:1 ratio of trading to clearing, which is a realistic multiplier as discussed here,  this would be equivalent to 5630 tonnes of gold and 62,200 tonnes of silver traded each day in the London wholesale gold and silver markets. On an annualised basis, for gold, this would imply that the equivalent of over 1.4 million tonnes of gold are traded per year in the London gold market, quite an achievement, seeing that less than 200,000 tonnes of gold is said to have ever been mined throughout history, and half of this total is held in the form of jewellery.

The LBMA press release goes on to say that:

Publication of aggregate physical holdings is the first step in reporting for the London Precious Metals Market.

The next step is Trade Reporting.

The collection of trade data will add transparency to the market and provide gross turnover for the Loco London market. Previously gross turnover had been calculated from one-off surveys or estimated from the clearing statistics.

With the LBMA vault reporting being the first step, but only coming out in the summer of 2017, its anyone’s guess as to when LBMA trade reporting will be coming out, a project which has been bandied about in the financial media and by the LBMA for nearly 3 years now, but which must take the record as the slowest fintech formulation and release in the history of London financial markets, ever.

BOEGoldReserves01t
Source: www.GoldChartsRUS.com

The Bank of England’s latest physical gold holdings for January month-end 2017 is only in the region of 5100 tonnes of gold bars. Furthermore, since the LBMA say that there are only about 6500 tonnes of gold in the entire London market, the LBMA commercial gold vaults in London have to hold far less gold than the Bank of England. Add to this the fact that the gold in the commercial vaults is mostly held on behalf of gold-backed Exchange Traded Funds (ETFs).

Given the above, it becomes increasingly clear than when the LBMA does decide to release gold vault holdings figures sometime in summer 2017, whatever figure(s) is released, will most likely confirm that there is very little gold in the London market which is not claimed to be owned by either a central bank or a gold-backed ETF. It will also provide a field day for all sorts of theories and calculations about the true ratio of gold trading volumes to gold bar vault holdings, and how much of this gold is allocated and earmarked, and how much can be considered a combined bullions banks’ float.

A Quick Calculation

Its possible to go someway towards estimating a minimum figure for how much gold to expect the LBMA to report on the commercial vaults when it begins vaults reporting this summer. The same exercise could be conducted for silver but is beyond the scope of this analysis. For gold, when such a figure is calculated and added to the amount of gold in the Bank of England vaults, it gives a grand total of how much gold is in the combined LBMA and Bank of England vaults in London.

A large number of high-profile gold-backed ETFs store their gold bars in LBMA vaults in London, mainly in the vaults of HSBC and JP Morgan. The HSBC vault in London holds gold on behalf of the SPDR Gold Trust (currently 853 tonnes) and ETF Securities (about  215 tonnes). The JP Morgan gold vault in London holds gold on behalf of ETFs run by iShares (about 210 tonnes in London), Deutsche Bank (95 tonnes),  and Source (100 tonnes). An ABSA ETF holds about 36 tonnes of gold with Brinks in London. In total, these ETFs represent about 1510 tonnes of gold. For the approach used to calculate this type of figure for gold-backed ETFs, please see “Tracking the gold held in London: An update on ETF and BoE holdings“.

ETF gold holdings (most of which are stored in London) have been relatively static since mid March 2017. See chart below. Therefore if the LBMA starts reporting vault gold holdings for a month-end date such as month-end March 2017, it would probably reflect about 1500 tonnes of ETF gold, mostly held by at HSBC and JP Morgan vaults in London. This is assuming that some of the ETF gold is not held in sub-custody at the Bank of England vaults.

ETF transparent 6 month weekly
Source: www.GoldChartsRUS.com

Until the LBMA starts its vault reporting, its unclear how much other gold is in the commercial vaults in London above and beyond the ETF holdings. However, non-monetary gold regularly flows in and out of the London Gold Market from gold trade with countries such as Switzerland. While March 2016 to October 2016 was a period in which the UK was a strong net importer of non-monetary gold from Switzerland, since then the UK has been a net exporter of gold to Switzerland, and has exported 325 tonnes of gold from October 2016 to end of March 2017. Therefore, whatever data the LBMA starts reporting, it logically should reflect the renewed outflow of gold from London to places like Switzerland and would tend to suggest that whatever excess bullion bank float gold is in the London commercial vaults, it is less than it would have been in the absence of these renewed outflows.

The vaulting page of the LBMA website still has there are:

“6,500 tonnes of gold held in London vaults, of which about three quarters is stored in the Bank of England”

While this web page text is probably slightly out of date, a literal interpretation would imply that 4875 tonnes of gold are in the Bank of England (which is not too far from the actual figure) and that 1625 tonnes are in the commercial vaults (which would mean that very little non-ETF gold is in the commercial vaults).

The Bank of England claims to have about 72 central bank customers with gold accounts, For month-end January 2017, the Bank of England is reporting that there was approximately 5100 tonnes of gold in its vaults. At least 3800 tonnes of this gold is claimed to be owned by 34 known central banks. See “Central Bank Gold at the Bank of England” for more details. That would leave about 1300 tonnes of gold at the Bank of England owned by a selection of other central banks and bullion banks. As to how much gold the bullion banks hold at the Bank of England is not clear, but since central bank gold holdings are relatively static (at least when excluding gold lending), then most of the month-to-month movements in Bank of England gold vault holdings are most likely due to bullion bank activity.

As to how easily bullion bank gold holdings at the Bank of England can switch to or be transported to the vaults of the commercial vault operators in London is also unclear, as logistics is a secretive area of the London Gold Market.

So with (1500 ETF tonnes of gold + X) in the commercial vaults, and 5100 tonnes of gold in the Bank of England vaults, this gives a grand total of 6600 tonnes of gold + X in all the vaults of the London as of early 2017. X could be 400 tonnes, it could be 1400 tonnes, or it could be any other figure of similar magnitude. My guess is that there is not that much gold in the commercial vaults above and beyond whats in the gold-backed ETFs. Maybe a few hundred tonnes or so. However, we will have to wait until the dog days of ‘summer’ in London to know this definitively.

Bank of England releases new data on its gold vault holdings

An article in February on BullionStar’s website titled “A Chink of Light into London’s Gold Vaults?” discussed an upcoming development in the London Gold Market, namely that both the Bank of England (BoE) and the commercial gold vault providers in London planned to begin publishing regular data on the quantity of physical gold actually stored in their gold vaults.

Critically, this physical gold stored at both the Bank of England vaults and the commercial London vaults underpins the gargantuan trading volumes of the London Gold Market and the same market’s ‘liquidity’. Therefore, a new vault holdings dataset would be a very useful reference point for relating to London’s ‘gold’ trading volumes as well as relating to data such as the level and direction of the gold price, the volume of gold held in gold-backed Exchange Traded Funds (ETFs), UK gold import and export statistics, and Swiss and Hong Kong gold imports and exports.

The impending publication of this new gold vault data was initially signalled by two sources. Firstly, in early February, the Financial Times (FT) wrote a story claiming that the London Bullion Market Association (LBMA) planned to begin publishing 3 month lagged physical gold storage data for the entire London gold vaulting network, that would, according to the FT:

“show gold bars held by the BoE, the gold clearing banks, and those [vaults] operated by the security companies such as Brink’s, which are also members of the LBMA.”

The “gold clearing banks” are the bullion bank members of London Precious Metals Clearing Limited (LPMCL), namely, HSBC, JP Morgan, ICBC Standard Bank, Bank of Nova Scotia – Scotia Mocatta, and UBS. HSBC and JP Morgan operate precious metals vaults in London. See profile of JP Morgan’s London vault and a discussion of the HSBC vault . ICBC Standard Bank also maintains a vault in London which is operated on its behalf by Brinks.

There are 4 security companies with their own vaults in London, namely, Malca Amit, Loomis, Brinks and G4S. Therefore, including the Bank of England, there are 8 custodians with gold vaults in London that comprise the LBMA gold vaulting network.

The second publication to address the new gold vault data was the World Gold Council. On 16 February, addressing just the Bank of England vaults, the World Gold Council wrote in its Gold Investor publication that:

“The Bank of England is, for the first time, publishing monthly data revealing the amount of gold it holds on behalf of other central banks.”

“The data reveals the total weight of gold held within the Bank of England’s vaults and includes five years of historical data.”

While I had been told by a media source that the London vault data would be released in the first quarter of 2017, at the time of writing, there is still no sign of any LBMA vault holdings data covering the commercial vault operators in London. However, the Bank of England has now gone ahead and independently released its own numbers covering gold held in the Bank of England gold vaults. These gold vaults, of which there are between 8 – 10 (the number fluctuates), are located on the 2 basement levels of the Bank of England headquarters in the City of London.

In an updated web page on the Bank of England’s website simply titled ‘Gold’, the Bank of England has now added a section titled ‘Bank of England Gold Holdings’ and has uploaded an Excel spreadsheet which contains end-of-month gold holdings data covering every month for a 6-year period up to the end of December 2016, i.e. every month from January 2011 to December 2016 i.e. 72 months.

BoE vault
Bank of England ‘show’ gold vault

According to the Bank of England, the data in the spreadsheet shows:

“the weight of gold held in custody on the last business day of each month. We publish the data with a minimum three-month lag.

Values are given in thousands of fine troy ounces. Fine troy ounces denote only the pure gold content of a bar.

We only accept bars which comply with London Bullion Market Association (LBMA) London Good Delivery (LGD) standards. LGD bars must meet a certain minimum fineness and weight. A typical gold bar weighs around 400 oz.

Historic data on our gold custody holdings can be found in our Annual Report.”

Prior to this spreadsheet becoming available, the Bank of England only ever divulged gold vault quantity data once a year within its Annual Report, for year-end reporting date end of February.

You will appreciate that the new spreadsheet, having data for every month of the year, and for 72 months of data retrospectively, conveys a lot more information than having just one snapshot number per year in an annual report. Therefore, the Bank of England has gone some way towards improving transparency in this area.

Before looking at the new data and what it reveals, it’s important to know what this data relates to. The Bank of England provides gold custody (storage) services to both central banks and a number of large commercial banks. Large commercial banks which trade gold are commonly known as bullion banks, and are mostly the high-profile and well-known investment banks.

On its gold web page, the Bank highlights this fact – that it provides gold custody service to both central banks and commercial banks:

“We provide safe custody for the United Kingdom’s gold reserves, and for other central banks. This supports financial stability by providing central banks with access to the liquidity of the London gold market.

We also provide gold accounts to certain commercial firms that facilitate access for central banks to the London gold market.”

In the London Gold Market, the word “liquidity” is a euphemism for gold loans, gold swaps, and gold trading including gold sales. This reference to central banks accessing the London Gold Market as being in some way supportive of ‘financial stability’ is also an eye-opener, since reading between the lines, the Bank of England is conceding that by accessing the London Gold Market’s “liquidity” via bullion banks, these central bank clients are either contributing to direct stabilisation of the gold price in some shape or form, or else are using their gold operations to raise foreign currencies for exchange rate intervention and/or system liquidity. But both routes are aiming at the same outcome. i.e. stability of the financial system.

At the end of the day, the gold price has always been a barometer that central banks strive to keep a lid on and which they aim to stabilise or smoothen the gyrations of, given that the alternative – a freely formed and unmanipulated gold price – would thwart their coordination of fiat currency exchange rates, interest rates and inflation targets.

Interestingly, in addition to the new spreadsheet of gold holdings data, the Bank of England gold web page now includes a link to a new 1 page ‘Gold Policy’ pdf document, which, looking at the pdf document’s properties, was only created on 30 January 2017. This document therefore also looks like it was written in conjunction with the new gold vault data rollout.

The notion of central banks accessing the liquidity of the London Gold Market via bullion banks is further developed in this Gold Policy document also. The document is quite short and merely states the following:

“GOLD ACCOUNTS AT THE BANK OF ENGLAND

1. The Bank primarily offers gold accounts to central bank customers. This is to support financial stability by providing central banks with secure custody for their gold reserves and access to the liquidity of the London gold market (particularly given the Bank’s location).

2. To facilitate, either directly or indirectly, access for central banks to the liquidity of the London gold market, the Bank will also consider providing gold accounts to certain commercial firms. In deciding whether to provide an account, the Bank will be guided by the following criteria.

a. The firm’s day to day activities must support the liquidity of the London gold market.
b. Specifically, the Bank may have regard to a number of factors including but not limited to: evidence of active or prospective trading with a central bank customer; or whether the firm has committed to honour buy and sell prices.

3. Access to a gold account remains at the sole discretion of the Bank.

4. The Bank will review this policy periodically.”

The Vault Data

Nick Laird has now produced a series of impressive charts of this new Bank of England data on his website GoldChartsRUS. Plotting the series of 72 months of gold holdings data over January 2011 to December 2016 yields the below chart.

BOEGoldReserves01t
Bank of England custodial gold holdings: January 2011 – December 2016. Source www.GoldChartsRUS.com

On average, the Bank’s vaults held 5457 tonnes of gold over this 6 year period. The minimum amount of gold held was 4693 tonnes at the end of March 2016, while the maximum quantity of gold held was 6250 tonnes at the end of February 2013.

The overall trend in the chart is downward with a huge outflow of gold bars from the bank’s vaults from the end of February 2013 to the end of March 2016.

As of January 2011, the BoE held just over 5500 tonnes of gold bars in its vaults. Gold holdings rose until the end of August 2011 and peaked at nearly 5900 tonnes before falling to 5600 tonnes at year-end 2011. Overall in 2011, the holdings fluctuated in a 400 tonne range, trending up during the first 8 months, and down during the latter 4 months.

This downtrend only lasted until January 2012, at which point BoE gold holdings totalled about 5450 tonnes. For the remainder of 2012, BoE gold under custody rose sharply, reaching 6200 tonnes by the end of 2012, a level near the ultimate peak in this 6 year chart. The year 2012 was therefore a year of accumulation of gold bars at the Bank during which 750 tonnes were added.

The overall maximum peak was actually 6250 tonnes at the end of February 2013, after which a sustained downtrend evolved through the remainder of 2013. By December 2013, gold under custody at the Bank of England had fallen to 5670 tonnes, creating an overall outflow of 580 tonnes of gold bars during 2013.

The outflow of gold continued during 2014 with another 470 tonnes flowing out of the Bank, leading to end of year 2014 gold holdings of just 5200 tonnes. The outflow also continued all through 2015 with only 4780 tonnes of gold in custody at the end of December 2015. The Bank therefore lost another 440 tonnes  of gold bars in 2015.

Overall, that makes an outflow of 1490 tonnes of gold from the Bank’s vaults over the 3 years from 2013 to 2015 inclusive. This downtrend lingered for 3 more months, with another 80 tonnes lost, which brought the end of March 2016 and end of April 2016 figures to a level of about 4700 tonnes, which is the overall trough on the chart. It also means that there was a net outflow of 1570 tonnes of gold bars from the Bank’s vaults from the end of February 2013 to the end of March / April 2016.

A new uptrend / inflow trend began at the end of April 2016 and continued to the end of November 2016, where gold custody holdings peaked again at about 5123 tonnes before levelling off at the end of December 2016 at 5102 tonnes. Therefore, from the end of April 2016 to the end of December 2016, the Bank of England vaults added 400 tonnes of gold bars.

The gold holdings of the vast majority of central banks have remained stagnant over the 2011 – 2016 period, the exceptions being the central banks of China and Russia. But Russia buys domestically mined gold and stores it in vaults in Moscow and St Petersburg, so this would not affect gold holdings at the Bank of England. China’s central bank, the People’s Bank of China (PBoC), is known to buy its gold on the international market, including the London Gold Market. It then monetizes this gold (classifies it as monetary gold), and airlifts it back to China. But these Chinese purchases don’t show up in UK gold exports because monetary gold is exempt from trade statistics reporting. However, if China was surreptitiously buying gold from other central banks with gold accounts at the Bank of England or buying gold from bullion banks with gold accounts at the BoE, then some of the gold outflows from the BoE could be PBoC gold purchases. But without central bank specific data, its difficult to know.

But what is probably true is that the fluctuations in the quantity of gold stored in the Bank of England vaults are more do to with the gold holdings of bullion banks and less to do with the gold holdings of central banks, for the simple reason that central bank gold holdings are relatively static, or the least the central banks claim that their gold holdings are static. This does not take into account the gold lending market which the central banks and bullion banks go to great lengths to keep secret.

Bank of England custodial gold holdings and US Dollar Gold Price: January 2011 - December 2016. Source www.GoldChartsRUS.com
Bank of England custodial gold holdings and US Dollar Gold Price: January 2011 – December 2016. Source www.GoldChartsRUS.com

There is also a noticeable positive correlation between the movement of the US Dollar gold price and the inflows/outflows of gold to and from the Bank of England vaults, as the above chart demonstrates.

Bullion Bank gold accounts at the BoE

One basic piece of information that the Bank of England’s new vault storage data lacks is an indication of how many central banks and how many commercial banks are represented in the data.

In its first quarterly report from Q1 2014, the Bank of England states that 72 central banks operate gold accounts at the bank of England, a figure which includes a few official sector organisations such as the International Monetary Fund (IMF), European Central Bank (ECB), and Bank for International Settlements (BIS). This number would not have changed much in the meantime, so we can assume that the gold holdings of about 72 central banks are represented in the new data. But the number of commercial banks holding gold accounts at the Bank of England is less clear-cut.

The 5 gold clearing banks of the LPMCL all hold gold accounts at the Bank of England. Why? Because it says so on the LPMCL website:

“Each member of LPMCL has vaulting facilities under its control for the storage of gold and/or silver, plus in the case of gold bullion, account facilities at the Bank of England, which have contributed to the development of bullion clearing in London.”

The LPMCL also states that its clearing statistics include:

“Transfers over LPMCL Clearing Members’ accounts at the Bank of England.”

Additionally, the LPMCL website states that their

“clearing and vaulting services help facilitate physical precious metal movement logistics, location swaps, quality swaps and liquidity management.”

See BullionStar article “Spotlight on LPMCL: London Precious Metals Clearing Limited” for a full profile of LPMCL.

The Bank of England’s reference in its new ‘Gold Policy’ document to commercial banks needing to be “committed to honour buy and sell prices” is a reference to market makers and would cover all 13 LBMA market makers in gold, which are the 5 LPMCL members and also BNP Paribas, Citibank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Société Générale, Standard Chartered Bank, Toronto-Dominion Bank. But there are also gold trading banks that make a market in gold which are not officially LBMA market makers, such as Commerzbank in Luxembourg which claims to be one of the biggest bullion banks in the world.

So I would say that lots of other bullion banks (of which there about 40 in total) have gold accounts at the Bank of England in addition to the 13 official LBMA market makers.

More fundamentally, any bullion bank that is engaged in gold lending with central banks (the central banks being the lenders and the bullion banks being the borrowers) would need a gold account at the Bank of England. I counted 28 bullion banks that have been involved with borrowing the gold of just one central bank, the central bank of Bolivia (Banco Central de Bolivia – BCB) between 1998 and 2016. Some of these banks have since merged or exited precious metals trading, but still, it gives an estimate of the number of bullion banks that have been involved in the gold lending market. The Banco Central de Bolivia’s gold lending activities will be covered in some forthcoming blog posts.

Bullion banks that are Authorised Participants (APs) for gold-backed ETFs such as the SPDR Gold Trust (GLD) or iShares Gold Trust (IAU) may also have gold accounts at the Bank of England. I say may have, because in practice the APs leave it up to the custodians such as HSBC and JP Morgan to allocate or deallocate the actual physical gold flowing in and out of the ETFs, but HSBC on occasion uses the Bank of England as a sub-custodian for GLD gold (see “SPDR Gold Trust gold bars at the Bank of England vaults” for details), so if some of the APs want to keep their own stash of allocated physical gold in relation to ETF trading, it would make sense for them to have a gold account at the Bank of England.

As to how much gold the GLD stores at the Bank of England and how regularly this occurs is still opaque because the SEC does not require the GLD filings to be very granular, however there is a very close correlation between inflows and outflows from GLD and the inflows and outflows from the Bank of England vaults, as the following chart clearly illustrates.

Gold held in the SPDR Gold Trust (GLD) and custody gold held at the Bank of England: January 2011 - December 2016. Source:www.GoldChartsRUS.com
Gold held in the SPDR Gold Trust (GLD) and custody gold held at the Bank of England: January 2011 – December 2016. Source:www.GoldChartsRUS.com

As gold was extracted from the GLD beginning in late 2012, a few months later the Bank of England gold holdings began to shrink also. This trend continues all the way through 2013, 2014 and 2015. Then as the amount of gold began to increase in the GLD at the end of 2015, the gold holdings at the Bank of England began to increase also. Could this be bullion banks extracting gold from the GLD, then holding this gold at the Bank of England and then subsequently exporting it out of the UK?

Some of it could, but UK gold net exports figures suggest that gold was withdrawn from both the Bank of England vaults and from the ETF gold stored at commercial gold vaults (run by HSBC and JP Morgan), after which it was exported.

BOEGoldReserves07t
Custody gold held at the Bank of England and UK gold imports and exports: January 2011 – December 2016. Source:www.GoldChartsRUS.com

Looking at the above chart which plots Bank of England gold holdings and UK gold imports and exports (and net exports) is revealing. As Nick Laird points out in this chart, over the 2013 to 2015 period during which the Bank of England gold holdings fell by 1500 tonnes, there were UK net gold export flows of 2500 tonnes, i.e. 2500 tonnes of gold flowed out of London gold vaults, so an additional 1000 tonnes had to come from somewhere apart from the Bank of England vaults.

Spot Checks

The new monthly vault holdings data from the Bank of England can now also be compared to the amount of gold reported by the Bank of England in its annual reports. The figures the Bank reports in the annual report are as of the end of February. These figures are only reported in Pounds Sterling, not quantities, so they need to be either converted to USD and divided by the USD LBMA Gold Price on the last day of February, or else just divided by the GBP LBMA Gold Price on that day.

In September 2015, I wrote the article “How many Good Delivery gold bars are in all the London Vaults?….including the Bank of England vaults”. This was followed by an October 2016 update titled “Tracking the gold held in London: An update on ETF and BoE holdings”. Both of these articles aimed to calculate how much gold was actually stored in the entire London gold vaulting network by looking at how much gold was held in custody in the Bank of England vaults and how much gold was held by ETFs in London.

For end of February 2015, the calculated total for gold held at the Bank of England (based on the annual report) came out at 5,134 tonnes. Now the Bank of England data says 5126 tonnes which is very close to the calculation.  For February 2016, the calculation came out at 4725 tonnes.  The new Bank of England data now says  4730 tonnes, so that’s pretty close also.

Conclusion

This new Bank of England data is welcome and the Bank of England has taken a step towards greater transparency. However, it would be more useful if the Bank published a breakdown of how much of this gold is held by central banks and how much is held by bullion banks, along with the number of central banks and number of bullion banks that the data represents. Two distinct sets of data would be ideal, one for central bank custody holdings and the other for bullion bank custody holdings. The Bank most likely would never publish two sets of data as it would show bullion bank gold storage activity for the whole world to see.

