Collectively, the central bank sector claims to hold the world’s largest above ground gold bar stockpile, some 33,800 tonnes of gold bars. Individually within this group, some central banks claim to be the top holders of gold bullion in the world, with individual holdings in the thousands of tonnes range.
This worldwide central bank group, also known as the official sector, spans central banks (such as the Deutsche Bundesbank), international monetary institutions (such as the Bank for international Settlements) and national monetary authorities (such as the Saudi Arabian Monetary Authority – SAMA).
These institutions hold gold as one of their reserve assets. Any gold held by a central bank as a reserve asset is classified as monetary gold. In addition to monetary gold, central bank reserve assets include such things as foreign exchange assets (such as US Dollars) and IMF Special Drawing Rights (SDRs). In general, reserve assets held by central banks are managed according to the criteria of safety, liquidity and return.
Given that central banks don’t generally divulge the gold that they lend, swap or otherwise use as collateral, the question as to whether the official sector actually holds 33,800 of gold, or far less than that amount, is debatable. But for the purposes of this discussion, the amount of gold that the central banking sector holds is not important.
This discussion focuses on why central banks hold gold. This discussion also uniquely draws on actual responses from many of the world’s largest central banks as to why, in their own words, they hold gold. While the common reasons for central banks holding gold range from store of value, to financial insurance, to asset diversification, we thought its best to let the actual gold holding central banks state their case.
Taking the list of official sector gold holders compiled by the World Gold Council (which uses IMF data sourced from the individual banks), the Top 40 gold holders on this list were identified. While most of the Top 40 gold holders are national central banks or equivalent, there are also a small number of international monetary institutions in the Top 40, namely, the Bank for International Settlements (BIS), the European Central Bank (ECB), and the International Monetary Fund (IMF). A similar question was sent out to each bank and institution. The question was:
“in the context that central banks hold gold as a reserve asset on their balance sheets, can Central Bank X clarify the main reasons why it continues to hold gold as a reserve asset?”
The central banks which responded to this question with constructive or definitive answers were as follows:
Germany’s Deutsche Bundesbank, which is most famous recently for repatriating gold from New York and Paris, but which still stores gold in London and New York, placed a particular emphasis on gold’s high liquidity, as well as gold’s powerful role in financial crises and emergencies:
“The part of the Bundesbank’s gold reserves which is to remain abroad could, in particular, be activated in an emergency. Therefore one part will remain in New York following completion of the relocation – the United States has the most important reserve currency in the world – and one part in London, the world’s largest trading centre for gold.
In the event of a crisis, the gold could be pledged as collateral or sold at the storage site abroad, without having to be transported. In this way, the Bundesbank could raise liquidity in a foreign reserve currency. However, these are purely precautionary measures as we are not expecting this kind of contingency scenario at the current time.
Gold is a type of emergency reserve which can also be used in crisis situations when currencies come under pressure.”
In neighbouring Austria, the Oesterreichische Nationalbank (OeNB), Austria’s central bank, also mentioned the liquidity characteristics of gold, its benefits in a crisis, and also gold’s diversification benefits. The OeNB also recently made headlines when it too repatriated some of its gold back from storage in London. The OeNB told BullionStar that:
“Gold is an essential part within our strategy for crisis prevention and crisis handling and is held as liquidity reserve but is also a means to diversity our investments.”
Staying in the region, Switzerland’s central bank, the Swiss National Bank (SNB) highlighted the diversification and risk optimisation benefits of gold, responding that the National Bank holds gold because:
“As part of a good diversification of currency reserves, a certain proportion of gold can help reduce the balance sheet risk. The Swiss Federal Constitution, art. 99 stipulates that the SNB has to hold a part of its currency reserves in gold.
See also the speech given by Fritz Zurbrügg, Vice Chairman of the Governing Board of the SNB; it contains comments on the role of gold in the SNB’s currency reserves: .”
Article 99 of the Swiss Constitution in part says that “the Swiss National Bank shall create sufficient monetary reserves from its profits; a part of these reserves shall be held in gold“.
Fritz Zurbrügg’s speech cited by the SNB, which was mostly a politically loaded SNB attack against the 2014 Swiss gold referendum more than anything else, says in part that gold reserves can be used in crisis management and that the SNB’s gold is “stored in multiple locations for reasons of risk diversification“.
The Polish central bank, Narodowy Bank Polski (NBP), provided a very detailed answer to BullionStar covering gold’s lack of credit risk and counterparty risk and its finite supply, as well as gold’s safe haven and diversification benefits: The NBP said that:
“Gold, due to its attributes is a quite specific asset, and traditionally has been an important component of central bank’s foreign reserves.
The main features which support the unprecedented role of gold at the same time constitute the rationale for holding gold within central bank’s reserves. These are: lack of credit risk, independence from any country’s economic policy, limited size of the resource, physical features such as durability and almost imperishability.
Additionally, gold has been constantly perceived as a safe haven asset, and is particularly desirable in crisis times, when gold prices increase while other core assets’ prices have a downward tendency.”
Moving north to Sweden, the Swedish Riksbank, the world’s oldest central bank, responded to BullionStar with an explanation that its holds gold for liquidity, foreign exchange intervention, and diversification reasons:
“In brief, gold is a financial asset that, like the currency reserve, aims to ensure that the Riksbank can carry out its tasks. The gold can, for example, be used to fund liquidity support or foreign exchange interventions.
The main reason why Sweden still has a gold reserve is because the value of gold does not normally follow the same pattern as the value of the currency reserve. Consequently, the combined value of the gold and currency reserve is more stable than the value of the gold reserve and the currency reserve separately.”
Elsewhere in Europe, the Bank of Greece, Greece’s central bank, told BullionStar that it holds gold because of its safe haven and high liquidity characteristics during crises, crises which notably the Bank of Greece has faced plenty of in the recent past:
“The two main reasons central banks, including the Bank of Greece (typically prudent-oriented organisations), choose to include gold as a reserve asset on their balance sheets, are: 1) its recognition as a safe haven asset during periods of markets’ unrest and 2) the ability of instant liquidation in case of emergency.”
The Bank of Portugal, the Portuguese central bank, kept its answer generic, and seemed to speak on behalf of central banks in general, covering the main arguments why central banks as a group hold gold:
“Gold reserves are kept by Central Banks mostly for safety, liquidity, return and as a diversification strategy. Gold compares extremely favorably to other traditional reserve assets with high-quality and liquidity helping Central Banks to preserve capital, diversify portfolios, mitigate risks and on the medium/long-term Gold has consistently outperformed the average returns of other alternative financial assets.”
The United Kingdom’s official gold holdings are held in the name of HM Treasury, and not, as sometimes thought, in the name of the Bank of England. The Bank of England is custodian of the HM Treasury gold as well as custodian for the gold of many nations, including many of the central banks mentioned in this article. HM Treasury told BullionStar:
“The Government’s official holdings of international reserves comprise gold and foreign currency assets, and (IMF) Special Drawing Rights (SDRs).
HM Treasury appoints the Bank of England as its agent to carry out the day-to-day management of the international reserves. The Bank of England’s ‘Handbook on Foreign Exchange Reserves Management’ sets out the traditional reasons for countries holding gold in their foreign exchange reserves.”
Looking at this Bank of England Handbook, a section titled “The Role of Gold” sums up the UK’s traditional reasons for holding gold:
the “war chest” argument – gold is seen as the ultimate asset to hold in an emergency and in the past has often appreciated in value in times of financial instability or uncertainty;
the ultimate store of value, inflation hedge and medium of exchanges – gold has traditionally kept its value against inflation and has always been accepted as a medium of exchange between countries;
no default risk – gold is “nobody’s liability” and so cannot be frozen, repudiated or defaulted on;
gold’s historical role in the international monetary system as the ultimate backing for domestic paper money.
While the BoE author (John Nugée) questions if gold is suitable for the reserve management strategies of all central banks, he concludes that:
“The traditional view of gold as the ultimate asset still carries weight, and gold also provides an excellent diversification for currency assets; over the very long run there is a significant negative correlation between gold and other assets and a portfolio containing gold will show lower volatility over several business cycles.
Moreover central banks can increasingly manage their gold holdings to enhance returns through gold lending, gold swaps, collateralised borrowing, and so on. “
Notably, apart from South Africa’s answer below, the Bank of England paper is the only reference to gold lending and gold swaps in all the correspondence and references generated by these central bank responses. But it is not surprising that the Bank of England mentions gold lending and gold swaps, since the Bank of England is the world’s centre for these particular central bank activities.
Responding from Sydney, the Reserve Bank of Australia (RBA) told BullionStar that it views gold as financial insurance and to some extent as a form of asset diversification:
“The principal reason the Bank continues to hold some gold is as a contingency against unforeseen events. You may be aware that in 1997 the Bank sold 167 tonnes of gold, reducing its holdings from 247 tonnes to 80 tonnes after it was concluded that the gold holdings provided fewer diversification benefits than some other reserve assets.”
From this annual report, there are a number of reasons stated as to what the National Bank of Romania holds gold as a reserve asset:
“The gold reserve is meant, inter alia, to enhance confidence in the stability of the Romanian financial system and of the leu, being particularly useful in times of heightened economic turmoil (domestically or abroad) or geopolitical tensions.
Unlike other asset types, gold has no solvency risk attached, because it is not “issued” by an authority (such as a government or a central bank).“
Bangko Sentral ng Pilipinas, the Central Bank of the Philippines, also highlighted the themes of gold as a safe haven asset and as a portfolio diversifier, as well as an inflation hedge:
“The BSP, like other central banks, holds gold as reserve asset for the following reasons:
Diversification. By diversifying its reserve assets to include gold, the BSP is in a better position to manage risks and promote stability since gold is not directly influenced by economic shocks and policies. Moreover, its supply and demand are independent from the factors affecting the value of other reserve assets components.
Security. Gold is a real asset and bears no counterparty or credit risk. In times of uncertainty, gold is considered a safe-haven asset.
Inflation hedge. When inflation and inflation expectations are high, gold is considered a hedge against accelerating asset prices. Central banks buy gold to protect their currencies’ purchasing power in the event of an inflation.
Moreover, since the Philippines is a gold-producing nation, the BSP can purchase gold from small-scale miners, refine and cast these into gold bars (good delivery bars) that would qualify as reserve asset. Therefore, it can build up its gold reserves without relying too much on external purchases that would have to be paid for in foreign exchange.”
The Reserve Bank of South Africa (SARB) provided what is probably the most comprehensive answer of all the central banks polled, possibly a model text book answer. SARB said that:
the SARB as a central bank can be viewed as a “traditional gold holder” which has inherited gold reserves as part of a legacy and has over time kept its level of gold reserves unchanged to support a broad country strategy. South Africa being one of the main gold producers in the world, it is appropriate for the SARB to hold part of its official reserves in gold to confirm the country’s confidence in the metal.
More in general and similar to many other central banks, the rationale for SARB [holding gold] remains:
Gold acts as a store of value in times of crisis and is therefore seen as a safe-haven for capital preservation
Gold acts as a hedge against inflation. In other words, the price of gold tends to increase as inflation rises
Gold provides some diversification to official reserves – it’s rather low correlation with government bonds and money-market instruments
Gold has an intrinsic value and as a result it is nobody’s liability. As a unique asset class, it is not influenced by a country’s economic policy and outlook
Although short-term gold lending rates are currently very low, this has not always been the case and these rates may increase again, suggesting that it may not forever remain a non-income earning asset. In addition, when investing for longer time periods, gold loans earn positive, albeit low, returns when compared to other asset classes
Gold reserves can be regarded as insurance against unlikely, but extremely damaging events, such as the collapse of financial systems or debt default by major sovereign nations
Banco Central do Brasil, the Brazilian central bank, referenced reserve diversification and store of value in its response to BullionStar:
“The asset allocation of the Brazilian foreign reserves, including Gold, is a strategic decision of the Board of Governors. But, according to some Central Banks best practices, Gold as a commodity may be used as storage of value and to diversify their foreign reserves portfolio.”
While there is some skepticism as to how much gold the central bank of Libya actually has in the aftermath of its recent invasion, the Banque du Liban provided an interesting response on why it still holds gold, i.e. that its prevented by law from selling its gold holdings:
“When the LBP [Libyan Pound up to 1971] was very strong versus the USD in the early seventies ,Banque du Liban bought a large portion of its gold reserves what was very wise as the ounce price was around 42 USD.
Then after the turmoil that plunged the country into war and chaos and in order to preserve the reserves, the parliament issued a law preventing Banque du Liban from trading on gold and consequently from selling the existing reserves. The law is still in force and Banque du Liban is holding now the 15th largest gold reserves worldwide.”
European Central Bank (ECB)
The ECB responded to BullionStar’s question without actually addressing the question and by citing references which not not address the question either. This deflection strategy is not unknown in ECB press conferences. The ECB said that:
The only reference the 4th central bank gold agreement (which was between the ECB and European central banks) makes to gold reserves is that “Gold remains an important element of global monetary reserves“, but does not say why. Interestingly, the ECB’s ‘Foreign Reserves and own Funds” page states that “The ECB’s foreign reserves [which include gold] ensure that the ECB has sufficient liquidity to conduct foreign exchange operations if needed.”
These “foreign exchange operations” are, according to the ECB, mainly foreign exchange interventions, which can be unilateral or concerted (ECB member banks together), and can be centralised (directed by the ECB) or decentralised (carried out by the member banks on behalf of the ECB). So is ECB gold being used as liquidity in foreign exchange operations? The Swedish Riksbank mentioned this use of gold, so it might be an operational tactic of the ECB also.
A number of banks, although they responded, said that they could not comment on the reasons they hold gold. This secretive approach isn’t very logical and is even more surprising given that some of the banks which took this approach are all from otherwise progressive and advanced OECD economies.
The Banco de España, which is a member of the ECB’s Eurosystem alongside such central banks as the Portuguese, German and Austrian central banks, seemed to be particularly secretive as to why it holds gold, and told BullionStar:
“We do not make public comments on the reserve assets policy of the Banco de Espana so unfortunately we cannot help you in your query.”
“Regarding your inquiry on our gold asset, we cannot disclose any information other than the information published on our website due to our confidentiality policy.”
However, looking at the Bank of Japan website, there is nothing material on the site addressing why the BoJ continues to hold a very large amount of gold.
Bank for International Settlements (BIS)
The BIS, headquartered in Basel, Switzerland, is commonly known as the central bankser’s central bank. The BIS is also infamously known for organising and plotting gold price suppression and gold market interventions through its various Gold Pool cartels. As well as holding gold in its own name, the BIS holds gold on behalf of other central banks. Perennially secretive, it was not surprising that the BIS refused to answer BullionStar’s question directly, but at least they replied. The BIS said:
While there is some discussion of gold in BIS Papers 40 and 58, there is no discussion for the reasons why central banks hold gold as a reserve asset.
The cutoff point for this survey was the Top 42 gold holding central banks in the world, as this allowed the inclusion of Australia and Brazil, both of which are large gold holders and both of which are also large domestic gold producers. Between them, these 42 central banks and monetary institutions claim to hold 32,075 tonnes of gold, which is 95% of the 33,790 tonnes of gold claimed to be held by the 100 central banks on the World Gold Council list.
Of the central banks and institutions contacted, 21 replied with definitive responses. Arguably, this is quite a high response rate given that it was surveying a diverse cross-section of central banks from around the world on a subject which central banks are traditionally quite secretive about. Of the central banks in the Top 42 list, emails were sent to all of those that were contactable by email. In a few cases a web contact form was used.
Five central banks were not contactable as they did not have any obvious email address or web contact form. These banks were from Lebanon, Venezuela, Mexico, Taiwan and China. The Chinese People’s Bank of China is notoriously difficult to contact, even for BullionStar which has been writing about the PBoC and the Chinese Gold Market for years.
Four central banks had a bounce back on the email addresses stated on their websites. These were the central banks of Algeria, Egypt, and Indonesia. None of the three banks contacted by web form responded. These were the central banks of India, Turkey, and Saudi Arabia.
Not surprisingly, banks from more developed and democratic countries have a more transparent means of being contacted and they maintain media and communications staff. Therefore it is logical that these banks are more likely to have responded.
Of the 9 central banks and institutions which did not respond within a reasonable time-frame, they were then re-contacted, asking them had they had time to look at the query. Nearly all of these banks still did not reply. These institutions were the US Treasury, and central banks from the Russia Federation, South Korea, Kuwait, Kazakhstan, Belgium, Netherlands, Thailand, and Italy.
Its notable that the US Treasury, which claims to have the largest official gold reserves in the world, 8133 tonnes of gold, did not respond as to why it supposedly holds the largest gold reserves in the world. These supposed US gold reserves are as large as the gold reserves of the next three countries combined (Germany, Italy and France).
The IMF, headquartered in Washington DC, sent a generic reply to say that they had received the query, but they never responded. The Central Bank of Iraq received the query, forwarded it to their operations department, but there was no subsequent response.
Some of these non-responding banks have ‘reasons we hold gold’ sections on their websites or in their annual reports, so for anyone interested, those information sources could be consulted.
In their own words, the reasons central banks hold gold in large quantities are many fold, however there are consistent themes in the central banks’ explanations. Many of the respondents cited gold’s ability to be mobilized in a crisis, that ‘gold holdings can be activated in an emergency’, that gold is an ‘emergency reserve in a crisis’, ‘a contingency against unforeseen events’, a form of ‘insurance’, or as the Bank of England says ‘a war chest’ and the ‘ultimate asset to hold in an emergency’. As such, nearly all central banks referred to gold as a safe haven asset.
Many central banks mentioned gold’s high liquidity, and some referred to the ability to use their gold to raise liquidity in a foreign currency, even for foreign exchange intervention.
Gold’s role as a hedge against inflation was cited in a number of the central bank answers, which explains why central banks look to the gold price as a barometer of inflation expectations.
Many of the banks also pointed out that because of the unique attributes of physical gold, such as limited supply and mined into existence, gold does not have any counterparty risk or credit risk, and because it is not issued by governments, it has no default risk.
The return generating potential of gold was also cited by a few central banks via the use of gold lending, gold swaps and the use of gold as collateral. Interestingly, very few of the banks that responded directly mentioned gold lending, although many of these central banks do engage in gold lending. This in itself highlights the absolute secrecy surrounding all data relating to the gold lending market which is centred in London at the Bank of England and also through the Swiss National Bank in Berne and the Banque de France in Paris.
Many of the respondents also highlighted gold’s portfolio diversification benefits. Because its price is not affected by economic events in the same way as the prices of financial securities, the gold price is not highly correlated with the prices of other assets. Gold therefore brings stability to a reserve asset portfolio.
