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What’s Happening (or Not) at the LBMA: Some Updates

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

Then in February 2017, in an article titled “Banks to Test London Gold-Trading Platform in Transparency Push”, Bloomberg addressed the LBMA’s trade reporting project and Boat’s reporting system LBMA-i and quoted LBMA CEO Ruth Crowell as saying that:

“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

  • Editor’s Note
  • Introduction
  • London Bullion Market Association
  • London Platinum and Palladium Market
  • The Price
  • London Good Delivery – Gold and Silver
  • Good Delivery – Platinum and Palladium
  • London Precious Metals Clearing Limited
  • Precious Metal Accounts
  • Lending and Borrowing Metal
  • Options
  • Precious Metal Benchmarks
  • Bank of England
  • Futures Markets and Exchange
  • Traded Products
  • Physical Metal
  • Documentation
  • Market Regulation
  • Taxation
  • Conversion Table
  • Key Facts about Precious Metals
  • Clearing Statistics
  • Market Trade Statistics
  • Central Bank and Governmental
  • Ownership of Gold
  • Properties of Precious Metals
  • Frequently Asked Questions
  • Annexes
  • Disclaimer

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.

 Limited Hangout

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.

Bank of England custodial gold holdings as of 30 September 2017. Source: www.GoldChartsRUs.com

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.

LBMA vaults gold holdings as of 30 September 2017. Source: www.GoldChartsRUs.com

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.

LBMA vaults silver holdings as of 30 September 2017. Source: www.GoldChartsRUs.com

 

The West lost at least another 1000 tonnes of large gold bars in 2015

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.

kilobars

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.

LBMA gold and silver refinery output 2015. Source:
LBMA gold and silver refinery output, updated for 2015. Source: LBMA Overview Brochure, May 2017

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“.

Excerpt from LBMA May 2016 press release
Excerpt from LBMA May 2016 refinery production press release

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:

GFMS
GFMS global gold mining production + Scrap Recycling + Hedging, 2014 and 2015. Source: GFMS World Gold Survey 2015 (published in 2016)

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”.

AH-graphic
The Swiss Argor-Heraeus refinery identifies Good Delivery gold bars as one of the 3 sources of gold coming into its refinery
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Argor-Heraeus – Gold arrives at refinery from mines, scrap and ‘Good Delivery’ gold bars

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.

2015

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.

The UK (London) was the biggest source of Swiss gold imports during 2015
The UK (London) was the biggest source of Swiss gold imports during 2015. Source: www.GoldChartsRUs.com

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.

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SPDR Gold Trust – gold holdings 2007-2017 (black line). 2015 indicated in gold line  Source: www.GoldChartsRUs.com

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.

Custody gold at the Bank of England
Custody gold holdings at the Bank of England 2010 – 2017, 2015 indicated in gold line. Source: www.GoldChartsRUs.com

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?

Are the World’s Billionaire Investors Actually Buying Gold?

Infographic website Visual Capitalist recently published an eye-catching infographic on behalf of Sprott Physical Bullion Trusts which featured 4 well-known billionaire investors and their supposed investments in gold. The infographic is titled “Why the World’s Billionaire Investors Buy Precious Metals” and can be seen here.

The 4 investors profiled in the infographic are:

  • Jacob Rothschild (Lord), chairman of London-based investment trust RIT Capital Partners Plc
  • David Einhorn, president of Manhattan-based hedge fund firm Greenlight Capital
  • Ray Dalio, chairman and CIO of hedge fund firm Bridgewater Associates, Westport (Connecticut)
  • Stanley Druckenmiller, chairman and CEO of Manthattan-based Duquesne Family Office (and formerly of Duquesne Capital Management)

Overall, four very famous investors, and four names that should at least be vaguely familiar to almost anyone who has a passing interest in financial markets and investing.

For each of the 4 billionaires, the Sprott infographic provides a few quotes about their views on gold and then moves on to record their recent ‘Moves’ into ‘gold’, or in some cases their recent readjustments of existing ‘gold’ exposures.

However, the trouble with this infographic is that although it’s visually appealing, nowhere does it mention how these famous investors achieve their exposures to ‘gold’, i.e. what form their gold investments take.

This is something which is also regularly bypassed in financial media articles, especially those published by Bloomberg, articles which refer to hedge fund managers such as Druckenmiller, or John Paulson, or Ray Dalio buying ‘gold’, but which all too often are too lazy to do basic research into the actual trades that these hedge fund managers execute to acquire their positions in ‘gold’ and whether these positions are actually in real physical gold or in some form of synthetic or derivative or paper gold.

In fact, the first comment posted on the Visual Capitalist website under said Sprott infographic when it was published asks exactly this question:

I’d like to know if they are holding physical bullion, presumably in guarded safe vaults, or just paper.”