While the Bank of England has now followed through with its promise to publish its gold vault holdings, the LBMA has still not published gold vault data for the commercial gold vault providers, i.e. its members HSBC, JP Morgan, ICBC Standard Bank, Brinks, Malca Amit, Loomis and G4S. Where is this data, why is there a delay, and why has it not yet been published?

As a reminder, the Financial Times article in early February said that the LBMA would publish gold vault holdings data that would:

“show gold bars held by the BoE, the gold clearing banks, and those [vaults] operated by the security companies such as Brink’s”

The Financial Times article also said that:

HSBC and JPMorgan, London’s biggest bullion banks, are backing the initiatives by the LBMA to improve transparency.”

With the gold holdings data on the other London vaults still not published, it begs the question, has there been a change of mind by HSBC and JP Morgan, two of the LBMA’s largest and most powerful members?

The vaulting page of the LBMA’s website could also do with an update since currently it erroneously says:

“Reputedly [the Bank of England vaults are] the second largest vault in the world with approximately 500,000 gold bars held in safe custody on behalf of its customers, including LBMA members, central banks, international financial institutions and Her Majesty’s Treasury.”

A holding of 500,000 Good Delivery gold bars is equal to 6250 tonnes. However, according to the Bank of England’s own figure for month end December 2016, the Bank of England only holds 5100 tonnes of gold in custody (408,000 Good delivery gold bars). Therefore, the LBMA is overstating the Bank of England’s holdings by 1150 tonnes, unless, and it’s unlikely, that the BoE vaults have seen huge gold bar inflows in the last 4 months.

Sweden’s Gold Reserves: 10,000 gold bars shrouded in Official Secrecy

In early February 2017 while preparing for a presentation in Gothenburg about central bank gold, I emailed Sweden’s central bank, the Riksbank,  enquiring whether the bank physically audits Sweden’s gold and whether it would provide me with a gold bar weight list of Sweden’s gold reserves (gold bar holdings). The Swedish official gold reserves are significant and amount to 125.7 tonnes, making the Swedish nation the world’s 28th largest official gold holder.

Before looking at the questions put to the Riksbank and the Riksbank’s responses, some background information is useful. Sweden’s central bank, Sveriges Riksbank aka Riksbanken or Riksbank, has the distinction of being the world’s oldest central bank (founded in 1668). The bank is responsible for the administration of Swedish monetary policy and the issuance of the Swedish currency, the Krona.

Since Sweden is a member of the EU, the Riksbank is a member of the European System of Central Banks (ESCB), but since Sweden does not use the Euro, the Riksbank is not a central bank member of the European Central Bank (ECB). Therefore the Riksbank has a degree of independence that ECB member central banks lack, but still finds itself under the umbrella of the ESCB. Since it issues its own currency, the Riksbank is responsible for the management of the Swedish Krona exchange rate against other currencies, a task which should be borne in mind while reading the below.

On 28 October 2013, the Riksbank for the first time revealed the storage locations of its gold reserves via publication of the following list of five storage locations (four of these locations are outside Sweden) and the percentage and gold tonnage stored at each location:

  • Bank of England               61.4 tonnes (48.8%)
  • Bank of Canada               33.2 tonnes (26.4%)
  • Federal Reserve Bank   13.2 tonnes (10.5%)
  • Swiss National Bank        2.8 tonnes (2.2%)
  • Sveriges Riksbank         15.1 tonnes (12.0%)

The storage locations of Sweden’s official Gold Reserves: Total 125.7 tonnes

Nearly half of Sweden’s gold is stored at the Bank of England in London. Another quarter of the Swedish gold is supposedly stored with the Bank of Canada. The Bank of Canada’s gold vault was located under it’s headquarters building on Wellington Street in Ottawa. However, this Bank of Canada building has undergone a complete renovation and has been completely empty for a number of years, so wherever Sweden’s gold is in Ottawa, it has not been in the Bank of Canada’s gold vault for the last number of years.

The Swedish gold in Canada (along with gold holdings of the central banks of Switzerland, the Netherlands and Belgium) could, however, have been moved to the Royal Canadian Mint’s vault which is also in Ottawa. Bank of Canada staff are now moving back into the Wellington Street building this year. But is the Swedish gold moving back also or does it even exist? The location of the Swedish gold in Ottawa is a critical question which the Swedish population should be asking their elected representatives at this time, and also asking the Riksbank the same question.

Just over 10% of the Swedish gold is supposedly in the famous (infamous) Manhattan gold vault of the Federal Reserve under the 33 Liberty building. Given the complete lack of cooperation of the Federal Reserve Bank of New York (FRBNY) in answering any questions about foreign gold holdings in this vault, then good luck to Swedish citizens in trying to ascertain that gold’s whereabouts or convincing the Riksbank to possibly repatriate that gold.

A very tiny 2% of Swedish gold is also listed as being held with the Swiss National Bank (SNB). The SNB gold vault is in Berne under its headquarters building on Bundesplatz.

The Riksbank also claims to hold 15.1 tonnes of its gold (12%) in its own storage, i.e. stored domestically in Sweden. Interestingly, on 30 October 2013, just two days after the Riksbank released details of its gold storage locations, Finland’s central bank in neighbouring Helsinki, the Bank of Finland, also released the storage locations of its 49 tonnes gold reserves. The Bank of Finland claims its 49 tonnes of gold is spread out as follows: 51% at the Bank of England, 20% at the Riksbank in Sweden, 18% at the Federal Reserve Bank of New York, 7% in Switzerland at the Swiss National Bank and 4% held in Finland by the Bank of Finland. This means that not only is the Riksbank storing 15.1 tonnes of Swedish gold, it also apparently is also storing 9.8 tonnes of Finland’s gold, making a grand total of 24.9 tonnes of gold stored with the Riksbank. The storage location of this 24.9 tonnes gold is unknown, but one possibility suggested by the Swedish blogger Cornucopia (Lars Wilderäng) is that this gold is being stored in the recently built Riksbank cash management building beside Stockholm’s Arlanda International Airport, a building which was completed in 2012.

On its website, the Riksbank states that its 125.7 tonnes of gold “is equivalent to around 10,000 gold bars”. A rough rule of thumb is that 1 tonne of gold consists of 80 Good Delivery Bars. These Good Delivery Gold gold bars are wholesale market gold bars which, although they are variable weight bars, usually each weigh in the region of 400 troy ounces or 12.5 kilograms. Hence 125.7 tonnes is roughly equal to 125.7 * 80 bars = 10,056 bars, which explains where the Riksbank gets its 10,000 gold bar total figure from.

Riksbank

Using Gold for Foreign Exchange Interventions

On another page on its web site titled ‘Gold and Foreign Currency Reserve’, the Riksbank is surprisingly open about the uses to which it puts its gold holdings, uses such as foreign exchange interventions and emergency liquidity:

“The gold and foreign currency reserve can primarily be used to provide emergency liquidity assistance to banks, to fulfil Sweden’s share of the international lending of the International Monetary Fund (IMF) and to intervene on the foreign exchange market, if need be.”

This is not a misprint and is not a statement that somehow only applies to the ‘foreign currency reserve’ component of the reserves, since the same web page goes on to specifically say that:

The gold can be used to fund emergency liquidity assistance or foreign exchange interventions, among other things.”

Therefore, the Riksbank is conceding that at least some of its gold is actively used in central bank operations and that this gold does not merely sit in quiet unencumbered storage. On the contrary, this gold at times has additional claims and titles attached to it due to being loaned or swapped.

When the Riksbank revealed its gold storage locations back in October 2013, this news was covered by a number of Swedish media outlets, one of which was the Stockholm-based financial newspaper Dagens Industri, commonly known as DI. DI’s article on the topic, published in Swedish with a title translated as “Here is the Swedish Gold“,  also featured a series of questions and answers from personnel from the Riksbank asset management department. Some of these answers are worth highlighting here as they touch on the active management of the Swedish gold and also the shockingly poor auditing of the Swedish gold.

In the DI article, Göran Robertsson, Deputy Head of Riksbank’s asset management department, noted that historically the Swedish gold was stored at geographically diversified locations for security reasons, but that this same geographic distribution is now primarily aimed at facilitating the rapid exchange of Swedish gold for major foreign currencies, hence the reason that nearly half of the Swedish gold is held in the Bank of England gold vaults – since the Bank of England London vaults are where gold swaps and gold loans take place.

Robertsson noted that over the 2008-2009 period, 50 tonnes of gold Swedish gold located at the Bank of England was exchanged for US dollars: 

“London is the dominant international marketplace for gold. We used the gold 2008-2009 during the financial crisis when we switched it to the dollar we then lent to Swedish banks”

One of these Riskbank gold-US Dollar swap transaction was also referenced in a 2011 World Gold Council report on gold market liquidity. This report stated that in 2008 following the Lehman collapse:

“In order to be able to provide liquidity to the Scandinavian banking system, the Swedish Riksbank utilised its gold reserves by swapping some of its gold to obtain dollar liquidity before it was able to gain access to the US dollar swap facilities with the Federal Reserve.” 

In the October 2013 DI interview, Göran Robertsson also noted that at some point following this gold – dollar exchange, “the size of the reserve was restored“, which presumably means that the Riksbank received back 50 tonnes of gold. As to whether the restoration of the gold holdings was the exact same 50 tonnes of gold as had been previously held (the same  gold bars) is not clear.

Sophie Degenne, Head of the Riksbank’s asset management department, also noted that:

“The main purpose of the gold and foreign exchange reserves is to use it when needed, as in the financial crisis”

Auditing of the Swedish Gold

On the subject of so-called transparency and auditing of the gold, Sophie Degenne said the following in the same DI interview:

“Why do you reveal at which central banks the gold is located?
It is a part of the Riksbank endeavours to be as transparent as we can. We have engaged in dialogue with the relevant central banks”

How do you verify that the gold is really where it should be?
“We have our own listings of where it is. We reconcile these against extracts that we receive once a year. From now on, we will also start with our own inspections.”

Therefore, the Riksbank gold auditing procedure at that time was one of merely comparing one piece of paper to another piece of paper and in no way involved physically auditing the gold bars in any of the foreign locations. These weak audit methods of the Swedish gold were first highlighted by Liberty Silver CEO, Mikael From in Stockholm-based news daily Aftonbladet’s coverage of the Swedish gold storage locations in an article in early November 2013 titled “Questions about Sweden’s gold reserves persist“.

In Aftonbladet’s article, Mikael From stated that while it was welcome that the Riksbank was at that point signalling an ambition to inspect the Swedish gold reserves, it was not clear that the Riksbank would be conducting a proper audit of the gold reserves at the time of inspection, although such a proper audit would be highly desirable. Mikael stated that without such a proper audit, and without witnessing the gold with their own eyes, the Riksbank and the Swedish State could not be certain that the Swedish gold actually existed.

He also called for the Riksbank to provide information proving that the Swedish gold actually exists in its claimed storage locations. This was particulaly important due to a portion of the Swedish gold supposedly being stored at the gold vault of the Federal Reserve Bank of New York (NYFED), a storage location which had in the past been non-cooperative and problematic for the German Federal Court of Auditors when they tried to examine the NYFED’s storage arrangements in 2011/2012.

Questions to the Swedish Riksbank – February 2017

Turning now to the questions which I posed to the Swedish Riksbank in early February 2017 about its gold reserves. I asked the Riskbank two basic and simple questions as follows:

“I am undertaking research into central bank gold reserves, including the gold reserves held by the Riksbank at its 5 storage facilities. 

1. Are the gold bars held by the Riksbank in its foreign storage facilities physically audited by the Riksbank (i.e. stored at Bank of England, Bank of Canada, Federal Reserve New York and Swiss National Bank)? In other words, does the Riksbank have a physical audit program for this gold?

2. Secondly, would the Riksbank be able to send me a gold bar weight list which shows the gold bar holdings details for the 125.7 tonnes of gold held by the Riksbank. A weight list being the industry standard list showing bar brand (refiner), serial number, gross weight, fineness, fine weight etc.

A few days after I submitted my questions, the Presschef/Chief Press Officer of the Riksbank responded as follows. On the subject of auditing:

“Answer 1: Yes, the Riksbank performs regularly physical audits of its gold.

In response to the question about a gold bar weight list, the Chief Press Officer said:

Answer 2: The Riksbank publishes information about where the gold is stored and how much in tonnes is at each place. See table (same distribution table as above). However, the Riksbank does not publish weight lists or other details of the gold holdings.

So here we have the Riksbank claiming that it personally now performs physical audits of its gold on a regular basis. This is the first time in the public domain, as far as I know, that the Riksbank is claiming to have undertaken physical gold audits of its gold holdings, and it goes beyond the 2013 statement from the Riksbank’s Sophie Degenne when she said “we will also start with our own inspections“.

But critically ,there was zero proof offered by the Riksbank to me, or on its website, that it has undertaken any physical gold audits. There is no documentation or evidence whatsoever that any physical audits have ever been conducted on any of the 10,000 gold bars in any of the 5 supposed storage locations that the Riksbank claims to store gold bars at. Contrast this to the bi-annual physical audits which are carried out on the gold bars in the SPDR Gold Trust (GLD) which are published on the GLD website.

In any other industry, there would be an outcry and court cases and litigation if an entity claimed it had conducted audits while offering no proof of said audits. However, in the world of central banking, perversely, this secrecy is allowed to persist. This is outrageous to say the least and Swedish citizens should be very concerned about this lack of transparency of the Swedish gold reserves. 

Official Secrecy about Swedish Gold Reserves

Given the brief and not very useful Riksbank responses to my 2 questions above, I sent a follow on email to the Riksbank asking why the Swedish central bank did not publish a gold bar weight list. My question was as follows:

Is there any specific reason why the Riksbank does not publish a gold bar weight list in the way, for example, that a gold-backed ETF does publish such a weight list every trading day?

i.e. Why is the Riksbank not transparent about its gold bar holdings?”

This second email was answered by the Riksbank Head of Communications, as follows:

“This kind of information is covered by secrecy relating to foreign affairs, as well as security secrecy and surveillance secrecy in accordance with the relevant provisions in the Swedish Public Access to Information and Secrecy Act.

As far as we are aware of, the Riksbank is among the most transparent central banks, being public with information about the storage locations and volumes, but do let us know if any other central banks are offering the level of transparency you are asking for (except for Germany of course, which we are aware about).”

So here you can see here that gold, which in the words of the Wall Street Journal is just a ‘Pet Rock’, is covered by some very strong secrecy laws in Sweden. Why would a pet rock need ultra strong secrecy laws?

An explanatory document on Sweden’s “Public Access to Information and Secrecy Act” can be accessed here. In Sweden, the rules governing public access to official documents are covered by the Freedom of the Press Act. While its beyond topic to go into the details of Swedish secrecy laws right now, there is a short section in the document titled “What official documents may be kept secret?” (Section 2.2) which includes the following:

“The Freedom of the Press Act lists the interests that may be protected by keeping official documents secret:

  • National security or Sweden’s relations with a foreign state or an international organisation;
  • The central financial policy, the monetary policy, or the national foreign exchange policy;
  • Inspection, control or other supervisory activities of a public authority;
  • The interest of preventing or prosecuting crime;
  • The public economic interest;
  • The protection of the personal or economic circumstances of private subjects; or
  • The preservation of animal or plant species.

Given that the Riksbank stated that the information in its gold bar weight lists was “covered by secrecy relating to foreign affairs, as well as security secrecy and surveillance secrecy”, I would hazard a guess that the Riksbank would try to reject Freedom of Information requests in this area by pointing to central bank gold storage and gold operations as falling under points 1 or 2, i.e. falling under national security or relations with a foreign state or international organisation, or else monetary policy / foreign exchange policy (especially given that the Riksbank uses gold reserves in its foreign currency interventions). Perhaps the Riksbank would also try to twist point 5 as an excuse, i.e. that it wouldn’t be in the public economic interest to release the Swedish gold bar details.

As to why the Riksbank and nearly all other central banks are ultra secretive about gold bar weight lists and even physical auditing of gold bar holdings usually boils down to the fact that, like the Riksbank, these gold bar holdings are actively managed and are often used in gold loans, gold swaps and even gold location swaps. If identifiable details of the gold bars of such central banks were in the public domain, given that these bars are involved in loans, currency swaps and location swaps, these gold bar details could begin to show up in the gold bar lists of other central banks or of the gold bar lists of publicly listed gold-backed Exchange Traded Funds. This would then blow the cover of the central banks which continue to maintain the fiction that their loaned and swapped gold is still held in unencumbered custody on their balance sheets, and would blow a hole in their contrived and corrupt accounting policies.

A Proposal to the Oldest Central Bank in the World

Since the Riksbank happened to ask me were there any central banks “offering the level of transparency [I was] asking for” i.e. providing gold bar weight lists, I decided to send a final response back to the Riksbank in early March highlighting the central banks that I am aware of that have published such gold bar weight lists, and I also took the opportunity of proposing that the Riksbank should follow suit in publishing its gold bar weight list. My letter to the Riksbank was as follows:

“You had asked which central banks offered a level of transparency on their gold holdings that include publication of a gold bar weight list. Apart from the Deutsche Bundesbank, which you know about, I can think of 3 central banks which have released weight lists of their gold bar holdings.

The 3 examples below (together with the Bundesbank) show that some of the most important central banks and monetary authorities in the world have now deemed it acceptable to include the release of gold bar weight lists as part of their gold communication transparency strategies. 

The 4 sets of weight lists below include gold bar holdings at the Bank of England (stored by Mexico, Australia, Germany), and at the Federal Reserve Bank of New York (stored by the US Treasury and Bundesbank). Together these two storage locations account for 60% of the Riksbank’s gold holdings (74.6 tonnes).

The Riksbank is the world’s oldest central bank and has a long track record of being progressive and transparent. By releasing the Riksbank’s gold bar weight lists for the gold bars stored over the 5 storage locations (London, New York, Ottawa, Berne and in Sweden), the Swedish central bank would be joining an elite group of central banks and monetary institutions that could be considered the early stage adopters of much needed transparency in this area.”

1. Bank of Mexico

Most recently in 2017, Bank of Mexico has released a weight list of its earmarked gold bars stored at the Bank of England. This list in pdf format can be downloaded here – > http://www.guillermobarba.com/assets/uploads/2017/03/LT-BM-18703-ok.pdf

The Mexican list details 7265 gold bars held (about 90 tonnes), and includes bank of England internal sequence number, refiner brand, gross weight, assay (fineness), and fine weight.

See also https://www.bullionstar.com/blogs/ronan-manly/mexicos-earmarked-gold-bars-bank-englands-vaults/

 2. Reserve Bank of Australia

In July 2014, the Reserve Bank of Australia (RBA) released a weight list of 6313 gold bars (about 79 tonnes) that it has stored at the bank of England in London. See  http://www.rba.gov.au/information/foi/disclosure-log/rbafoi-131418.html

The weight list in Excel format can be downloaded here http://www.rba.gov.au/information/foi/disclosure-log/xls/131418.xls

The RBA list includes refiner brand, gross weight, assay (fineness), and fine weight, as well as bank of England account number.

3. US Treasury

In 2011, the US Treasury’s full detailed schedules of gold bars was published by the US House Committee on Financial Services as part of submissions for its hearing titled “Investigating the Gold: H.R. 1495, the Gold Reserve Transparency Act of 2011 and the Oversight of United States Gold Holdings”.

These US Treasury weight lists are as follows, and are downloadable from the financial services section of the “house.gov” web site.

  • Weight list of all Treasury gold held at Fort Knox, Denver and West Point – 699,515 bars  – pdf format

http://financialservices.house.gov/uploadedfiles/attachment_4_mints_schedule_of_inventory_of_deep_storage_gold_reserves.pdf

  • Weight list of all Treasury gold held at Fort Knox, Denver and West Point – 699,515 bars – xlsformat

http://financialservices.house.gov/uploadedfiles/mints_schedule_of_inventory_of_deep_storage_gold_reserves.xls

Deutsche Bundesbank

The Bundesbank weight list which you know about. The most recent version of this list was published on 23rd February 2017 and can be downloaded here http://www.bundesbank.de/Redaktion/EN/Downloads/Bundesbank/Organisation/bar_list.pdf?__blob=publicationFile

The Bundesbank list show all the German gold bars held at the Bank of England, NY fed and Banque de France as well as in Frankfurt.”

Conclusion

As of now, the Swedish Riksbank has a) not published a gold bar weight list of any of its gold bar holdings and b) not acknowledged my follow up email where I listed the central banks that have produced such lists and suggested that the Riksbank do likewise.

The Swedish Riksbank claims to hold 10,000 large Good Delivery gold bars in 5 locations across the world and now claims to have conducted physical gold audits of this gold. Yet it has never published any physical gold audit results of any of these gold bars nor published any of the serial numbers of any of the 10,000 gold bars it claims to have in storage. For a so-called progressive democracy this is shocking, although not surprising given the arrogant and unaccountable company that central bankers keep with each other.

If someone with time on their hands, ideally a Swedish citizen, has an interest in this area, it would be worthwhile for them to research the rules of the Swedish Freedom of Information Act, and then craft a few carefully worded Freedom of Information requests to the Riksbank requesting physical audit documents and gold bar weight lists of Sweden’s 125.7 tonnes of gold that is supposedly held in London, New York, Ottawa, Berne and in Sweden, possibly in or around Stockholm or beside Arlanda airport. 

While these Freedom of Information requests would probably get rejected due to some spurious secrecy excuse and thrown back at the applicant in short order, at least its worth trying, and might make a good story for one of the Swedish financial newspapers to cover.

Death Spiral for the LBMA Gold and Silver auctions?

In a bizarre series of events that have had limited coverage but which are sure to have far-reaching consequences for benchmark pricing in the precious metals markets, the LBMA Gold Price and LBMA Silver Price auctions both experienced embarrassing trading glitches over consecutive trading days on Monday 10 April and Tuesday 11 April. At the outset, its worth remembering that both of these London-based benchmarks are Regulated Benchmarks, regulated by the UK’s Financial Conduct Authority (FCA).

In both cases, the trading glitches had real impact on the benchmark prices being derived in the respective auctions, with the auction prices deviating noticeably from the respective spot prices during the auctions. It’s also worth remembering that the LBMA Gold Price and LBMA Silver Price reference prices that are ‘discovered’ each day in the daily auctions are used to value everything from gold-backed and silver-backed Exchange Traded Funds (ETFs) to precious metals interest rate swaps, and are also used widely as reference prices by thousands of precious metals market participants, such as wholesalers, refineries, and bullion retailers, to value their own bi-lateral transactions.

Although the gold and silver auctions are separately administered, they both suffer from limited direct participation due to the LBMA only authorising a handful of banks to directly take part. Only 7 banks are allowed to participate directly in the Silver auction while the gold auction is only currently open to 14 entities, all of which are banks. Limited participation can in theory cause a lack of trading liquidity. Added to the mix, a central clearing option was introduced to the LBMA Gold Price auction on Monday 10 April, a day before Tuesday’s gold auction screw-up. The introduction of this central clearing process change saw four of the direct participants suspended from the auction since they had not made the necessary system changes in time to process central clearing. This in itself could have caused a drop in liquidity within Tuesday’s gold auction as it reduced the number of possible participants.