With such widespread support among the world’s central banks for holding physical gold, as a safe haven, as an inflation hedge, and as a form of investment diversification, their enthusiasm for gold in 2018 looks as strong as it has ever been in any decade of the modern era.
In August 2014, the long-standing and tainted London Silver Fixing daily auction was replaced by a newly launched London Bullion Market Association (LBMA) Silver Price daily auction. Similarly, in March 2015, the infamous London Gold Fixing daily auctions were replaced by revised twice daily LBMA Gold Price auctions.
In both cases, the new auctions, which the LBMA were quick to maintain control over, were trumpeted by the bullion bank controlled LBMA as ushering in an era of improved transparency in gold and silver price discovery within the London Gold and Silver Markets, a marketplace which dominates in setting the international gold and silver prices.
The LBMA Gold Price and LBMA Silver Price auctions are both critical to the world of precious metals, because they derive benchmark reference prices for gold and silver which are used extensively in the valuation of everything from Exchange Traded Funds (ETFs) to OTC precious metals contracts.
The benchmarks are also used as reference prices in all sorts of transactions from sophisticated wholesale market transactions of central banks, refiners and miners, to small quantity gold and silver coin purchases in bullion dealer shops all over the world.
Both benchmarks are also ‘Regulated Benchmarks’ under UK financial market regulations as “policed” by the UK’s Financial Conduct Authority (FCA).
It was therefore surprising that last week on 1 March, ICE Benchmark Administration (IBA), the administrators of the LBMA Gold Price and LBMA Silver Price auctions, issued a ‘Notification’ announcing that from 1 April 2018:
“the LBMA Gold and Silver Prices will not be available on the LBMA website until midnight London time on the date that the prices are set.“
More extensive quotes from the IBA Notification are as follows:
“Please note that effective 1 April 2018, the arrangements for delayed redistribution of the LBMA Gold Price and the LBMA Silver Price will change so that the delay period increases from 30 and 15 minutes to midnight London time.”
“delayed prices are available with no monthly fee, currently with a delay of 30 minutes from publication for the LBMA Gold Price and 15 minutes from publication for the LBMA Silver Price.”
“Any public websites that display the LBMA Gold Price and the LBMA Silver Price (currently with a 30 minute and 15 minute delay respectively) will be required to delay prices to midnight London time.”
So instead of a 30 minute delay, starting on 1 April (April Fool’s Day) the price for the morning LBMA Gold Price auction will not be available until about 14 and a half hours after the auction completes.
For the afternoon LBMA Gold Price auction, the price will only be available to the public about 9 hours after the auction finishes. For the LBMA Silver Price auction, the lag time on the public being able to see the daily reference price will now be 12 hours instead of 15 minutes. That’s a whopping 40 times longer. If only this was an April Fools joke. Alas, it’s not.
Any rational person would therefore conclude that the changes to the auctions being forced in by ICE Benchmark Administration (IBA) can only be described as torpedoing the concepts of price transparency and price discovery.
It should also be remembered that although IBA is the auction administrator, IBA would never make these publication time changes without the blessing of the LBMA, since the LBMA is the intellectual property owner of the benchmarks and the ultimate authority on these benchmarks as well as the gatekeeper on who can take part in these auctions.
“The revised arrangements for delayed redistribution of the LBMA Gold Price and LBMA Silver Price… recently announced by ICE Benchmark Administration (IBA)… are consistent with the timing of the publication of the LBMA Platinum and Palladium prices.”
As a reminder, the LBMA also controls the worldwide pricing for platinum and palladium through the LBMA Platinum Price auction and the LBMA Palladium Price auctions, both of which were awarded to the London Metal Exchange by the LBMA in 2014 during a secretive and non-competitive tender process.
The publication time (to the public) of the platinum and palladium prices is indeed midnight on the day the auctions occur. As the LBMA website states:
“Since 13 July 2015, the prices on the LBMA’s website are displayed with a delay until midnight following the setting of the prices each day.”
Why the worldwide platinum and palladium user base is not up in arms about these platinum and palladium price delays, only they can answer. But it is certainly a spin too far to think that anyone will accept the warped alchemy of the LBMA that because the LBMA Platinum and Palladium prices are ‘freely’ published only at midnight, that somehow this validates the decision of the IBA / LBMA to also roll back transparency in the LBMA Gold and Silver auctions to midnight.
Overall, this price publication time rollback is farcical, but not surprising in the world of the LBMA where black is white and where a step backwards is spun as a step forwards. This development might also be humorous if it wasn’t so important. Especially as the changes are being implemented on 1 April, April Fool’s Day! But the auction prices are important and also very influential in the global gold and silver markets. Hence, it is no laughing matter.
London Gold and Silver Trade Reporting: Not in Your Lifetime
Apart from the regressive step on LBMA auction price timing which will make the London gold and silver markets more opaque, the lack of Trade Reporting for London gold and silver trades is another area that continues to shroud the London Gold and Silver Markets in a virtual blanket of secrecy. That’s right, there are no trades reported in the London gold and silver markets. Zero. And there never have been any trades reported in the London gold and silver markets.
With no trade data, there is no market efficiency. How could there be any market efficiency when the market cannot analyse the trades that have taken place? Insider bullion banks are therefore free to trade gold and silver in the knowledge that the global markets don’t know what the insiders are doing. This also applies to the central banks in the London Gold Market in their buying and selling and lending and swaps transactions. So the London Gold and Silver Markets are not ‘Fair’.
At the end of January, I wrote an article titled “What’s Happening (or Not) at the LBMA: Some Updates” which in part discussed the broken promises on trade reporting made by the LBMA over the last 2-3 years, and the complete lack of progress that the LBMA has made on actually publishing any trade data to the Market. As early as January 2015 (over 3 year ago), the LBMA stated to the UK Regulator’s “Fair and Effective Markets Review” (FEMR) at that time that it would:
“welcome further transparency through post trade reporting, providing the industry with data that at the moment does not exist for the bullion market.”
During the course the next 3 years, the LBMA made many promises about publishing this trade reporting data, none of which came to pass.
For example, in February 2016 for trade reporting, the LBMA claimed that there was a “target delivery date in the second half of 2016”. This never happened.
The next broken promise, made at the LBMA annual conference in October 2016 claimed that”Phase 1 will focus on reporting and will launch in Q1 2017. This reporting covers all Loco London Spot, forward & option trading.” This never materialised.
This was followed by a litany of further promises during 2017 from the LBMA CEO, the LBMA Chairman and the LBMA Legal Counsel that all promised a publication date for trade reporting of early 2018. In May 2017, the LBMA CEO said that “Reporting will begin later this year in a phased approach and, following a period of quality checking the data, it is expected that it will be published in early 2018.“
In August 2017, the LBMA Chainman said that “it is expected that the first data will be published in early 2018“. At the LBMA’s annual conference in October 2017 in Barcelona, the LBMA’s Legal Counsel said that “the data will then be aggregated and published but not until Q1 2018.“
Now that the first quarter 2018 has come and nearly gone, you can probably guess what has happened. The correct answer is …nothing has happened, with the LBMA again totally disregarding its own promises and now unbelievably shifting the trade reporting publication date out an entire year more to “early 2019“. You couldn’t make this up.
And as per usual, there was no LBMA press release about this further delay, only a small reference buried in the back of the latest issue of its in-house magazine, The Alchemist. As per the reference:
“Many members have already begun to report their trades to the LBMA-i platform and many members are being on-boarded. The reporting process will continue during 2018 with a view to establishing a robust data set which will be published in early 2019“.
Nothing more can be said about this trade reporting fiasco other than it must be obvious to everyone that the LBMA and its bullion bank members do not want the transparency that gold and silver trade reporting would provide. Otherwise they would not have spent 4 years on a project which any individual investment bank could start and complete within less than 3 months.
As I said in the conclusion of my January commentary on this topic:
“In this extremely long drawn out exercise by the LBMA, it must be clear by now that the LBMA and its trading members are engaging in this trade reporting project on their own terms, and with little regard for the spirit and recommendations of the Fair and Efficient Markets Review. There is also a trend of missed deadlines, broken promises, and a lack of explanation for the delays.“
To this you can now add another year (to early 2019). Will we be saying the same thing in early 2019, of more missed deadlines? Based on the LBMA’s track record, any bookie worth their salt would probably say ‘Yes’.
This article is in 3 parts and covers a) upcoming trade reporting in the London gold market which is being led by the London Bullion Market Association (LBMA), b) the recent publication by the LBMA of a Guide to the London OTC precious metals markets, and c) an update on monthly vault reporting which the LBMA and the Bank of England launched in 2017.
LBMA Trade Reporting
The lack of trade reporting in the London gold market is possibly one of the biggest ommissions in global financial markets, since the lack of gold trade data totally obscures knowledge of gold price discovery in a market that is predominantly a synthetic paper trading market, but which also plays hosts to the secretive world of central bank gold trading and central bank gold lending.
Trade reporting in the London gold market is also an initiative which the London Bullion Market Association (LBMA) has been promising to establish for more than 3 years, but which as yet has not produced one scrap of gold trade data, as the launch date and publication dates for this trade reporting have been continually pushed out.
In June 2014, in the wake of widespread trading misconduct, the UK Financial authorities launched the “Fair and Effective Markets Review” (FEMR) to improve confidence in the UK’s Fixed Income, Currency and Commodities (FICC) as well as to improve the fairness and efficiency of those markets.
The Review was conducted by the Treasury, the Bank of England and the UK Financial Conduct Authority (FCA) with the help of an independent Market Practitioner Panel drawn from the financial sector.
According to the FEMR, fair markets are those that have features such as market transparency and open access, while efficient markets are markets where trading and post-trade infrastructures provide sufficient liquidity and allow participants to discover and trade at competitive prices.
The FEMR recommendations were published in June 2015, which is now over two and a half years ago. One of the key recommendations of the FEMR report was to promote fairer market structures in FICC markets including improved transparency in over-the-counter markets. The Market Practitioner Panel also recommended that standardized physical markets such as the gold bullion trading market should have post-trade reporting so as to:
“provide an understanding of liquidity, help to dispel some concerns over information abuse” and “work towards levelling the playing field.”
During the review process, the FEMR authorities allowed interested parties to submit their views on the review, and in January 2015, the LBMA submitted a letter to FEMR (c/o the Bank of England) in which it stated that:
“The LBMA would also welcome further transparency through post trade reporting, providing the industry with data that at the moment does not exist for the bullion market.”
While this statement sounds innocuous enough, in a case of trying to steer the FEMR agenda while making it appear to be fully in agreement, the LBMA submission letter also made it clear that its members wanted the “precious metals market” to “report anonymised unique transactional data”.
In its submission, the LBMA further showed its true colours, i.e. that it primarily represents the powerful bullion banks and their central bank clients, as well as representing the interests of the Bank of England, when in a case of managing the expectations of the FEMR, the LBMA stated that “the role of the central banks in the bullion market may preclude ‘total’ transparency, at least at public level.” It also said that “transparency could be increased via post-trade anonymised statistical analysis of nominal volumes, provided by the clearing banks.”
The LBMA also cleverly retained control of the FEMR related agenda as it applied to the gold market when in April 2015 the LBMA launched its own “Strategic Review” of the London bullion market by commissioning the “independent” consultancy EY to undertake the actual strategic review and write a report.
Although the LBMA at the time gave lip-service to transparency and said that it would engage with the global bullion market in shaping this strategic review, the reality was otherwise and, for example, this author’s request for engagement were ignored by the LBMA. Furthermore, the actual EY report and its recommendations were never published and even the well-connected Financial Times in October 2015 said that it had only “seen” a “copy of the recommendations”.
One of the initiatives that supposedly grew out of this EY review was a Request for Information (RFI) by the LBMA to potential financial technology service providers in October 2015. This RFI was to “to assist the LBMA in delivering the EY recommendations from the Strategic Review.”
What exactly the EY recommendations were is unclear, since the EY report was never published, but based on LBMA press releases, the goal of the review in terms of strategic objectives was said to be to enhance transparency, improve efficiency, and expand the use of technology in the gold and other precious metals markets.
The following month in November 2015, the LBMA announced that it had received 17 responses from 20 providers to its RFI queries, and that it had reappointed EY to help evaluate these responses.
Then on 4 February 2016 (i.e. exactly 2 years ago), the LBMA launched a Request for Proposals (RfP) process and asked a short-listed of 5 of the above 20 service providers to submit proposals to deliver a number of services to the London gold market including trade reporting, portfolio reconciliation and valuation curves, and also to build or provide infrastructure to support these services such as a submission interface, trade repository and data warehouse etc.
These services, including trade reporting, would, according to the LBMA press release, “be launched later in 2016”, and more specifically had a “target delivery date in the second half of 2016”.
Then a FEMR Implementation Report from July 2016 made note of the fact that the “LBMA had launched a specific ‘Request for Proposal’ focusing on trade reporting as a priority in response to the market commitment by LBMA members to enhance transparency.”
But strangely, even though the LBMA said in February 2016 that it would launch trade reporting ‘later in 2016’, and even though the July 2016 FEMR noted that ‘trade reporting was a priority’, it was only on 12 October 2016 that the LBMA actually announced the winning entry in the RfP process.
This winning entry was awarded to a joint bid by financial technology service providers Autilla and Cinnober’s Boat Services Ltd. On the same day, the LBMA pushed out the launch date of trade reporting even further into the future and said that “in the first quarter of 2017, the LBMA together with Boat…will launch a trade reporting service”.
At the LBMA annual conference in Singapore on 17 October 2016, the LBMA CEO Ruth Crowell also said in her speech that:
“Now, what are these New Services? First and foremost, Phase One will focus on reporting and will launch in Q1 2017. This reporting covers all Loco London Spot, forward & option trading.”
“Reporting will not only make us more transparent and professional as a market….it will also demonstrate of the size and liquidity of the market for clients, investors and regulators.”
Also, at the same conference In October 2016, Jamie Khurshid, CEO of Boat Services Ltd provided a timeline for the roll-out of the LBMA’s trade reporting, which included the following:
November 30 2016: Completion of design phase & engagement with member firm technology organisations
Q1 2017: Implement customization and configuration of solution
End Q1 2017: Complete on-boarding, certification & training
April 2017: Soft Launch to manage member flow exposure risk
“LBMA-i will be ready to start collecting data in the second quarter” (2017)
“The data will then be vetted before being published later in the year” (2017)
However, in the May 2017 issue of the LBMA’s magazine, The Alchemist, the LBMA had already shifted the trade reporting dates even further out, with the LBMA CEO saying that:
“Reporting will begin later this year in a phased approach and, following a period of quality checking the data, it is expected that it will be published in early 2018.“
Then in the August 2017 issue of the LBMA’s Alchemist, LBMA Chainrman Paul Fisher stated that:
“Market Makers are expected to start reporting in the coming months, followed by other members later in 2017. After a period of quality checking, it is expected that the first data will published in early 2018.“
At the LBMA’s next annual conference in October 2017 in Barcelona, there were a few additional references to trade reporting with the LBMA’s legal counsel saying that:
“From September this year (2017), Market Makers and some full trading Members have started to report trade data into the LBMA-i. The LBMA-i is the reporting hub that is provided by Boat and Autilla.“
“the data is sufficiently anonymous without giving away the underlying client. The data will then be aggregated and published but not until Q1 2018. This is to provide the time to analyse the data and again work with the market to understand what we need to be publishing.“
In this extremely long drawn out exercise by the LBMA, it must be clear by now that the LBMA and its trading members are engaging in this trade reporting project on their own terms, and with little regard for the spirit and recommendations of the Fair and Efficient Markets Review. There is also a trend of missed deadlines, broken promises, and a lack of explanation for the delays. Trade reporting data is being sent internally, analysed heavily, and filtered and scrubbed and sanitized. Nothing as yet has been published, and promised publication dates have been continually pushed out.
The LBMA doesn’t even try to hide this, saying in one of its conference presentations that the “decision to publicise anonymous, aggregate data sits with LBMA and Member firms” and that it requires “a minimum of 3 months to analyse data and agree parameters for public deferral”.
In all of this, gold investors of the world are getting the usual run around. The LBMA’s agenda for implementing trade reporting has far less to do with providing gold trade data to the investing public and the global gold market, and a lot more to do with influencing lobbying efforts with regulators and placating the woolly recommendations of soft touch regulators.
There isn’t even any clarity on what level of trade date will be made available to the public when and if it is finally released. The LBMA claims that the reporting by its trading members is mandatory and covers “all four metals” (gold, silver, platinum and palladium) in “spot, forward, options, deposits, loans and swaps, whether Loco London, Loco Zurich or other locations.”
If so, they should release all of this data, in granular format by category, showing for each metal, trade volumes by transaction type across spot, forward, options, deposits, loans and swaps. Transparency also calls for data that is useful for analysis, like the full suite of trade data that is reported by the world’s securities exchanges, where all trades would be reported, showing price, quantity, trade type (spot, option etc), transaction type (ETF, consignment etc), client counterparty types (central bank, broker, commercial bank, hedge fund, refinery, miner etc).
The LBMA’s reporting when published should also reveal the size of the physical gold market relative to the non-physical (paper) gold market. As the LBMA’s submission letter to FEMR in 2015 said:
“Reporting in the physical market, which currently does not happen, will need to consider market pricing factors such as premiums, shipping/storage, taxes and duties.“
So, yes, its possible that this information on the physical market can be reported. Technically there is nothing preventing this. But will it be reported? Likewise, will the trade data that is published reveal the magnitude of fractionally-backed unallocated gold trading that accounts for over 95% of daily London gold market turnover?
Another area critical for trade reporting report is central bank gold trades and central bank gold lending and gold swap related trades. Will central bank trades be reported as a grouping? Highly unlikely, as the LBMA already said that “the role of the central banks in the bullion market may preclude ‘total’ transparency, at least at public level.
But as I see it, almost none of the above will be reported by the LBMA, and the most we can expect per metal is a gross trade turnover figure rolled up by month, which is a figure that is practically useless in revealing anything about the real workings of trading in the London precious metals markets.
The LBMA Guide to the OTC Precious Metals Market
In early November 2017, the LBMA published an updated “Guide to the Global OTC Precious Metals Market”. The guide in pdf format can be opened here. The relevant LBMA press release is here. The guide is edited by Jonathan Spall, consultant to the LBMA, with input also from Aelred Connelly PR Officer to the LBMA.
On first reading, although well presented, it becomes apparent that this new Guide does not contain very much new information at all, with most of the information in the guide either already on the LBMA website, or taken from other LBMA publications and tweaked slightly. More recent developments such as London vault reporting or the LBMA Gold Price are included, but only the type of content that was already in the associated LBMA press releases.
If you didn’t know anything about the London gold market, this guide might provide some introductory detail, but other than that, it’s like a standard reference text which would be found in a reference library.