Given that the infographic is ‘Presented by’ Sprott Physical Bullion Trusts, one might assume that Rothschild, Einhorn, Dalio and Drukenmiller are all investing in physical bullion.

But are they? This is the question I set out to answer and which is documented below. Some of my findings may surprise you.

The Rothschilds: Jacob & RIT Capital Partners

First port of call, the Rothschilds of St James’s Place in London. Given that the Rothschilds are probably the richest family in the world and have been involved in the gold market for hundreds of years, you might assume that the family of the Five Arrows knows a thing or two about the difference between real gold bars and paper gold. And presumably they do. However, no one seems to have told this to the day-to-day managers of RIT Capital Partners Plc, the Rothschild controlled investment vehicle quoted in Sprott’s infographic.

Investment trusts are actually public limited companies (Plcs) which are structured as closed-ended investment vehicles. These vehicles issue a certain number of shares that can then be publicly traded. RIT Capital Partners plc, formally called the Rothschild Investment Trust (hence the name RIT), trades on the London Stock Exchange. Jacob Rothschild (The Lord Rothschild) is chairman of RIT Capital Partners Plc.

As a publicly traded vehicle, RIT Capital Partners Plc publishes annual and half-yearly reports, and is therefore more transparent than its hedge fund brethren. RIT’s latest report, an annual report for year-end 2016, was published on 28 February 2017.

Strangely, although the Sprott infographic was only published on 7 June 2017, it quotes not from the annual report for year-end 2016 but from RIT’s half-yearly report to 30 June 2016, which was published on 15 August 2016.

The Sprott infographic states:

“In a 2016 shareholder update [Jacob] Rothschild outlined bold changes to the RIT Capital Partners’ portfolio, including…increased exposure to gold and precious metals to 8%

Similarly, in the RIT Chairman’s Statement (page 2) of the 30 June 2016 report, Jacob Rothschild said “We increased gold and precious metals to 8% by the end of June.

Glancing at either the Chairman’s statement or the Sprott infographic, you might think ‘ok, so RIT holds (or held) 8% of its portfolio in gold and precious metals’. However, this is not the case, a fact which becomes clear when we look at the Investment Portfolio (holdings) of RIT that are detailed in the same report.

Jacob Rothschild, RIT Capital Partners
Jacob Rothschild, RIT Capital Partners

RIT is a global investment fund whose holdings span equities, hedge fund investments, private investments, real assets, credit, and bonds. It’s ‘gold’ and ‘precious metals’ holdings are listed under ‘Real Assets’. The entire RIT portfolio is worth £2.73 billion.

The Real Assets section of the RIT report to 30 June 2016 (on page 6 of the report, page 8 of the pdf) lists relevant gold-related line items as:

  • “BlackRock Gold & General Fund”, described as “Gold and precious metal equities”, valued at £22.9 million, and representing 0.9% of the NAV, with a fund weight of 0.83%
  •  “Gold Futures” with a description “Long, 6.0% notional“, valued at £7.6 million, represents 0.3% of the NAV
  • “Silver Futures with a description “Long, 1.2% notional” valued at £7.6 million, representing 0.0% (rounded) of the NAV

These are the only gold-related investments in the entire RIT portfolio. Therefore, could this 8% that Jacob Rothschild refers to as “we increased gold and precious metals to 8% by the end of June” be a combination of a 6% notional long on gold futures, a 1.2% notional on long silver futures, and a 0.8% fund weight in gold mining equities through the BlackRock Gold & General Fund holding?

In short, the answer is Yes.

Firstly, looking at the BlackRock Gold & General Fund, this is a UCITS equity fund which exclusively invests in the shares of gold and silver mining companies such as Newcrest, Newmont, and GoldCorp and which is benchmarked against the FTSE Gold Mining Index (an equity index). However, the BlackRock website reminds us that “The Fund does not hold physical gold or metal.” Like all equity investments, this fund exposes its holders to equity risk, currency risk, sectoral risks (in this case the mining sector), possible gold hedging risks, and the general corporate risks that come with stock specific investing in any publicly quoted company, some of which cannot be diversified through portfolio investing.

Next up are the precious metals futures line items. In investment portfolios, notional is literally the gross exposure of a position. In this case, the RIT portfolio being long 6.0% notional in gold futures just means that the portfolio’s notional exposure to gold (via the gold futures position) represented (on 30 June 2016) an amount which was 6.0% of the total (gross) exposure of the portfolio. This is also a leveraged position since it was acquired via the purchase of exchange traded futures and the maintenance of these futures via margin. The amount reflected in the NAV for this position just refers to the margin.