Other theories have been put forward to explain the price divergences, such as the banks being unwilling to hedge or arbitrage auction trades due to the advent of more stringent regulatory changes to prevent price manipulation. While this may sound logical in theory, no one, as far as I know, has presented empirical trade evidence to back up this theory. There is also the possibility of deliberate price manipulation of the auction prices by a participant(s) or their clients, a scenario that needs to be addressed and either ruled out or confirmed.

ICE Benchmark Administration (IBA), the administrator of the LBMA Gold Price, also introduced a price calculation Algorithm into the gold auction in mid-March 2017, a change which should also be considered by those seeking to find a valid explanation for the gold auction price divergence where the opening price kept falling through multiple auctions rounds whilst the spot price remained far higher. Could the algorithm have screwed up on 11 April?

Whatever the explanations for the price divergences, these incidents again raise the question as to whether these particular precious metals auctions are fit for purpose, and why they were designed (and allowed to be designed) at the outset to explicitly block direct participation by nearly every precious metals trading entity on the planet except for a limited number of London-based bullion bank members of the LBMA.

LBMA Silver Price fiasco

First up, on Monday 10 April,  buried at the end of a Reuters News precious metals market daily news wrap was a very brief snippet of news referring to an incident which dogged the LBMA Silver Price during Monday’s daily auction (an auction which starts at midday London time). According to Reuters:

“silver prices slipped after the LBMA silver price benchmark auction was paused for 17 minutes after a circuit breaker was triggered when the auction price moved outside of the spot range, the CME said in a statement.”

What exactly the CME meant is unclear because whatever statement Reuters was referring to has not been released on the CME Group website or elsewhere, and Reuters did not write a separate news article about the incident.

To recap, the LBMA Silver Price is administered by Thomson Reuters on a calculation platform run by the CME Group, and operated on a contract basis on behalf of the London Bullion Market Association (LBMA). However, there is nothing anywhere on the CME’s LBMA Silver Price web page, or on the Thomson Reuters LBMA Silver Price web page, or on the LBMA website, in the form of a statement, comment or otherwise, referring to this ‘circuit breaker’ that persisted for ’17 minutes’ in the LBMA Silver Price auction during which time the ‘auction price moved outside of the spot range

On its calculation platform, CME makes use of a pricing algorithm to automatically calculate a price for each round of the LBMA Silver Price auction (excluding the first auction round). From page 8 of its LBMA Silver Price Methodology Guide:

“3.7 Starting Price

The initial auction price value is determined by the auction platform operator by comparing multiple Market Data sources prior to the auction opening to form a consensus price based on the individual sources of Market Data. The auction platform operator enters the initial auction price before the first round of the auction begins….”

“3.4 End of Round Comparison

If the difference between the total buy and sell quantity is greater than the tolerance value, the auction platform determines that the auction is not balanced, automatically cancels orders entered in the auction round by all participants, calculates a new price, and starts a new round with the new price.”

There is also a manual price override facility which can be invoked if needed:

3.8 Manual Price Override

In exceptional circumstances, CME Benchmark Europe Ltd can overrule the automated new price of the next auction round in cases when more significant or finer changes are required. When doing so, the auction platform operator will refer to a composition of live Market Data sources while the auction is in progress.”

As to why the “auction platform operator” did not invoke these manual override powers and seek market data sources during the time in which the silver auction was ‘stuck’ for 17 minutes is unclear. A 17 minute pause would presumably be, in the CME’s words, ‘exceptional circumstances’.

Unfortunately, neither the CME website, the Thomson Reuters website, or the LBMA website provides intra-round pricing data for the LBMA Silver Price, so anyone who doesn’t have a subscription to the live data of the auction is well and truly left in the dark as to what actually happened on Monday 10 April. Unlike the LBMA Gold Price auction which at least provides an ‘Auction Transparency Report’ for each auction (see below), the LBMA Silver Price auction is sorely lacking in any public transparency whatsoever.

But what is clear from the Reuters information snippet is that the LBMA Silver Price auction on Monday 10 April suffered a serious trading glitch, that saw the prices that were being formed in the auction deviate from where the silver spot price was trading during that time. This price deviation suggests a lack of trading liquidity in the auction and/or an inability of the participants to hedge their trades in other trading venues. As to whether the final LBMA Silver Price that was derived and published as the daily benchmark price on 10 March was outside the spot range (and above or below spot) is not mentioned in the Reuters report.

The complete opacity about this incident is concerning but not really surprising since nearly everything in the London precious metals markets is shrouded in secrecy, and corporate communication in this area is truly abysmal.

Recalling that Thomson Reuters and CME announced in early March that they are abruptly pulling out of the contract for administrating and calculating the LBMA Silver Price, this latest fiasco is unwelcome news for the LBMA – CME – Thomson Reuters triumvirate, and raises further questions for the FCA as to whether this Silver auction and benchmark should even be allowed to continue in its present or similar form.

LBMA-Gold-Price

LBMA Gold Price fiasco

Turning to the London gold auction, on the afternoon of Tuesday 11 April, the LBMA Gold Price auction (which starts at 3:00pm London time) experienced what can only be described as a shocking and serious trading fiasco which has real world consequences for all trading entities that use the LBMA Gold Price Benchmark reference price (and there are many that do so). As a reminder, ICE benchmark Administration (IBA) administers the daily LBMA Gold Price auctions on behalf of the LBMA.

Again it was Reuters that broke the gold auction news. In a short article titled ‘London gold benchmark fixes $12/oz off spot price‘, Reuters said the following:

London’s gold price benchmark fixed some $12 below the spot price on Tuesday afternoon as the auction appeared to become locked in a downward spiral. From an initial $1,265.75, close to the spot price at the time, the auction price ratcheted steadily lower before fixing at $1,252.90 in the ninth round. From the fifth round to the eighth the bid and offer volumes remained frozen, unable to match.

This came a day after ICE introduced clearing for the LBMA Gold Price auction”

Reuters concludes its article by noting that the ICE clearing was introduced:“before several participating banks had the necessary systems in place.”

“As a result, China Construction Bank, Societe Generale, Standard Chartered and UBS  are yet to confirm a date for their participation in the cleared auction.. ICE declined to comment. The LBMA, which owns the intellectual property rights to the auction, was not immediately available to comment.”

This forced reduction in the number of participants in the auction seems to be relevant to the issue and therefore requires further scrutiny.

ICE Central Clearing – Foisted on the LBMA Gold Price auction?

In mid-October 2016 during the LBMA precious metals conference in Singapore, ICE Benchmark Administration announced that it would introduce central clearing into the London Gold Price by utilizing a series of daily futures contracts which it planned to launch in February 2017. The introduction of central clearing into the auction was initially planned for March 2017.

The LBMA Gold Price Oversight Committee meeting minutes for 4 November 2016 specify the March 2017 launch date and make clear that all banks ‘wanted to move‘ to use the clearing route, and that ICE Benchmark Administration ‘wish to keep running a healthy auction‘ (whatever that means). The minutes stated:

“IBA gave a central clearing update to the Committee, notifying them that the cleared instrument would be launched in January 2017 and the auction trades could be routed there from March 2017. The Committee were informed that IBA had spoken to every bank and every bank wanted to move. Discussion moved to the technical implications for this new model and IBA’s primary wish to keep running a healthy auction.”

Up until at least the end of February, ICE’s LBMA Gold Price page stated the following:

From March 2017, subject to regulatory review, centrally cleared settlement will be available for transactions which originate from IBA’s gold auction underlying the LBMA Gold Price.

This will give firms the choice of settling their trades bilaterally against each counterparty (as they currently do), or submitting their trades to clearing and settling versus the clearing house. This mechanism removes the requirement for firms to have bilateral credit lines in place with all of the other Direct Participants in the auction.

Central clearing opens the auction to a broader cross-section of the market. It also facilitates greater volume in the auction.

By the end of March 2017, the above statement had been altered from March 2017 to “Q2 2017″ with ICE pushing back the launch date for the introduction of central clearing:

From Q2 2017, subject to regulatory review, centrally cleared settlement will be available for transactions which originate from IBAs gold auction underlying the LBMA Gold Price….”

Reuters again covered these ICE clearing delays in a series of articles during March, highlighting the fact that 4 of the 13 banks that are direct participants in the LBMA Gold Price auction were not ready for the introduction of central clearing due to delays in making unspecified changes to their internal IT systems that would allow such central clearing processing. So anybody who had been reading these Reuters articles would have been aware that there were risks on the horizon in terms of some of the LBMA Gold Price auction participants being slow in being ready for the changes.

In a 15 March article titled ‘London gold rush - ICE to launch clearing before banks are ready‘, Reuters said that ICE would introduce central clearing to the auction on 3 April and that:

“U.S.-based exchange operator ICE has already pushed back the launch of its service by several weeks to allow the banks and brokers who participate in the auction to adapt their IT systems, four sources with direct knowledge of the matter told Reuters.”

 “Sources at many participant banks said that they were unhappy with the speed at which ICE was seeking to introduce clearing, which require investment in IT processes and back office systems and raise complex compliance issues.

 “However, at least four of the 14 banks and brokers who participate in the LBMA Gold Price auction will still not be ready to use the new system

Banks that are not ready would be suspended from the auction until they have the necessary IT infrastructure in place or would have to participate through other players who could clear deals, according to the sources. 

ICE’s readiness to provoke such disruption illustrates how much it wants to avoid further delays that could torpedo its ambitions to become the dominant exchange in London’s vast bullion market, market sources said”

Reuters picked up this theme again on 21 March with an article titled “ICE delays launch of clearing for London gold benchmark: sources“, in which it said that the 3 April start date had again been pushed back and that:

“two sources told Reuters that ICE had again delayed and there was now no set start date.”

“Sources earlier told Reuters that Societe Generale, Standard Chartered, ICBC Standard Bank and China Construction Bank would not be ready to clear the LBMA auction in time for April 3.”

Again interestingly, ICE’s desire to promote its own gold futures contracts was seen as a primary driver for trying to rush through the introduction of central clearing for the gold auction, as doing so would add volume to ICE’s daily gold futures contracts:

“market sources say ICE plans to use clearing of the LBMA Gold Price auction, which it administers, to funnel business to its contracts and give it a head start over rivals.”

As a reminder, ICE and CME have both recently launched gold futures contracts connected to the London market, and the London Metal Exchange (LME) plans to launch its own suite of London gold futures contracts in early June.

Central clearing uses exchange for physical (EFP) transactions in the daily futures contracts which are then cleared at ICE Clear US. The futures have daily settlement each day between 3:00 pm and 3:05 pm London time. But how the whole process ties together is still quite puzzling. An email to the IBA CEO asking for details of how the futures are linked to the auction went unanswered.

Both the ICE and CME contracts had a damp squib start, experiencing weeks of zero trading volumes. See BullionStar article from 8 February 2017 titled “Lukewarm start for new London Gold Futures Contracts”.

On 30 March, Bloomberg announced on Twitter that central clearing in the LBMA Gold Price auction would start on Monday 10 April.

death

Downward Spiral

So what was this downward spiral that the LBMA Gold Price auction experienced on the afternoon of Tuesday 11 April when it became, in the words of Reuters, locked in a downward spiral?

Let’s look at the ICE Auction Transparency Reports for the few days before and during the 11 April afternoon fiasco. These reports show the number of auction rounds, the number of participants,and the bid and offer volumes for each round as well as the price at the end of each round.

Fourteen entities are now authorized to be direct participants in the LBMA Gold Price auction, 13 of which are banks, the other being new participant INTL FCStone since early April. INTL FCStone is a financial services company that has a slant towards commodities. The 13 banks are:

  • Bank of China
  • Bank of Communications
  • China Construction Bank
  • Industrial and Commercial Bank of China (ICBC)
  • Goldman Sachs
  • HSBC Bank USA
  • JPMorgan Chase Bank (London Branch)
  • Morgan Stanley
  • Société Générale
  • Standard Chartered
  • The Bank of Nova Scotia – ScotiaMocatta
  • Toronto-Dominion Bank
  • UBS

Unlike the old London Gold Fixing which had 5 member banks that were obliged to always turn up (and since 2004 dial in) for every auction, this LBMA Gold Price auction does not require all the authorized participants to dial-in. Most of the time, far fewer than the full contingent turn up. For example on Friday 7 April, 8 banks turned up at the morning auction while only 7 banks turned up at the afternoon auction (i.e only a 50% turnout). However, Friday 7 April is also relevant since that was the last day before ICE introduced central clearing to the gold auction.

7 April AM
LBMA Gold Price auction – 7 April – morning – click to enlarge
7 april PM
LBMA Gold Price auction – 7 April – afternoon – click to enlarge

Fast forwarding to the morning gold auction on Monday 10 April when ICE first introduced central clearing, you can see from the below auction report that only 5 banks participated. This is the same small number that took part in the former London Gold Fixing which was run by the infamous and scandal ridden London Gold Market Fixing Limited and which consisted of Deutsche Bank, Barclays, HSBC, Scotiabank and Société Générale.

The reason the turnouts after the introduction of central clearing are so low is that 4 of the direct participant banks have been excluded from the auction due to not being ready to implement central clearing  – a fact predicted by Reuters News in March. This means that the usual number of between 7-10 banks participating in the auction has now been reduced by 4, as four banks cannot take part. As Reuters said on 21 March “Banks that are not ready would be suspended from the auction until they have the necessary IT infrastructure in place”.

The irony of this debacle is that the participating banks all already have bilateral credit limits with each other and so don’t need to do central clearing in the auction. Only new /future direct participants which do not have bilateral credit lines technically need to utilize the clearing solution.

Central clearing is supposed to make it easier for a far wider range and number of participants to take part. But if this entails enhancements to IT systems that some of the most sophisticated investment banks on the planet are struggling with, what hope is there for other precious metals trading entities to participate.

But some reason – probably to try to kickstart the trading volume in its daily gold futures contracts – ICE has made it mandatory for all existing direct participants (the bullion banks) to open clearing accounts and get their IT systems in shape to use clearing.

The ICE website now states:

“Central clearing  for the auction is enabled by effecting  Exchange for Physical (“EFP”) transactions into the new physically settled, loco London gold daily futures contract which is traded on ICE Futures U.S. The EFPs establish positions in the futures contract which are cleared and can be physically delivered at ICE Clear U.S

and Direct participants (DPs) “must establish a clearing account with an ICE Clear U.S. Clearing member” so as to be able to use this account to clear auction trades.

However, “DPs may still maintain credit lines to settle bilaterally against other DPs” and “DPs can elect, for each counterparty, to clear or settle their auction transactions bilaterally.” If this is so, then why the need to force these banks to open a clearing account and push through complex IT changes?

The ICE LBMA Gold Price web page now includes a double asterisk next to the names of the culprit banks that are not ready for central clearing. These banks are China Construction Bank, Société Générale, Standard Chartered, and UBS. the double asterisk states that “** Date of participating in the cleared auction to be determined.

So now, more than 2 years after the LBMA Gold Price has been introduced, we are back to a situation where only 5 large bullion banks are participating in a daily gold price auction, an auction which has huge ramifications for the reference pricing of gold across myriad gold markets around the world.

Both of the auctions on 10 April finished within the first round, with buy volume and sell volume in balance, so there was no need for subsequent auction rounds.

10 April AM
LBMA Gold Price auction – 10 April – morning – click to enlarge
10 April PM
LBMA Gold Price auction – 10 April – afternoon – click to enlarge

Turning to the morning auction of Tuesday 11 April, only a measly 4 banks took part in the first round of the auction, and 5 participants took part in rounds 2 and 3. The bid and ask volumes were not that much out of balance, and the auction finished after 3 rounds.

11 April AM
LBMA Gold Price auction – 11 April – morning

Turning to the afternoon auction of 11 April, the price action commentary provided by Reuters was as follows:

from an initial $1,265.75, close to the spot price at the time, the auction price ratcheted steadily lower before fixing at $1,252.90 in the ninth round. From the fifth round to the eighth the bid and offer volumes remained frozen, unable to match.

Below you can see visually see what happened round by round from the first round price of $1,265.75 where there was zero bid volume and 125,217 ozs (nearly 4 tonnes) of ask volume, through the fifth to (actually) the ninth rounds where bid volume was an unchanging 92,873 ozs and ask volume was an unchanging 107,090 ozs, but still the price fell from $1,260.50 to fix in round 9 at $1,252.90, i,e, the price fell $7.60 in 2 minutes while the volumes didn’t budge. And most critically, the fixing price was $1252.90 while the spot price was trading at $1267 at that time.

LBMA Gold Price auction - afternoon 11 April 2017
LBMA Gold Price auction – 11 March afternoon – Click to enlarge

As Kitco News said in its coverage of the LBMA Gold Price fiasco:

“the benchmark ended up being set almost $15 dollars below where spot prices were trading at the time. The PM Gold Price showed a benchmark at $1,252.90 an ounce; however at the time, spot gold prices were trading around $1,267 an ounce, with prices heading towards a new five-month high.”

How could this happen? How could the auction price diverge so much from the spot price at that time and how could the auction go through round after round lowering the price while the bid and ask volumes did not change and while the spot price was actually far higher than any of the prices in the auction?

Kitco’s explanation, which is mostly based on the view of one person, Jeff Christian of the CPM Group, put the problem down to “poorly conceived regulations and a faulty price discovery mechanism“, i.e. a lack of liquidity due to banks being scared off by tightening regulations, and that this “sharp reduction in liquidity during the auction process” is causing “a large discrepancy in prices“. Christian also said that “because of regulations, banks and other financial institutions are backing away from becoming market makers.

But this reasoning of backing away due to regulations is not backed up by the facts for the simple reason that banks have continued to join the LBMA Gold Price auction at a rapid rate over the last 2 years, i.e. there is a trend of ever more banks applying to be authorized to participate in the auction. For example, since the auction was launched on 20 March 2015 with 6 banks, 9 more banks have signed up JP Morgan, Morgan Stanley, Standard Chartered, Bank of China, ICBC, China Construction Bank, Bank of Communications, Toronto Dominion Bank, and INTL FCStone. Note that Barclays was one of the original six banks in the auction but dropped out after it downscaled its the precious metals business in London. There are also the same number of LBMA Market Makers now as there were two years ago, in both cases 13 LBMA Market Makers.

Kitco’s article also fails to mention the central clearing implementation fiasco brought about by ICE’s rush to channel activity into its gold futures contracts and Kitco even fails to realize that 4 banks were suspended from the auction due to this central clearing issue.

daily AUD gold futures ICE 11 April
ICE Daily Gold Futures report for 11 April – See Volume and Open Interest – Click to Enlarge

Another factor relevant to the screwed up afternoon auction on 11 April that should be considered is the fact that in mid-March 2017, ICE Benchmark Administration introduced a price algorithm into the LBMA Gold Price auction. This fact has been totally ignored by the financial media.

From a human Chairperson to an automated Algorithm

Up until mid March 2017, the LBMA Gold Price auction used a human ‘independent chairperson’ to choose the opening price in the auction and also the auction price in each subsequent round. The identities of these independent chairpersons have never been divulged by ICE nor the LBMA.

Critically, sometime during the 3rd week of March 2017, ICE Benchmark Administration (IBA) introduced a pricing algorithm into the LBMA Gold Price auction. This change in procedure (moving from an auction chairperson to an auction pricing algorithm) was not actively highlighted by either ICE or the LBMA but is clear from looking at Internet Archive imprints of the ICE LBMA Gold Price webpage.

In an imprint of the LBMA Gold Price webpage from 9 March 2017, the methodology section states that:

“The auction process has an independent chairperson, appointed by IBA to determine the price for each round and ensure that the price responds appropriately to market conditions.”

See screenshot below for the same statement –  taken from the same webpage:

methodology 9 march 2017
LBMA Gold Price webpage – Methodology section 9 March 2017

Bullet point 1 of the Auction Process for the 9 March version of the webpage also refers to the chairperson as being responsible for setting the starting price and the price of each subsequent round “in line with current market conditions and the activity in the auction.

process 9 march 2017
LBMA Gold Price webpage – 9 March

But by 16 March, when the next imprint of the LBMA Gold Price page was made by the Internet Archive, the reference in the methodology section to an independent chairperson had been fully deleted, and bullet point 1 had been changed from mentioning a chairperson to discussing an algorithm, specifically changed to “IBA sets the starting price and the price for each round using an algorithm that takes into account current market conditions and the activity in the auction.

See screenshot below for the same statement –  taken from the same webpage:

process 16 march 2017
LBMA Gold Price webpage – 16 March

So if there is an algorithm that is taking into account current market conditions in addition to activity in the auction, why did this algorithm not take the current spot prices into account over rounds 4 – 9 of the LBMA Gold Price auction on the afternoon of Tuesday 11 April?

Furthermore, for such a major change to the methodology and auction process in an auction whose benchmark price is widely used in the gold world, it’s very surprising that neither ICE, nor the LBMA, nor the London financial media mentioned this substantial algorithmic change.

In early December 2016, ICE published an LBMA GOLD PRICE Methodology Consultation in which one of the consultation’s proposed changes was “the introduction of an algorithm to determine the price for each auction round“.

The December 2016 document noted that:

“IBA’s auction process is currently that the auction chair sets the price for each Round in line with current market conditions and the activity in the auction”

“IBA currently has a panel of auction chairs who are independent of any firm associated with the auction, including Direct Participants. The chairs are externally sourced but work with IBA to deliver a robust process for determination of the LBMA Gold Price.

The chairs use their extensive market experience to set the round prices based on a pricing framework agreed with IBA. IBA chose to operate the auction using human chairs to make sure that the price could respond appropriately to market conditions from the outset.

IBA’s feedback from the market was that, at least in the early stages, the professional judgement of a human chairman was needed.

“After operating the auction for more than a year, IBA started to develop an algorithm to set the auction’s starting price and subsequent round prices. IBA has now been testing and refining the algorithm over a number of months

As per the proposal, the algorithm would replace the human chair, after which:

Each auction will continue to be supervised by IBA’s analysts, and, if for any reason an auction did not progress as expected, IBA’s existing safeguards would be deployed to protect the integrity of the auction and the LBMA Gold Price benchmark

These safeguards were stated as being three, namely:

- Pause the auction and restart, to give Participants an opportunity to contact clients or re-evaluate their positions

- Increase the imbalance threshold, if it appears that the auction will otherwise not finish

- Cancel an order, if it is compromising the integrity of the process and the relevant participant cannot be reached. 

The proposals were pencilled in for implementation in Quarter 1, 2017.

Following the consultation, a “Methodology Consultation Feedback” document was published on the ICE Benchmark Administration website. One feedback respondent was concerned about who would be overseeing the daily auctions in the absence of a human chairperson, to which ICE answered:

“IBA can confirm that the auction will always be supervised by at least two IBA analysts. This approach is consistent with how we operate our other benchmarks.

Our aim is to put the auction on auto-pilot, not to make it driverless.