Unbelievably, this updated LBMA guide claims that it seeks to “make the moving parts of the market transparent”. However, in reality, it provides very little detail on transparency, so this claim rings hollow.
There is nothing revealed in the guide as to how the market really works, who the influential players are, and no data that would reveal the real state of the market, i.e. the fractional backing of unallocated accounts, the level of outstanding gold lending, the working of the gold vaults, how gold ETFs are allocated to and from what sources they are allocated from, how the Bank of England interacts with the commercial bullion banks and its client central banks, the trading volumes in the market and what transaction types they refer to etc.
This is a pity and a missed opportunity, since if it wanted to, the LBMA could have revealed how the moving parts of the market really work. But it is not surprising, since in its public and media interactions, the LBMA essentially acts as gatekeeper, regulating and filtering the information that it allows to be disclosed about the London gold market.
Structure of the Guide
Excluding the introduction and appendices, there are 22 sections in the guide. As well as gold and silver, the guide also covers the London Platinum and Palladium Market (LPPM), and the good delivery system for platinum and palladium.
TABLE OF CONTENTS
London Bullion Market Association
London Platinum and Palladium Market
London Good Delivery – Gold and Silver
Good Delivery – Platinum and Palladium
London Precious Metals Clearing Limited
Precious Metal Accounts
Lending and Borrowing Metal
Precious Metal Benchmarks
Bank of England
Futures Markets and Exchange
Key Facts about Precious Metals
Market Trade Statistics
Central Bank and Governmental
Ownership of Gold
Properties of Precious Metals
Frequently Asked Questions
Looking at the table of contents, the sections which would appear to be of particular interest and worth scrutinizing to see if they provide any new information are as follows:
Section 4: The Price
This section has short discussions of things like characteristics of the price (troy ounce, fineness etc), that are mostly taken from a page on the LBMA web site. Most importantly, this section does nothing to illuminate important questions about ‘price discovery’ or ‘where does the internationally quoted gold price come from?’.
There is nothing in this section about price discovery or that the prices on COMEX and the London OTC market create the international gold price. COMEX is mentioned elsewhere in the guide not in relation to price discovery.
You have to read between the lines to see how the guide addresses the issue of trading and price. It first says that it’s a wholesale market price [true]. It then mentions delivery location of London – i.e., ‘loco London’. All it says is as follows:
“The standard delivery location of gold and silver is London – Loco London. This is ultimately an account held with a clearing bank for precious metals and backed by metal held in a vault in London that forms part of the clearing system.”
However, this paragraph fails to mention that these are fractionally-backed unallocated positions, and that the position in the account with a clearing bank is a synthetic cash-settled gold derivative and really not backed by gold. The ‘backed by metal held in a vault in London’ is therefore misleading and disingenuous, since there is not necessarily any gold backing an ‘account held with a clearing bank’.
Section 4 then ends with a baffling and confusing paragraph which looks deliberately designed to mislead with a title of “The Metal’ Not the Account”, which says:
“Clearly, gold, silver, platinum and palladium are all traded metals. It is an important distinction that it is not unallocated or allocated metal that is traded, but the metal itself.
The terms ‘allocated’ and ‘unallocated’ simply reflect the type of account over which the metal clears post trading of the underlying metal.”
This line, that “it is not unallocated or allocated metal that is traded, but the metal itself” looks like an attempt by the author to try to justify that all trading in the London market is trading of underlying metal. However, when an unallocated position is traded, it is just a claim on a bullion bank that is being traded. There is no specific metal. Its is just a liability to a bullion bank that is traded. And since these positions are fractionally-backed, it is not metal which is being traded. So, its mischievous to say that “the metal itself” is being traded. Perhaps the LBMA should be asked “Show me which underlying metal is being traded?”
Section 7: London Precious Metals Clearing Ltd (LPMCL)
The LPMCL is one of the most important components of the London gold and silver markets since all trades that flow through these markets are cleared through LPMCL. But strangely, this section say very little about LPMCL and there is no discussion of the London precious metals clearing statistics or what they represent. This section merely says that LPMCL is a:
“daily clearing system of paper transfers whereby LBMA members offering clearing services utilise the unallocated precious metals accounts they maintain between each other” and that LPMCL lies at the heart of the Loco London (OTC) system”
This section could have actually provided real detail in LPMCL. But it didn’t. It just takes some text from the LPMCL website. The LPMCL subsection also has no explanation of the AURUM system and the fact that it its unallocated metal that is being cleared.
In fact, this entire LPMCL section is misleading because the section is titled “London Precious Metals Clearing Limited” and apart from a few introductory paragraphs about LMPCL, the rest of the section is devoted to physical gold vaulting, with sub-section headings such as” Vault Managers”, “Vault Operators Accreditation Scheme”, “Weighing Gold”, “Weighing Silver”, “Traditional Weighing”, “Weighing Platinum and Palladium”, “Scales”.
But clearing of paper transfers (which LPMCL’s AURUM processes) is not related to vaulting of physical metal. Allocating metal is distinct from the clearing of trades in AURUM. It’s a separate step. Notably, this section also doesn’t mention who the member banks of LPMCL are. They are HSBC, JP Morgan, Scotia, ICBC Standard, and UBS. Could it be trying to draw attention away from the names (the bullion banks) that actually run the LBMA?
Notably also, in the LPMCL website under Definitions, there is a definition for Paper Gold:
“A term used to describe gold contracts such as loco London deals and future contracts which do not necessarily involve the delivery of physical gold.”
Section 8: Precious Metal Accounts
This section begins with the strange, and misleading comment that “it’s the metal that’s being traded”:
“The Metal not the Account
Clearly, gold, silver, platinum and palladium are all traded metals. It is an important distinction that it is not unallocated or allocated metal that is traded, but the metal itself.”
Given that the LPMCL website definition of unallocated metal is an “amount of that Precious Metal which we have a contractual obligation to transfer to you”, the “metal not the account” statement above makes little sense and is illogical.
Section 9: Lending and Borrowing
The first subsection of section 9 is titled “Deposits and Leases”, but there is no mention that bullion banks predominantly do the borrowing or that the central banks predominantly do the lending, nor of the level of outstanding loans from central banks to bullion banks.
In a subsection called “Lending Allocated Metal”, it mentions official central bank holdings of 33,399.2 tonnes in July 2017, but makes no attempt to comment on how much of this metal is lent out:
As of July 2017, it has been calculated by the World Gold Council (using data from the International Monetary Fund’s International Financial Statistics) that the world’s central banks hold 33,399.2 tonnes of gold. A listing appears in section 22.
But the question must be asked, why does the LBMA need to resort to quoting figures from the WGC which are in turn just figures reported to the IMF when the LBMA can get lending info from its member firms about gold lending activity, and from the Bank of England.
This subsection also states that central banks lends to commercial banks. But there is no mention of which central banks and commercial banks are involved, or the level of gold lending by central, or the length of deposits, or whether they roll over the loans and for how long.
Interestingly, the same subsection confirms that if a central bank lends out its allocated gold bars, it doesn’t get back the same bars. As the text says:
“Therefore, allocated metal becomes unallocated when it is lent but can be returned as allocated. Albeit, it will be returned with different bars and will likely be of a (slightly) different weight.
‘’…it’s not possible to lend allocated metal. Allocated metal is associated with specific bars in an account and, clearly, it is not possible to lend specific bars and expect to get the same ones back while receiving a return”
Section 12: Bank of England
There is nothing new in this section, and only vague references of how central banks in the London gold market lend and swap gold with bullion banks.
“The Bank provides safe custody for the United Kingdom’s gold reserves (owned by Her Majesty’s Treasury) and for other central banks. This supports financial stability by providing central banks with access to the liquidity of the London gold market. It also provides gold accounts to certain commercial firms (including members of the LBMA) that facilitate access for central banks to the global OTC gold market.”
Section 14: Physical Market
This section is short and only addresses consignment stocks and inventory financing. Its quite telling that a Guide to the London OTC gold market only has one section (out of 22) about a ‘Physical gold market”. In a real, specialized physical gold market (not London), this would takes many pages to cover. The intro to this section even tacitly admits that loco London trading has nothing to do with the physical gold market:
” However, unlike Loco London trading, the physical market can require knowledge of a myriad of specific country requirements, the logistics and costs of moving precious metal around the world in various forms prior to fabrication, the manufacturing costs at the various refineries and sourcing refining/manufacturing capacity.”
Section 21: Market Trade Statistics
This section is as good as blank given that there are no gold market trade statistics. This page just gives some sketchy information about the delayed gold trade reporting project (see above).
Section 22: Central Bank and Government Ownership of Gold
For such a promising sounding section, based on the title, this section is a real letdown and has nothing in it except a short introduction followed by a replicated table of World Official Gold Holdings sourced from the World Gold Council.
This new updated LBMA Guide is in some ways similar to a ‘Limited Hangout’ as the term is used in the intelligence community, i.e. revealing partial truth while keeping the main body of information hidden, and acting as gatekeeper to drip feed some information.
In other words, some information is ‘hung out’ while the main body of information is kept hidden. The public see the information that is offered and thinks “this is useful, this source is credible” but then the public inquires no further. The LBMA can point to the fact it is ‘transparent’ about the gold market, while actually not revealing anything at all important about the real workings of said market. The LBMA has drip fed some information to the public while actually acting as gatekeeper and preventing any critical information from reaching the market.
One of the characteristics of a limited hangout is that nothing new is really revealed about the subject matter being discussed. This is exactly what the LBMA guide is. All of the information contained in the guide is already on the LBMA website or else within LBMA press releases.
There is also a failure to discuss the most important areas of the London Gold Market including the fractional reserve nature of unallocated gold accounts, what the daily gigantic trade volumes in gold and silver are based on, how the London OTC gold market that trades huge quantities of synthetic gold positions continues to set the international gold price, the extent of gold lending in the London market and who are the lending central banks and who are the borrowing bullion banks, the real role of the Bank of England in the London market and the lending market, how the LMPCL clearers maintain gold accounts at the Bank of England.
This goes back to the theme of transparency and secrecy that I discussed in a presentation in Singapore October 2016 titled “The Gold Market – Where Transparency means Secrecy”, a transcript of which can be read here.
This also relates to the topic of market efficiency and availability of market data and information. Because, a market which is secretive and which is not transparent, such as the London Gold Market, cannot be efficient, because some market participants, namely bullion banks and central banks, have an informational advantage over other participants.
And remember that the London Gold Market creates the international gold price, so the transparency of this market is not just a theoretical issue, it has real world implications for everyone who owns and transacts in physical gold around the world.
Vault Holdings Reporting
Last year in 2017, both the Bank of England and the London Bullion Market Association (LBMA) for the first time began publishing monthly data showing the quantities of physical gold and silver held in the wholesale precious metals vaults in London.
The Bank of England data covers monthly gold holdings held by its central bank and commercial customers in the Bank of England’s gold vaults. Note that the bank of England does not store any silver. The LBMA publishes monthly data on both the gold and silver held in the vaults of the 8 commercial vault operators which comprise its vaulting network.
Both sets of data are published on a 3-month lagged basis. The Bank of England began to independently publish its monthly gold vault data at the end of the first quarter 2017, and the first month’s figures for the end of December 2016 revealed that the Bank’s gold vaults held 5102 tonnes of gold. See “Bank of England releases new data on its gold vault holdings” for more details. Prior to 2017, the Bank only published gold vault holdings data once a year in its annual report.
The LBMA began publishing its vault data at the end of July 2017. Prior to that the LBMA had never published any data addressing precious metals holdings in its London vaulting network.
When the LBMA published its first set of data at the end of July, it stated that as of 31 March 2017 there were 7449 tonnes of gold and 32078 tonnes of silver in the vaults of the 8 commercial vault operators that comprise its vaulting network. See “LBMA Gold Vault Data – How low is the London Gold Float?” from 2 august 2017 for more details.
For some reason, the first set of LBMA was on a 4-month lagged basis, however, since then they have since caught up to reporting on a 3-month lagged basis.
Since it’s now 6 months since the LBMA first released its vault data, it’s timely to do a short update on the more recently published vault data from both the LBMA and the bank of England, starting from the end of March 2017.
At the end of March 2017, the Bank of England was storing 5081 tonnes of gold in the vaults under its headquarters building in London. As of September 2017 (the latest month published), the Bank of England was storing 5220 tonnes of gold. Therefore in that 6 month period, net gold holdings in the Bank of England’s vaults increased by 139 tonnes, or 2.73%. There were net additions of gold to the Bank’s vaults in 5 of those 6 months, but nothing really significant stands out. A net 43 tonnes were added in April, 33 tonnes in June, there was a net decline of 8 tonnes in July, and a net addition of 56 tonnes in September.
See chart below for a graphical representation of these Bank of England vault holdings changes.
Over the 6 month period from month-end March 2017 to month-end September 2017, the LBMA precious metals vaults saw a net inflow of 294 tonnes of gold, or a 3.95% increase. There were net additions over the same 5 months as the Bank of England witnessed. On an aggregate basis, total gold holdings rose from 7449 tonnes to 7743 tonnes with large net inflows of gold bars appearing in the LBMA vaults in April with 47 tonnes added, 45 tonnes added in June, 86 tonnes added in August, and September saw the highest inflow with 157 tonnes of gold added. Only July 2017 saw net outflows of 59 tonnes of gold bars.
See chart below for changes to these LBMA vault holdings totals.
Adding the gold inflows of 294 tonnes in the LBMA vaults to the gold inflows of 139 tonnes in the Bank of England vaults, this means that over the 6 month period being discussed, the total amount of gold stored in all the London wholesale gold vaults increased by 433 tonnes, which is the equivalent of just under 35,000 Good Delivery gold bars, each weighing approximately 400 ounces. Gold-backed ETFs which store their gold in London only added about a net 40 tonnes of gold over the same period, so could only explain a small part of the total increase.
The LBMA vaults on an aggregated basis added 1794 tonnes of silver over the same 6 month period to the end of September 2017. Total silver holdings rose from 32078 tonnes to 33873 tonnes. This was a net increase of 5.6% in the total silver quantity held in the vaults. The largest net inflows were in April with 749 tonnes added, and June with 658 tonnes of silver added. Silver-backed ETFs which hold their silver in London actually saw net outflows over the 6 month period in question, so these movements do not explain the large 1794 tonnes of silver added to the London vaults over this time.
One of the most notable events in Russia’s precious metals market calendar is the annual “Russian Bullion Market” conference. Formerly known as the Russian Bullion Awards, this conference, now in its 10th year, took place this year on Friday 24 November in Moscow. Among the speakers lined up, the most notable inclusion was probably Sergey Shvetsov, First Deputy Chairman of Russia’s central bank, the Bank of Russia.
In his speech, Shvetsov provided an update on an important development involving the Russian central bank in the worldwide gold market, and gave further insight into the continued importance of physical gold to the long term economic and strategic interests of the Russian Federation.
Firstly, in his speech Shvetsov confirmed that the BRICS group of countries are now in discussions to establish their own gold trading system. As a reminder, the 5 BRICS countries comprise the Russian Federation, China, India, South Africa and Brazil.
Four of these nations are among the world’s major gold producers, namely, China, Russia, South Africa and Brazil. Furthermore, two of these nations are the world’s two largest importers and consumers of physical gold, namely, China and Russia. So what these economies have in common is that they all major players in the global physical gold market.
Shvetsov envisages the new gold trading system evolving via bilateral connections between the BRICS member countries, and as a first step Shvetsov reaffirmed that the Bank of Russia has now signed a Memorandum of Understanding with China (see below) on developing a joint trading system for gold, and that the first implementation steps in this project will begin in 2018.
Interestingly, the Bank of Russia first deputy chairman also discounted the traditional dominance of London and Switzerland in the gold market, saying that London and the Swiss trading operations are becoming less relevant in today’s world. He also alluded to new gold pricing benchmarks arising out of this BRICS gold trading cooperation.
BRICS cooperation in the gold market, especially between Russia and China, is not exactly a surprise, because it was first announced in April 2016 by Shvetsov himself when he was on a visit to China.
“We (the Central Bank of the Russian Federation and the People’s Bank of China) discussed gold trading. The BRICS countries (Brazil, Russia, India, China and South Africa) are major economies with large reserves of gold and an impressive volume of production and consumption of the precious metal. In China, gold is traded in Shanghai, and in Russia in Moscow. Our idea is to create a link between these cities so as to intensify gold trading between our markets.”
Also as a reminder, earlier this year in March, the Bank of Russia opened its first foreign representative office, choosing the location as Beijing in China. At the time, the Bank of Russia portrayed the move as a step towards greater cooperation between Russia and China on all manner of financial issues, as well as being a strategic partnership between the Bank of Russia and the People’s bank of China.
The Memorandum of Understanding on gold trading between the Bank of Russia and the People’s Bank of China that Shvetsov referred to was actually signed in September of this year when deputy governors of the two central banks jointly chaired an inter-country meeting on financial cooperation in the Russian city of Sochi, location of the 2014 Winter Olympics.
National Security and Financial Terrorism
At the Moscow bullion market conference last week, Shvetsov also explained that the Russian State’s continued accumulation of official gold reserves fulfills the goal of boosting the Russian Federation’s national security. Given this statement, there should really be no doubt that the Russian State views gold as both as an important monetary asset and as a strategic geopolitical asset which provides a source of wealth and monetary power to the Russian Federation independent of external financial markets and systems.
And in what could either be a complete coincidence, or a coordinated update from another branch of the Russian monetary authorities, Russian Finance Minister Anton Siluanov also appeared in public last weekend, this time on Sunday night on a discussion program on Russian TV channel “Russia 1”.
Siluanov’s discussion covered the Russian government budget and sanctions against the Russian Federation, but he also pronounced on what would happen in a situation where a foreign power attempted to seize Russian gold and foreign exchange reserves. According to Interfax, and translated here into English, Siluanov said that:
“If our gold and foreign currency reserves were ever seized, even if it was just an intention to do so, that would amount to financial terrorism. It would amount to a declaration of financial war between Russia and the party attempting to seize the assets.”
As to whether the Bank of Russia holds any of its gold abroad is debatable, because officially two-thirds of Russia’s gold is stored in a vault in Moscow, with the remaining one third stored in St Petersburg. But Silanov’s comment underlines the importance of the official gold reserves to the Russian State, and underscores why the Russian central bank is in the midst of one of the world’s largest gold accumulation exercises.
1800 Tonnes and Counting
From 2000 until the middle of 2007, the Bank of Russia held around 400 tonnes of gold in its official reserves and these holdings were relatively constant. But beginning in the third quarter 2007, the bank’s gold policy shifted to one of aggressive accumulation. By early 2011, Russian gold reserves had reached over 800 tonnes, by the end of 2014 the central bank held over 1200 tonnes, and by the end of 2016 the Russians claimed to have more than 1600 tonnes of gold.