I also checked with RIT investors relations as to whether Jacob Rothschild, when he stated that RIT holds gold, was actually referring to these gold futures positions. RIT investor relations responded:

“Yes, we do refer to long gold futures exposure as “holding gold”. We take this view since we are confident that gold futures are acting as a suitable proxy for gold both from a regulatory perspective and in terms of where we are in the cycle.

However, it should be clear to all that holding gold futures is not the same thing as holding vaulted physical gold. Gold futures may provide exposure to the US Dollar price of gold, but that’s about it, and even if they can be theoretically exercised into physical gold on the COMEX or ICE platforms, no one uses them for this purpose. For example, only 0.04% of COMEX gold futures contracts result in physical delivery each year.

Gold futures also entail exchange risk, risk of not being able to exercise for delivery, margin risk, forced cash settlement risk, etc etc. Gold futures are also derivatives that can come into existence in massive quantities as long as there are counterparties to take the other side of the futures trades.

Allocated physical gold on the other hand is an asset which exists in limited quantities, has no counterparty risk, has intrinsic value and has been used as money and as a store of value for thousands of years.

The “regulatory perspective” that RIT refers to just seems to mean that the fund’s exposure ticks various compliance boxes and is an acceptable security from a compliance and regulatory perspective.

The “where we are in the cycle” phrase probably refers to the interest rate cycle in terms of interest rate movements, inflation, real interest rates etc, but surely this is irrelevant because if you really believe that gold futures prices are a perfect proxy for gold prices, then the existence of a “cycle” and the phases of such a cycle become irrelevant to the investment decision?

In summary, it should be clear that RIT Capital Partners Plc does not hold any gold or other precious metals, because it merely holds gold futures and units in a BlackRock fund which itself only holds gold and silver equities (common shares) and which does not hold physical gold.

Just for completeness, let’s turn to the latest annual report from RIT for year-end 2016 that Sprott did not refer to. Has anything changed compared to 30 June 2016? At year-end 2016, according to Jacob Rothschild:

We continue to hold gold and gold mining shares amounting to 6% of the portfolio.

Therefore, by the end of 2016, by RIT’s logic, it now had a 6% exposure to gold (and the exposure to silver futures had disappeared). However, as per the 6 month earlier period, this was really a) exposure to the US dollar price of gold via gold futures and b) an exposure to the common equity of publicly-traded gold mining companies through the BlackRock fund investment.

In the Real Assets section of the RIT annual report (page 13 of the report, page 15 of the pdf), it lists:

  • “BlackRock Gold & General Fund”, with a description “Gold and precious metal equities” valued at £20.3 million, representing 0.9% of the NAV, and with a fund weight of 0.7%
  • “Gold Futures” with a Description “Long, 5.7% notional” representing (0.2%) of the NAV

Again, the 6% Rothschild reference includes the 5.7% long notional on gold via the gold futures, the BlackRock fund with a weight of 0.7%, and possibly the (0.2%) NAV (margin), which altogether net to approximately 6% when rounded down. Since 8% sounds better than 6%, Sprott may have chosen to reference the 30 June 2016 RIT report and not the more recent 30 December 2016 RIT report as this would make Rothschild appear more bullish on gold.

David Einhorn and Greenlight Capital

Hedge funds by their nature are very secretive, and because they are private pools of capital, they have no obligation to report detailed holdings even to their clients, let alone to the general public. Some of the justifications for hedge fund secrecy include preventing other trading parties adversely trading against them and preventing competitors replicating their positions. Note, hedge funds still have to report equity holdings to the US SEC and they do this via their quarterly 13F form submissions, which can be viewed on the SEC EDGAR website about 6 weeks after quarter end.

Sometimes hedge fund stars will drop hints about some of their positions or engage with the financial media, but this is mainly to talk their positions and trading books up. Often however, the “partner letters” (similar to shareholder letters) that hedge fund partnerships send to their clients / investors will give some indication as to their positions and asset allocations, and for whatever reason, some of these letters seem to make it into the public domain pretty quickly. Note that most hedge funds are established as Limited Liability Companies (LLCs), a structure which supports the partnership model.

Following Jacob Rothschild, next up on the Sprott infographic is hedge fund manager David Einhorn and his Greenlight Capital hedge fund firm. Greenlight, as a hedge fund firm, runs a series of funds that invest in equity, debt etc but also include global macro and that are known as the “Greenlight Capital funds” a.k.a. “The Partnerships”. There are at least 6 funds in this group, maybe more.