Unfortunately, from the wider gold market’s perspective, the LBMA Gold Price auction on the afternoon of Tuesday 11 April does indeed appear to have been ‘driverless‘ as it “did not progress as expected“, so it is now up to the LBMA and ICE to establish what the ‘IBA analysts’ were up to behind the driving wheel that day.

On its website, ICE states that the LBMA Gold Price methodology is “reviewed by the LBMA Gold Price Oversight Committee as documented in its Terms of Reference.” This Oversight Committee should also explain to the gold world what actually happened on the afternoon of 11 April.

Additionally, I find no explanation on ICE’s LBMA Gold Price webpage as to how exactly the automated algorithm works, what its logic rules are, how it was programmed etc.

Conclusion

The trading glitch with the LBMA Silver Price on Monday 10 April seems to have been completely missed by London’s financial media except for the brief reference by Reuters. The fact that there is no information on the CME, Thomson Reuters and LBMA websites about the issue should raise concern for users of this benchmark and for the UK’s regulator, the FCA. In an ideal world, there should be a full ‘outage’ report published on each of the 3 websites explaining what happened, but this will not happen in the shadowy and secretive London Silver Market.

Perhaps the auction price divergence in the LBMA Silver Price stems from a lack of liquidity brought on by the limited presence of auction participants, or due to the inability or unwillingness of participants to hedge or arbitrage their auction trades against the London OTC spot or other trading venues? The simple thing to do would be for CME, Thomson Reuters and the LBMA to explain themselves since this would minimize guesswork and to provide global silver market entities with clarity. Anything short of a full explanation by the parties concerned is irresponsible.

For the LBMA Gold Price auction, ICE Benchmark Administration needs to release a full ‘outage’ report and explanation on what exactly happened in the afternoon auction on 11 April and explain to the global gold market whether the introduction of central clearing was in any way responsible for the price divergence, and whether there are any conflicts of interest in trying to get banks to use its daily gold futures contracts. While they are at it, ICE should fully explain how the recent introduction of a pricing algorithm impacts the gold auction and whether this too had an impact on the auction price entering a downward spiral.

As the LBMA Silver Price and LBMA Gold Price are both Regulated Benchmarks, the FCA regulator needs to step up to the plate and for once show that it is on the side of the users of these benchmarks and not the powerful London banks.

Both of these auctions require full transparency and ease of direct participation by the full spectrum of the world’s gold and silver trading entities. Currently, they fall far short of these goals.

German and Swiss Precious Metals Refiners join forces as Heraeus acquires Argor-Heraeus

German precious metals group Heraeus Precious Metals (HPM), part of the Heraeus industrial group, has just announced the full acquisition of Swiss precious metals refining group Argor-Heraeus. Heraeus is headquartered in Hanau, just outside Frankfurt. Argor-Heraeus is headquartered in Mendrisio in the Swiss Canton of Ticino, beside the Italian border.

The Heraeus takeover announcement, on 3 April 2017, continues a noticeable acquisition trend in the Swiss precious metals refining sector and follows the July 2016 acquisition of Neuchâtel based Metalor Technologies by Japanese Tanaka Precious Metals, and the takeover of Ticino-based Swiss gold and silver refiner Valcambi by Indian group Rajesh Exports in July 2015. The Heraeus press release from Monday 3 April can be read here in English.

singapore-germany-silver-bullionstar-bar-1kg-2015-refined

A Deal Telegraphed in November

In early November 2016, BullionStar was among the first to report that Swiss Argor-Heraeus was indeed an acquisition target. At the time, market sources had indicated that the most likely acquirer was a private equity company Capinvest, with other suitors said to be Japanese group Asahi and Swiss based MKS-PAMP.

In late 2016, S&P Global Platts reported that Swiss private equity company “Capvis” was in talks to acquire Argor-Heraeus, with one of Platts sources quoting a purchase price in the region of €200 million with completion in Q1 2017, while another source said €200 million was too high a figure. At the end of the day, a Capvis takeover did not materialise and earlier this year market sources said that Argor-Heraeus was no longer for sale (externally). In hindsight, it was probably at this stage that Heraeus decided to make its move. Alternatively, the discussions with external buyers may have just been conducted so as to gauge sentiment and establish a series of potential valuations for the Swiss refiner.

As a reminder, Argor-Hereaus had an unusual ownership structure in that it was jointly owned by 4 shareholders, namely German group Heraeus, German bank Commerzbank, the Austrian Mint, and Argor-Heraeus management. Prior to the takeover, Heraeus was the largest shareholder holding 33% of Argor-Heraeus shares, with Commerzbank holding a further 32.7% of the equity, the Austrian Mint holding another 30%, and Argor-Heraeus’s management holding the balance of shares.

As an existing shareholder and board member of Argor-Heraeus, the Heraeus group would have been privy to all of Argor-Heraeus’s financial and operational details, and so would have been in an advantageous position to negotiate purchase price details with Commerzbank and the Austrian Mint, which would have been a natural advantage relative to external potential acquirers.

Purchase Price

However, the exact purchase price Argor-Heraeus is not known, since, according to the Heraeus press release “the parties have agreed not to disclose financial details of the deal”. Notwithstanding this, German newspaper Handelsblatt is claiming that the Heraeus takeover values Argor-Heraeus at “half a billion Swiss Francs“, since according to Handelsblatt’s sources, Heraeus paid “few hundred million euros for the remaining Argor shares“. With CHF 500 million equal to approximately €468 million, the Handelsblatt claim would mean that Heraeus may have paid €313 million for the 67% of Argor-Heraeus that it did not own. This would be far higher than the €200 million figure that S&P Platts mentioned in December.

singapore-gold-bullionstar-bar-100g-back

Motivations for Acquisition

According to Heraeus, one of its motivations in acquiring Argor-Heraeus is to strengthen its capabilities in gold and silver refining by tapping “Argor’s expertise and processing capacity for gold and silver”, since Heraeus considers itself strongest in platinum group metals. Heraeus states that another driver of the acquisition is geographical diversification given that Argor-Heraeus has facilities on the ground in Chile, as well as in Italy, Germany and of course Switzerland, while Heraeus has a strong presence in Asia, North America and India in addition to Germany.

BullionStar Bars by Heraeus and Argor-Heraeus

BullionStar is very familiar with both Heraeus and Argor-Heraeus and has a good working relationship with both refinery groups. In fact, the popular BullionStar 1 kg silver bars are produced by Heraeus on behalf of BullionStar, while BullionStar’s own branded 100 gram gold bars are minted by Argor-Heraeus on behalf of  BullionStar. See bar images above. Argor-Heraeus is one of the five refineries appointed to the LBMA’s Good Delivery List referee panel for Gold and Silver. In addition, BullionStar carries a wide range of other Heraeus silver bars, Heraeus gold bars, and Argor-Heraeus gold bars.

Conclusion

With 3 of the 4 giant Swiss precious metals refineries having now been acquired by new owners within less than 2 years of each other, this leaves the PAMP refinery, owned by MKS PAMP, as the only one of the “Big 4″ Swiss refineries to have bypassed this recent flurry of corporate control activity. As to whether MKS PAMP will itself become a takeover target is debatable, but it would be surprising if MKS isn’t thinking about this very question right now.

Further information

For more information on the Heraeus group and its precious metals activities, see BullionStar Gold University profile of Heraeus https://www.bullionstar.com/gold-university/heraeus-refinery

For a full overview of Swiss refiner Argor-Heraeus, please see BullionStar Gold University profile of Argor-Heraeus https://www.bullionstar.com/gold-university/argor-heraeus-refinery

For more information on the Tanaka acquisition of Metalor Technologies, see specific section of Metalor profile on BullionStar Gold University https://www.bullionstar.com/gold-university/metalor-refinery#heading-4

For more information on the acquisition of Swiss Valcambi by Rajesh Exports, see BullionStar blog https://www.bullionstar.com/blogs/ronan-manly/swiss-gold-refineries-and-the-sale-of-valcambi

For analysis of initial news (last November) about Argor-Heraeus being acquired, see BullionStar blog https://www.bullionstar.com/blogs/ronan-manly/swiss-gold-refinery-argor-heraeus-to-be-acquired-by-private-equity-investors

Mexico’s Earmarked Gold Bars at the Bank of England vaults

Guillermo Barba, the Mexican financial and economic journalist, has recently published an article on his website confirming that through an information request that he had made to Mexico’s central bank, Banco de México (Banxico), the central bank has now released what amounts to a relatively comprehensive list of Mexico’s gold bars held in storage at the Bank of England gold vaults in London.

Mexico’s list is an inventory of wholesale market gold bars that Banixco owns and stores in custody at the Bank of England vaults in London. In the contemporary parlance of the gold market, most people would call this type of holding an allocated gold holding, but more historically in the Bank of England world, it has been known as an “earmarked gold” holding or a “set-aside gold” holding because the specific bars are set-aside for a specific central bank, in other words the central bank has its name attached to those particular bars (earmarked).

Wholesale gold bars are also known as London Good Delivery gold bars or variable weight gold bars, and each weighs in the region of 400 troy ounces ( ~ 12.5 kilos). On the Banixco list, there are 7,265 wholesale gold bars listed. This new list is one of the very few detailed central bank gold bars lists (weight lists) which exists in the public domain, and it could be useful for a number of purposes (see below).

Barba has done persistent and diligent work over the last 6 years, by patiently obtaining more and more information from the Mexican central bank about its gold reserves via various Freedom of Information Requests (FOIA), and shedding some light on this usually opaque area of gold and central banking.

Bank of Mexico

2011: Gold Reserves Skyrocket, Central Bank Secrecy

Before we examine this newly published list from the Banco de México, a little background is useful. As of February 2017, Mexico held about 120.7 tonnes of gold in its official gold reserves, which puts the country at the tail-end of the world’s Top 30 official/country gold holders.

All through the 2000s, Banixco only held a few tonnes of gold in its official reserves, ranging from about 4 tonnes and 9 tonnes. This situation changed in early 2011 when the Mexican central bank purchased just over 93 tonnes of gold in March 2011 (first reported by the FT in early May 2011). This brought Mexico’s gold holdings up from 7.1 tonnes to about 100.2 tonnes by the end of Q1 2011. The country’s official gold holdings were boosted further to about 125.2 tonnes by Q2 2012 when Banixco bought more than 16 tonnes in March 2012. See World Gold Council quarterly changes of central bank gold holdings for the underlying data.

After Mexico made these sizeable gold purchases in early 2011, Guillermo Barba submitted various FOIAs to the Mexican central bank about the country’s newly acquired gold stash. Unfortunately, most of these information requests received weak responses from the Bank. For example, the question:

“How many bars of gold make up the recent acquisition of 93 tonnes of gold made by Banxico en the first quarter of 2011”

received a response from Banixco of:

“…we inform you that the information that you request is classified as reserved”

The Mexican central bank also added that:

“due to the variability of the content of gold in the bars, it is not possible to specify with certainty the exact number of bars purchased.”

We later learned that the Bank of England purchased this “gold” on behalf of Mexico. On the surface, Banixco saying that it could not “specify with certainty the exact number of bars purchased” seems to suggest that at least some of the Mexican gold at that time in 2011 was held on a unallocated basis and possibly out on loan to bullion banks in the London gold lending market.

If Mexico bought actual gold bars at the outset in Q1 2011, the gold bought for Mexico was probably already sitting in the Bank of England vaults. Some of it may then have been lent out to bullion banks immediately. Alternatively, at the outset in Q1 2011, the Bank of England could have ‘sold’ to Mexico a fine ounce claim on a number of gold ounces, that could then be allocated to actual gold bars on a future date. Without seeing the purchase invoices of the Mexican gold transactions, it’s hard to say what the initial purchase transactions referred to.

Another question Barba put to Banixco in 2011 was:

“In what country or countries is the gold that forms part of the International Reserves of Mexico physically located?”

Banixco responded:

access to the requested information will not be granted, since it is classified as reserved”

Barba’s article addressing his questions in 2011 and Banixco’s responses, which was published in September 2011, can be read here.

118 Tonnes at the Bank of England

In October 2012, Barba received responses to further information requests that he had made to Banixco, with Banixco confirming that:

“At month’s end, April 2012, Banco de Mexico maintained a position in fine gold of 4,034,802 ounces, of which only 194,539 ounces are located in the territory of the United Mexican States.

countries where these reserves are located are ‘United States of America, England and Mexico.

the acquisitions of gold during March and April 2012 are under custody in England’.”

[the gold is stored in] “the city of London, England, where more than 99% of the  gold which the Bank of Mexico maintains outside the country is presently under custody…”

With 4,034,802 ounces (125.5 tonnes) held in total, and 194,539 ounces (6.05 tonnes) held in Mexico, there were 3,840,263 ounces (119.44 tonnes) held outside Mexico, which was 95.2% of Mexico’s total gold holdings. With 99% of the foreign gold in London, this equated to about 3.8 million ounces (118 tonnes) held in London, and about 38,000 ounces (1.2 tonnes) held in the US with the Federal Reserve Bank (FRB).

Mexican Federal Auditors not happy with Banixco

In February 2013, Guillermo Barba also highlighted that the Mexican Federal Audit Office (Auditoría Superior de la Federación or ‘ASF’) Report for the Year 2011 was highly critical of Banixco’s relaxed approach to its gold purchases at the Bank of England.

The ASF reprimanded Banixco, saying that it:

has not conducted physical inspections to gold to verify compliance with the terms of acquisition and the conditions regarding its storage, in order to be certain of the physical custody of this asset”

According to the ASF, Banixco only held documents about the “Terms and Conditions” of the gold holdings contract with the Bank of England, with records of “the dates of the transactions” and also some “payment vouchers”.

ASF also recommended that the Mexican central bank:

make a physical inspection with the counterparty [Bank of England]  that has the gold under its custody, in order to be able to verify and validate its physical wholeness.”

February 2017: Partial Glimpse of Bar List

Fast forward to 17 February 2017, and Barba published another article confirming that following some further information requests to the Mexican central bank, Banixco had clarified the following facts about its gold holdings:

“Of the 3.881 million ounces of gold that the Bank of Mexico has at the close of October 2016, 98.95% are held in the United Kingdom, 0.0004% in the Federal Reserve Bank of the United States and the remaining 1.05 % In Mexico.”

“The Bank of Mexico has the serial number of each ingot protected in accounts assigned abroad. From these accounts, the number of ingots rises to 7,265. It should be noted that for unallocated accounts there is no specific serial number and therefore the number of ingots cannot be determined.”

“Assigned accounts are those that are owned on specific ingots with serial numbers, and segregated from the rest.“ 

Therefore, for each gold ingot held in a foreign domiciled allocated gold account, Bank of Mexico is in possession of the bar serial numbers. This was the first information from Banixco that specifically addressed the number of gold bars held by the Mexican central bank at the Bank of England.

As of October 2016, with 3,881,000 ounces of gold held by Mexico in total, 98.95% of which was held at the Bank of England in London, that would infer that 3,840,250 ounces of gold (119.4 tonnes) were held in London,  with only about 1,550 ounces (0.0004%) held at the FRB in New York.

Assuming each gold bar contains 400 oz troy ounces of gold, then 7,265 bars would contain 2.906 million troy ounces. It would also mean that about 934,000 troy ounces (29 tonnes) of Mexico’s gold are held unallocated accounts (where the gold is not unassigned as specific gold bars). The existence of unallocated gold accounts is revealing since it proves that the Bank of England doesn’t just offer its central bank customers the traditional custody facility of earmarked / set-aside / allocated gold bars. It also offers what either amounts to gold accounts that are denominated on a fine ounces basis but are fully backed by a pool of gold, or alternatively these unallocated accounts may not be fully backed (i.e. fractionally-backed).

To facilitate gold lending in the London Gold Market between central banks (the lenders) and commercial bullion banks (the borrowers), the Bank of England would have to operate account facilities for its customers that were in a sense dematerialised because when a central bank lends gold bars to a bullion bank, it does not necessarily (and probably doesn’t) receive back the same gold bars, because those bars have either been sold in the market or onward lent in the market. Therefore an account convention with specific bars earmarked to a customer would not facilitate this process. Only an account where the unit is a balance of fine troy ounces of gold would allow these transfers to occur. In this scenario, the central bank still insists it has a fine troy ounce gold holding, even though its gold has been lent out to a bullion bank.

The other alternative is that the Bank of England is selling its central bank customers a gold account service where, for example,  Central Bank A pays dollar cash upfront for 100 tonnes of gold, and the Bank of England signs a piece of paper saying “We the Bank of England have a liability to Central Bank A for 100 tonnes of gold“, but that gold is not necessarily in the Bank of England vaults or anywhere else. The Bank of England just has to be able to allocated the claim to real physical gold bars if Central Bank A ever decides that its 100 tonne gold asset be converted to allocated gold bars.

Without seeing the “Terms and Conditions” of these “unassigned gold” contracts with the Bank of England, its hard to say how exactly the “unassigned gold” is backed up, and to what extent it’s backed up.

Historically, the Bank of England only ever offered earmarked gold accounts to its central bank customers, and on a few occasions in the 1950s and 1970s it actually pushed back on plans to offer customers fine gold ounce balance accounts (and got legal advice on this), because the Bank did not want to go down the road of ending up with one pool of gold backing multiple central bank customer accounts, as this went against the concept of custody of assets and title to specific gold, and furthermore the Bank was afraid of the legal implications of central banks depositing specific bars but getting back different bars which might not be of the same quality etc.

March 2017: Banixco Releases Detailed Bar List

Initially, as per his 17 February article, Banixco only provided Barba with a list of the 7,265 gold bars showing two columns of data, the first column listing internal Bar-IDs from the Bank of England’s gold bar database, and the second column listing the refiner brand names of the bars. This first list can be seen here, but it’s not really that important, because a few weeks later, Banixco agreed to provide Barba with a second, much more comprehensive list. This second list is featured in Barba’s article dated 7 March 2017.

The latter Banixco gold bar list file can be downloaded here. For each of the 7,265 gold bars listed (in 7265 Rows), the list contains 7 columns or variables of data, namely:

  • Sequence Number from 1 to 7265
  • “Serial Number” (which is an internal Bank of England sequence number)
  • Brand Code (an 8-digit code)
  • Gross Weight (troy ounces to 2 decimal places)
  • Assay (gold Fineness)
  • Fine Weight (troy ounces to 3 decimal places)
  • Refiner Brand

Although the Banixco list does not include the real serial numbers that each gold refiner stamps on its own gold bars, the combination of columns “refiner brand – gross weight – assay – fine weight” in the list should be adequate to uniquely identify each bar, because don’t forget, these are variable weight bars and each bar for a given refiner will have a different fine weight when expressed to 3 decimal places. The start of the list looks as per the below screenshot:

Banixco gold bar list - List of wholesale gold bars held by the Bank of Mexico in the Bank of England gold vaults in London
Banixco gold bar list – List of wholesale gold bars held by the Bank of Mexico in the Bank of England gold vaults in London

Overall, the 7265 gold bars weigh 2,919,911.55 troy ounces and contain a total of 2,912,000 fine troy ounces of gold.The list provided by Banixco is sorted by ‘Brand Code’ which is an 8-digit Bank of England database table field that consists of refiner code (digits 1-4), refiner location (digits 5-6) and sequence number (digits 7-8). For example, Valcambi is VALCCH01 i.e. VALC, CH = Switzerland, and 01.

The 2nd column in the list is a Bank of England internal ID bar number which is either 6 or 7 digits. On Mexico’s list, the highest number is 1047712 and the lowest number is 704989, but the numbers present on the list run in short and broken sequential ranges of, for example, 1039142-1039221 or  880338-880446. If this is a sequential internal series of numbers that started at 000001, it would suggest that more than 1 million individual Good Delivery Bars have passed through the Bank of England’s 10 gold vaults since the numbering series was initiated. The series may not be fully sequential at all, and could possibly also include some part of the number signifying vault location, although this is doubtful.

Rand Refinery

The Refiner Bar Names on Mexico’s Gold Bar List

There are 24 ‘Brand Codes’ listed on the Mexico’s gold bar list, including such refiners as South Africa’s Rand Refinery, Australia’s Perth Mint, Switzerland’s Valcambi, Argor-Heraeus and Metalor, the Royal Canadian Mint, Germany’s Heraeus, Johnson Matthey, the US Assay Office, the State Refinery (Moscow), the Central Bank of the Philippines Gold Refinery, and N.M. Rothschild. Many of these brands held at the Bank of England are the same refiner brands which are trusted and popular in the retail investment gold bar market,  and carried by BullionStar, such as Perth MintArgor-Heraeus, Heraeus, Royal Canadian Mint, and Johnson Matthey.

Some refiners have, or have had over time, refinery operations in multiple geographic locations, so some refiners have multiple Brand Codes listed in the Bank of England gold bar database. One example is Johnson Matthey, which on the Banixco list is listed as 4 separate entities, namely Johnson Matthey Salt Lake City USA, Johnson Matthey and Co Ltd [GB], Johnson Matthey & Mallory Ltd. Toronto,  and Johnson Matthey Hong Kong Ltd. Another example is Metalor, which is present on the Banixco list in 3 guises, namely Metalor Hong Kong, Metalor USA, and Metalor Technologies SA (Switzerland).

Other long-standing refiners have gone through various mergers over time and their historic parts are now all part of a larger refining group. This applies to “Perth Mint” bars, which on the Banixco list are represented by Western Australia Mint (Trading as AGR) , AGR Joint Venture Melbourne and the Royal Mint (Perth).

On an individual Brand Code basis, the below table shows these refinery brand names, and the number of gold bars of each brand name that show up on Mexico’s gold bar weight list.

Central Bank of Mexico - Refinery brands of the 1765 gold bars held in custody at the Bank of England gold vaults in London
Central Bank of Mexico – Refinery brand names of the 7265 large gold bars held in custody for Mexico at the Bank of England gold vaults in London

First up is the Rand Refinery, with Banixco holding 1735 rand Refinery gold bars. Nearly a quarter of Banixco’s earmarked bars are Rand Refinery bars. It’s not surprising that on a refiner name basis, Banixco holds more Rand Refinery gold bars than any other bar brand. After all, Rand Refinery of South Africa is said to have refined over 50,000 tonnes of gold since it was established in 1921, which is about 30% of all the gold that has ever been mined. A lot of Rand Refinery bars were also historically sold in the London Gold Market and held within the bank of England vaults. This is probably still the case.

For example, according to the Bank of England archives, most of the gold held by the  International Monetary Fund (IMF) at the Bank of England was (as of the late 1970s) in the form of Rand Refinery gold bars. Whether this is still the case is unclear, as the IMF is ultra secretive about its remaining gold reserves and never reports facts such as gold bar weight lists.

Perth Mint

Second up is AGR Joint Venture, which is now technically part of the Perth Mint, with the Bank of Mexico holding 1519 of these bars. Together with the Rand refinery bars, these two brands makeup 45% of Banixco’s total holdings. Adding in the bars of Johnson Matthey Toronto and Valcambi Switzerland, nearly 70% of Mexico’s bars are from just 4 bar brands.