Although the Russian Federation’s gold reserves are managed by the Bank of Russia, the central bank is under federal ownership, so the gold reserves can be viewed as belonging to the Russian Federation. It can therefore be viewed as strategic policy of the Russian Federation to have embarked on this gold accumulation strategy from late 2007, a period that coincides with the advent of the global financial market crisis.
According to latest figures, during October 2017 the Bank of Russia added 21.8 tonnes to its official gold reserves, bringing its current total gold holdings to 1801 tonnes. For the year to date, the Russian Federation, through the Bank of Russia, has now announced additions of 186 tonnes of gold to its official reserves, which is close to its target of adding 200 tonnes of gold to the reserves this year.
With the Chinese central bank still officially claiming to hold 1842 tonnes of gold in its national gold reserves, its looks like the Bank of Russia, as soon as the first quarter 2018, will have the distinction of holding more gold than the Chinese. That is of course if the Chinese sit back and don’t announce any additions to their gold reserves themselves.
A threat to the London Gold Market
The new gold pricing benchmarks that the Bank of Russia’s Shvetsov signalled may evolve as part of a BRICS gold trading system are particularly interesting. Given that the BRICS members are all either large producers or consumers of gold, or both, it would seem likely that the gold trading system itself will be one of trading physical gold. Therefore the gold pricing benchmarks from such a system would be based on physical gold transactions, which is a departure from how the international gold price is currently discovered.
However, ‘gold’ trading in London and on COMEX is really trading of very large quantities of synthetic derivatives on gold, which are completely detached from the physical gold market. In London, the derivative is fractionally-backed unallocated gold positions which are predominantly cash-settled, in New York the derivative is exchange-traded gold future contracts which are predominantly cash-settled and again are backed by very little real gold.
While the London and New York gold markets together trade virtually 24 hours, they interplay with the current status quo gold reference rate in the form of the LBMA Gold Price benchmark. This benchmark is derived twice daily during auctions held in London at 10:30 am and 3:00 pm between a handful of London-based bullion banks. These auctions are also for unallocated gold positions which are only fractionally-backed by real physical gold. Therefore, the de facto world-wide gold price benchmark generated by the LBMA Gold Price auctions has very little to do with physical gold trading.
It seems that slowly and surely, the major gold producing nations of Russia, China and other BRICS nations are becoming tired of the dominance of an international gold price which is determined in a synthetic trading environment which has very little to do with the physical gold market.
The Shanghai Gold Exchange’s Shanghai Gold Price Benchmark which was launched in April 2016 is already a move towards physical gold price discovery, and while it does not yet influence prices in the international market, it has the infrastructure in place to do so.
When the First Deputy Chairman of the Bank of Russia points to London and Switzerland as having less relevance, while spearheading a new BRICS cross-border gold trading system involving China and Russia and other “major economies with large reserves of gold and an impressive volume of production and consumption of the precious metal”, it becomes clear that moves are afoot by Russia, China and other nations to bring gold price discovery back to the realm of the physical gold markets. The icing on the cake in all this may be gold price benchmarks based on international physical gold trading.
On August 10, the Wall Street Journal (WSJ) published an article about the Federal Reserve Bank of New York (FRBNY) custody gold and the NY Fed’s gold vault. This vault is located under the New York Fed’s headquarters at 33 Liberty in Manhattan, New York City.
The article, titled “The Fed Has 6,200 Tons of Gold in a Manhattan Basement – Or Does It?”, can be read on the subscription only WSJ site here, but is also viewable in full on both the Fox News Business and MorningStar websites, here and here. It also appeared on the front page of the Wall Street Journal print edition on Friday, August 11.
The NY Fed offers a ‘custody gold’ storage service to its customers, customers which are exclusively foreign central banks and international financial institutions, except notably, the US Treasury is also a gold storage customer of the NY Fed. The Fed’s gold vault, which is on level E (the lowest level) of its basement area under its downtown Manhattan headquarters, open in 1924, and has been providing a gold storage service for foreign central banks since at least the mid-1920s. Custody gold means that the NY Fed stores the gold on behalf of its customers in the role of custodian, and the gold is supposed to be stored on an allocated and segregate basis, i.e. “Earmarked gold”.
NY Fed stored gold has risen in public consciousness over the last few years arguably because of recent Bundesbank gold repatriation operations from New York as well as also similar gold repatriation from the central bank of the Netherlands. The moves by the Chinese and Russian central banks to actively increasing their gold reserves have also put focus on whether the large traditional central bank / official sector gold holders (such as Germany, Italy and the International Monetary Fund) have all the gold that they claim to have, much of which is supposedly stored at the NY Fed vault.
The main theme of the August 10 WSJ piece, as per the title, is whether the NY Fed actually stores all the gold in the vault that its claims to store, a theme which it introduced as follows:
“Eighty feet below the streets of lower Manhattan, a Federal Reserve vault protected by armed guards contains about 6,200 tons of gold.
The WSJ article intersperses a number of facts about this custody gold alongside various quotes, and while I cannot speak for anyone else quoted in the article, the quotes could probably best be described as being on the sceptical side of the NY Fed’s official claims.
Since I am quoted in the article, it seems appropriate to cover it here on the BullionStar website. The relevant section is as follows:
‘But “no one at all can be sure the gold is really there except Fed employees with access,” said Ronan Manly, a precious-metals analyst at gold dealer BullionStar in Singapore. If it is all there, he said, the central bank has “never in its history provided any proof.”
Mr. Manly is among gold aficionados who wonder if the bank is hiding something about what it’s hiding.’
Let me begin by explaining the basis of my quote.
The only reporting which the New York Fed engages in for the custody gold recorded as being held on behalf of its customers (central banks and official sector organizations) is a single number communicated each month (with a 1 month lag) on Federal Reserve table 3.13 – “Selected Foreign Official Assets Held at Federal Reserve Banks” and listed as “Earmarked Gold”.
As of the end of July 2017, the Fed reported that it was holding $7.84 billion of “Earmarked Gold” in foreign and international accounts. This amount is a valuation at the official US Treasury / Fed price of gold of US $42.22 per fine troy ounce, and which works out at approximately 5775 tonnes of gold.
The reason that this figure differs from the ~6200 tonnes number quoted by the Wall Street Journal is that it doesn’t include 416 tonnes of US treasury gold also claimed to be stored in the NY fed vaults. When the US Treasury claimed quantity is added, the figure comes to 6191 tonnes, hence the WSJ citation of circa 6200 tonnes.
NY Fed Gold – Opacity and Secrecy
Other than that, the Federal Reserve does not publicly communicate any other relevant information or details about the quantity of custody gold bars said to be stored in its vault, and furthermore, the Fed has never in its history publicly communicated any such relevant details or information.
So it is a fact that the Federal Reserve has “never in its history provided any proof” that all the gold it claims is there is really there, hence the quote is factual, and hence the connected quote that “no one at all can be sure the gold is really there except Fed employees with access” is a valid conclusion also.
The NY Fed has never provided any of the following:
– details of the names of the central banks and international financial institutions that it claims to hold gold on behalf of
– details of how much gold is held by each customer
– details of whether any of the gold stored in the vault is under lien, claim encumbrance or other title
– details of whether any of the custody gold is lent or swapped
– details of location swaps and / or purity swaps of gold bars between the NY Fed vaults and other central bank or commercial bank vaults around the world
– details of the fact that nearly all of the gold bars supposedly held in the NY Fed vault are a combination of old US Assay office gold bars and low grade coin bars made from melted coins
The NY fed has never allowed the conduct of any independent physical gold bar audits or published any results of its own audits. It has never published any gold bar weights lists (note one weight list for some US Treasury gold bars stored at the NY Fed vault made it into the public domain in 2011 as part of documentation that was submitted to a ‘Investigate the US Gold’ hearing in front of the US House of Representatives Committee on Financial Services. That weight list starts on page 132 of the pdf which can be accessed here.
Mainstream Media Cheerleaders and Detractors
The lack of transparency of the New York Fed as regards the custody gold that it stores for its central bank customers is therefore a valid point. The Wall Street Journal article of August 10 is merely highlighting this valid point. However, predictably this did not stop some mainstream US media critics from denouncing the WSJ article such as can be seen in the following tweet from a POLITICO ‘chief economic correspondent‘.
In which the WSJ takes seriously the lunatics who think the NY Fed is lying about what's in its vaults. https://t.co/83LsDN4ApP
I would wager that this Ben White chap has never asked the New York Fed any serious questions about its custody gold, preferring instead to throw around tweets using accusatory language such as ‘lunatics’. But this sort of reaction is par for the course from elements of the cheerleading US mainstream media, who seem to feel an obligation to protect the Fed and the status quo of the incumbent central bank led financial system from any valid criticism.
However, I have asked the NY Fed serious questions about its custody gold.
– the number of central banks and official sector institutions that have gold in storage with the NY Fed in Manhattan.
– the identities of these central banks / official sector institutions that have gold in storage.
– could FRBNY CBIAS / Account Relations provide me with gold bar weight lists for the gold holdings that these central banks and official sector institutions hold with the NY Fed?
As the first query went unanswered, I then resubmitted the query a month later in mid-March. On neither occasion did the Fed respond or acknowledge the request. Realistically, I didn’t expect the NY Fed to answer, since they have track record of being aloof and unanswerable to anyone but their own stakeholders, however, the outcome of the emails has established that the NY Fed does not engage on this issue nor provide any transparency in this area to the public.
I had expected the WSJ article to be a lot longer and more in-depth than it actually was, and to obtain some publishable response from the NY Fed. The WSJ however says in the article that:
“The Fed declined to comment”
The lack of any quotation by the Fed within the WSJ article is a glaring omission, and actually proves the complete lack of cooperation by the Fed on the entire topic of gold bar storage. The WSJ article does say that it filed Freedom of Information (FOIA) Requests with the NY Fed, which again underscores that without FOIAs, the Fed wouldn’t voluntarily reveal anything.
What these Freedom of Information requests actually contained is not, however, even revealed by the WSJ, except hilariously in one passing reference to “a heavily redacted tour guide manual“. Hilarious in the sense that the NY Fed would even see fit to heavily redact a simple tour-guide manual. To quote the WSJ:
‘The Wall Street Journal filed Freedom-of-Information requests with the New York Fed. Among the Journal’s findings, from a heavily redacted tour-guide manual provided by the Fed: Tour guides are informed that “visitors are excitable” and should be asked to “please keep their voices down.”‘
Why doesn’t the Wall Street Journal do a full publication of all the NY Fed FOIA responses that it received and publish them on its website? This at least would be some sort of backup evidence to the published article.
There are a multitude of angles that the Wall Street Journal could cover if it wanted to do a proper investigation into the gold bars supposedly stored in the NY Fed vault below 33 Liberty on Manhattan Island.
Why did the German Bundesbank take multiple years to transfer back a small portion of the gold that it claimed to have held at the NY Fed vaults, with much of that gold having to be recast / remelted into new bars en route to Frankfurt in Germany. If the gold was allocated and segregated to the Bundesbank account at the NYFed, there would have been no reason for the multi-year transfer delays and no reason to need to melt down and recast any gold bars.
Why did low-grade coin bars start turning up in the NY Fed vaults from 1968 onwards? The only place they could have come from is Fort Knox in Kentucky. The fact that these low-grade coin bars had to be used suggests there was not enough high-grade gold bars (995 US assay office Good Delivery gold bars) to satisfy central bank customer requirements at the NY Fed vault at that times. Some of these coins bars were over time shifted out of the NY Fed vaults and refined into high-grade bars and sent to the Bank of England in London. How much coin bar gold is still in the NY Fed vault.
For the 3 largest claimed gold holders at the NY Fed, which are the Banca d’Italia, the Bundesbank and the International Monetary Fund, and which between supposedly hold at least 4000 tonnes of gold at the NY Fed, there is no way to validate the accuracy of any of these holdings, neither from IMF, Bundesbank or Banca d’Italia sources, nor from the NY Fed. These gold holdings have, on paper, not changed since the early 1970s, but thats over 40 years ago and there is no way to check the accuracy of these 3 holdings which make up the lions share of all the gold supposedly held at the NYFed.
Why is there a tunnel between the NY Fed level E basement gold vault to the Chase Manhattan Plaza level B5 basement gold vault across the street? i.e. Why is a central bank vault linked to a commercial vault run by a commercial bank (JP Morgan Chase)?
Does, or has the JP Morgan / Chase in the past, facilitated the activation of NY Fed stored central bank gold into the commercial gold market via movements of gold bars from 33 Liberty to Chase Manhattan Plaza vaults?
Why is there no mention in the Wall Street Journal article of the NY Fed’s Auxiliary vault which was built in 1963 and its location, and which supposedly stores gold bars in a “wall of gold”. Was this not newsworthy?
Why did the 2004 version of the NY Fed gold vault brochure ‘The Key to the Gold Vault’ state that gold bars “belonging to some 60 foreign central banks and international monetary organizations” were stored at the NY Fed vault, and then the 2008 version of the same brochure had changed this statement to gold “belonging to some 36 foreign governments, central banks and official international organizations”.
Why the drop from 60 customers to 36 customers. I have heard from a very reliable senior ex-NY Fed executive that some central banks were unhappy to keep their gold in Manhattan in the aftermath of 9/11 and wanted it stored elsewhere. You wouldn’t blame then given what happened to the Scotia gold vaults under the WTC 4 on 9/11.
Why does the NY Fed decline to comment for a Wall Street Journal article? Surely this should ring alarm bells at the Wall Street Journal?
The London Bullion Market Association (LBMA) has just released a first update on the quantity of physical gold and silver holdings stored in the ‘LBMA’ London vaulting network. The LBMA press release explaining the move, dated 31 July, can be read here.
This vaulting network, administered by the LBMA, comprises a set of precious metals vaults situated in London that are operated by the Bank of England and 7 commercial vault operators. For simplicity, this set of vaults can be called the LBMA London vaults. The 7 commercial vault operators are HSBC, Brinks, ICBC Standard Bank, Malca Amit, JP Morgan, Loomis and G4S. ICBC Standard outsources its vault management to Brinks. It’s possible that to some extent HSBC also outsources some of its vault management to Brinks.
Strangely, the LBMA’s initial reporting strangely only runs up to 31 March 2017, which is 4-months prior to the first publication date of 31 July. This is despite the fact that new LBMA vault holdings data is supposed to be published on a 3-month lagged basis, which would imply a latest report coverage date of 30 April.
At the end of April 2017, the Bank of England separately began publication of gold vault holdings for the gold bars that the Bank stores in custody within its own vaults. The Bank of England reporting is also on a 3-month lagged basis (and the Bank actually adheres to this reporting lag). See BullionStar article “Bank of England releases new data on its gold vault holdings”, dated 28 April 2017, for details of the Bank of England vault reporting initiative.
Currently, the Bank of England is therefore 1 month ahead of the LBMA vault data, i.e. on 31 July 2017, the Bank of England’s gold page was updated with Bank of England gold custody vault holdings as of 30 April 2017.
Ignoring the LBMA 3-month lagged vs 4-month lagged anomaly, the LBMA’s first vault reporting update, for vault data as of 31 March 2017, states that the 8 sets of vaults in question (which includes the Bank of England gold vaults) held a combined 7449 tonnes of gold and a combined 32078 tonnes of silver.
Also included in the first batch of LBMA data are comparable London vault holdings figures for gold and silver for each month-end date from July 2016 to February 2016 inclusive. Therefore, as of the 31 July 2017, there is now an LBMA dataset of 9 months of data, which will be augmented by one month each month going forward. Whether the LBMA will play catch-up and publish April 2017 month-end and May 2017 month-end figures simultaneously at the next reporting date of 31 August 2017 remains to be seen.
The New Vault Data – Gold and Silver
For 31 March 2017, the LBMA is reporting 7449 tonnes of gold stored across the 8 sets of vault locations. For the same date, the Bank of England reported 5081 tonnes of gold held in the Bank of England vaults. Therefore, as of 31 March 2017, there were 2368 tonnes of gold ‘not in the Bank of England vaults’ (or at least 2368 tonnes of gold not counted by the Bank of England data).
Of the gold not in the Bank of England vaults, about 1510 tonnes of this gold in London was held by gold-backed Exchange Traded Funds (ETFs), mainly with the custodians HSBC and JP Morgan. These ETFs include the SPDR Gold Trust and various ETFs from ETF Securities, Source, iShares, and Deutsche Bank etc. This 1510 tonnes figure is taken from an estimate calculated at the end of April 2017 using data from the GoldChartsRUs website. See BullionStar article “Summer of 17: LBMA Confirms Upcoming Publication of London Gold Vault Holdings” dated 9 May 2017 for details of this ETF calculation.
Subtracting this 1510 tonnes of ETF gold from the 2368 tonnes of gold stored outside the Bank of England vaults means that as of 31 March 2017, there were only about 858 tonnes of gold stored in the LBMA vaults outside of the Bank of England vaults that was not held by gold-backed ETF holdings. See Table 1 below.
The lowest gold holdings number reported by the LBMA within its 9 months of vault data is actually the first month, i.e. July 2016. At month-end July 2016, the LBMA report shows total vaulted gold of 7283 tonnes. There was therefore a net addition of 166 tonnes of gold to the LBMA vaults between August 2016 and the end of March 2017, with net additions over the August to October 2016 period, followed by net declines over the November 2016 to February 2017 period.
Turning to silver, as of 31 March 2017, the LBMA is reporting total vaulted silver of 32,078 tonnes held in London vaults. The vaulted silver data also shows a notable increase over the period from the end of July 2016 to the end of March 2017, with a net 2485 tonnes of silver added to the vaults.
Since the Bank of England vaults only store gold in custody on behalf of customers and do not store silver, there are no silver holdings at the Bank of England and therefore there is no specific Bank of England silver reporting. The LBMA silver data therefore refers purely to silver vaulted with operators such as Brinks, JP Morgan, Malca Amit, HSBC, and Loomis.
There are currently at least 12,000 tonnes of silver stored in London on behalf of silver-backed ETFs such as the iShares Silver Trust (SLV), various ETF Securities products, a SOURCE ETF and some Deutsche Bank ETFs. Subtracting these ETF holdings from the full 32,078 tonne figure being reported by the LBMA would suggest that there are an additional ~ 20,000 tonnes of non-ETF silver held in the London vaults.
Previous Vault Estimates for Gold and Silver
Prior to the new LBMA and Bank of England vault holdings data reports, the only way to work out how much gold and silver were in the London vaulting network was through estimation. Between 2015 and 2017, a number of these estimates were calculated for gold and published on the BullionStar website and the GoldChartsRUs website.