Grouping refiner names where appropriate such as all Johnson Matthey names and all Perth Mint related names, results in a slightly different ranking, with Perth Mint taking pole position with 1892 bars held by Banixco, and with Rand Refinery and Johnson matthey in exact joint second place with 1736 bars a piece in the Mexican holdings.

Central Bank of Mexico – Refinery brand names of the 7265 large gold bars held in custody for Mexico at the Bank of England gold vaults in London

Under this grouping approach, 74% of Mexico’s gold bars have been manufactured by just 3 refinery groups, rising to nearly 85% if Valcambi bars are included.

One of the reasons for highlighting this, is that it could be useful for extrapolating the frequency of gold bar brands that might be held across gold accounts generally at the Bank of England. While this extrapolation might be flawed, it does suggest that there are certain refinery bars brands that are more common than others within the Bank of England vault network.

The Bank of England did not just go and transfer newly refined gold bars into the Banixco account. It populated the Banixco allocated gold holding (in 2011 or after) with a selection of bars from lots of different eras. Hence the presence of NM Rothschild bars, US Assay Office bars, old Royal Mint (Perth) bars, as well as AGR Joint venture bars. Its also possible that a bullion bank or bullion banks executed the order on behalf of Mexico with gold that these banks store at the Bank of England (bullion banks also store gold at the bank of England for those who were not aware of this fact).

AGR Joint Venture bars were only produced until 2003. See here for details of AGR’s history. NM Rothschild bars have not been produced since 1967. Royal Mint (Perth) bars are extremely old and have not been produced under this name for a very long time. LBMA Good Delivery records don’t even specify when Royal Mint (Perth) bars ceased to be produced. The last Johnson Matthey bars produced in England were in 2005. US Assay Office bars (from the New York Assay Office) haven’t been produced since 1997 at the latest, and mostly well before that. Therefore, even though the Banixco gold bar list doesn’t list year of manufacture for each bar, some inferences can be made to show that a lot of the bars allocated to the Mexican gold account at the Bank of England are old bars that are no longer in production. But that’s not surprising because gold is a store of wealth and has been for 1000s of years, so an old bar is as good as a newer bar.

The bar list is also interesting in that it shows that when the Bank of England (or a bullion bank with a gold holding at the Bank of England) either buys physical gold bars on behalf of a central bank customer, or allocates specific bars to a central bank gold account for a gold balance that was previously in a unallocated account, it is either transferring gold from a Bank of England inventory holding, or by buying gold from another central bank  that’s already in its vaults, or else buying gold from a bullion bank that probably also has gold stored at the Bank of England, part of which may be gold that has flowed out of gold-backed Exchange Traded Funds that store their gold in the London vaults.

Conclusion

Which brings us to some critical points. Using the “refiner brand – gross weight – assay – fine weight” combination for bars on the Banixco list, it should be possible to cross reference these bars against records of gold bars that have been held over time in gold-backed ETFs such as GLD and IAU. Various gold researchers such as Warren James maintain databases with records of all gold bars that are in and that have ever been in gold-backed ETFs. If a bar on the Banixco list has a match in those database tables, then it proves that the Bank of England sources gold for its central bank customers that was at one time held in one of the ETFs. And this probably happens, since the bullion banks such as HSBC and JP Morgan are active in allocating and deallocating gold in and out of  ETFs, and they hold gold accounts at the Bank of England and are active in the gold lending market.

More importantly, if in the future, a gold-backed ETF flags up one or more gold bars that were among the 7265 gold bars on the Banixco list, and Banixco hasn’t reported selling any gold, then it will prove that Banixco either lent or swapped some of ts gold while still accounting for it under ‘gold and gold receivables’ in its balance sheet, and it will prove that central bank gold is being double counted while on loan, i.e. claimed to be held by a central bank, while really being held in a gold-backed ETF.

More Bad News for the LBMA Silver Price, but an Opportunity for Overhaul

On Friday 3 March 2017, in a surprise announcement with implications for the global silver market, the London Bullion Market Association (LBMA) informed its members that the current administrator and calculation agent of its recently launched LBMA Silver Price auction, Thomson Reuters and the CME Group respectively, will be pulling out of providing their services to the problematic London-based silver price benchmark within the near future. Thomson Reuters and the CME Group issued identical statements.

This is surprising because Thomson Reuters and the CME Group only began administering / calculating the LBMA Silver Price auction two and a half years ago in August 2014, when, amid much hubris, the duo were awarded the contract after a long-drawn-out and high-profile tender process. Notably, the Thomson Reuters  / CME contract with the LBMA was for a 5-year term running up to and into 2019. So the duo are now pulling out mid-way through a contract cycle.

More surprisingly, in their statements of 3 March, the LBMA / Thomson Reuters and CME allude to the European Benchmark Regulation being in some way responsible for the hasty departure. However, given that the units of CME and Thomson Reuters that are parties to the LBMA contract are their specialist benchmark units “CME Benchmark Europe Limited” and “Thomson Reuters Benchmark Services Limited”, which specialise in administering and calculating benchmarks, this excuse makes no sense.

In essence, this development is an embarrassment for all concerned and could lead to further reputational damage for the parties involved. It also now re-focuses market scrutiny on an area which the LBMA and its associates could well wish to forget, i.e. the former London silver fixing run by the infamous London Silver Market Fixing Limited, a company which itself is still one of the defendants, along with HSBC, Bank of Nova Scotia and Deutsche Bank, in a live New York class action suit that is scrutinizing the manipulation of the London silver price.

LBMA Silver Price: A Regulated Benchmark

Note that the LBMA Silver Price benchmark is now a “Regulated Benchmark” under United Kingdom HM Treasury Legislation, and is one of 8 financial market benchmarks regulated by the UK’s Financial Conduct Authority (FCA). So this is not some backwater obscure benchmark that we are talking about here. This is a benchmark with far-reaching effects on the global precious metals markets and a sister of the LBMA Gold Price benchmark. The reference prices from these benchmarks are used from everything from valuing Exchange Traded Funds (ETFs) to being the price reference points in ISDA swaps and bullion bank structured products such as barrier options.

According to the LBMA’s usual public relations mouthpiece Reuters, which relayed the news to the broader market on 3 March, the LBMA will be:

“looking to identify a new provider in the summer, and have the new platform up and running in the autumn”

This dramatic “exit stage right” by Thomson Reuters and the CME Group is a far cry from their initial and continued corporate spin of being committed to the silver price auction, which they claimed both at auction launch in August 2014, and also as recently as 2016 when they grovelled with promises of process improvement and wider participation in the auction in the wake of the silver price manipulation fiasco in the LBMA Silver Price auction on 28 January 2016.

It was on 28 january 2016 that the midday auction took a whopping 29 rounds to complete and the price derived in the auction was manipulated down by a massive 6% under where silver spot and silver futures prices were trading at that time. See the beginning of BullionStar blog “The LBMA Silver Price – Broken Promises on Wider Participation and Central Clearing” for further details about the 28 January auction.

TRCMEsquare

 

Where is the Commitment?

On 15 August 2014, the day the LBMA Silver Price auction was launched, William Knottenbelt, MD at CME Group stated:

“Through our existing relationships with market participants and the broader silver marketplace we are uniquely positioned to provide a seamless transition for the spot silver benchmark in London.” 

“CME Group has a long and successful history of offering benchmark risk management and price discovery solutions for the global precious metals markets.” 

Then, on 22 March 2016, when CME and Thomson Reuters introduced some changes to the auction in the wake of the 28 January 2016 auction price manipulation, both parties released more spin on their continued commitment to the auction. Thomson Reuters’ Head of Benchmark Services, Tobias Sproehnle, in a statement that now looks to be hollow, said:

“these changes together with a comprehensive consultation with the broader silver community – producers, intermediaries and consumers - are a further demonstration of Thomson Reuters and CME Group’s commitment to providing innovative, market leading benchmarks for the Silver market.

While Gavin Lee, the head of CME Benchmark Services, led with an equally hubristic statement that:

“in consultation with Silver market participants, we are always looking for new ways to develop this benchmark further

These statements from CME and Thomson Reuters, less than a year ago, run totally contrary to the fact that the duo are now going to abandon the LBMA Silver Price auction ship, which will necessitate the appointment of a replacement administrator and calculation agent. Where is the continued “commitment” to the silver benchmark and the silver market that they were we eager to espouse last March?

Why the Hasty Departure?

According to the Reuters news report last Friday 3 March:

A spokesman for Thomson Reuters confirmed the company was stepping down from the process. CME could not immediately be reached for comment.

Not very informative or cooperative from either party when one of the providers was not even available to explain its exit rationale, and the other merely confirms a fact to its in-house news arm, a fact which the LBMA had already announced earlier that day to its members.

However, if you look at the CME Group website, a short announcement was added to its website on 3 March 2017, which states:

The forthcoming European Benchmark Regulation, due to be implemented in January 2018, prompted a review of the existing LBMA Silver Price administration arrangements and, in consultation with the LBMA, CME Group and Thomson Reuters have decided to step down from their respective roles in relation to the LBMA Silver Price auction.

This statement was also added to the Thomson Reuters website on 3 March.

Before briefly looking at the relevance of this “European Benchmark Regulation”, which the Reuters news article even failed to mention, its notable that the CME / Thomson Reuters early withdrawal was also covered on 3 March by the MetalBulletin website.

According to MetalBulletin (subscription site), the above statement by CME is apparently part of an identical statement which the LBMA released to it members on Friday 3 March (the LBMA statement).

MetalBulletin adds in its commentary that:

“CME is looking to streamline its precious metals division, with contracts in this area being its fastest growing asset. The exchange wants to focus on its core products, Metal Bulletin understands.”

What MetalBulletin means by this I don’t know. The logic doesn’t make any sense. The sentence doesn’t even make sense. Benchmarks are a core product of CME group. CME even states that it offers:

“the widest range of global benchmark products across all major asset classes”

CME Benchmark Europe Limited was specifically set up in 2014 to provide the calculation platform for the LBMA Silver Price. Furthermore, CME has just launched a suite of silver and gold futures contracts for the London market (launched in late January 2017), the silver contract being the “London Spot Silver Futures (code SSP)“. Even though these CME contracts have had no trading interest so far, the CME claims that it is currently “working with major banks to synchronize their systems to start trading” these contracts (London Spot Silver Futures and London Spot Gold Futures).

So why would CME want to voluntarily ditch the provision of a high-profile London silver benchmark, when it could attain trading synergies between the LBMA Silver Price and its new London silver futures contracts, or at the very least improve brand recognition in the market?  And not to forget CME and Thomson Reuters claim a”commitment to providing innovative, market leading benchmarks for the Silver market“.

European Benchmark Regulation

Turning to the new “European Benchmark Regulation”, what exactly is it, and why would it be relevant for the LBMA and CME and Thomson Reuters to mention the European benchmark Regulation in the context CME and Thomson Reuters pulling out of the LBMA Silver Price auction?

At its outset, the European Benchmark Regulation was proposed by the European Commission. The Commission’s proposal was also issued in coordination with a range of entities and initiatives such as MiFID, the Market Abuse Directive, the benchmark setting processes of the  European Securities and Markets Authority (ESMA) and European Banking Authority (EBA), and also the IOSCO financial benchmark principles.

According to law firm Clifford Chance:

The new [EU] Regulation is a key part of the EU’s response to the LIBOR scandal and
the allegations of manipulation of foreign exchange and commodity benchmarks

“The Regulation imposes new requirements on firms that provide, contribute to or use a wide range of interest rate, currency, securities, commodity and other indices and reference prices.”

“Most of the new rules will not apply until 1 January 2018″

“The new Regulation imposes broad ranging and exacting requirements
on a wide range of market participants. It may reinforce the trend to discontinue benchmarks and reference prices

According to law firm Simmons & Simmons:

The Regulation seeks to:

  • improve governance and controls over the benchmark process, in particular to ensure that administrators avoid conflicts of interest, or at least manage them adequately
  • improve the quality of input data and methodologies used by benchmark administrators
  • ensure that contributors to benchmarks and the data they provide are subject to adequate controls, in particular to avoid conflicts of interest
  • protect consumers and investors through greater transparency and adequate rights of redress.

The Regulation aims to address potential issues at each stage of the benchmark process and will apply in respect of:

  • the provision of benchmarks
  • the contribution of input data to a benchmark, and
  • the use of a benchmark within the EU.

All of these goals aspired to by the legislation of the European Benchmark Regulation seem reasonable and would benefit users of the LBMA Silver Price auction, so given the above, it seems very bizarre that CME and Thomson Reuters and the LBMA stated last Friday 3 March that:

The forthcoming European Benchmark Regulation, due to be implemented in January 2018, prompted a review of the existing LBMA Silver Price administration arrangements

Remember that the CME and Thomson Reuters service providers to the LBMA Silver Price are their specialist benchmark units “CME Benchmark Europe Limited” and “Thomson Reuters Benchmark Services Limited”. That is what these units do, administer and calculate benchmarks. This European benchmark Regulation has been known about for a few years. Especially known about by the benchmark units of CME and Thomson Reuters. The Regulation didn’t suddenly appear out of nowhere last week, as the above statement is appearing to hint at.

And why such a brief and unclear statement from CME, Thomson Reuters and the LBMA? Is this European Benchmark Regulation just an excuse being thrown out to distract from other issues that might really be behind CME and Thomson Reuters stepping down.

Or perhaps CME and Thomson Reuters are aware of issues within the current administration of the LBMA Silver Price that would make it difficult to comply with the new legislation or that would make it too onerous to comply? But such rationale doesn’t make sense either because why are CME and Thomson Reuters not bailing out of the all the benchmarks that they are involved in? Furthermore, if the European Benchmark Regulation is a factor, why would any other benchmark service provider such as ICE Benchmark Administration (IBA) bother to pitch in the LBMA’s forthcoming tender process to find a replacement for Thomson Reuters and CME?

Perhaps CME and Thomson Reuters are worried about future reputation damage of being associated with the LBMA Silver Price due to some brewing scandal? Or perhaps the powerful bullion banks within the LBMA wanted to scupper any change that there will ever be wider participation or central clearing in any future version of the auction?

I will leave it to readers to do their own research on this and draw their own conclusions.

A Banking Cartel vs. Wider Auction Participation

One issue which has dogged the LBMA Silver Price auction since launch is that it never gained any level of “wider participation” or market representative participation. There are only 7 bullion banks authorised by the LBMA to be direct participants in the auction, and there are zero direct participants from the silver mining, silver refineries, and silver sectors.

This is despite the LBMA, CME and Thomson Reuters all misleading the global silver market on this issue on many occasions, and claiming that there would be very wide participation in the auction after it was launched. See BullionStar blog “The LBMA Silver Price – Broken Promises on Wider Participation and Central Clearing” for a huge amount of factual evidence to back up this statement, including webcasts by CME, Thomson Reuters and the LBMA, and an interview by Reuters with LBMA consultant Jonathan Spall, formerly of Barclays. Here are a few examples:

The LBMA’s Ruth Crowell was claiming back in July and August 2014 that they were interested in having 111 direct participants:

“clear demand for increased direct participation, and we had 25% of those 444 coming back saying they would be interested, and we’re still interested in having all of those participants on board”

“The advantage with centralised clearing, particularly for the pricing mechanism, is that we can really exponentially grow the amount of direct participants

Jonathan Spall, LBMA Consultant stated that:

“The hope of course is that we get many more participants in the new benchmark process….while it is likely that we will start by having banks involved it is ultimately hoped that the wider market will participate, be they refiners, miners etc.

“Ultimately – and as I said before – the intention is that there is much wider participation. So yes, refiners, miners etc.

Harriett Hunnable, then of the CME Group, stated:

“So this is really the new world, this is not the old fixing…..this is wider participation…and the London bullion market is really encouraging that…this is the new world, or the LBMA Silver Price!”.

According to the CME / LBMA / Thomson Reuters presentations, there was supposed to be a “phase 3 introduction of centralised clearing

Central counterparty clearing will enable greater direct participation in the London Silver Price

In summary, central clearing would allow direct participants to participate directly in the auction without the need for bi-lateral credit lines. However, the plan for central clearing was quietly dropped. The CME and Thomson Reuters have now had 32 months in which to introduce central clearing into the silver auction and it hasn’t happened. Nor will it now. The fact of the matter is that the LBMA banks do not want wider participation and they don’t want central clearing of auction trades either. These banks, which at the end of the day are just costly intermediaries, essentially want to monopolise the silver auction and prevent wider participation, and prevent true silver price discovery. Could it be the banks through their LBMA front that have sabotaged the contract with CME and Thomson Reuters so as to reset the contract and re-start another tender process that will ensure that no wider participation can ever see the light of day?

It’s also important to note that there is no way for miners and refiners to be direct participants in the auction. This is because the LBMA has designed the auction participant rules to keep out refiners and miners (and anyone else that is not a bullion bank). The rules are specifically designed so that only bullion banks can satisfy the LBMA’s Benchmark Participant criteria. See section 3.13 of the LBMA Silver Price auction methodology document accessible here.

Currently only 7 bullion banks are direct participants in the auction, namely HSBC, JPMorgan Chase, Bank of Nova Scotia (ScotiaMocatta), Toronto Dominion, UBS, Morgan Stanley, and China Construction Bank.  Most of these banks are very influential on the LBMA Management Committee. HSBC, Scotia and Mitsui were in the auction from Day 1 on 15 August 2014. UBS joined the auction on 26 September 2014, JP Morgan Chase Bank joined on 14 October 2014, Toronto Dominion Bank joined on 6 November 2014. Mitsui left in either late 2015 or January 2016 (the exact date is unclear). China Construction Bank only joined the auction on 6 May 2016.

Lastly, Morgan Stanley only joined the LBMA Silver Price auction on 25 October 2016 (which is just 4 months ago), at which point the LBMA / CME and Thomson Reuters had the audacity to spin that 7 LBMA bullion banks trading in a shadowy auction of unallocated silver accounts in London somehow represents the global silver market:

CME: “The addition of another member brings greater depth and diversity to the market and underlines the ongoing globalisation of the Silver Price as a leading, liquid precious metals benchmark.”

Thomson Reuters: “With the addition of Morgan Stanley to the panel, the LBMA Silver Price provides even deeper insight into the global silver market. We continue to welcome new participants to this essential mechanism for the markets.”

LBMA: “They [Morgan Stanley] add depth and liquidity to the auction and I look forward to other market participants joining in the future.”

LBMA Silver Price is NOT Representative of Silver Market

But, to reiterate (and as was stated previously in this blog), the LBMA Silver Price auction is not representative of the global Silver Market whatsoever, and it does not meet some of the simplest IOSCO benchmark requirements:

“IOSCO benchmark principles state that a benchmark should be a reliable representation of interest, i.e. that it should be representative of the market it is trying to measure. Interest is measured on metrics such as market concentration. In the Thomson Reuters methodology document (linked above), on page 11 under benchmark design principles, the authors estimate that there are 500-1000 active trading entities in the global silver market.”

The Thomson Reuters methodology document from August 2014 also admitted that “volumes in the LBMA Silver Price are a fraction of the daily volume traded in the silver futures and OTC markets”.

Why then are 7 LBMA bullion banks allowed to monopolize the representation of 500 – 1000 active trading entities from the global silver market within the auction, an auction that its worth remembering generates a silver reference price which is used as a global silver price reference and pricing source?

BullionStar investment silver bars and coins

Refiners and Miners

Based on the current rules, the vast majority of the world’s silver refiners cannot directly take part in the LBMA Silver Price auction.

Only 8 precious metals refiners are Full Members of the LBMA while 25 refiners are associates of the LBMA. Of the 8 full members, 5 of these refiners are on the LBMA refiner Referee panel, namely, Argor-heraeus, Metalor and PAMP from Switzerland, Rand Refinery from South Africa, and Tanaka Kikinzoki Kogyo from Japan. These refiners were added to the panel as LBMA Associates in 2003, and were only made Full Members in 2012. The only reason they happened to be fast-tracked as full members of the LBMA was due to their status as Referees for the LBMA good delivery list. Even the other major Swiss based refinery Valcambi is still not a full member of the LBMA.

Based on the current participant criteria of the Silver auction, where only full LBMA members could conceivably become direct participants, 25 of the refiners that are LBMA Associates cannot directly take part in the auction even if they wanted to. Candidates for Full LBMA Membership also have to jump through a number of hoops based on sponsorship by existing members, business relationships, due diligence, and involvement in the precious metals markets.

For a refiner to even become a LBMA associate, the refiner must have already attained Good Delivery Status for its silver or gold bars. There are about 80 refineries on the LBMA’s current Good Delivery List for silver. The chance of the vast majority of these refiners taking part in the LBMA silver auction is nil since not only are they not LBMA full members, they aren’t even LBMA associates.

Based on the current auction criteria, it’s without doubt literally impossible for nearly all silver producers / miners on the planet to directly participate in the LBMA Silver Price auction. Precious metal mining companies are not normally officially connected to the LBMA, and would more naturally be members of the Silver Institute or World Gold Council or another mining sector organization. So it’s confusing as to why the LBMA even mentions mining companies as possible auction participants since there are no mining companies that are Full Members of the LBMA, so they cannot be participants in the silver auction. The only mining companies that are even “Associates” of the LBMA are Anglogold Ashanti and Coeur Mining.

In 2014, Coeur Mining’s treasurer, referring to the LBMA Silver auction said:

“We hope to have the opportunity to become a direct participant down the road and look forward to working with the LBMA, CME and other silver producers to drive the evolution of this market.”

The unfortunate Coeur Mining now looks like it has been strung along by the LBMA with empty promises that it can somehow someday participate in the silver auction, but this is literally a fiction given the way the auction rules are currently set up.

Conclusion

In its announcement on 3 March, the LBMA said that it will shortly launch a tender process to appoint a replacement provider. The LBMA told Reuters News:

“We would be looking to identify a new provider in the summer, and have the new platform up and running in the autumn”

However, given the abysmal track record of the LBMA Silver Price, the question that should really be asked at this time is why is the bullion bank controlled LBMA even allowed to be in charge of such an important “Regulated Benchmark” as a global silver price benchmark, a benchmark that has far-reaching effects on global buyers and sellers of silver.

Take a brief look back at how the last tender process run by the LBMA for the London silver price was handled.

A Silver Price Seminar held by the LBMA on 19 June 2014 was not even open to the wider bullion market. As Ruth Crowell, CEO of the LBMA, told the publication MetalBulletin in an October 2014 interview:

“Not just our members, but ISDA members, and any legitimate members of the market were invited to the seminar. We also had observers from the FCA and the Bank of England. We wanted to keep [attendance] as wide-ranging as possible but to avoid anyone who perhaps would be disruptive

What is this supposed to mean? To prevent anyone attending the seminar who might have a different view on how the global silver price benchmark should be operated that doesn’t align with the view of the LBMA?

The actual process of selecting the winning bid from the shortlist of tender applicants was only open to LBMA Full members and Seminar attendees via a 2nd round voting survey. The independent consultant review that was part of the selection process, was conducted by someone, Jonathan Spall, who was not independent of the former fixings and so should not have been involved in the process.

Promises of wider participation involving refiners and miners were abandoned. Promises of central clearing of auction traded were thrown out the window. Prior to launch, the auction platform was hastily built by Thomson Reuters and CME without an adequate market-wide solution for clearing silver trades. Another of the bidders, Autilla/LME, had a working auction solution which would have allowed wider market participation at August 15 2014 go-live, but this solution was rejected by the LBMA Management Committee, LBMA Market Makers and the LBMA Data Working Group, the groups which had the ultimate say in which applicant won the tender.

There were only 3 participants in the LBMA Silver Price auction (all of them banks) when it was launched in August 2014, and two of which, HSBC and Scotia, were parties to the former London Silver Fixing. The LBMA Silver Price auction was therefore an example of same old wine in a new bottle. The same 2 banks, HSBC and Scotia are now defendants in a silver price manipulation class action suit in New York. There are now only 7 direct participants in the LBMA Silver Price. These are all bullion banks. This is 32 months after the auction has been launched. The LBMA accreditation process specifically prevents refiners and miners from joining the auction. As there are 500 – 1000 trading entities of silver globally, the LBMA Silver Price mechanism is totally unrepresentative of the silver market.

The defection of CME and Thomson Reuters now provides a one-off opportunity for the global silver market to insist that the current scandal ridden current auction be scrapped and taken out of the hands of the bullion bank controlled London Bullion Market Association (LBMA). It is also an opportunity to introduce a proper silver price auction in its place that is structured to allow direct participation by hundreds of silver trading entities such as the world’s silver refiners and miners, an auction that employs central clearing to allow this wider participation, and an auction that is based on trading real physical silver and not the paper credits representing unallocated claims that the participating London bullion banks shunt around between themselves. This could help lead to real silver price discovery in the global silver market. However, the chances of this happening with the LBMA still involved in the new tender process are nil.

Germany’s Gold remains a Mystery as Mainstream Media cheer leads

On 9 February 2017, the Deutsche Bundesbank issued an update on its extremely long-drawn-out gold repatriation program, an update in which it claimed to have transferred 111 tonnes of gold from the Federal Reserve Bank of New York to Germany during 2016, while also transferring an additional 105 tonnes of gold from the Banque de France in Paris to Germany during the same time-period.

Following these assumed gold bar movements, the Bundesbank now claims to have achieved its early 2013 goal of repatriating 300 tonnes of gold from New York to Frankfurt, but after 4 years it is still 91 tonnes short of its planned transfer of 374 tonnes of gold from Paris to Frankfurt. In essence, over an entire 4-year period (i.e. 208 weeks), the Bundesbank has only been able to transfer 583 tonnes of gold back from New York and Paris to Germany. And the Bundesbank still claims to have 1236 tonnes of gold remaining in storage with the New York Fed.

Predictably, instead of prompting the mainstream financial media into asking why these supposed gold bar movements have taken so long, the Bundesbank press release threw the mainstream media into a frenzy of immediately back-slapping the Bundesbank while regurgitating its press release with articles such as “Germany brings its gold stash home sooner than planned” from Reuters , “Germany Gets Its Gold Back Faster With Job Seen Done in 2017” from Bloomberg, and “Germans Sent Gold Away to Keep It From the Soviets. Now Much of It Is Back” from the New York Times.

Furthermore, if the mainstream financial media had bothered looking at Federal Reserve “Table 3.13 – Selected Foreign Official Assets Held at Federal Reserve Banks” under ‘Earmarked Gold’ (line item 4), they would have seen that the foreign custody gold figure that the Fed reports has not changed since September 2016, and that the Fed’s foreign custody gold figure had dropped by 113 tonnes between March 2016 and September 2016, meaning that the Bundesbank’s 111 tonne gold transfer from the US to Germany had been completed by September 2016, i.e. at least 4 months before the Bundesbank reported it.

table frb
Selected Foreign Official Assets Held at Federal Reserve Banks – ‘Earmarked Gold’, 2016. CLICK TO ENLARGE

100 tonnes of gold per day Air-Lifted

All gold withdrawals from the Fed’s “earmarked gold” reporting category in 2016 occurred between March and September 2016, with activity each month throughout that period except in May. As to why there were gold withdrawals from the Fed of 113.45 tonnes when the Bundesbank only reported transferring back 111 tonnes is not clear. Was an additional amount withdrawn from the Fed vault by another foreign central bank or did the Bundesbank conduct further melting down of its US Assay office gold bars and lose 2+ tonnes (1.7%) of fine ounce content that was overstated in its Federal Reserve holdings? Or perhaps this amount was lost when weighing old US Assay Office ‘melts’ (batches of 18-22 bars) which had never been properly weighed before.

Whatever the case, we will never know because the Fed does not divulge the identities of its central bank gold custody customers, nor does the Bundesbank divulge simple details such as gold bar serial numbers on its so-called gold bar list (more of which below).

Simple common sense would have alerted the mainstream media robots to the fact that it is not normal for international gold movements to take 4 years to complete, and that there is something absolutely not right with Germany’s foreign held gold taking so long to transport from New York and Paris. Paris is just a 1 hour flight from Frankfurt and 6 hours by road, and New York is less than 9 hours flying time to Frankfurt.

Other simple questions which the mainstream financial media have failed to ask or have failed to think of include why does the Bundesbank need to keep any gold at all stored at the Federal Reserve in New York, let alone 1236 tonnes, when the New York Fed vault is not even an international gold trading center. And is this gold left in New York is under any liens, claims, encumbrances, loans or swaps?

In contrast to the Bundesbank’s laughable repatriation program duration, take for example, the Banco Central do Venezuela, which was able to transfer 160 tonnes of gold from Europe to Venezuela’s capital, Caracas, over a 2 month period from 25 November 2011 to 30 January 2012. See “Venezuela’s Gold Reserves – Part 2: From Repatriation to Reactivation” for details.

That’s 80 tonnes per month, which would equate to a 4 month transfer window for 300 tonnes of the Bundesbank’s gold stored in New York, not 4 years. Furthermore, why is the mainstream media not asking the Bundesbank why it takes more than 4 years to transfer 374 tonnes of gold from Paris to Frankfurt?

More damning to the contemporary Bundesbank, the same Americans (Federal Reserve) were able to fly over 800 tonnes of gold from the US to England exactly 50 year ago, in November and December 1967, to prop up their share of the London Gold Pool gold holdings at the Bank of England. This gold was flown into RAF Mildenhall in Suffolk over 9 days in batches of around 100 tonnes each day using US air force cargo carriers, and then this gold was ferried by police escorted convoys down to the City of London.

The first 4 of these US air force flights were on Tuesday 28 November 1967, Wednesday 29 November, Friday 1 December, and Sunday 3 December, with the Americans flying in 100 tonnes of gold each day to RAF Mildenhall over those 4 days. That’s 400 tonnes of gold flown from the US to Europe in just 6 days. See screenshot below.

100 tonnes per day
The Federal Reserve is able to organise massive and rapid gold movements by air when it wants to

These 4 flights in late November and early December 1967 were followed by 5 more flights on Tuesday 19 December, Thursday 21 December, Thursday 28 December , Friday 29 December, and Sunday 31 December 1967. These 5 flights transported another 445 tonnes of gold bars (14,317,458 fine ounces) from the US to the Bank of England vaults (see screenshot below). That’s another 445 tonnes of gold moved from the US to London in just 13 days.

5 flights
Federal Reserve had 445 tonnes of gold flown from the US to London in just 13 days in December 1967

Overall, the November and December 1967 gold airlifts transported nearly 850 tonnes of gold from the US to Europe in just 1 month.

There were also further massive gold airlifts from the US to the Bank of England in the summer of 1968 which ironically the Federal Reserve needed to do so as to pay back physical gold swaps which the Bundesbank had made available to the Americans at the Bank of England during the last days of the London Gold Pool in March 1968.

These rapid and massive physical gold movements over international borders in 1967 and 1968 show how laughable the Bundesbank’s current gold repatriation program actually is, and how servile the mainstream financial media are in not even questioning the timeframe of the Bundesbank’s repatriation operations.

RAF Mildenhall police escort
POLICE ESCORTS for Gold Run from RAF MILDENHALL to BANK OF ENGLAND, December 1967. Source here

Updated “So-Called” Bar List

Following its press release on 9 February, the Bundesbank then published an updated version of its so-called gold bar list on 23 February, specifying its gold holdings as of 31 December 2016. A so-called gold bar list, because the format of the Bundesbank’s gold bar list does not follow any accepted industry standard format and does not contain basic details such as bar serial number and bar refiner name that are crucial to any normal gold bar weight list. The updated Bundesbank bar list was also released in a very low-key way, and its publication does not seem to have been picked up by any of the mainstream financial media. The updated Bundesbank ‘list’ can be viewed here in a file that the Bundesbank had actually created on 14 February 2017.

DB 2016
Bundesbank gold bar holdings as per 31 December 2016

To reiterate, a proper gold bar weight list, as per the definition of the London Bullion Market Association (LBMA) in its Good Delivery Rules for Gold and Silver Bars, contains the following details:

  • Serial Number of bar
  • Bar Refiner Brand
  • Gross weight (troy ounces)
  • Assay (Fineness)
  • Fine Weight (troy ounces)

For example, here is a recent gold bar weight list from the iShares Gold Trust (IAU). For each bar held in the iShares Gold Trust, the weight list lists:

  • bar brand (refiner name)
  • bar serial number
  • shape (400 oz)
  • Assay (fineness)
  • Gross ounces
  • Fine ounces
  • Vault (example JP Morgan London)

The Bundesbank claims that all of its gold bars are good delivery bars, so it and its gold custodians (Bank of England, Banque de France and Federal Reserve Bank of New York) have all of this information stored on their respective gold bar accounting systems, including real bar serial numbers and refiner names. They have to store this information since any bars entering or leaving LBMA network gold vaults need to be accompanied by proper weight lists, including serial number and bar refiner brand.

Compare a proper weight list with the sparse and incomplete what the Bundesbank includes in its gold bar list:

  • Inventory Number (internal sequence numbers or incomplete bar numbers)
  • Gross Weight
  • Fineness
  • Fine Weight
Bundesbank 'list' format
Bundesbank gold bar ‘list’ format – No serial numbers, No bar refiner names

For Germany’s bars listed as held by the Bundesbank, Bank of England and Banque de France, these inventory numbers are merely “internally assigned inventory numbers”, and ludicrously in the case of the Bank of England and Banque de France gold vaults, they only allow other central banks to publish partial internal inventory numbers (the last three digits).

The secrecy with which the Bank of England, Banque de France and other central banks treat real gold bar serial numbers and other identifiers is most likely due to their paranoia that publication of such serial numbers would undermine their ability to operate with secrecy in the gold lending and gold swap market where bar identities might pop up in the gold holdings of commercial operators such as gold-backed Exchange Traded Funds (ETFs).

Numbers listed against Bundesbank bars held at the Federal Reserve Bank of New York do supposedly show a refiner number, or a melt number, but without the refiner name and year of manufacture of these bars being divulged by the Bundesbank, there is no way to verify and cross-check these bar numbers.

Note that this new Bundesbank gold bar list is the third such list that it has published, and it is in the same format as the previous two versions, both of which are also not real gold bar weight lists since they lack refiner serial numbers and refiner names.

For the purposes of this article, let’s refer to a “Bundesbank bar list” as an “incomplete partial weight list”. The Bundesbank had actually signalled the publication of its updated list at the bottom of its 9 February press release, where it stated:

“On 23 February, the Bundesbank will publish an updated list of its gold bars on its website. This list contains the bar, melt or inventory numbers, the gross and fine weight as well as the fineness of the gold.”

3 Bundesbank gold bar lists

To recap, the Bundesbank had already published 2 incomplete partial weight lists. The first of these was published on 7 October 2015 and showed holdings as of 31 December 2014. The file can be accessed here, or at the bottom of the page here. The Bundesbank actually created this file on 5 October 2015 and saved it with a file name of 2015_10_07_gold.pdf.

DB 2014
Cover page of Bundesbank’s 2014 incomplete partial gold bar list

The publication of this first bar list was elegantly and deftly dissected and critiqued by Peter Boehringer, of the German campaign “Repatriate our Gold”, in his October 2015 article “Guest Post: 47 years after 1968, Bundesbank STILL fails to deliver a gold bar number list”.

The Bundesbank’s second incomplete partial weight list was created on 4 February 2016 and listed holdings as of 31 December 2015, and was published sometime after 4 February 2016. Confusingly, the incomplete partial weight list as of 31 December 2015 file was uploaded to the same web page and with the same file name as the 31 December 2014 file (i.e. it was uploaded with the filename  2015_10_07_gold.pdf and it over-wrote the first list). This second incomplete partial weight list can be accessed here.

DB 2015
Cover page of Bundesbank’s 2015 incomplete partial gold bar list

Why no lists prior to December 2014?

Given that the Bundesbank has now demonstrated its ability to generate files itemising its gold holdings, even with limited bar details, the fact that the Bundesbank only began publishing its gold holdings’ lists in October 2015 should immediately raise suspicion as to why it did not publish such bars lists as of the end of 31 December 2012 (prior to the repatriation beginning), and as of 31 December 2013.

A casual observer would deduct that the Bundesbank does not want anyone to see an itemised list of its gold holdings on these dates in 2012 and 2013, and the casual observer would probably be correct in deducing such a conclusion. For its was during 2013 and 2014 that the Bundesbank melted down and recast 55 tonnes of the gold bars that it had held in New York. Five tonnes of its gold was melted down and recast in 2013 and a whopping 50 tonnes was melted down and recast in 2014. Recall that in January 2014, the Bundesbank stated that during 2013:

We had bars of gold which did not meet the ‘London Good Delivery’ general market standard melted down and recast. We are cooperating with gold smelters in Europe,” Thiele continued. The smelting process is being observed by independent experts. It is set up in such a manner that the Bundesbank’s gold cannot be commingled with foreign gold at any time.’

Some of the bars in our stocks in New York were produced before the Second World War.” “Our internal audit team was present last year during the on-site removal of gold bars and closely monitored everything. The smelting process is also being monitored by independent experts.”

“The very same gold arrived at the European gold smelters that we had commissioned.” “The gold was removed from the vault in the presence of the internal audit team and transported to Europe. Only once the gold had arrived in Europe was it melted down and brought to the current bar standard.”

And again in January 2015, the Bundesbank revealed that: during 2014 it:

“took advantage of the transfer from New York to have roughly 50 tonnes of gold melted down and recast according to the London Good Delivery standard, today’s internationally recognised standard.”

For more details of these statements, and follow-up questions to the Bundesbank, please see “The Keys to the Gold Vaults at the New York Fed – Part 3: ‘Coin Bars’, ‘Melts’ and the Bundesbank“.

If the Bundesbank had published weight lists as of the end of years 2012 and 2013, then details such as bar gross weight, fineness (gold purity), and bar fine weight would have to have been divulged. By not publishing earlier bars lists, no one outside the Bundesbank – Federal Reserve nexus will ever be aware of the weights and purities of these 55 tonnes of gold bars that were melted down and recast. The Bundesbank obviously has or had the details of these smelted bars, since it commissioned and monitored the smelting process. But as Peter Boeringher stated in his October 2015 article “it appears the bar lists for these transferred bars were lost or destroyed.”

What secrets did these bars hold? One distinct possibility was that they were low-grade coin bars, that had been produced from melted gold coin. In this case they would have been bars of 0.90 or .9167 gold purities or similar. Low grade coin bars began appearing at the NY Fed vault in Manhattan in 1968 and most likely came from the US Treasury’s gold holdings at  Fort Knox, Kentucky which consist of about 80% low-grade coin bars. It would not look good for the NY Fed if such low grade bars appeared on a foreign central bank’s gold bar list, and would invariably raise questions as to which US vaults this gold was sourced from.

Perhaps the bars that the Bundesbank melted were Prussian Mint bars from the Nazi era which the Bundesbank would be averse to holding in Germany for political reasons? Or maybe they were problematic US Assay office bars which had a lower fine ounce content than was stated on the actual bar, an issue that dogged another portion of the Bundesbank’s gold stocks in London in 1968. Or perhaps they were gold bars with some other embarrassing provenance which the Bundesbank and Federal Reserve needed to mask the true origin of. Without the Bundesbank ever clarifying this issue, we will never know.

Comparing the 3 Lists

What can we glean from comparing the 3 lists to each other? The only variable on which to compare the lists are gross weight, fineness, and fine weight, and the bar and melt counts per location.

In theory, the lists from December 2014, December 2015 and December 2016 should be identical assuming that the total amount of gold bars has not changed between versions.

If the lists are not identical, then it could suggest a number of things including:

  1. gold bars that were previously held in Melts have now been individually weighed and itemized on the more recent list. This would most likely be for bars that were transferred to Frankfurt, but could also apply to bars which remained in the other storage locations
  2. further instances of gold bars remelted / recast while being transferred from New York or Paris to Frankfurt that the Bundesbank has kept quiet about
  3. gold bars still held in Paris or New York (or London) that have been being recast and upgraded before being moved. This would apply more to Paris going forward
  4. sales of gold bars to ‘fund’ the German official gold coin program.
  5. gold lending / swap / repo transactions

Since the lists do state melt number, if there are less any melt numbers listed in more recent lists compared to older lists, then it means that the Bundesbank or its agents have weighed and itemised the individual bars in various melts (groups of 18-24 bars). For example, if the entries for 20 melts had disappeared from a more recent version of a list, then there should be about 400 extra individual bars of the newer list.

Using some quick eyeballing, the file dated 31 December 2014 has 2307 pages including introduction. The file dated 31 December 2015 has 2401 pages including introduction, i.e. the latter file has 94 extra pages. There are approximately 44 pages of melts in the 2014 file listed from page 2263 to the last page 2307. There are approximately 40 pages of melts in the 2015 file listed from page 2361 to the last page 2401. From a rough count, there are about 85 rows per page. This would mean about 340 melts were weighed and converted into itemised rows of single bars during 2015. Not all melts have full sets of bars, but assuming they did, that would be about 20 bars per melt, which would be about 20*340 = 6800 bars which would appear in individual rows in the 2015 list if the melts were “broken out”, which is about 80 pages, and is fairly near explaining the reason for the extra 94 pages in the 2025 file.

If you look at the number of gold bars listed in the press releases (current version and archived version), you will see that there were in total 270,326 bars at the end of 2014 and 270,058 bars at the end of 2015, so there were 258 less bars at the end of 2015.

As of the end of 2015, there were 34,808 bars in London vs 35,066 bars at the end of 2014. i.e. There were 258 bars less in London (about 3 tonnes). So the London drop explains the total drop. This could be gold used for a gold coin program.

This is just some quick eyeballing. The next step is to do an automated comparison of the 3 lists side by side by comparing the variables gross weight, fineness and fine weight so see which bar details may have changed over the 2 year period, and to look at what might have changed. This matching and calculation exercise will probably be undertaken by a gold bar database expert in the near future, so watch this space for further details.

 

A Chink of Light into London’s Gold Vaults?

On 5 February, the Financial Times of London (FT) featured a story revealing that the London Bullion Market Association (LBMA) plans to begin publishing data on the amount of real physical gold actually stored in the London precious metals vaulting network. The article titled “London gold traders to open vaults in transparency push” can be read here (accessible via FT subscription or via free monthly FT read limit).

This new LBMA ‘monthly vault data’ will, according to the FT’s sources, be published on a three-month lagged basis, and will:

show gold bars held by the BoE, the gold clearing banks, and those [vaults] operated by the security companies such as Brink’s, which are also members of the LBMA.”

The shadowy source quoted in the FT article is attributed to “a person involved in setting up the programme”, but at the same time, although “the move [to publish the data] is being led by the LBMA“, the same LBMA ”declined to comment” for the FT story. This then has all the hallmarks of a typical authorised leak to the media so as to prepare the wider market for the data release.

On 16 February, the World Gold Council in its “Gold Investor, February 2017″ publication featured a focus box on the same gold vault topic in its “In the News” section on page 4, where it states:

“Enhanced transparency from the Bank of England

The Bank of England is, for the first time, publishing monthly data revealing the amount of gold it holds on behalf of other central banks.

 As a leading custodian of gold, with one of the largest vaults in the world, the Bank of England’s decision is highly significant. Not only will it enhance the transparency of the Bank’s own gold operations; it will also support the drive towards greater transparency across the gold market.

The data reveals the total weight of gold held within the Bank of England’s vaults and includes five years of historical data.”

The Proposed Data

Based on these two announcements, it therefore looks like the gold vault data release will be a combined effort between the LBMA and the Bank of England, the blood brothers of the London Gold Market, with the Bank of England data being a subset of the overall LBMA data. While neither of the above pieces mention a release date for the first set of data, I understand that it will be this quarter, i.e. sometime before the end of March. On a 3 month lagged basis, the first lot of data would therefore probably cover month-end December 2016, because that would be a logical place to start the current dataset, rather than, for example, November 2016.

While the Bank of England data looks set to cover a 5 year historical period, there is no indication (from the FT article) that the wider LBMA vault data will do likewise. From the sparse information in the FT article, the LBMA data will “show gold bars held“. Does it mean number of gold bars, or combined weight of gold bars? What exactly it means, we will have to wait and see.

The Bank of England data will capture “total weight of gold held“. Notice that in the above World Gold Council piece it also states that the data will cover the amount of gold that the Bank of England “holds on behalf of other central banks.” There is no mention of the amount of gold that the Bank of England holds on behalf of commercial bullion banks.

Overall, this doesn’t exactly sound like it is “enhancing the transparency of the Bank’s own gold operations” as the World Gold Council puts it. Far from it. Enhancing the transparency of the Bank of England’s gold operations would require something along the lines of the following:

  • Identities of all central banks and official sector institutions (ECB / IMF / BIS / World Bank) holding active gold accounts at the Bank of England. Active gold accounts meaning non-zero balances
  • Identities of all commercial / bullion banks holding active gold accounts at the Bank of England
  • A percentage breakdown between the central bank gold held in the Bank of England vaults and the bullion bank gold held in the Bank of England vaults
  • An indicator for each gold account as to whether it is a set-aside earmarked custody account or whether it is a fine troy ounce balance account
  • Information for each central bank and official sector institution as to whether any of “its” gold is lent, swapped or repo’d
  • Information for the bullion bank gold accounts as to whether the gold recorded in those accounts is borrowed, sourced from swaps, sourced from repos, or otherwise held as collateral for loans
  • Information on the gold accounts of the 5 LPMCL clearing banks showing how much gold each of these institutions holds each month and whether the Bank of England supplies physical gold clearing balances to these banks
  • Information on when and how often the London-based gold-backed ETFs store gold at the Bank of England, not just using the Bank of England as sub-custodian, but also storage in their own names, i.e. does HSBC store gold in its own name at the Bank of England which is used to supply gold to the SPDR Gold Trust
  • Information on whether and how often the Bank of England intervenes into the London Gold Market and the LBMA Gold Price auctions so as to supply gold in price smoothing and price stabilisation operations in the way that the Bank of England’s Terry Smeeton seems to have been intervening into the London Gold Market in the 1980s
  • Information on the BIS gold holding and gold transactions settlements accounts at the Bank of England and the client sub-account  details and central bank identities for these accounts
  • Information on gold location swaps between gold account holders at the Bank of England and gold accounts at the Federal Reserve Bank of New York, the Banque de France, and the Swiss National Bank, and BIS accounts in those locations
  • Gold for oil swaps and oil for gold swaps

Anything less is just not cricket and does not constitute transparency.