The “Tracking the gold held in London” article, published on 5 October 2016, took a LBMA statement of 6500 tonnes of gold being in London, the earliest reference to which was from 8 February 2016 Internet Archive page cache, and also took a Bank of England statement that the Bank held 4725 tonnes as of the end of February 2016 period, and then it factored in that the UK net imported more than 800 tonnes of non-monetary gold up to August 2016, and also that ETFs had added about 399 tonnes over the same period. It also calculated, using GoldChartsRUS ETF data, that the London-based gold-backed ETFs held about 1679 tonnes of gold as of the end of September 2016.
Therefore, as of the end of September 2016, there could have been at least 7300 tonnes of gold held across the LBMA and Bank of England vaults, i.e. 6500 tonnes + 800 tonnes = 7300 tonnes. As it turns out, this estimate was quite close to the actual quantity of gold held in the LBMA and Bank of England vaults at the end of September 2016, which the LBMA’s new reporting now confirms to have been 7590 tonnes. The estimate is a lower number because it was unclear as to which initial date the LBMA’s 6500 tonnes reference referred to (in early 2016 or before).
Previous Vault Estimates Silver
At the beginning of July 2017, an article on the BullionStar website titled “How many Silver Bars are in the LBMA Vaults in London?” estimated that there were about 12,000 tonnes of Good Delivery silver bars held across 4 LBMA vault operators in London on behalf of 11 silver-backed Exchange Traded Funds. These ETFs and the distribution of their silver bars across the 4 vault operators of Brinks, Malca Amit, JP Morgan and HSBC can be seen in the following table.
Table 3: ETF Silver held across LBMA commercial vaults in London, early July 2017
The above article about the number of silver bars in the London vaults also drew on some data from precious metals consultancy Thomson Reuters GFMS, which each year publishes a table of identifiable above ground global silver supply in its World Silver Survey. One category of silver within the GFMS identifiable above ground silver inventories is called ‘Custodian Vaults’. This is distinct from silver holdings in ETFs and silver holdings in exchange inventories such as in COMEX approved vaults in New York. A simple way to view ‘Custodian Vaults’ silver holdings is as an opaque ‘unreported holdings’ category as opposed to the more the transparent ETF holdings and COMEX holdings categories.
For 2016, according to GFMS, this ‘Custodian Vaults’ silver amounted to 1571.2 million ounces (48,871 tonnes), of which 488.7 million ounces (15,200 tonnes), or 31% was represented by what GFMS calls the ‘Europe’ region. Unfortunately, GFMS do not break out the ‘Custodian Vaults’ numbers by individual country because they say that they receive the data on a confidential basis and cannot divulge the granularity. The early July article on BullionStar had speculated that:
“With 488.7 million ozs (15,201 tonnes) of silver held in Europe in ‘Custodian vaults’ that is not reported anywhere, at least some of this silver must be held in London, which is one of the world’s largest financial centers and the world’s highest trading volume silver market.”
“Apart from London, there would presumably also be significant physical silver holdings vaulted in Switzerland and to a lessor extent in countries such as Germany, the Netherlands and maybe Austria etc. So whats’s a suitable percentage for London? Given London’s extensive vaulting network and prominence as a hedge fund and institutional investment centre, a 40-50% share of the European ‘custodian vault’ silver holdings would not be unrealistic, with the other big percentage probably vaulted in Switzerland.
This would therefore put previously ‘Unreported’ silver holdings in the London vaults at between 6080 tonnes and 7600 tonnes (or an additional 182,000 to 230,000 Good Delivery Silver bars).
Adding this range of 6080 – 7600 tonnes to the 12,040 tonne figure that the 11 ETFs above hold, gives a total figure of 18,120 – 19,640 tonnes of silver stored in the LBMA vaults in London (545,000 – 585,000 Good Delivery silver bars).
But here’s the catch. With the LBMA now saying that as of the end of March 2017 there were 1.031 billion ounces of silver, or 32078 tonnes, stored in the LBMA vaulting network in London (and 31238 tonnes of silver in London as of end of December 2016), of which at least 12,000 tonnes is in silver-backed ETFs, then that still leaves about 20,000 tonnes of silver in the London vaults, which is higher than the silver total attributed to the entire ‘custodian vault’ category’ in Europe (as per the GFMS 2016 report).
Even the lowest quantity in the 9 months that the LBMA reports on, which is month-end July 2016, states that the LBMA vaults held 951,433,000 ounces (29,593 tonnes), which after excluding silver ETFs in London, is still higher than the total ‘Custodian Vault’ category that GFMS attributes to the European region in 2016.
These new LBMA vault figures are basically implying that all of the GFMS custodian vault figure for Europe (and some more) is all held in London and not anywhere else in Europe. But that could not be the case as there is also a lot of silver vaulted in Switzerland and other European countries such as Germany, to think of but a few.
This begs the question, does the GFMS Custodian vault number for Europe need to be updated to reflect the gap between the non-ETF holdings that LBMA claims are in the London vaults and what GFMS is reporting in a European ‘Custodian vaults’ category? If the LBMA reporting actually broke down the silver vaulting quantity number into Good Delivery silver bars and other categories, it might help solve this puzzle as it would give an indication of how much of this 32,000 tonnes of silver is in the form of bars that are accepted for settlement in the London Silver Market i.e. Good Delivery silver bars.
Could some of this 32,000 tonnes of silver be in the form of silver jewellery, and private holdings of silver antiques and even silver artifacts? On the surface the LBMA reporting appears to say not since it states that:
“jewellery and other private holdings held by retailers, individuals and smaller vaults not included in the London Clearing system are not included in the numbers”
But because this statement reads rather ambiguously, by implication another interpretation of the LBMA statement could be that:
“jewellery and other private holdings held by retailers and individuals in vaults that are part of the London Clearing system are included in the numbers”
The London Clearing system here refers to the vaults of the 7 commercial vault operators.
Until GFMS comes back with a possible clarification of its ‘Custodian Vault’ figure for Europe, then this contradiction between the LBMA data for silver and GFMS data for silver will persist.
Large Bars but also Small Bars and Gold Coins
According to the LBMA’s press release, while “the LBMA vault holding data …represent the volume of Loco London gold and silver held in the London vaults offering custodian services“, surprisingly the new LBMA data includes “all physical forms of metal inclusive of large wholesale bars, coin, kilo bars and small bars.”
The inclusion of gold coins, smaller gold bars and gold kilobars in the LBMA vault data is bizarre because only large wholesale bars are accepted as Good Delivery in the London gold and silver markets, not gold coin, not smaller bars, and not gold kilobars. Even the LBMA website states that “the term Loco London refers to gold and silver bullion that is physically held in London. Only LBMA Good Delivery bars are acceptable for trading in the London market.”
Furthermore, the entire physical London Gold Market and physical London Silver Market revolve around the LBMA Good Delivery lists. Spot, forward and options trades on the London OTC gold and silver market are only referenced to a unit of delivery of a Good Delivery bar, both for gold and for silver.
This is the London Good Delivery gold bar. It must have a minimum fineness of 995.0 and a gold content of between 350 and 430 fine ounces….. Bars are generally close to 400 ounces or 12.5 kilograms”
For silver, the same guide states that:
“Unit for Delivery of Loco London Silver
This is the London Good Delivery silver bar. It must have a minimum fineness of 999 and a weight range between 750 and 1,100 ounces, although it is recommended that ideally bars should be produced within the range of 900 to 1,050 ounces. Bars generally weigh around 1,000 ounces.”
Additionally, all the new London-based gold futures contracts launched by the LME, ICE and CME also reference, if only virtually, the unit for Delivery of loco London gold, i.e. the London Good Delivery gold bar. They do not reference smaller gold bars or gold coins.
In contrast to the LBMA , the COMEX exchange where the famous COMEX 100 ounce gold futures contract is traded only reports vault inventories of gold and silver where the bars satisfy that contract for delivery, i.e. the contract for delivery is one hundred (100) troy ounces of minimum fineness 995 gold of an approved brand in the form of either “one 100 troy ounce bar, or three 1 kilo bars”. COMEX do not report 400 oz gold bars or gold coins specifically because the contract has nothing to do with these products. Then why is the LBMA reporting on forms of gold that have nothing to do with the settlement norms of its OTC products in London?
Additionally, the LBMA website also states that “only bars produced by refiners on the [Good Delivery] Lists can be traded in the London market.“ All of this begs the question, why does the LBMA bother including smaller bars, kilogram bars and gold coins? These bars cannot be used in settlement or delivery for any standard London Gold Market transactions.
Perhaps these smaller gold bars and gold coins have been included in the statistics so as to boost the total reported figures or to make reverse engineering of the numbers more difficult? While the combined volumes of smaller bars and kilobars probably don’t add up to much in terms of tonnage, the combined gold coin holdings of central banks stored at the Bank of England could be material.
For example, the United Kingdom, through HM Treasury’s Exchange Equalisation Account (EEA), claims to hold 310.3 tonnes of gold in its reserves, all of which is held in custody at the Bank of England. The latest EEA accounts for 2016/2017, published 18 July 2017 state that “The gold bars and gold coin in the reserves were stored physically at the Bank’s premises.” See Page 43, Exchange Equalisation Accounts for details. Many more central banks, for historical reasons, also hold gold coins in their reserves. See Bullionstar article “Central Banks and Governments and their gold coin holdings” for some examples.
As another example, the Banque de France in Paris holds 2435 tonnes of gold of which 100 tonnes is in the form of gold coins, and 2,335 tonnes of gold bars. Even though these gold coins are held in Paris, this shows that central bank gold coin holdings could materially affect LBMA gold reporting that includes ‘gold coins‘ within the rolled up number. But such gold coins cannot be traded within the LBMA / LPMCL gold trading / gold clearing system and if present would overstate the number of Good delivery gold bars within the system.
The Bank of England gold page on its website also only refers to Good Delivery ‘gold bars’ and says nothing about gold coins, which underlines the special status to which the Bank of England assigns Good Delivery gold bars in the London Gold Market. Specifically, the BoE gold page states that:
“..we provide gold storage on an allocated basis, meaning that the customer retains the title to specific gold bars in our vaults”
“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“
The Bank of England has now confirmed to me, however, that the gold holdings number that it reports on its website “is the total of all gold held at the Bank” and that this “includes coins that belong to the Exchange Equalisation Account (EEA) which are held by the Bank on behalf of Her Majesty’s Treasury (HMT)”
This means that the total gold number being reported by both the Bank of England and the LBMA needs to be adjusted downward by some percentage so as to reflect the amount of real Good Delivery gold bars in the London vaults. What this downward adjustment should be is unclear, as neither the Bank of England nor the LBMA break out their figures by category of gold bars versus gold coins.
LBMA numbers – Obscured Rolled-up numbers
Another shortcoming in the LBMA’s vault reporting is that it does not break down the gold and silver holdings per individual vault. The LBMA will be only releasing 2 highly rolled-up numbers per month, one for gold and one for silver, for example, 7449 tones for gold and 32078 tonnes for silver in the latest month.
Contrast this to New York based COMEX and ICE gold futures daily reporting, which both do break down the gold holdings per New York vault. Realistically, the LBMA was never going to report gold or silver holdings per vault, as this would be a bridge too far towards real transparency, and would show how much or how little gold and silver is stored by each London vault operator / at each London vault location.
This does not, however, stop the LBMA from claiming transparency and in its 31 July press release it states that:
“According to the Fair and Effective Markets Review (see here for further details) ‘…in markets where OTC trading remains the preferred model, authorities and market participants should continue to explore the scope for improving transparency, in ways that also enhance effectiveness.’“
Real transparency, as opposed to lip-service transparency, would be supported by providing an individual breakdown of the number of Good Delivery gold and silver bars stored in each of the 8 sets of vaults at each month end. If they want to include gold coins, smaller gold bars, and gold kilo bars as extra categories, then this could also be itemised on a proper report. It would also only take any decent software developer about 1 day to write and create such a report.
There is also the issue of independently auditing these LBMA numbers. The issue is essentially that there is no independent auditing of these LBMA numbers nor will there be. So there is no second opinion as to whether the data is accurate or not.
The Bank of England gold vault reporting is also short of transparency as it does not provide a breakdown of how much of the reported gold is held by central banks, how much gold is held by bullion banks, how much of the central bank gold is out on loan with the bullion banks, and how much gold, if any, is held on behalf of ETFs at the Bank of England as sub-custodian. Real transparency in this area would provide all of this information including how much gold the LPMCL bullion clearing banks HSBC, JP Morgan, UBS, Scotia Mocatta and ICBC Standard hold at the Bank of England vaults.
On the issue of ETF gold held at the Bank of England, it has been proven that at times the Bank of England has acted as a gold custodian for an ETF, for example, during the first quarter 2016, the SPDR Gold Trust held up to 29 tonnes of gold at the Bank of England, with the Bank of England acting in the capacity of sub-custodian to the SPDR Gold Trust. See BullionStar article “SPDR Gold Trust gold bars at the Bank of England vaults” for details.
The London Float
The most important question with this new LBMA vault reporting is how much of the 7449 tonnes of gold stored in London as of the end of March 2017 is owned or controlled by bullion banks.
Or more specifically, what is the total level of LBMA bullion bank unallocated gold liabilities in the London market compared to the amount of real physical gold bars that they own or control.
This ‘gold owned or controlled by the bullion banks’ metric can be referred to as the ‘London Float’. LBMA bullion banks can maintain their own holdings of gold bars which they buy in the market or import directly, and they can also borrow other people’s gold thereby controlling this gold also. Some of this gold can be in the LBMA commercial vaults. Some can also be in the Bank of England vaults.
In its press release, the LBMA states that:
“The physical holdings of precious metals held in the London vaults underpin the gross daily trading and net clearing in London.”
This is not exactly true. Only gold which is owned or controlled by the bullion banks can underpin gold trading in London. Allocated gold sitting in a vault that is owned by central banks, ETFs or investors and which does not have any other claim attached to it, does not underpin anything. It just sits there in a vault.
As regards gold bars stored in the LBMA vaults in London, these bars can either be owned by central banks at the Bank of England, owned by central banks at commercial vaults in London, owned by ETFs at the commercial vaults in London, owned or controlled by bullion banks, and owned by investors (either institutional investors, hedge funds, private individuals etc). On occasion, some ETF gold has at various times been at the Bank of England.
If central bank gold is held in allocated form and not lent out, then it is ‘off the market’ and can’t be ‘used’ by any other party such as a LBMA bullion bank. If central bank gold is lent out or swapped out to bullion banks, then it can be used or even sold by those bullion banks. The LBMA uses the euphemism ‘liquidity’ to refer to this gold lending. For example, from the LBMA’s recent press release on the new vault reporting it says:
“In addition, the Bank of England also offers gold custodial services to central banks and certain commercial firms, that facilitate central bank access to the liquidity of the London gold market.”
ETF gold when it is held within an ETF cannot legally be used by other entities since it is owned by the ETF and allocated to the ETF. Institutionally owned gold or private owned gold when it is allocated is owned by the holder. It could in theory be lent to bullion banks also.
Some of the LBMA bullion banks have gold accounts at the Bank of England. How many of these banks maintain gold holdings within the Bank of England vaults nobody will say, not the Bank of England nor the LBMA nor the bullion banks, but it at least extends to the 5 members of London Precious Metals Clearing Limited (LPMCL) which are HSBC, JP Morgan, Scotia Mocatta, ICBC Standard and UBS. Gold accounts for bullion banks undoubtedly also extend to additional bullion banks beyond the LPMCL members because many bullion banks have been involved in gold lending at the Bank of England for a long time, for example Standard Chartered, Barclays, Natixis, BNP Paribas, Deutsche Bank, and Goldman Sachs, and these banks would at some point have to take delivery of borrowed gold at the Bank of England.
Note, the gold brokers of the London Gold Market have for a long time, as least since the 1970s, been able to store some of their gold bars at the Bank of England vaults. These brokers were historically Samuel Montagu, Mocatta, the old Sharps Pixley, NM Rothschild and Johnson Matthey.
Since LBMA bullion banks can maintain gold accounts at the LBMA commercial vaults in London, and because some of these banks have gold accounts at the Bank of England also, then this London “gold float” can comprise gold bars at the commercial vaults and gold bars at the Bank of England vaults. It is however, quite difficult to say exactly what size this London bullion bank gold float is at any given time.
Whatever the actual number, its not very big in size because if you subtract central bank gold and ETF gold from the overall LBMA gold figure (of 7449 tonnes as of the end of March 2017) then whatever is left is not a very big quantity of gold bars, and at least some of this residual gold stored in the LBMA commercial vaults is owned by institutions, hedge funds, private individuals and platforms such as BullionVault.
In September 2015, a study of central bank gold held at the Bank of England calculated that about 3779 tonnes of Bank of England custody gold can be accounted for by central bank and monetary authority gold holdings. See “Central bank gold at the Bank of England” for details and GoldChartsRUs page “LBMA/BOE VAULTED GOLD, 2016 Update – The London Float”. Compared to the 4725 tonnes of gold held at the Bank of England at the end of February 2016, this would then mean that there were about 946 tonnes of gold at the Bank of England that was “unaccounted for by central banks”. This was about 20% of the total amount of gold held at the Bank of England at that time.
However, some of this 946 tonnes was probably central bank gold where the central bank owner had not publicly divulged that it held gold at the Bank of England. Many central banks around the world that were contacted as part of the research into the “central bank gold at the Bank of England calculation” either didn’t reply or replied that they could not confirm where their gold was stored. See BullionStar article “Central Banks’ secrecy and silence on gold storage arrangements” for more details.
After factoring in these unknown central bank gold holders at the Bank of England, the remaining residual would be bullion bank gold. It could therefore be assumed that a percentage of gold stored at Bank of England, somewhere less than 20% and probably also less than 10%, is owned by bullion banks. Since central bank gold holdings, on paper at least are relatively static, the monthly changes in gold holdings at the Bank of England therefore probably mainly reflect bullion bank gold movements rather than central bank gold movements.
If we look back now at the LBMA vault data for gold as of 31 March 2017, how much of this gold could be bullion banks (London float) gold.
LBMA total gold vaulted: 7449 tonnes
Bank of England gold vaulted: 5081 tonnes
Gold in commercial LBMA vaults: 2368 tonnes
Gold in ETFs: 1510 tonnes
Gold in commercial vaults not in ETFs: 858 tonnes
Gold in commercial vaults not in ETFs that is allocated to institutions & hedge funds = x
i.e. 7449 – 5081 = 2368 – 1510 = 858
Assume 10% of the gold at the Bank of England is bullion bank gold. Also assume bullion banks gold hold some gold in LBMA commercial vaults.