And its important to remember that any publication of gold vault data by the LBMA and Bank of England is not being done because the LBMA suddenly felt guilty, or suddenly had an epiphany on the road to Damascus, but, as the FT correctly points out:

“the LBMA, whose members include HSBC and JPMorgan, hopes to head off the challenge and persuade regulators that banks trading bullion should not have to face more onerous funding requirements.”

Bank of England

The Current Data

As a reminder, there is currently no official direct data published on the quantity of real physical gold bars held within the London gold vaulting system. This vaulting system comprises the vaults of eight vault operators (see below for list).

Once a year in its annual report, the Bank of England provides a Sterling (GBP) value of gold held by its gold custody customers, while the LBMA website states a relatively static total figure of “approximately 6,500 tonnes of gold held in London vaults” that it claims are in the vaults in its network. But beyond these figures, there is currently no official visibility into the quantity of London Good Delivery gold bars held in the London vaults. There are, various ways of estimating London gold vault data using the Bank of England annual figure and the LBMA figure together with Exchange Traded Fund gold holdings and central bank divulged gold holdings at the Bank of England.

These approaches have been documented in BullionStar articles “Central bank gold at the Bank of England” and “How many Good Delivery gold bars are in all the London Vaults?….including the Bank of England vaults“, both from September 2015, and more recently “Tracking the gold held in London: An update on ETF and BoE holdings” from September 2016.

The September 2015 estimates calculated that there were 6,256 tonnes of gold in total in the London vaults, with 5,134 tonnes at the Bank of England (as of end February 2015), and 1,122 tonnes in London “not at the Bank of England“, all of which was accounted for by gold-backed ETFs which store their gold in London. These calculations implied that there was nearly zero gold stored in London outside the Bank of England that was not accounted for by ETF holdings.

The “Tracking the gold held in London” estimates from September 2016 used a figure of 6,500 tonnes of gold in total in the London vaults, and showed that there were 4,725 tonnes inside the Bank of England vaults, of which about 3,800 tonnes was known to be held by central banks (and probably a lot of the remainder was held by central banks also) and that there were 1,775 tonnes of gold outside the Bank of England. The article also calculated that there were 1,679 tonnes of gold in the gold backed ETFs that store their gold in London, so again, there was very little gold in the London vault network that was not accounted for by ETFs and central bank gold.

BoE-Gold

The Vaults of London

Overall, there are 8 vault operators for gold within the LBMA vaulting network. These 8 vault operators are as follows:

  • The Bank of England
  • HSBC Bank plc
  • JP Morgan Chase
  • ICBC Standard Bank Plc
  • Brink’s Limited
  • Malca-Amit Commodities Ltd
  • G4S Cash Solutions (UK) Limited
  • Loomis International (UK) Ltd

HSBC, JP Morgan and ICBC Standard are 3 of the London Gold Market’s clearing banks that form the private company London Precious Metals Clearing Limited (LPMCL). The other two member of LPMCL are Scotia Mocatta and UBS. Brink’s, Malca-Amit, G4S and Loomis are the aforementioned security companies. The LBMA website lists these operators, alongside their headquarters addresses.

Bizarrely, the FT article still parrots the LBMA’s spoon-fed line that the vaults are “in secret locations within the M25 orbital motorway”. But this is far from the truth. Many of the London vault locations are in the public domain as has been covered, for example, on this website, and the FT knows this:

JP Morgan: https://www.bullionstar.com/gold-university/jp-morgan-gold-vault-london

Malca-Amit https://www.bullionstar.com/gold-university/malca-amit-london-gold-vault

G4S: https://www.bullionstar.com/gold-university/g4s-london-gold-vault

And perhaps HSBC: https://www.bullionstar.com/gold-university/hsbc-gold-vault-london

G4S location https://www.bullionstar.com/blogs/ronan-manly/g4s-london-gold-vault-2-0-icbc-standard-bank-in-deutsche-bank-out

Malca-Amit location https://www.bullionstar.com/blogs/ronan-manly/gold-vaults-london-malca-amit

HSBC possible location https://www.bullionstar.com/blogs/ronan-manly/hsbcs-london-gold-vault

And obviously, the Bank of England vaults are where they always have been, under the Bank’s headquarters in the City of London: https://www.bullionstar.com/gold-university/bank-england-gold-vaults

It’s slightly disappointing that we spend time and effort informing the London financial media where some of the London gold vaults are, and then they continue to parrot the LBMA’s misleading “secret locations” line. I put this fake news down to a decision by the FT editors, who presumably have a stake in playing along with this charade so as not to rock the boat with the powerful investment banks that they are beholden to.

The FT also reminds us in its article that “last year a gold vault owned by Barclays, which can house $80bn of bullion, was bought by China’s ICBC Standard Bank.

This Barclays vault in London was built by and is operated by Brink’s, and presumably after being taken over by ICBC Standard, it is still operated by Brink’s. Logistically then, this ICBC Standard vault is most likely within the Brink’s complex, a location which is also in the public domain, and which even hosts an assay office as was previously mentioned here over a year ago. The Barclays vault (operated by Brink’s) is even mentioned in a Brink’s letter to the SEC in February 2014, which can also be seen here -> Brinks letter to SEC February 2014.

brinks1

brinks2
Brink’s letter to SEC, February 2014

Given the fact that there are eight sets of vaults in the London vault system (as overseen by various groups affiliated to the LBMA such as the LBMA Physical Committee, the LBMA Vault Managers Working Party,  the gold clearers (London Precious Metals Clearing Limited), and even the LBMA Good Delivery List referees and staff, then one would expect that whatever monthly vault data that the LBMA or its affiliates publishes in the near future, will break out the gold bar holdings and have a distinct line item in the list for each vault operator such as:

  • HSBC – w tonnes
  • JP Morgan – x tonnes
  • ICBC Standard – y tonnes
  • Brink’s – z tonnes

dsc_0102_800.jpg

Conclusion

At the LBMA conference in Singapore last October, there was talk that there were moves afoot for the Bank of England to begin publishing data on the custody gold it holds on a more regular basis. It was also mentioned that this data could be extended to include the commercial bank and security carrier vaults but that some of the interested parties were not in favour of the idea (perhaps the representative contingents of the powerful HSBC and JP Morgan). Whatever has happened in the meantime, it looks like some data will now be released in the near future covering all of the participating vaults. What this data will cover only time will tell, but more data than less is always welcome, and these data releases might also help show how near or how far we were with earlier estimates in trying to ascertain how much gold is in the London vaulting system that is not accounted for by ETF holding or central bank holdings.

Revealing the extent of the gold lending market in London is critical though, but this is sure to remain a well-kept secret, since the LBMA bullion banks and the Bank of England will surely not want the general market to have any clue as to which central banks don’t really have any gold while still claiming to have gold (the old gold and gold receivables trick), in other words, that there is serious double counting going on, and that some of the central bank gold has long gone out the door.

 

Lukewarm start for new London Gold Futures Contracts

The second half of 2016 saw announcements by three exchange providers for plans to compete in the London Gold Market through offerings of exchange-traded London gold futures contracts.

First off the mark was the London Metal Exchange (LME) in conjunction with the World Gold Council with a planned platform called LMEprecious. There were rumblings of this initiative in the London financial media from as early as January 2015,  but concrete details for the actual platform were only announced on 9 August 2016. See LME press release “World Gold Council, LME and key market participants to launch LMEprecious.” The LME plans to call its gold futures contract LME Gold. There will also be an “LME Silver”. Each is a suite of contracts of varying lengths including a daily futures (spot settlement) contract. See also BullionStar blog “The Charade Continues – London Gold and Silver Markets set for even more paper trading” from August 2016 which took a first look at the LMEprecious suite.

Two months after the LME announcement, during the annual conference of the London Bullion Market Association (LBMA), Intercontinental Exchange (ICE) announced on 17 October that it too planned the launch of a gold futures contract in the London market. See Bullion Desk’s “ICE to launch gold futures in 2017, competition in gold market grows” as well as the ICE press release. The ICE contract is named “Gold Daily Futures” and resides on the ICE Futures US platform. It too is a daily futures contract.

Not to be outdone, the CME Group then followed suit on 1 November 2016 and it too announced plans for a “London Spot Gold Futures contract” as well as a “London Spot Silver futures contract”. See CME press release “CME Group Announces New Precious Metals Spot Spread” from 1 November 2016, and “CME to launch London spot gold, silver futures for spot spread” from the Bullion Desk, 1 November 2016. The CME contract was to trade on COMEX (Globex and Clearport) as a daily futures contract, and was devised so as to offer traders a spot spread between COMEX and London OTC Spot gold.

As of August 2016, the LME’s target launch date was said to be “the first half of 2017”. ICE was more specific with a target launch of February 2017 (subject to regulatory review). In it’s announcement, CME went for an even earlier planned launch date of 9 January 2017 (subject to regulatory approval).

cme ice lme

Two Launches – No Volume

Why the update? Over the 2 weeks, there have been a number of developments surrounding these 3 contracts. The CME and ICE gold futures contracts have both been launched, and additionally, LME has provided more clarity around the launch date of its offering.

Surprisingly, while there was plenty of financial media coverage of these 3 gold futures contracts when their plans were initially publicised from August – November 2016, there has been little to no financial media coverage of the contracts now that 2 of the 3 have been launched.

On 25 January, I took a look at the CME website to see what the status of the CME gold futures contract might be. Strangely, the contract itself was defined on the CME website (with a code of GSP) but it had no trading volume. From the website, it was not clear when the contract actually launched, but it looked to be sometime during the last week of January.

On 25 January, I also sent a short email to CME asking:

“Has the London Spot Gold contract started trading yet?

http://www.cmegroup.com/trading/metals/precious/london-spot-gold.html 

It doesn’t look like it has, even though the contract is defined on your website. Could CME confirm when it will start trading?”

Next day on 26 January, I received this response from the CME:

“Thank you for reaching out to the CME Group with your query.  The London Spot Gold and Silver products are available to trade but at this time no trades have been made in the listed contract months.”

Fast forward to end-of-day 7 February. From the CME website, I still cannot see that there have been any trades in this gold futures since it was launched. The volumes are all zero. The same applies to the London Spot Silver futures contract (code SSP).

Next up the ICE gold futures contract (AUD). Upon checking the ICE website under section “Products”,  the new ICE Gold Daily Futures contract has been defined, and the description states “The Daily Gold Futures contract will begin trading on trade date Monday, January 30, 2017“.

Turning to the ICE reporting section of the website for futures products, and selecting the end of day ICE Futures US report page, and then selecting the reports for AUD, there are 6 daily reports available for download, namely, from 30 and 31 January, and 1, 2, 3 and 6 February. Again, looking at each of these reports, there are varying prices specified in the reports but there are no trading volumes. All of the volumes are zero.

Therefore, as far as the CME and ICE websites show, both of these new gold futures contracts have been launched and are available to trade, but there hasn’t been a single trade in either of the contracts. Not a very good start to what was trumpeted and cheer-led as a new dawn for the London Gold Market by outlets such as Bloomberg with the article “Finance Titans Face Off Over $5 Trillion London Gold Market“.

LMEprecious – To Launch Monday 5 June 2017

Finally, possibly so as not to be forgotten while its rivals were launching their London gold futures offerings, the LME on Friday 3 February announced in a general LME and LME Clear update memo that the planned launch date of its LMEprecious platform is now going to be Monday 5 June, i.e. 4 months from now.

LME update header

LME footer

As a reminder, the LMEprecious contracts will be supported by a group of market maker investment banks, namely Goldman Sachs,Morgan Stanley, Société Générale, Natixis and ICBC Standard Bank.

It’s also important to remember that all 3 of these gold futures contract product sets are for the trading of unallocated gold, (i.e. claims on a bullion bank for gold, aka synthetic / fictional gold). All 3 contracts claim to be physically-settled but this is essentially a play on words, because in the world of the London Gold Market, physically-settled does not mean physically-settled in the way any normal person would define it. LBMA physically-settled just means passing unallocated balances around, a.k.a. pass the parcel. To wit:

ICE London gold futures settle via unallocated accounts:

“The contract will be settled through unallocated loco London gold vault accounts using LBMA Good Delivery Rules.”

CME London gold futures settle via unallocated accounts:

London Spot Gold futures contract will represent 100 troy ounces of unallocated gold

And for LMEprecious, settlement will be:

“Physical settlement one day following termination of trading. Seller transfers unallocated gold to [LME Clearing] LMEC account at any LPMCL member bank, and buyers receive unallocated gold from LMEC account at any LPMCL member bank.”

Conclusion

With neither the CME nor the ICE gold futures contracts registering any trades as of yet (according to their websites), it will be interesting to see how this drama pans out. Will they be dud contracts, like so many gold futures contracts before them that have gone to the gold futures contracts graveyard, or will they see a pick up in activity? All eyes will also be on the LME contract from 5 June onwards.

The lack of coverage of the new CME and ICE London gold futures contracts is also quite unusual. Have the London financial media already forgotten about them? According to Reuters it would seem so. On 22 January, Reuters published an article titled “LME’s pitch for share of gold market faces bumpy ride” which exclusively questioned whether the LME gold contract would be a success, while not even mentioning the CME and ICE contracts. Given that 22 January was right before the CME and ICE contracts were about to be launched, this is quite bizarre. Presumably Bloomberg will come to the rescue of its ‘financial titans’ heros, and will write glowing tributes about the new contracts, but this will be tricky given the zero trade volumes. We await with bated breath.

Ireland’s Monetary Gold Reserves: High Level Secrecy vs. Freedom of Information – Part 2

This is Part 2 of a two-part series. Part 1 of this series, “Ireland’s Monetary Gold Reserves: High Level Secrecy vs. Freedom of Information – Part 1” published on 23 January, looked at initial attempts in 2011 and 2012 to extract basic information about Ireland’s monetary gold reserves from the Central Bank of Ireland and the Irish Department of Finance. These attempts proved unsuccessful due to non-cooperation from the central bank which at that time was not covered under the Irish Freedom of Information Act (FOI Act), and also a bizarre refusal of a FOI request from the Department of Finance and a subsequent claim by that Department that it had zero records of said gold reserves that it has entrusted to the Central Bank of Ireland (a central bank which it owns).

On 14 October 2014, a new and expanded Freedom of Information Act was enacted into law in the Republic of Ireland. This news FOI Act (2014) extended the scope of coverage of Freedom of Information requests to “All Public Bodies” in the Irish State, and for the first time included Ireland’s central bank, the Central Bank of Ireland. Information and records relating to the expanded list of public bodies are not fully retrospective, and FOI requests under the new FOI Act (2014) only cover the right of access to records created by these additional public bodies on or after 21 April 2008.

FOI to the Central Bank of Ireland – 2015

Given the introduction of the new FOI Act (2014) and the fact that it covered the Central Bank of Ireland, on 21 June 2015 I submitted a FOI Request to the Central Bank of Ireland with a series of questions about Ireland’s gold reserves. I was cognizant of the fact that the FOI Act only covered records after 20 April 2008 so I structured the questions to take account of this time limitation. The Central Bank of Ireland financial year follows the calendar year, with the annual financial accounts being made up to 31 December (i.e. calendar year-end). Therefore, the logical place to start was with the central bank’s 2009 Annual Report and 2010 Annual Report.

In the 2009 annual report, page 77, note 10 to the Balance Sheet for the line item “Gold and Gold Receivables” states that:

“With the exception of coin stocks held in the Bank, gold holdings consist of deposits with foreign banks. The change in the balance in 2009 is due to the change in the market value of gold during the year.”

In the 2010 annual report, page 98, note 10 to the Balance Sheet for line item “Gold and Gold Receivables” states that:

“Gold and gold receivables represent coin stocks held in the Bank, together with gold bars held at the Bank of England. The increase in the balance in 2010 is due to the change in the market value of gold during the year.”

Notice the difference in wording between the 2009 and 2010 annual reports. Exclusive of the gold coin holdings, the gold reserves in 2009 were stated as consisting of “deposits with foreign banks” while in 2010, the gold reserves were stated as consisting of “gold bars held at the Bank of England“, i.e. one is gold deposits with foreign banks (plural) and the other is allocated gold bars at a specific location (i.e. the Bank of England).

If you go back further and look at earlier annual reports of the Central Bank of Ireland from the years 2008 and 2007, the wording used is “ gold holdings consist of deposits with foreign banks. Going back another year to 2006, that year’s annual report contained a critical passage on the Irish gold holdings which stated that:

“The gold is held in physical form and ….may be placed on deposit in the London gold market depending on market conditions”.

See screenshot below.

Note 10 to the Balance Sheet for line item “Gold and Gold Receivables” in the 2006 annual report, page 89, stated in a similar way to the 2007 -2009 annual reports, that:

“With the exception of coin stocks held in the Bank, gold holdings consist of deposits with foreign banks. The change in value is due mainly to the change in the market value of gold during the year.”

The phrase “gold holdings consist of deposits with foreign banks” refers to gold placed on deposit in the London Gold Market, i.e. these gold deposits are central bank gold lending deposits placed with commercial bullion banks.

2006 annual report
Excerpt from Central Bank of Ireland Annual Report 2006 – Gold Holdings

In fact, the phrase “gold holdings consist of deposits with foreign banks” is stated in all the Central Bank of Ireland annual reports from 2009 all the way back to the 2000 Annual Report.

Given that the Central Bank of Ireland Annual Report 2010 stated that the gold holdings consisted of “gold bars held at the Bank of England, my FOI request asked for details of these gold bars in the form of a gold bar weight list. Because, if one claims to have physical gold bars stored at the Bank of England, one certainly has access to produce a weight list with the details of said gold bars.

Since the form of the Central Bank of Ireland’s gold holdings changed from “deposits with foreign banks” in 2009 to gold bars held at the Bank of England in 2010, my FOI Request also asked for records of any correspondence relating to this change. Gold deposits are on a fine ounce basis, gold bars held are on an allocated bar set-aside basis. They are two very different things. When you put gold on deposit with a bullion bank (i.e. lend it), you get back the same amount of gold that you placed on deposit (and maybe interest in the form of gold), but you don’t necessarily get back the same gold bars, since the bullion bank probably sold or lent on the gold that you deposited.

FOI Request Wording

The FOI Request I submitted to the Central Bank of Ireland on 21 June 2015 was as follows (in blue text) and contained 2 parts, the second part of which had 2 questions:

Dear FOI Unit,

This is a request being made under the Freedom of Information Act 2014.

I would like to request that a copy of documents (such as paper records, records held electronically, email correspondence) containing the following information be provided to me:

“1. Details of the gold holdings of the Central Bank of Ireland during 2009 which consisted of “deposits with foreign banks” as specified on page 77 of the 2009 Annual Report.

The details I am requesting are:

- the names of the foreign banks that the Central Bank of Ireland gold was deposited with during 2009, the duration of these gold deposits during 2009, details of the interest earned on these gold deposits, and information on the dates on which these gold deposits ended (since the gold holdings were not on deposit in 2010).

Source for reference: In the 2009 Annual Report, Note 10 to the Statement of Accounts, Page 77 states: “Gold and Gold Receivables With the exception of coin stocks held in the Bank, gold holdings consist of deposits with foreign banks”

2. Details of the gold holdings of the Central Bank of Ireland during 2010 which consisted of “gold bars held at the Bank of England” as specified on page 98 of the 2010 Annual Report.

I am requesting the following information on the “gold bars held at the Bank of England”:

- A document, such as a weight list, bar list, or bullion weight list, that uniquely identifies the bars of gold held on behalf of the Central Bank of Ireland by the Bank of England. This list would include (for each bar), details such as bar brand, bar serial number (serial number from refiner, not Bank of England number), year of manufacture of bar, gross weight, fineness, fine ounces.

- Information or correspondence that discusses the rationale for switching the Central Bank of Ireland’s gold holdings from “deposits with foreign banks” in 2009 (see above) into “gold bars held at the Bank of England” in 2010.

Source for reference: In the 2010 Annual Report, Note 10 to the Statement of Accounts, Page 98 states “Gold and Gold Receivables Gold and gold receivables represent coin stocks held in the Bank, together with gold bars held at the Bank of England.”

On 6 July 2015, the Central Bank of Ireland FOI Unit responded to me by email with an acknowledgement of my FOI Request, which can be viewed here -> Acknowledgement Letter CB of Ireland FOI gold 20150706. This letter also includes my full FOI request as per the blue text above.

FOI Request Refused in Entirety

On 20 July 2015, I received an email from a “FOI Decision Maker” at the Central Bank of Ireland with an attached letter detailing the fact that he had fully refused by FOI Request and his rationale for doing so. That letter can be viewed here -> FOI gold reserves Decision Letter refusing FOI Request – 20 July 2015. The introduction to the letter stated:

 “A final decision was made to refuse your request by myself, Xxxxxxx Xxxxx, FOI Decision
Maker, today, 20 July 2015. I may be contacted by telephone on (01) xxx xxxx in order to
answer any questions you may have, and to assist you generally in this matter.”
 

Recall that my first question was asking the central bank to provide records “containing the names of the foreign banks that the Central Bank of Ireland gold was deposited with during 2009, the duration of these gold deposits during 2009, details of the interest earned on these gold deposits, and information on the dates on which these gold deposits ended” i.e. information about gold deposits a.ka. gold lending.

In his response, the FOI Decision Maker referred to this question as ‘Category 1′. He completely ignored the fact that I was asking about gold lending and stated that “Please note that the Central Bank of Ireland’s gold bars were held with the Bank of England during the course of 2009.

This was a completely redundant and misleading statement because with gold lending, the lent gold does not necessarily leave the Bank of England. It stays in the Bank of England vault wherein title is transferred to bullion bank gold accounts during the deposit period and more than likely the deposits are then rolled over into other short-term gold deposits with additional bullion banks. It was also a deflection of my question since it ignored the fact that the 2009 Annual Report had stated that “gold holdings consist of deposits with foreign banks“, and failed to explain why the Annual report had referred to deposits with foreign banks (plural).

The FOI Decision Maker went on to say that he had “identified one record falling within the scope of your request, namely a statement from the Bank of England dated 31 December 2009 confirming the number of gold bars held with the Bank of England on that date”, but that he had “made a decision to refuse this part of your request for the following reasons“.

This is where the central bank FOI fiasco became even more bizarre and ludicrous, or in the words of an ex-Irish Taoiseach (Prime Minister), it became “grotesque, unbelievable, bizarre and unprecedented (GUBU)”, because the FOI Decision Maker claimed he was refusing the request to provide the Bank of England gold bar statement by invoking a clause in the FOI Act (2014) [Section 40 (1) of the Act] that allowed an exemption if:

access to the record could reasonably be expected to have a serious, adverse effect on the ability of the Government to manage the national economy or on the financial interests of the State…” 

The FOI Decision Maker also stated that in his view “the release of detailed information regarding the gold bars held at the Bank of England on behalf of the Central Bank of Ireland could have a serious, adverse effect on the financial interests of the State, as it would disclose important information about the Central Bank’s gold holdings.”

Releasing information about gold bars would disclose important information about those same gold bars? No kidding?

He went on to state: “Furthermore the release of this information, which is of substantial value, would identify the stock of gold coins held at the Central Bank from the stock of gold bars held at the Bank of England and from which a market valuation for the separate holdings could easily be calculated.” And? Why would this be a big deal? It would not be a big deal. The gold coin holdings of the Central Bank of Ireland are quite immaterial and completely incidental to the questions raised in my FOI request.

Not to labour the point, but this FOI Decision Maker continued to dig a hole with the embarrassing excuses as he considered “public interest factors for and against the release of this information” and stated that while there is public interest in ensuring transparency and accountability of public bodies, I believe that interest is outweighed by the public interest in protecting the confidentiality of asset valuation information, pertaining to the financial circumstances of the Central Bank” so that “accordingly, I believe the public interest is better served by refusing, rather than granting, access to this record.

Now you can see what we are up against when small-minded central bank bureaucrats are unleashed and given a small amount of power in their FOI Unit fiefdoms to pronounce and decide on what they think is and is not in the public interest.

Question: Who voted that these anonymous central bank staffers should have the power to say what is and what is not in the public interest? Answer: Nobody did.

Category 2(a)

The second part of my FOI Request asked the Central Bank of Ireland to provide “a weight list, bar list or bullion weight list that uniquely identifies the bars of gold held on behalf of the Central Bank of Ireland by the Bank of England“. After all, the 2010 Annual Report stated that the gold holdings of the Central Bank of Ireland were in the form of “gold bars held at the Bank of England.

A gold bar weight list is an itemised list of all the gold bars held within a holding that uniquely identifies each bar. In the London Gold Market, the LBMA’s “Good Delivery Rules” specifies the data that this list should contain for the large 400 oz bars as held by central banks. The data in a weight list includes such details as the bar serial number, the refiner name, the gross weight of the bar in troy ounces, the gold purity of the bar and the fine weight of the bar in troy ounces. All gold being shipped in and out of gold vaults in the London Gold Market, including in and out of the Bank of England vaults, has to be accompanied by a proper industry standard weight list. Gold Backed Exchange Traded Funds (ETFs) produce these weight lists for their gold holdings at the end of each and every trading day so it’s not a big task to produce such a list via a position / accounting system.

So, if you have gold bars held at the Bank of England, like the Central Bank of Ireland claims to have, then you certainly have access to a weight list provided by the Bank of England since the Bank of England has a gold bar accounting system which records all of this information. In fact, the Bank of England has provided such a gold bar list to the Reserve Bank of Australia (RBA) for the 80 tonnes of gold that the RBA stores at the Bank of England. This list came to light via an Australian FOI request, and the Aussie list can be seen here.

A full weight list would also be needed when undertaking a physical gold bar audit, which is something that the large gold-backed ETFs perform twice per year. Keep this in mind for anyone wanting to ask the Central Bank of Ireland how, if ever, they audit the Irish gold stored at the Bank of England.

Given all of this background, the following statement from the Central Bank of Ireland FOI Decision Maker as to why he was refusing my request for a gold bar weight list is nothing short of incredible, because he said:

 “Section 15(1)(a) of the Act states that a FOI request may be refused if:

the record concerned does not exist or cannot be found after all reasonable steps to
ascertain its whereabouts have been taken,’

Your request was referred to two divisions within the Central Bank of Ireland, the Payment and Securities Settlement Division and the Currency Issue Division. Both divisions have confirmed that they do not hold any such records which fall within the scope of this part of your request. Accordingly, this part of your request is refused.”

If the Central Bank of Ireland holds gold bars at the Bank of England, then it is a lie to state that a weight list does not exist, because a weight list has to exist even if it is in the gold bar accounting system of the Bank of England and has not been printed.

If the Central Bank of Ireland is claiming that it doesn’t have such a list, then this shows a shocking lack of oversight with regards to the Irish gold holdings at the Bank of England. It could arguably also show a convenient laziness to acquiring such a list which the central bank could then use as a plausible deniability scenario.

Category 2(b)

On my request for records which addressed “the rationale for switching the Central Bank of Ireland’s gold holdings from “deposits with foreign banks” in 2009…into “gold bars held at the Bank of England” in 2010, the FOI Decision Maker again avoided any discussion of gold lending and reverted to reiterating that:

“the Central Bank of Ireland’s gold bars were held with the Bank of England during both 2009 and 2010. Given that there was no switching from foreign banks to the Bank of England, no records exist which fall within the scope of this part of your request and this part of your request is, therefore, refused.”

There was no explanation offered by this Decision Maker as to why the wording between the 2009 and 2010 annual reports had changed.

The FOI Refusal letter wrapped up with a “Right of Review” paragraph which explained that it was possible to seek an internal review of the decision by a more senior staff member of the Central Bank by a written submission to the Central Bank of Ireland FOI Unit stating the reasons for seeking a review and accompanied by a €30 internal review fee.

The refusal letter ended by saying “should you have any questions or concerns regarding the above, please contact me by telephone on +353 1 xxxxxxx“. So I decided to take up the offer of the FOI Decision Maker, and gave him a call the next day.

Phone Call with the FOI Decision Maker

The following is a summary of the phone call I had with the Central Bank of Ireland FOI Decision Maker after he had refused my FOI Request.

Part of my FOI had asked the central bank to explain the change in wording between 2009 and 2010 where the annual report in 2009 had said the gold was on deposit with foreign banks, while the 2010 annual report said the gold was held in the form of gold bars at the Bank of England.

On the phone call, the FOI Decision Maker said that these two descriptions were referring to the same gold and that the Central Bank of Ireland just changed the wording in the 2010 annual report to be more specific. I don’t believe this, but anyway, he said the justification that it was the same thing being described was because the 2010 report lists both the 2010 data and the 2009 data in two columns side by side with the same footnote (gold held in the Bank of England).

He said the central bank senior accounting person had explained this to him and that she had said that ‘there was no change in investment policy‘. [This could mean anything, including that the gold might still be on loan]. Given that one of my previous questions to the central bank prior to 2014 asking it to explain its investment policy on gold had been met with non-cooperation and “talk to the hand” (see Part 1), then its impossible to know what the Central Bank of Ireland’s investment policy on gold is or was in the first place.

I then explained to the FOI Decision Maker about gold lending with commercial banks using Bank of England customer gold, and asked him to explain why the wording had said ‘gold deposits’ with ‘foreign banks’ (plural) all the way through from 2000 to 2009 and that its documented in the 2006 annual report that the bank engaged in gold lending in the London Gold Market. He could not explain this, but he seemed to be hesitant when I was talking about gold lending. He also said that since the Central Bank of Ireland is only subject to the Irish FOI Act for any data since mid 2008 (which is true), then he couldn’t comment on anything in the year 2008 or before that. A nice handy get out clause for him.

Next up, he said that they found one ‘custodian statement’ dated 2009 from the Bank of England which specified number of gold bars and fine ounces held, and they were considering providing this statement to me. This is where the FOI gets bizarre.

He said that they had 2 conference calls with the Bank of England trying to find out if there was a weight list and also about releasing this statement to me. The second conference call even included the “chief security officer” from the Bank of England FOI office, but that the Bank of England told the Central Bank of Ireland guy that ‘you absolutely cannot‘ send this statement out with bars total and fine ounces since its ‘highly classified‘  and  ‘highly‘ something else (I didn’t catch the 2nd ‘highly’ as I was stunned while trying to jot down the notes during the call).

Talk about national security. So here we have the Bank of England instructing another sovereign central bank (the Central Bank of Ireland) in what it’s allowed to and not allowed to release in its own FOIs. I think the Irish Office of the Information Commissioner and any decent Irish journalists might be interested in this, and how the Bank of England was meddling in an Irish FOI Request.

The FOI Decision Maker had said in his letter that the data I was looking for concerned ‘important information about the Central Bank gold reserves‘. When I pointed out that of course it does, that was the whole point of my FOI request, he said ‘well, the FOI Act was not designed with the Central Bank in mind. we have a lot of confidential data etc‘. Again you can see this typical aloof central banker interpretation of the FOI legislation.

I concluded by asking him if there was any point in sending in fresh FOI requests. He said if they are for records, yes, but he tried to steer me in the direction of asking questions to their press office.

Bank of England and Central Bank of Ireland

FOI Appeal to the Central Bank of Ireland

Next up, I decided to appeal the FOI response by annihilating the spurious excuses put forward by the Central Bank of Ireland FOI Decision Maker, and also by arguing that a UK central bank has no right to interfere in determining a FOI Request that falls under Irish law. I sent the following FOI Internal Review / Appeal request to the Central Bank of Ireland on 18 August 2015:

“Hello FOI Unit,

I would like to seek an internal review / appeal of the final decision of Freedom of Information request (ref: 2015-000132)  made by Xxxxxxx Xxxxx, FOI Decision Maker, sent by email to me on 20th July 2015. This decision refused my request of 21st June 2015.

Reasons for seeking the Review

I have documented below the reasons why I am seeking a review of the decision, and listed them by number.

Part of my request was to obtain details of the gold bars held on behalf of the Central bank of Ireland at the Bank of England. Such a record does exist.

The FOI Decision Maker says in his decision: “I have identified one record falling within the scope of your request, namely a statement from the Bank of England dated 31 December 2009 confirming the number of gold bars held with the Bank of England on that date.”

The FOI Decision Maker quotes from “Section 40 (1) of the Act”:

(a) access to the record could reasonably be expected to have a serious, adverse effect on the ability of the Government to manage the national economy or on the financial interests of the State…”

and he specifically says:

“In my view, the release of detailed information regarding the gold bars held at the Bank of England on behalf of the Central Bank of Ireland could have a serious, adverse effect on the financial interests of the State, as it would disclose important information about the Central Bank’s gold holdings.”

  1. There was no proof proved by the FOI Decision Maker as to how releasing a statistic stating the number of gold bars held by the Central Bank of Ireland could “have a serious, adverse effect on the financial interests of the State.”

Likewise, there was no proof provided as to how disclosing “important information about the Central Bank’s gold holdings” could have a “could have a serious, adverse effect on the financial interests of the State.”

I would like a review of the decision to withhold the Bank of England statement dated 31st December 2009 reviewed, with a view to releasing said statement to me.

A follow-up call with the FOI Decision Maker on 21st July about the decision revealed that the Central Bank of Ireland had conducted 2 conference calls with the Bank of England about my request, with the second conference call even including a ‘chief security officer’ or similar from the Bank of England FOI office, and that the Bank of England told the Central Bank of Ireland that ‘you absolutely cannot’ send this statement out with bars total and fine ounces since its ‘highly classified’.

  1. I find it unacceptable that a request made under the Freedom of Information Act of Ireland can allow interference from a foreign central bank in determining its outcome. This is the Bank of England interfering in the Freedom of Information Act of another sovereign nation. Any input from the Bank of England in this matter should be inadmissible and I would like these interactions with the Bank of England to be reviewed as part of the appeal, and how a statement of gold bars can be said to be ‘highly classified’.

The FOI Decision Maker says “the release of this information, which is of substantial value, would identify the stock of gold coins held at the Central Bank from the stock of gold bars held at the Bank of England and from which a market valuation for the separate holdings could easily be calculated.”

“While there is public interest in ensuring transparency and accountability of public bodies, I believe that interest is outweighed by the public interest in protecting the confidentiality of asset valuation information, pertaining to the financial circumstances of the Central Bank.”

3. The asset valuation information of gold holdings is not confidential. In line with international accounting standards Central Bank of Ireland gold is valued at market value in the Balance sheet. The FOI Decision Maker’s explanation does not make any sense, and only serves to deflect my request. My request is not about gold coins. Introducing that argument is spurious and irrelevant.

The FOI Decision Maker says: “Your request was referred to two divisions within the Central Bank of Ireland, the Payment and Securities Settlement Division and the Currency Issue Division. Both divisions have confirmed that they do not hold any such records which fall within the scope of this part of your request.”

All foreign gold held in custody at the Bank of England is weight listed. I am submitting to you evidence of this fact in the form of a response to a Reserve Bank of Australia (RBI) freedom of information request in 2014 where the RBI responded to the request with a full Excel spreadsheet “Listing of the Reserve Bank of Australia’s gold inventory as held at the Bank of England”. See details below.

A freedom of Information request to the Reserve Bank of Australia in 2014

http://www.rba.gov.au/foi/disclosure-log/rbafoi-131418.html

Reference No.: RBAFOI-131418

Summary of Request: Listing of the Reserve Bank of Australia’s gold inventory as held at the Bank of England.

Date Released: 17 July 2014

Contents: One XLS file.

http://www.rba.gov.au/foi/disclosure-log/xls/131418.xls

It is a minimal requirement in international auditing standards to have access to details of assets held in custody.

  1.  In refusing my request, there was no explanation as to why the Bank of England has not provided such as weight list of gold bars to the Central Bank of Ireland. I would therefore like to appeal this finding also that the Central Bank of Ireland cannot request and provide a weight when other central banks, such as the RBI, can.

The 2009 Central bank of Ireland annual report states that gold holdings consisted of “deposits with foreign banks” as specified on page 77 of the 2009 Annual Report.

The 2010 Central Bank of Ireland annual report states that gold holdings during 2010 consisted of “gold bars held at the Bank of England” as specified on page 98 of the 2010 Annual Report.

The 2009 reference refers to gold deposits as distinct to gold in custody. The 2009 reference also refers to foreign banks in the plural.

The FOI response did not provide any explanation as to why the 2009 annual report used the wording of gold ‘deposits with foreign banks’ (in the plural).

The response merely stated that “the Central Bank of Ireland’s gold bars were held with the Bank of England during the course of 2009.” Gold on loan does not move, it stays in the Bank of England, and so this statement that “the Central Bank of Ireland’s gold bars were held with the Bank of England during the course of 2009” does not address the issue of the “deposits with foreign banks”.

  1. The FOI refusal of ‘Category 2(b)” of my request uses the above justification (i.e. “the Central Bank of Ireland’s gold bars were held with the Bank of England during the course of 2009”). Since there was no adequate explanation of the references to “deposits with foreign banks”, then this is not adequate grounds for refusal and I would like this reviewed.

The FOI Decision Maker says: “there is sufficient information in the public domain regarding the gold holdings of the Central Bank of Ireland.”

This is a subjective assessment. If there was sufficient information in the public domain regarding the gold holdings of the Central Bank of Ireland I would not have felt the need to submit a Freedom of Information request.

The public interest calls for transparency and accountability by the Central Bank of Ireland. The Central Bank of Ireland reports to the Minister of Finance who, as part of the Irish Government, works on behalf of the citizens of Ireland. In my view, refusing my request undermines the public interest and erodes transparency and accountability, and is not in the spirit and keeping of the Freedom of Information Act.

The Response

On 4 September 2015, I received a response and decision from the Central Bank of Ireland in relation to the request for an internal review. This response letter is uploaded here -> 20150904_Letter_to_requester_internal_review_decision_redacted.

In summary, the response letter, which was written by a separate FOI Decision Maker stated that:

I am a more senior member of staff than the original decision maker in this case and I have decided on 2nd September 2015 to vary the original decision on your request.” 

“In making my decision, I have had regard to the original request, the records
which were located as part of that request, and the appeal letter which you submitted in 
this regard.”

I have identified two records which fall within the scope of the first part of your
request, namely the 2009 and 2010 statements received from Bank of England. I
have decided to vary the original decision in respect of releasing the main text of
these statements
 

In my opinion, disclosing the total gold holdings in the Bank of England from which an estimate of the gold holdings in the Currency centre could be deduced would not unduly increase the security threat to the Currency centre when compared to the value of banknotes issued into circulation by the Central Bank. Therefore, in my view, the disclosure of the number of gold bars and fine ounces held in the Bank of England in 2009 and 2010, as recorded in the two statements, is unlikely to have a ‘serious adverse effect’ on the financial interests of the State

“With regard to the second part of your request, I am satisfied that there is no record
detailing the weight list, bar list, or bullion weight list, that uniquely identifies the bars of gold held on behalf of the Central Bank of Ireland by the Bank of England for the period 2009/10. I am advised that the Bank of England is unable to provide holdings bar lists which are past dated.

Accordingly, I have decided to affirm the original decision in respect of the second part of your request and …on the grounds that “the record concerned does not exist or cannot be found after all reasonable steps to ascertain its whereabouts have been taken.

You were also advised verbally by the original Decision Maker that a redrafting of
note 10 to the Statement of Accounts took place in 2010 to provide a more accurate
reflection of the external gold holdings of the Central Bank of Ireland.

 From the above you can see that:

a) There was no explanation offered by this second FOI Decision Maker to explain why the first FOI Decision Maker had made a misleading and erroneous statement that the release of record would have a “serious adverse effect  on the financial interest of the State. Putting it into context, this statement by the first FOI Decision Maker was just bluff or in common parlance it was ‘horse manure’.

b) There was no comment or acknowledgement by the second FOI Decision Maker about a foreign central bank, i.e. the Bank of England, meddling in and sabotaging an initial FOI Request, or the presence of a Bank of England FOI security officer on a conference call saying “absolutely this guy cannot have this gold bar statement” since its “highly classified”.

c) This second FOI Decision Maker inadvertently stated that the gold coin holdings held by the Central Bank of Ireland are stored in its ‘Currency centre’ premises, which is located in Sandyford, County Dublin, in a low rise secure building in campus type grounds. No part of my FOI Request or Review asked about these gold coin holdings. But since the second FOI Decision Maker volunteered this information, we now know where the domestically stored gold coin holdings are located.

Central Bank of Ireland Currency Centre, Sandyford, Dublin - Home of the irish gold coin reserves holdings
Central Bank of Ireland Currency Centre, Sandyford, Dublin – Home of the Irish gold coin reserve holdings

d) The second FOI Decision Maker stated that there is no record “that uniquely identifies the bars of gold held on behalf of the Central Bank of Ireland by the Bank of England for the period 2009/10.

If the Irish gold couldn’t be uniquely identified over these years (2009 and 2010), then it would suggest that is was not held in custody on a set-aside / earmarked / allocated basis as specific gold bars, and therefore the claim of the Central Bank of Ireland in its 2010 annual report that it held “gold bars at the Bank of England” is misleading.

 e) “I am advised that the Bank of England is unable to provide holdings bar lists which are past dated.This sounds unbelievable. The Bank of England has a sophisticated gold bar accounting system, and has had one since at least the late 1970s. The Bank of England currently also uses a Book Entry Transfer system (BETs) to transfer gold bars between accounts, a system which would itself need archiving capabilities.

All financial market position and transaction systems have archive capabilities. Historic records in financial markets have to be held for multiple years on electronic storage backup and in offsite backup should clients/customers request such details. To use an excuse that the Bank of England cannot generate a gold bar list for any past date is insulting and infantile. It also shows that the Central Bank of Ireland has no independent oversight or control over the reporting of its gold holdings at the Bank of England.

f) “A redrafting of note 10 to the Statement of Accounts took place in 2010 to provide a more accurate reflection of the external gold holdings of the Central Bank of Ireland”. Taken on face value, this would imply that the 2009 Annual Report of the Central Bank of Ireland was misleading and not accurate. However, at no point in any annual report was there any note or explanation to acknowledge that any redrafting had taken place to provide a more accurate explanation.

There was also no explanation offered by the second FOI Decision Maker as to what “deposits with foreign banks” (in the plural) referred to in the 2009 annual report, as per point 5 in my FOI Review Request.

The Released Records

The 2 statements that the second FOI Decision Maker decided to allow to be released were 2 Swift statements of gold balances for year-end 2009 and 2010, sent from the Bank of England to the Central Bank of Ireland. The release schedule for the statements can be viewed here -> 2015-000132 Schedule. The actual statements, which the Central Bank of Ireland redacted in parts to remove swift codes, can be seen here -> 2015-000132 Records swift. Each of the statements is 6 pages long but contains mostly irrelevant swift formatting etc. The only relevant part of each statement is at the bottom of page 1 of each respective statement, where a varying gold balance is stated, against a total number of bars. That a weight list cannot be produced shows that this gold is not held on an earmarked set-aside basis but merely on a fine ounce basis  (like a cash account) and that the number of bars mentioned on the statement is just an input that was added at some historical point in time when the account became a gold balance account.

For 2009 the statement is as follows:

GOLD BAL 258

WE CAN CONFIRM THE FOLLOWING BALANCE HELD IN YOUR ACCOUNT

ACCOUNT TITLE: CENTRAL BANK OF IRELAND

COB: 31/12/2009

NO OF BARS: 453

FINE OUNCES GOLD: 182,556.209

 

For 2010, the statement is as follows:

GOLD BAL 258

WE CAN CONFIRM THE FOLLOWING BALANCE HELD IN YOUR ACCOUNT

ACCOUNT TITLE: CENTRAL BANK OF IRELAND

COB: 31/12/2010

NO OF BARS: 453

FINE OUNCES GOLD: 182,555.914

This is the data which the first FOI Decision Maker said that “access to the record could reasonably be expected to have a serious, adverse effect on the ability of the Government to manage the national economy or on the financial interests of the State…He has got to be joking, right?

Conclusion

The examples set out in Parts 1 and 2 of this series will hopefully demonstrate to readers the disdain with which the Central Bank of Ireland and the Irish Department of Finance treat Freedom of Information Requests. I have detailed numerous examples where simple questions about the Irish gold reserves have been ignored, blocked, and refused, even when under the remit of the FOI legislation.

However the Central Bank of Ireland has complete contempt for FOI Acts and everything the FOI Act stands for. This is a wide ranging and live issue as the following recent article in the Irish media highlights. An Irish Times article dated 10 June 2016 and titled  “Central Bank ordered to review refusal of access to records“, highlights that the independent Information Commissioner said that his office had had “great difficulty in dealing with the bank in respect of the extent of our jurisdiction”, and said that a recent FOI case that was raised showed “the Bank was ‘entirely at odds’ with the spirit and intent of the FOI legislation.”

The same article quoted the Central Bank as saying that is was “fully committed to meeting the Freedom of Information principles of openness, transparency and accountability, and to the provision of access to records in accordance with its obligations under the Freedom of Information Act.

But this is a complete lie. As demonstrated by the arrogance and lack of cooperation of the Central Bank of Ireland on the topic of the Irish gold reserves, nothing could be further from the truth. Furthermore, there do not seem to be any political representatives willing to push the central bank on FOI issues, not any investigative journalists with the will to cover the topic of the Irish gold reserves at the Bank of England. Have these gold reserves ever even been physically audited? Given the lack of oversight with which the Central Bank of Ireland treats this gold holding, it would appear not. The crux of the issue in my view is the gold lending market, which the world’s central banks do not want the public to know any information about, hence the secrecy about gold bar weight lists.