Therefore total bullion bank gold could be (0.1 * 5081) + (858 – x) = 508 + 858 – x = 1366 – x.
Since x has to be > 0, then the bullion bank London float is definitely less than 1300 tonnes and probably less than 1000 tonnes. The bullion banks might argue that they can borrow more gold from central banks, take gold out of the ETFs, and even import gold from refineries. All of these options are possible, but still, the London bullion bank float is not that large. And it is this number in tonnes of gold which should be compared to the enormous volumes of ‘paper gold’ trading that occur in the London Gold Market each and every trading day.
For example in June 2017, the LBMA clearing statistics state that 21 million ounces of gold was cleared each trading day in the London Gold Market. That’s 653 tonnes of gold cleared each day in London. With a 10 to 1 ratio of gold trading to gold clearing, that’s the equivalent of 6530 tonnes of gold traded each day in the London gold market, or 143,660 tonnes over the 22 trading days of June. Annualised, this is 1.632 million tonnes of gold traded per year (using 250 trading days per year).
And sitting at the bottom of this trading pyramid is probably less than 1000 tonnes of bullion bank gold underpinning the gigantic trading volumes and huge unallocated gold liabilities of the bullion banks. So you can see that the London gold trading system is a fractional-reserve system with tiny physical gold underpinnings.
In May 2011, during a presentation at the LBMA Bullion Market Forum in Shanghai China, on the topic of London gold vaults, former LBMA CEO Stewart Murray included a slide which stated that:
Investment – more than ETFs
Gold Holdings have increased by ~1,800 tonnes in past 5 years, almost all held in London vaults
Many thousands of tonnes of ETF silver are held in London
Central banks hold large amounts of allocated gold at the Bank of England
Various investors hold very substantial amounts unallocated gold and silver in the London vaults
The last bullet point of the above slide is particularly interesting as it references “very substantial amounts’ of unallocated gold and silver. Discounting the fact for a moment that unallocated gold and silver is not necessarily held in vaults or held anywhere else, given that it’s just a claim against a bullion bank, the statement really means that investors have ‘very substantial amounts‘ of claims against the bullion banks offering the unallocated gold and silver accounts i.e. very substantial liabilities in the form of unallocated gold and silver obligations to the gold and silver unallocated account holders.
If a small percentage of these claim holders / investors decided to convert their claims into allocated gold and silver, especially allocated gold, then where are the bullion banks going to get the physical gold to give to these converting claim holders? Neither do the claim holders of unallocated positions have any way of knowing how accurate the LBMA vault reporting is, because there is no independent auditing of the positions or of the report.
UBS and LBMA
The last line of the LBMA press release about the new vault reporting states the following:
This line includes an embedded link to the Teves report within the press release. This opens a 7 page report written by Teves about the new vault reporting. By definition, given that this report is linked to in the press release, it means that Joni Teves of UBS had the LBMA vault reporting data before it was publicly released, otherwise how could UBS have written its summary.
In her report, Teves states that a UBS database estimates that there are “1,485 tonnes of gold worth about $60bn and about 13,759 tonnes of silver worth about $7.85bn are likely to be held in London to back ETF shares“.
These UBS numbers are fairly similar to the ETF estimates for gold (1510 tonnes) and silver (12040 tonnes) that we came up with here at BullionStar, and so to some extent corroborate our previous ETF estimates. Teves also implies that some of the gold in the Bank of England figure is not central bank gold but is commercial bank gold as she says:
“let’s say for illustration’s sake that about 80% to 90% of BoE gold holdings are accounted for by the official sector.“
The statement on face value implies that 10% – 20% of Bank of England gold is not central bank gold. But why the grey area phrase of “let’s say for illustration’s sake”. Shouldn’t the legendary Swiss Bank UBS be more scientific than this?
Teves also says assume “negligible amount (in commercial vaults) comprises official sector holdings“, and she concludes that “this suggests that over the past year, an average of about 2,945 to 3,450 tonnes ($119-$139 bn) of investment-related gold was held in London.”
What she is doing here is taking the average of 9 months of gold holdings held in the LBMA commercial vaults (which is 2439 tonnes) and then adding 10% and 20% respectively of the 9 month average of gold held at the Bank of England (which is 506 and 1011 tonnes) to get the resulting range of between 2945 and 3451 tonnes.
Then she takes the ETF tonnes estimate (1485) away from her range to get a range of between 1460 and 1965 tonnes, as she states:
… “Taking these ETF-related holdings into account would then leave roughly around 1,460 to 1,965 tonnes or about $59bn to $79bn worth of gold in unallocated and allocated accounts as available pool of liquidity for OTC trading activities“
But what this assumption fails to take into account is that some of this 1,460 to 1,965 tonnes that is in allocated accounts is not available as a pool of liquidity, because it is held in allocated form by investors precisely so that the bullion banks cannot get their hands on it and trade with it. In other words, it is ring fenced. Either way, a model will always output what has been input into it. Change the 10% and 20% range assumptions about the amount of commercial bank gold in the Bank of England vaults and this materially alters the numbers that can be attributed to be an ‘available pool of liquidity for OTC trading activities’.
Additionally, the portion of this residual gold that is in ‘unallocated accounts’ is not owned by any investors, it is owned by the banks. The ‘unallocated accounts’ holders merely have claims on the bullion banks for metal that is backed by a fractional-reserve trading system.
In her commentary about the silver held in the London vaults, Teves does not comment at all about the huge gap between her ETF silver in London (which UBS states as 13,759 tonnes), and the full 32000 tonnes reported by the LBMA,and does not mention how this huge gap is larger than all the ‘Custodian Vault’ silver which Thomson Reuters GFMS attributes to the entire ‘Europe’ region.
The amount of gold in the London LBMA gold vaults (incl. Bank of England) that is not central bank gold, that is not ETF gold, and that is not institutional allocated gold is quite a low number. What this actual number is difficult to say because a) the LBMA will not produce a proper vault report that shows ownership of gold by category of holder, and b) neither will the Bank of England in its gold vault reporting provide a breakdown between the gold owned by central banks and the gold owned by bullion banks. So there is still no real transparency in this area. Just a faint chink of light into a dark cavern.
On the topic of London vaulted silver, there appears to be a lot more silver in the LBMA vaults than even GFMS thought there was. It will be interesting to see how GFMS and the LBMA will resolve their apparent contradiction on the amount of silver stored in the London LBMA vaults.
Over the last number of years, one of the most interesting trends in the physical gold world is the ongoing conversion of large 400 ounce gold bars into smaller high purity 1 kilogram gold bars to meet the insatiable demand of Asian gold markets such as China and India.
This transformation of 400 ounce bars into 1 kilogram bars is an established fact and is irrefutable given the large amount of evidence which proves it is happening, as has been documented on the BullionStar website and elsewhere.
It is also something which causes plenty of excitement in the gold world as it underscores the huge movement of physical gold from West to East, and the continual depletion of gold inventories from locations such as the London Gold Market.
The general movement is one of 995 purity 400 ounce gold bars coming out of gold-backed ETFs, central bank gold holdings and other wholesale gold holdings, and these bars making their way to the Swiss refineries where they are transformed / smelted / recast into smaller 9999 high purity gold bars. The smaller gold bars are then exported from Switzerland to India, China, Hong Kong, and the Middle East.
At the same time as the wider gold market acknowledges and publicises this trend, the establishment gold world and bullion banks (as represented by the London Bullion Market Association) tend to downplay this conversion of 400 ounce gold bars into 1 kilogram bars, presumably because it directly highlights the continual drain of real physical gold out of the London vaults into China and India, gold which has little chance of ever coming back again.
For an example of significant downplaying of conversion of 400 ounce gold bars into kilogram gold bars, see BullionStar post from September 2015 titled “Moving the goalposts….The LBMA’s shifting stance on gold refinery production statistics” which documents how a mammoth 2000 tonnes of LBMA gold refinery output attributed to the year 2013, mysteriously disappeared from the LBMA’s publications in early August 2015, after the original figure of 6,601 tonnes had been highlighted on this website, with the original figure being replaced by a far lower 4600 tonnes.
While gold refineries in countries other than Switzerland may be involved in these 400 ounce to 1 kilogram gold bar transformations, the Swiss refineries are the big players in this area, as they say so themselves. The names in question are Valcambi, PAMP, Argor Heraeus and Metalor. For a full understanding of the extent to which these large Swiss gold refineries process 400 ounce gold bars into kilobars and the importance that they attribute to this specific category of refinery activity, please see BullionStar blog from November 2015 titled “From Good Delivery bars to Kilobars – The Swiss Refineries, the GFMS data, and the LBMA“.
But if you thought the massive conversion of large gold bars into kilogram bars that occurred in years such as 2013 and 2014 was an anomaly or a one-off, then think again. Because it also happened in 2015, and in a very big way.
LBMA Update – 2015 Gold Refinery Statistics
In early May 2017, the London Bullion Market Association published a revised version of its 4 page ‘LBMA Overview Brochure’, the most notable update of which was that it revealed refinery production statistics for 2015 for the gold and silver refineries around the globe that are on the LBMA’s Good Delivery List.
A table in the updated brochure states that in 2015, the “total refined gold production by the refiners on the List was estimated to be 5,034 tonnes”. The corresponding figure for gold in 2014 was 4921 tonnes.
At some point each year, the LBMA will invariable release such refinery statistics, however, the lag in publication is inexplicably long, for example, 2015 data only gets released in May 2017. Why 2016 data is not released in 2017 remains a mystery. This length of lag would not happen in any other industry. Leaving aside this mystery, the 2015 statistics are interesting and worth analysing for a whole lot of reasons, which are discussed below.
This year the LBMA update – of the 2015 data – was a very low-key affair indeed and did not even, in the LBMA’s eyes, merit a press release. This differs to May 2016, when the LBMA published 2014 gold and silver refinery statistics and at least accompanied the announcement with a press release which it titled “4,921 tonnes of gold production in 2014 – LBMA GD refiners”.
The LBMA’s May 2016 press release stated that 2014 refinery gold production by the refiners on the LBMA’s Gold Good Delivery List for gold totalled 4921 tonnes, and importantly, it attributed the excess over ‘world mine production of 4,394 tonnes‘ to be due to “recycling of material by LBMA GD refiners converting large 400 oz bars into kilobars“.
This reference to ‘world mine production of 4,394 tonnes‘, which was itself attributed to Thomson Reuters GFMS, is incorrect, and the LBMA should have said that “world mine production + scrap recycling + net hedging supply” was 4394 tonnes, as is clear in the Thomson Reuters GFMS table from which the figure of 4394 tonnes was taken. This table is as follows:
The ‘net hedging supply’ category can be ignored as it is not relevant for gold-laden material arriving into gold refineries for processing. What the LBMA should have said in its 2016 press release is that in 2014, the gold refineries on its list (which generate 85% – 95% of world gold refinery output) produced 4921 tonnes of gold, which was in excess of combined gold mining production and scrap recycling i.e. in excess of 3131 + 1158 = 4289 tonnes. This excess was due to “recycling of material by LBMA GD refiners converting large 400 oz bars into kilobars”.
Given that the LBMA gold refiners only represent 85% – 90% of world gold refinery output, and not 100%, the mine and scrap material that they process is only 85% – 90% of global mine production and scrap production. Therefore, the GFMS figures should be scaled back to represent this 85% to 90% range.
It is however not realistic to expect that bullion banks which supply large 400 ounce gold bars to gold refineries for conversion into smaller gold bars would use non-LBMA accredited gold refineries to do so, since a) bullion banks are all members of the LBMA, and b) the London bullion banks use Swiss gold refineries which are all on the LBMA good delivery list. They would therefore not use a more obscure non-LBMA gold refinery, such as one of the smaller Indian gold refineries, to convert large wholesale / central bank gold bars into smaller gold bars.
Therefore, what the LBMA press release in May 2016 should really have said is as follows:
“In 2014, the gold refineries on the LBMA Good Delivery List (which generate 85% – 95% of world gold refinery output) produced 4921 tonnes of gold. This was in excess of the 85% – 90% of combined gold mining production and scrap gold recycling that these refineries are known to process. The LBMA refineries’ 4921 tonnes of refinery output in 2014 in excess of their mine and scrap processing of 3646 – 3860 tonnes (85% and 90% of combined mine and scrap supply) was due to recycling of material by LBMA GD refiners converting large 400 oz bars into kilobars.”
Such a statement would then put conversion of large 400 ounce gold bars into kilogram gold bars by LBMA gold refineries in 2014 at between 1060 and 1275 tonnes of gold (4921 – 3860, and 4921 – 3646). It would also mean that large 400 ounce gold bars from existing above-ground stockpiles were topping up ‘normal’ physical gold supply (gold mining output and scrap recycling) by between 25% and 30% during 2014.
These 2014 refinery figures have previously been covered in a BullionStar posting in June 2016. See BullionStar blog “An update on LBMA Refinery Statistics and GFMS”. The important take-away point here is that in 2014 the gold refineries on the LBMA good delivery list generated refined gold output in a distinct category attributed to recycling of material by LBMA good delivery refiners converting large 400 oz bars into kilobars.
Fast forwarding now to the 2015 LBMA figures and the 2015 Thomson Reuters GFMS figures, and repeating the above calculations:
For 2015, the LBMA states that the gold refineries on its list had total refined gold output of 5034 tonnes. In 2015, according to Thomson Reuters GFMS, gold mining production was 3158 tonnes, while scrap gold supply was 1173 tonnes, i.e. a combined mine and scrap gold supply of 4331 tonnes.
Since the gold refineries on the LBMA Good Delivery List for gold represent 85% to 90% of ‘world production’, which by LBMA logic is GFMS gold mining production and GFMS scrap recycling, then, these refineries would have processed between 3681 tonnes and 3898 tonnes (85% – 95%) of mine production and scrap supply during 2015.
This then implies that during 2015, these LBMA gold refineries also processed between 1136 tonnes and 1353 tonnes of gold due to converting large 400 oz bars into kilobars.
If the LBMA had have written a press release in May 2017 to coincide with updating its table of the output of LBMA Good Delivery refineries, it should have read something like the following:
“In 2015, the gold refineries on the LBMA Good Delivery List (which generate 85% – 95% of world gold refinery output) produced 5034 tonnes of gold. This was in excess of the 85% – 90% of combined gold mining production and scrap gold recycling that these refineries are known to process. The LBMA refineries’ 5034 tonnes of refinery output in 2015 in excess of their mine and scrap processing of 3681 – 3898 tonnes (85% and 90% of combined mine and scrap supply) was due to recycling of material by LBMA GD refiners converting large 400 oz bars into kilobars, which was in the range of 1136 to 1353 tonnes.”
Where would these huge quantities of 400 ounce gold bars have come from that were melted down during 2015, predominantly or even exclusively by the Swiss gold refineries? Because 1136 to 1353 tonnes of large wholesale market gold bars is a lot of gold. The most likely source of this gold is from the London Gold Market. Beyond that, gold which was already stored in Switzerland is also a possible pool from which to draw from.
2015 UK to Switzerland Gold Exports
During 2015, Switzerland imported 1853 tonnes of non-monetary gold, and exported 1861 tonnes of non-monetary gold. By far the largest source of Swiss gold imports during 2015 was ‘the UK’, which in this case really means the London Gold Market. Non-monetary gold is just gold which is not monetary (central bank) gold. Non-monetary gold shows up on trade statistics. Monetary gold does not show up on trade statistics since central banks get an exemption from revealing physical movements of monetary gold across national borders.
During 2015, Switzerland imported 644.5 tonnes of non-monetary gold from the UK (London). You can see from the below graph that no other source country came anywhere close to supplying non-monetary gold to Switzerland in 2015, with the next largest source countries each only sending less than 70 tonnes of gold to Switzerland. And London does not have any gold mines nor any major scrap gold collection facilities.
Some of the other exporters of gold to Switzerland during 2015 were France, Germany, Italy and UAE/Dubai (none of which are gold mining countries), and South Africa, Russia, Peru (which have gold mining). Some of the gold sent from France, Germany, Italy and UAE was obviously scrap. Some of the gold sent from South Africa, Russia and Peru was most likely gold mining ore or gold doré. But somewhere within these numbers, there was also most likely good delivery gold bars. For example, why would Russia or South Africa send gold mining ore or gold doré or scrap to Switzerland when they have their own perfectly good gold refineries with huge capacity.
Surprising perhaps, the largest gold-backed ETF, the SPDR Gold Trust (GLD) did not lose that much gold during 2015, with only a net 65 tonne gold loss. This is more so because the damage to GLD’s gold holdings had really been done in mostly in 2013 and to a lesser extent in 2014 when holdings had fallen from the 1350 tonne range down to the 700 tonne range. See chart.
Based on recently released data from the Bank of England, it can be seen that during 2015 the Bank of England gold vaults lost 13.5 million ounces of gold, with Bank of England total gold holdings dropping from 167.2 million ounces at the end of 2014 to 153.6 million ounces at the end of 2015. This is equivalent to a 421 tonne loss of gold from the Bank of England vaults during 2015. All gold held in the Bank of England is in the form of Good Delivery gold bars (i.e. the large 400 ounce gold bars.
Whether gold lost from the Bank of England vaults during 2015 was central bank gold or bullion bank (commercial bank) gold is unclear since the Bank of England does not provide a breakdown of figures. It’s possible that some of this gold that left the Bank of England during 2015 was converted from monetary gold to non-monetary gold, and then sent to Switzerland to be transformed into kilogram gold bars. This would then show up in the Swiss trade statistics. If extracted from the Bank of England vaults and left as monetary gold and then exported to Switzerland, it would not show up in Swiss trade statistics.
If 644 tonnes of non-monetary gold, as per the Swiss trade statistics, were sent from London to Switzerland during 2015, and another 421 tonnes of monetary gold from the Bank of England were also sent to Switzerland during 2015, this in total would be 1065 tonnes of gold. This quantum would begin to account for the range of 1136 to 1353 tonnes being converted from 400 oz gold bars into 1 kilogram gold bars that the 2015 LBMA gold refinery statistics imply. Add in another 100 – 200 tonnes of Good Delivery bars from sources such as Russia, South Africa and Dubai and this huge scale of 400 ounce bar conversion begins to look achievable. There could also be Good Delivery bars flowing out of Swiss central bank vaults directly, i.e. the Swiss National Bank (SNB) gold vaults in Berne, which would not show up on any inbound gold trade customs statistics.
Within a 3 year period, we can see roughly that the following quantities of large gold bars were melted down into kilogram bars and sent to Asia:
2013: about 2000 tonnes of gold
2014: between 1060 and 1275 tonnes of gold
2015: between 1136 to 1353 tonnes of gold
Overall, within the 2013 – 2015 period that is about 4200 – 4600 tonnes of gold being converted into kilogram and other smaller denomination high purity gold bars and sent to markets in China, India, Hong Kong and elsewhere in Asia. This is gold above and beyond mine supply and scrap supply. Where has all of this gold come from? Some of it is proven to be from gold-backed ETFs. Some is most probably also from central bank vaults, in which case the central banks do not have the gold that they claim to have. Which everybody know anyway, as much central bank gold has been lent out and is merely a fiction on the central bank balance sheets. But there may also be other stockpiles of Good Delivery gold bars which are also feeding this huge trend. Until the LBMA begins to publish its vault statistics, any grey area unreported gold vault inventories in London are still being kept in the dark.
If the trend of raiding ETFs and borrowing central bank gold to send to Switzerland to convert into kilogram bars for the Asian markets continues, then this is not and cannot be sustainable. The question is how long it can remain sustainable, in other words when will it become unsustainable?
Sometime in the coming days, the London Bullion Market Association (LBMA) plans to begin publishing gold and silver vault holding totals covering the network of commercial precious vault operators in London that fall under its remit. This follows an announcement made by the LBMA on 8 May.
There are seven commercial vault operators (custodians) in the LBMA custodian vault network namely, HSBC, JP Morgan, Brinks, Malca Amit, ICBC Standard Bank, Loomis (formerly Viamat), and G4S. Note that ICBC Standard Bank has a vault which is operated by Brinks on behalf of ICBC Standard. It is also quite possible that some of the HSBC vaults, such as the famous GLD gold vault, are located within Brinks facilities.
Adding in the Bank of England gold vaults under the Bank of England’s head office in the City of London, the LBMA vaulting network comprises eight sets of vaults. However, the Bank of England vaults do not store silver, or at least there is no evidence that the Bank of England stores silver. However, the other 7 vault operators can and do store silver, or at least most of them do. It’s unclear whether the G4S vault stores anything on behalf of anyone, but that’s a different story.
The forthcoming LBMA vault data will represent actual physical gold and silver holdings, i.e. real tangible precious metals, as opposed to the intangible and gargantuan paper gold and paper silver trading volumes generated each day in the London precious metals markets.
The LBMA will report physical holdings data on an aggregated basis for each of gold and silver, i.e. one quantity number will be reported each month for vaulted gold, and one quantity number will be reported each month for vaulted silver. The LBMA data will be on a 3-month lagged basis. For example, if the LBMA begins reporting this data in early July (which it probably will), then the first set of data will refer to the end of March period.
The uncertainty as to when the LBMA will begin to publish its vault holdings data is purely because the LBMA has not provided a specific publication commencement date. At first, the LBMA announced that the reporting would begin “in the summer”. Subsequently, it announced that it’s vault reporting would begin in July.
As to whether the LBMA vault holdings numbers published each month will include or exclude the Bank of England gold vaults holdings is also unclear. At the end of April, the Bank of England went ahead and separately began to publish vault holdings numbers for its own gold vaults, also on a 3-month lagged basis. More information on this Bank of England initiative can be read in BullionStar blog “Bank of England releases new data on its gold vault holdings”
Incidentally, the Bank of England has now updated its website (updated 30 June) with the gold holdings figure for its vaults as of the end of March, and is reporting total physical gold holdings of 163.36 million troy ounces, which equates to 5081 tonnes of gold.
When the LBMA begins to publish its numbers, it will be clear as to whether the LBMA gold number includes the Bank of England gold holdings or not, and this will probably even be specified in a footnote of the report. Excluding the Bank of England vaults (or at least the non-loaned gold in the Bank of England vaults which is not under the title of bullion banks), the remaining lion’s share of the LBMA’s gold holdings number comprises gold held by Exchange Traded Funds (ETFs) in London.
“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.”
The approach used to calculate the gold stored by these ETFs in the London vaults can be seen in the article “Tracking the gold held in London: An update on ETF and BoE holdings”. To this 1510 tonnes gold figure we can add gold held on behalf of customers of BullionVault and GoldMoney – which is roughly 12 tonnes of gold between them (4.75 tonnes for GoldMoney, and 7.2 tonnes of gold for BullionVault).
When the LBMA publishes its first gold total for gold held in its vault network, it will also be clear as to whether the LBMA vaults hold any significant amount of physical gold above and beyond the gold allocated within the gold-backed ETFs. There may be some gold tonnage held on an allocated basis by the LBMA bullion banks as a ‘float’, and also some gold held in allocated form by various institutional investors such as hedge funds, but my hunch is that this residual gold will be at most a respectable fraction of the amount of gold stored on behalf of ETFs in London.
However, the silver holdings in the LBMA vault network are a different kettle of fish entirely, and in addition to ETF holdings (which are reported), there could be significant silver holdings in the London vaults which have gone unreported up until now (unreported silver in the form of what consultancy GFMS calls ‘Custodian Vault’ holdings).
Although gold usually generates the most headlines, it’s important not to forget about silver, and the fact that this new LBMA reporting will also provide a monthly aggregated total for the amount of physical silver held in the LBMA vaulting network in London. The silver stored in these LBMA vaults is in the form of variable weight London Good Delivery silver bars.
Since silver has a lower value to weight ratio than gold and is bulkier to store, silver a) takes up more room and b) can be stored in secure warehouses rather than ultra-high secure vaults that are used to store gold. This is particularly true in expensive cities such as London where it is more economical to store silver in locations with lower commercial rental values.
In the LBMA vaulting network, London Good Delivery silver bars are stored 30 bars per pallet, i.e. a formation of 10 bars stacked 3 bars high. Since each bar weighs approximately 1000 oz, each pallet will weigh about 30,000 ozs, i.e. each pallet would weigh about 1 tonne.
At this stage, can we arrive at an estimate of the minimum amount of silver currently held in the LBMA London vaulting network? The answer is yes, for the simple reason that, in a similar manner to gold-backed ETFs, a substantial number of silver-backed ETFs also hold their silver in the vaults of London-based precious metals vaulting custodians, and these ETFs publicly report their silver bar holdings.
In addition, BullionVault and GoldMoney (which are not ETFs), both hold silver with one of the custodians in the LBMA vaulting network – Loomis. But I have included the BullionVault and GoldMoney silver totals below purely because even though they are non-ETF custodian vault holdings, both companies’ silver holdings are publicly reported on their websites.
However, there is probably also a lot more additional silver held in the London vaults above and beyond the silver bars allocated to ETFs and the known silver stored by GoldMoney and BullionVault. Some of this additional silver falls under what Thomson Reuters GFMS classify as ‘Custodian Vault‘ silver, which is silver that is basically in an ‘Unreported’ category but which Thomson Reuters GFMS seems to think it knows about through its own ‘proprietary surveys’ and ‘field research’. This ‘Custodian Vault’ silver probably accounts for a substantial amount of silver in the London vaults. However, it is difficult to know because GFMS does not provide granularity on its numbers beyond an overall ‘Europe’ number. But I have made some assumptions about this ‘Custodian Vault’ silver in London, which is discussed in a final section below.
For the silver-backed ETFs, the first step is to identify which silver ETFs hold silver bars in the LBMA vaults in London. Using the list of silver ETF providers specified on Nick Laird’s GoldChartsRUs website (subscription only), the platform providers and their ETFs which hold silver in the LBMA vaults in London are as follows:
iShares: 1 ETF
ETF Securities: 6 ETFs
SOURCE : 1 ETF
Deutsche Bank: 3 ETFs
Between them, these four providers offer 11 ETFs that hold some or all of their silver in LBMA London vaults. This silver is held with custodians JP Morgan and HSBC, and with sub-custodians, Brinks and Malca Amit. Note, that GoldMoney and BullionVault store silver in London with Loomis as custodian.
As publicly traded vehicles, most of these ETFs publish daily silver bar weight lists or holdings files and they also undergo twice yearly physical audits by independent auditors. These weight lists and audits documents are helpful in pinpointing who the custodians and sub-custodians are, which locations these silver ETF’s store their silver in, and how much silver (in silver bar form) is stored in each location.
iShares Silver Trust (SLV)
The iShares Silver Trust, ticker code SLV, is the world’s largest silver-backed ETF. It’s probably best to think of SLV as the silver equivalent of the mammoth SPDR Gold Trust (GLD).
The custodian for SLV is JP Morgan Chase Bank (London Branch), and Brinks also acts as a sub-custodian for SLV. SLV holds silver in vaults across both London and New York. According to the SLV daily silver bar weight list, SLV’s silver bars are held in two Brinks vaults in London, one JP Morgan vault in London, and one JP Morgan vault in New York.
As of 29 June 2017, SLV reported that it was holding 348,841 Good Delivery silver bars containing a total of 339.89 million troy ounces of silver, or a colossal 10,572 tonnes of silver. The actual SLV bar list, which is uploaded to a JP Morgan website in pdf format using the same filename each day, can be seen here, but be warned that the file is about 5370 pages long, so there’s no real need to open it unless you are curious. A screenshot of the top of the first page is provided below
The SLV weight list specifies that the SLV silver is held in a ‘Brinks London‘ vault, a ‘Brinks London C‘ vault, a ‘JPM London V‘ vault, and a ‘JPM New York‘ vault. Between them, 2 Brinks vaults in London hold 55% of SLV’s silver bars representing 5753 tonnes, or 54% of the silver held in SLV. Adding in the ‘JPM London V‘ vault means that 289,053 silver bars, weighing 8720 tonnes (or 82% of SLV’s entire silver holdings) are held in LBMA London vaults.
The auditor for SLV is Inspectorate. Interestingly, the latest Inspectorate letter for SLV, for record date 10 February 2017, does not make a distinction between the 2 Brinks vaults in London and just reports that SLV’s silver is in:
“Three vaults located in and around London and New York:
– two vaults owned and operated by JP Morgan Chase Bank N.A. with 124,054 bars
– one vault owned and operated by Brinks, as a sub-custodian for JP Morgan Chase Bank N.A. with 220,066 bars
This would suggest that Inspectorate does not see the need to distinguish between the “Brinks London” vault and the “Brinks London C” vault, presumably because both Brinks vaults are in the same building in the Brinks facility (which is beside Heathrow Airport).
Even though the official custodian for SLV is JP Morgan Chase Bank N.A., London Branch (see original SLV Custodian Agreement filed April 2006 here), since it’s launch in 2006 SLV has at different times used quite a diverse group of sub-custodian vaults as well as at least 3 JP Morgan vaults. For example, over the 3 year period from early 2010 to early 2013, SLV stored silver in the following vaults:
Johnston Matthey, Royston
Brinks London A
Brinks London C
Viamat (now known as Loomis)
JP Morgan London A
JP Morgan London V
JP Morgan New York
Royston is about 50 miles north of central London. The above list is taken from the following chart which is from the ScrewTape Files website.
Given that there are Brinks vaults in London named ‘Brinks London‘, ‘Brinks London A‘, and ‘Brinks London C‘, this would most likely imply that there is or was also a ‘Brinks London B‘ vault, which, for whatever reason, doesn’t show up in any ETF custodian documentation.
The naming convention of the JP Morgan vaults in London as ‘JPM London A‘ and ‘JPM London V‘ is also interesting. SLV silver started being taken out of the ‘JPM London A’ vault in February 2012, and this vault was depleted of 100 million ounces of SLV silver (~ 3100 tonnes) by October 2012 (blue line in above chart). At the same time, the SLV silver inventory in the ‘Brinks London’ vault ramped up by 100 million ounces of SLV silver also between February 2012 and October 2012.
JPM London A could be JP Morgan’s original vault in the City of London. This would then make the JPM London V vault a separate location. My pet theory (pet rock theory) is that the V in the ‘JPM London V’ could refer to Viamat International, which is now known as Loomis. JP Morgan could have outsourced storage of silver to Viamat by ring-fencing some vault space. JP Morgan could then call this space a JP Morgan vault, even though it would be physically within a location managed by one of the security storage / transport providers.
I now think on balance that HSBC probably took the same approach with its gold vault and has it located in a Brinks facility, but that it calls it a HSBC vault. This could also mean that HSBC uses Brinks to store silver, while referring to it as HSBC storage. As to whether HSBC and JP Morgan store gold at the Bank of England while labelling it as a HSBC or JP Morgan storage area is another interesting question, but is beyond the scope of discussion here.
Note, there is also an iShares Silver Bullion Fund known as SVR which uses Scotia Mocatta as a custodian, which as of 29 June held 2,154 silver bars, however, SVR mostly holds its silver bars mostly in Toronto with Scotia, with a small number of silver bars stored with Scotia in New York. SVR therefore does not store any silver bars in London. See latest SVR weight list here.
ETF Securities – 6 ETFs
Keeping track of all the silver-backed ETFs offered by ETF Securities is challenging to say the least, but in the below discussion I’ve tried to devise a system which will make things at least a little clearer.
ETF Securities operates 6 ETFs which hold physical silver bars that are stored in the LBMA precious metals vaulting network in London. Of these 6 ETFS, 3 of them hold silver bars and nothing else. The other 3 ETFs are precious metals baskets which hold ‘physical’ gold, silver, platinum and palladium. Two of these ETFs are domiciled in the UK, 2 are domiciled in Australia, and the other 2 are domiciled in the US. In each of the UK, Australia and the US, ETF Securities offers 1 silver ETF and 1 precious metals basket ETF.
It’s most convenient to refer to the codes of these ETFs when discussing them. The 2 UK domiciled ETFs, with codes PHAG (silver) and PHPM (precious metals basket), are positioned under a company called ETFS Metal Securities Limited (MSL). The 2 ETFs domiciled in Australia, with codes PMAG (silver) and PMPM (precious metals basket), fall under a company called ETFS Metal Securities Australia Limited (MSAL). The final 2, which are US domiciled, are known as SILV (silver) and GLTR (precious metals basket).
ETFS Metal Securities Limited (MSL) – PHAG and PHPM
ETFS Physical Silver (PHAG) has a primary listing on the London Stock Exchange (LSE) and trades in USD. It’s NAV is also in USD. The custodian for PHAG is HSBC Bank Plc, with a listed vault location of London. Note: There is also another variant of PHAG called PHSP. It’s the same security as PHAG (same ISIN) but its trades in GBP (and its NAV is calculated in GBP). Its best to ignore PHSP as it’s literally the same fund.
ETFS Physical PM Basket (PHPM) is a precious metals Basket ETF that also holds gold, platinum, and palladium, in addition to silver. The custodian is HSBC Bank Plc with a vault location in London. There is also a GBP variant of PHPM called PHPP. Again, just ignore PHPP in this analysis.
ETFS Metal Securities Limited (MSL) officially reports all of its precious metals holdings in the same report (which it reports on each trading day). Since PHAG and PHPM are part of MSL, PHAG and PHPM silver bar holdings are reported together. According to the MSL weight list, as of 30 June 2017, MSL held 62,427 London Good delivery silver bars containing 60,280,155 troy ounces of silver(1875 tonnes). The individual ETFs within MSL also report their own holdings. However, there is a slight mismatch between dates on the individual fund pages and the date in the MSL spreadsheet with PHAG and PHPM reporting 29 June, while MSL has reported 30 June.
It’s not a big deal though. As of 29 June, PHAG held 58,777,148 troy ozs of silver (1828.2 tonnes) and PHPM held 1,480,037 troy ozs of silver (46 tonnes), which together is 60,257,185 troy ounces of silver (1874.25 tonnes), which is very close to the MSL reported number. Overall, PHAG holds 97.5% of the silver that is held in MSL, and PHPM only holds about 2.5% of the silver held in MSL.
Now, here’s the crux. While MSL uses HSBC Bank Plc in London as custodian for its silver, HSBC also uses Malca Amit London as sub-custodian, and the Malca Amit vault holds more than twice the amount of MSL silver (i.e. predominantly PHAG silver) than the HSBC vault. MSL’s reported silver holding are distributed as per the following table:
MSL holds 62,427 London Good Delivery silver bars in LBMA vaults in London, containing 60.28 million ounces of silver (1875 tonnes of silver). The Malca Amit vault stores 42,917 of these bars (1283 tonnes), and a HSBC vault stores another 19,510 silver bars (592 tonnes).
Inspectorate is also the independent auditor for the silver held by MSL. According to the latest Inspectorate audit letter, dated 3 March 2017 but referring to an end audit date of 31 December 2016, the silver in MSL was held in the vaults of HSBC Bank plc, London and at the vaults of Malca-AmitLondon.
ETFS Metal Secs. Australia Ltd (MSAL) – PMAG & PMPM
ETFS Physical Silver (PMAG), domiciled in Australia, is an ETF which only holds silver, and holds this silver in London with custodian HSBC Bank plc at a vault location in London. Note: ETF Securities officially refers to PMAG as ETPMAG.
ETFS Physical PM basket (PMPM) is a precious metals Basket ETF that also holds gold, platinum, and palladium, in addition to silver. The custodian of PMPM is HSBC Bank plc with a vault location in London. Note: ETF Securities officially refers to PMPM as ETPMPM.
In a similar way to UK domiciled MSL, MSAL (the ETFS Australian company) reports on all of its precious metals holdings in one daily spreadsheet including the silver in PMAG and PMPM. As of 30 June 2017, MSAL held 2754 silver bars in a HSBC vault in London, containing 2,664,690 troy ounces of silver (82.88 tonnes of silver).
Of the 2,664,690 ounces of silver held by MSAL, over 98%, or 2617,229 ounces, is held by PMAG, with less than 2% held in PMPM (47,362 ounces). The actual figures are 98.22% vs 1.78%. This means that PMAG roughly holds 2705 silver bars, and PMPM holds 49 silver bars.
Inspectorate is, not surprisingly, also the independent auditor for MSAL’s metal holdings, and as per the latest audit letter for record date 31 December 2016, the silver bars audit location is stated as having been “HSBC Bank plc, London“.
The latest silver bar weight list spreadsheet for the ETFS Silver Trust (SIVR), dated 29 June, which is titled “HSBC US Silver Bar List”, states that the SIVR Trust holds 21,437 silver bars containing 20,363,315 troy ozs of silver (633.4 tonnes of silver). There is no mention of SIVR holding any of its silver with a sub-custodian. The latest independent audit report for SIRV, by Inspectorate, for an audit reference date of 31 December 2016, states that the audit took place “at the vault of HSBC Bank plc, London (the “Custodian”)“, where Inspectorate found “20,108 London Good Delivery Silver Bars with a weight of 19,171,492.300 troy ounces.”
The latest silver bar weight list for the ETFS Precious Metals Basket Trust (GLTR), also dated 29 June, and which is titled “JPM Precious Metals Basket Bar List“, states that the GLTR Trust holds 5,670 silver bars containing 5,496,035 ozs of silver (~ 171 tonnes of silver).
However, while 85% of these bars (144.5 tones of silver) are stored in the ‘JP Morgan V‘ vault, 15% of the silver bars (26.5 tonnes of silver) are stored in a ‘Brinks 2‘ vault. So according to GLTR naming convention, as there is a ‘Brinks 2’ vault, presumably when it was first named, there was also a ‘Brinks 1’. ‘Brinks 2’ could possibly be referring to the same location as the ‘Brinks London A’ vault.
Inspectorate is also the independent auditor for the precious metals held by GLTR. In the latest Inspectorate audit letter for GLTR, with an audit reference date of 31 December 2016, Inspectorate states that its audit was only conducted “at the vault of J.P. Morgan Chase N.A, London (the “Custodian”)” where it counted “4,873 London Good Delivery Silver Bars“. This probably means that GLTR’s holdings of silver bars in the ‘Brinks 2’ vault are quite recent, i.e. they have been acquired since 31 December 2016.
SOURCE – Physical Silver P-ETC
A silver-backed ETF offered by the ETF provider ‘SOURCE’, which is named the Physical Silver P-ETC, holds its silver bars in a London vault of custodian JP Morgan. The SOURCE ETF platform was originally established in 2008 as a joint venture between Goldman Sachs, Morgan Stanley, and Merrill Lynch.
The latest silver bar weight list for the Physical Silver P-ETC (dated 23 June) states that it holds 3,129,326 troy ounces of silver (97.34 tonnes of silver). The list does not state an exact bar count, but looking at the weight list, there are about 3,237 silver bars listed.
Inspectorate is also the independent auditor for the Physical silver P-ETC. The latest Inspectorate audit letter, conducted on 4 January 2017, states that at that time, this ETF held 2,048 silver bars containing 1,982,343 troy ounces of silver. This is interesting because about a week ago, this SOURCE Physical silver P-ETC held about 4 million ozs of silver. Now it holds 3.1 million ounces of silver, and at the start of the year it held under 2 million ounces of silver. So the quantity of silver held in this SOURCE silver ETF fluctuates quite dramatically.
Deutsche Bank ETFs
There are 3 ETCs listed on the Exchange Traded Commodity (ETC) section of the Deutsche Asset Management website which hold physical silver in London. These 3 ETCs are as follows:
db Physical Silver ETC
db Physical Silver ETC (EUR)
db Physical Silver Euro hedged ETC
The Factsheets for these 3 Deutsche ETCs all list the custodian as “Deutsche Bank”, but list the sub-custodian as “JP Morgan Chase Bank”. For example, the Factsheet for the db Physical Silver ETCstates
“Custodian/Sub-custodian: Deutsche Bank AG/JP Morgan Chase Bank N.A.”
Shockingly, there do not seem to be any recent independent audit documents for any of these Deutsche ETCs anywhere on the Deutsche Asset Management website. The latest ‘Inventory Audit’ document in the ‘Download Center’ of the website is dated November 2012. That audit document can be viewed here. The old audit document stated that on 25 September 2012, ‘DB ETC Plc’ held 13,314 silver bars containing 13,040,194.3 troy ounces of silver (405.6 tonnes of silver), and that the audit was conducted at ‘Custodian and Location‘ of ‘JP Morgan Chase Bank, N.A. London‘. I have scanned the entire website and there is no sign of any other audit documents or any silver bar weight list.
The initial metal entitlement for units issued in each of these 3 ETCs was 10 troy ounces per unit. The latest units issued figures from Deutsche (dated 22 June 2017) for these ETCs is as follows:
db Physical Silver ETC: 277, 500 units issued
db Physical Silver ETC (EUR): 533,000 units issued
db Physical Silver Euro hedged ETC: 878,000 units issued
Total units issued for silver-backed db ETCs = 1,688,500 units
This would mean that in total, these 3 ETCs would have had an initial metal entitlement of 16,885,000 troy ounces of silver. However, due to what looks like operational fees being offset against the metal in these ETCs (i.e. selling silver to pay fund expenses), the effective metal entitlement for each of the 3 ETCs is now stated on the Deutsche website as being less than 10 troy ounces.
For db Physical Silver ETC, the entitlement is 9.6841 ounces. For db Physical Silver ETC, the entitlement is 9.6930 ounces and for db Physical Silver Euro hedged ETC the metal entitlement is a very low 7.9893 ounces.
Therefore, the amount of silver backing these ETCs looks to be (277500 * 9.6841) + (533000 * 9.693) + (878000 * 7.9893) = 14,868,312 troy ounces = 462.5 tonnes. Since there is no bar count, an approximate bar count assuming each bar weighs 1000 oz would be 14,870 Good Delivery silver bars.
Since there are no audit reports and no silver bar weight list for these ETCs, it’s difficult to know if real allocated silver in the form of London Good Delivery silver bars is backing these Deutsche Bank db ETCs, let alone trying to figure how many silver bars are in a JP Morgan vault in London backing these Deutsche products. We can therefore use 462.5 tonne for Deutche but with a caveat that there is no current silver bar weight lists or independent audit documents.
Total ETF Silver held in London LBMA Vaults
Adding up the silver held in the 11 ETFs profiled above yields the following table. In total, the 11 ETFs hold approximately 12,041 tonnes of silver (387.2 million troy ounces) across 4 vault operators. Brinks vaults hold 48% of the total, and JP Morgan vaults hold another 30%. HSBC and Malca Amit hold about 11% each of the remainder.
ETF Silver Holdings – Tonnes, for Silver stored in London LBMA Vaults
In terms of London Good Delivery silver bars, these 11 ETFs hold approximately 400,000 of these silver bars. Since the 3 Deutsche ETFs (ETCs) don’t have an available bar list, I converted the assumed troy ounce holdings to bar totals by assuming each bar held weighs 1000 ozs. Brinks stores over 191,000 of these Good delivery silver bars. That equates to nearly 6,400 pallets with 30 silver bars per pallet. If the pallets were stacked 6 high, and arranged in a square, that would be an area 32 pallets long by about 33 pallets wide. In addition, Brinks may also store silver on behalf of HSBC, or even on behalf of JP Morgan. Who knows?
According to the latest numbers on the BullionVault website (Daily Audit), BullionVault has 349,939.57 kgs of silver stored in London. That equates to 11,250,557 troy ozs of silver, or 350 tonnes of silver. This silver is stored in the form of London Good Delivery Silver Bars. According to the BullionVault website, BullionVault use Loomis as a custodian for storing silver bars in London:
Those with a BullionVault login can go in and view BullionVault’s latest silver bar weight list which has been generated by Loomis, but BullionVault don’t allow this list to be published externally. Suffice to say, the latest list, dated 11 May, lists 11,544 silver bars which are stored across nearly 400 pallets.
The GoldMoney website has a real-time audit page which currently states that GoldMoney has 202,057.614 kgs of silver. That equates to 6,496,153 troy ozs of silver, or 202 tonnes of silver stored in London. This silver is also stored with Loomis. At least some of this silver and probably a lot of it is in the form of London Good Delivery silver bars. Without being able to log in to the site properly, it’s not possible to see a bar list.
So between them, BullionVault and GoldMoney have 550 tonnes of silver stored in Loomis vaults in London. My guess is that Loomis (formerly Viamat) store precious metals in a warehouse in Shepperton Business Park, Govett Avenue, Shepperton, a warehouse which is in the corner of the business park, beside the railway track.
Adding this 550 tonnes of silver to the 12040 tonnes of silver held by the 11 ETFs above gives a figure of 12,590 tonnes. Let’s call it 12,600 tonnes. This is then the lower bound on the amount of physical silver in the LBMA vaults in London.
Thomson Reuters GFMS – “Custodian Vault” silver
On its ‘Silver Supply’ web page, the Silver Institute website has an interesting data table titled “Identifiable Above-Ground Silver Bullion Stocks” which lists 5 categories of above-ground silver stocks, namely ‘Custodian vaults’, ‘ETPs’, ‘Exchanges’, ‘Government’, and ‘Industry’.
What’s notable and striking about this table is that the ‘Custodian Vaults‘ category for 2016 amounts to a very large 1571.2 million troy ounces of silver (50,440 tonnes), and also the fact that this ‘Custodian vaults’ category is distinct from silver held in ‘Exchanges’ (such as COMEX and TOCOM) and ETPs / ETFs (such as the ETF products discussed above). The ‘Custodian Vaults’ category also does not include ‘Government’ stockpiles or ‘Industry’ inventories. The actual table and the data in the table are sourced from the Thomson Reuters GFMS “World Silver Survey” 2017 edition. As you will see below, this ‘Custodian Category’ refers to holdings of silver which are not reported, but which are stored in custodian vaults, including in the London vaults. This category therefore needs to be examined in the context of the LBMA’s imminent reporting of silver holdings in the LBMA London vaulting system.
You can also see from the above table that this 2016 Custodian Vaults figure of 1571.2 million ozs (50,440 tonnes) grew from a 2008 total of 615.6 million ozs (19,148 tonnes), so in eight years has risen more than 250%.
On pages 37-38 of this GFMS World Silver Survey 2017 (pdf – large file), GFMS makes some very interesting assertions. GFMS starts by defining what it calls Identifiable silver bullion stocks. It states:
‘Identifiable bullion stocks can be split into two categories: unreported GFMS stock estimates that are based on confidential surveys and field research; [and secondly] stocks that are reported.
“Unreported stocks include the lion’s share of our government category and our custodian vault category.”
“Reported inventories are predominantly held in ETPs..but also include some of the government and industry stockpiles.”
However, in the accompanying commentary to the above table, GFMS classifies all ETP, Exchange and Industry holdings as “Reported“, and all Custodian Vaults and Government holdings as “Unreported“. Therefore, it is useful to regroup the 2016 figures from the above table into a Reported category and an Unreported category, as the GFMS commentary then makes more sense. A regrouped table of the 2016 data is as follows, and illustrates that ‘Custodian Vault’ holdings of silver (none of which are reported) account for a whopping 61% of all above ground silver:
A GFMS bar chart in the 2017 World Silver Survey also underscores the dominant position of these (unreported) ‘Custodian Vault’ holdings:
GFMS goes on to say that in 2016 “Reported stocks were 36% of identifiable stocks“. Conversely, we can see that ‘Unreported’ silver stocks (Custodian Vaults and Government) were 64% of identifiable stocks.
GFMS says that for 2016 “71% of reported stocks were ETPs“, the rest being Exchange and Industry classifications. Exchanges refers to silver held in warehouses of COMEX (NY), TOCOM (Japan) and the SGE and SHFE (China). COMEX is currently reporting 209 million ouzs of silver in its approved warehouses in New York, of which 172 million ozs in Eligible and 37 million ozs is in the Registered category.
Interesting, but on a side note, GFMS also states in its 2017 silver report that as regards COMEX silver inventories:
“Eligible stocks reported by COMEX contain a portion that is allocated to ETPs”.
“At the end of 2016, the portion of COMEX Eligible stocks that was allocated to ETPs was around 16% of total COMEX eligible stocks.”
This will probably be an eye opener for those interested in COMEX silver warehouse stocks.
Addressing ‘Custodian Vault‘ stocks of silver, GFMS says that Europe’s share of Custodian Vault stocks was 488.7 million ozs (15,201 tonnes) in 2016 and accounted for 31% of total Custodian Vault stocks. Asian ‘Custodian Vault’ stocks of silver were just over 50% of the total with the remainder in North America (Canada and US).
Silver holdings in Custodian Vaults by Region, 2007 -2016. Source – GFMS World Silver Survey 2017
But what do these ‘Custodian Vault’ stocks of silver refer to?
GFMS does not provide a detailed answer, but merely mentions a number of examples, which themselves vary by region. For Asia GFMS says “the bulk of these stocks are located in China, and reflects stocks held in vaults at banks“, and also ” other parts of Asia, such as Singapore, have been increasing in popularity for storage of bars and coins in recent years“, while in India “global bullion banks increasingly seeking this location as a strategic point for silver vaulting in case the need arises.” There are also silver “stocks in Japan”. From a BullionStar perspective, we certainly are aware that there is a lot of silver bullion in vault storage in Singapore, so the GFMS statement is accurate here.
In North America, GFMS attributes the “growth in silver custodian vaulted stocks not allocated to ETPs” to a “drop in coin sales in North America last year“. In the 2016 edition of the World Silver Survey, GFMS said that the growth in custodian vault holdings was partially due to “the reallocation by some North American investors from their ETP holdings” [into custodian holdings].
Turning to Europe, GFMS says that the growth in Custodian vault silver holdings “can be attributed to increased institutional investor interest“. Therefore, according to GFMS, institutional investors in Europe are buying silver and holding real physical silver in Custodian vaults.
With 488.7 million ozs (15,201 tonnes) of silver held in Europe in ‘Custodian vaults’ that is not reported anywhere, at least some of this silver must be held in London, which is one of the world’s largest financial centers and the world’s highest trading volume silver market.
“Custodian vault stock data excludes ETP Holdings, but it is important to note that most custodians of ETP silver stocks also store silver in vaults that are not allocated to ETPs. the same is true of futures exchange warehouses.”
So how much of this 15,201 tonnes of ‘Custodian Vaults’ silver that is said to be in Europe is actually in London vaults? Apart from London, there would presumably also be significant physical silver holdings vaulted in Switzerland and to a lessor extent in countries such as Germany, the Netherlands and maybe Austria etc. So whats’s a suitable percentage for London? Given London’s extensive vaulting network and prominence as a hedge fund and institutional investment centre, a 40-50% share of the European ‘custodian vault’ silver holdings would not be unrealistic, with the other big percentage probably vaulted in Switzerland. This would therefore put previously ‘Unreported’ silver holdings in the London vaults at between 6080 tonnes and 7600 tonnes (or an additional 182,000 to 230,000 Good Delivery Silver bars).
Adding this range of 6080 – 7600 tonnes to the 12,040 tonne figure that the 11 ETFs above hold, gives a total figure of 18,120 – 19,640 tonnes of silver stored in the LBMA vaults in London (545,000 – 585,000 Good Delivery silver bars).
Note, BullionVault and GoldMoney silver is technically part of the ‘Custodian Vault’ figure, so can’t be counted twice.
ps: In its 2017 World Silver Survey, GFMS also stated that in 2016, ETPs (ETFs) held 664.8 million ounces of silver “with 75% of the total custodian vaulted stocks [that were] allocated to ETPs held in Europe and 24% in North America. Asia makes up the balance of less than 1%.“. This would mean that as of the date of the GFMS calculation for 2016, 498.6 million ounces of ETF silver was vaulted in Europe.
Above, I have accounted for 387.1 million ounces of silver that is currently stored in London on behalf of 11 ETFs. There are also 3 Swiss Silver ETFs which store their silver in Switzerland. These are ZKB (currently with 74.9 million ozs), Julius Baer (currently with 13.7 million ozs) and UBS (currently with 5.89 million ozs), giving a total of 94.49 million ozs of silver for these 3 Swiss based platforms. Therefore, between London vaults and vaults in Switzerland, there are currently 14 ETFs that together hold 481.6 million ounces of vaulted silver (14,980 tonnes of vaulted silver).
When the LBMA finally manages to publish its first report on the silver and gold stored in the LBMA vaults in London in the coming days, we will have a clearer picture of how much physical silver is actually in these mysterious and opaque vaults.
A lower bound based on ETF holdings and BullionVault and GoldMoney holdings would be about 12600 tonnes of silver. A higher bound that also reflects ‘Custodian Vault’ holdings could be in the region of 18120 – 19640 tonnes of silver. There would probably also be some LBMA bullion bank float, which may or may not be included in ‘Custodian Vault’ figures, that could push the silver total to over 20,000 tonnes or more.
The LBMA perennially claims that it wants to bring transparency to the London precious metals market. This has been a very hollow mantra for a long time now. However, while some of the LBMA members may want this transparency, others, possibly some of the powerful bullion banks or their clients, certainly don’t want transparency. Take a case in point. At the Asia Pacific Precious Metals Conference (APPMC) in Singapore in early June, the LBMA CEO in a speech to the conference talked about the difficulty of even getting a press release out about the upcoming publication of gold and silver vault holdings data. She said (fast forward to 8:37 in the below video):
“It was actually a huge achievement just to get the press release out.”
For what is supposed to be a mature and efficient financial marketplace, this is a truly bizarre occurrence, and it must be pretty obvious that some of the vested interests in the London gold and silver markets needed to be dragged kicking and screaming over the finish line as regards being in any way open about how much gold and silver is actually in these LBMA London vaults.
But now, according to the LBMA CEO in the same part of her speech, even so-called “credible investors” (as opposed to uncredible investors?) also “find it a little odd that as a marketplace, there’s no data“, which may explain the vampires within the LBMA being dragged into the daylight.
Hopefully with the above analysis and the upcoming aggregated LBMA silver vaulting numbers, these “credible investors” (and the hundreds of millions of other silver investors around the world) will now be less in the dark about the amount of silver in the London LBMA vaulting network, and will now have better information with which to make investment decisions when buying silver and selling silver.
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.
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 psychologyof ‘the market can only go one way and that is up’.”
Sangster’s view was also that there was “no question of anypermanent stabilisation of the gold price, merelyat a critical time holding it within a target area”, an operation he called a “smoothing 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, orperhaps 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 BundesbankCentral 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.
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:
Copies to : Mr McMahon, Mr Balfour, Mr Byatt
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
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 Washingtonlast Mondayby 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:
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’s ‘glosses on the G5 gold briefs‘ memo 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”.
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.
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.
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 assetscould 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.
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:
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 believeit 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 price. CWM 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”
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 banksas 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.“
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?
“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.”
“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.”
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:
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.
4th 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 October1979, 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.
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 to“advocate 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?
“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
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 Pool. This 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.
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.
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.
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  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.
Mr McMahon Copy to Mr Byatt
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 psychologyof “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 bankswould 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
The actual memorandum from JLS to McMahon can be seen here:Page 1andPage 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.
Hand-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.
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.
THE GOVERNOR O/R
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
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.
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:
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.
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:
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 Baslebut 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.
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.
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.
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.
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
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:
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.
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 RenéLarre, 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.
To: The Governors Copies to : Mr Payton, Mr Balfour, Mr Sangster , Mr Byatt only
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 TonySolomon 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.
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
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.
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 thebuying 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.
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
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 holdings‘ in the press releaseis 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:
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.
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 clearedeach 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.
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.
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.
“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.
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.
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.
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.
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.
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.”
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 makersand 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.
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.
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.
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.
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.
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?
“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.
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.
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.
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.”
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
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.”
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.
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.
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?”
“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.
“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)
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:
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.
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 Mint, Argor-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.
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.
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.
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.
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.
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.
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.
“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.“
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.
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 isnot 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?
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.
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.
“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.
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