David Einhorn
David Einhorn, Greenlight Capital

The Sprott infographic refers to a recent gold-related ‘Move’ that Einhorn that made as follows:

“In early 2017, Einhorn mentioned on an earnings call that he was:…Keeping gold as a top position”

More recently, Greenlight again refers to its gold positions in a partners letter dated 25 April 2017, in which it wrote that “gold gave us a small profit in macro”, and that:

 “Gold remains a long-term position with a thesis that global fiscal and monetary policies remain very risky”

So we can assume that Einhorn maintains a gold exposure of some sort. Since there was no information in the above partner letter as to what exactly Greenlight refers to as a gold position, and nothing that I could find on the web, I did what any junior Bloomberg reporter should but doesn’t do, and shot off an email to Greenlight asking how Greenlight Capital attains its long gold exposure? Surprisingly, or maybe not, within about 20 minutes Greenlight answered with a short and sweet one-liner:

 “We hold physical allocated gold in all our funds.” 

This response came from the top of the Greenlight tree, close to Einhorn. Hint David Einhorn only follows three accounts on Twitter, one of which is Donald Trump another of which is the Einhorn Trust. So now we know that at least one major hedge fund firm holds physical allocated gold.

On a side note, Greenlight also offers two funds called Greenlight Capital (Gold), LP and Greenlight Capital Offshore (Gold), Ltd. These two funds actually offers investors a gold class which denominates investments in that class in gold rather than USD. This is similar to a USD denominated fund offering shareholders a EUR or CHF class, the only difference being that this class is in gold. 

Ray Dalio and Bridgewater

Bridgewater Associates, based in Westport in Connecticut, runs some of the largest and most well-known individual hedge funds such as the global macro Pure Alpha as well as other well-known funds called ‘The All Weather’  and ‘Pure Alpha Major Markets’. Ray Dalio is founder, chairman and chief investment officer (CIO) of Bridgewater.

In the Sprott infographic, the gold ‘Move’ which they chose to highlight Dalio for was that:

“In 2016, Dalio said it is prudent to have a ‘well-diversified portfolio’ that is 5-10% gold”

However, unlike the other investors profiled, i.e. Rothschild, Einhorn, and Druckenmiller, who had investment decisions attributed to them that involved taking or extending long positions, there is nothing, at least in the infographic, that refers to Dalio taking on or amending a gold position.

When Dalio refers to gold, which he has done publicly on a number of occasions, he tends to do so in generalistic terms such as the following comments which were taken from Dalio’s appearance at the CEO Speaker Series conversations organised by the Council on Foreign Relations (CFR):

“And so gold is one of the currencies. So we have dollars, we have euros, we have yen and we have gold.”

“Now, it [gold] doesn’t have a capacity — the capacity of moving money into gold in a large number is extremely limited.”

“I think … there’s no sensible reason not to have some — if you’re going to own a currency, … it’s not sensible not to own gold”

“I don’t want to draw an inordinate amount of attention to gold”

“a certain limited amount, at least passably, should be in gold, just like you would hold a certain amount in cash”

“Now, it depends on the amount of gold, but if you don’t own, I don’t know, 10 percent in — if you don’t have that and then it depends on the world, then you — then there’s no sensible reason other than you don’t know history and you don’t know the economics of it.”

Ray Dalio, Bridgewater Associates
Ray Dalio, Bridgewater Associates

Dalio frequently, in various forums, demonstrates his understanding of the historical importance of gold in the monetary system. Based on the language that Dalio uses about capacity of the gold market and his appreciation of the history of gold, my hunch is that Bridgewater does hold physical gold in a similar manner to how Greenlight Capital holds gold.

Dalio has also gone on record with Tony Robbins hinting at a gold allocation that he would use for an “all weather fund”. This is not the Bridgewater All Weather Fund, but it could be something similar. Dalio’s recommended asset allocation that he gave Robbins was:

  • 30% Stocks
  • 40% Long-Term Bonds
  • 15% Intermediate-Term Bonds
  • 7.5% Gold
  • 7.5% Commodities

Although it is quite tricky to contact Bridgewater, I did manage to find Dalio’s email (somehow or other) and like an aspiring Bloomberg reporter (or not), I shot off an email to Dalio asking:

“Does Bridgewater hold physical gold in its funds (e.g. Pure Alpha, All Weather, and Pure Alpha Major Markets) or some other type of long gold exposure?” 

The same day, I received back an automated response:

______________________________________________________________________

Message from "Ray Dalio"
______________________________________________________________________

I recognize from your email address that this is the first message I have received from you since Bridgewater Associates began using Sender Address Verification (SAV).

Your message is very important to me.  Like you, we are very concerned with stopping the proliferation of spam.  We have implemented Sender Address Verification (SAV) to ensure that we do not receive unwanted email and to give you the assurance that your messages to me have no chance of being filtered into a bulk mail folder.

By pressing REPLY and SEND to this message your original message will be delivered to the top of my inbox.  You need only do this once and all future emails will be recognized and delivered directly to me.
...
Thank you!

Ray Dalio

However, after replying as per the instructions above using the verification address, there was no further response from Bridgewater. Maybe he is on vacation!

So the jury is still out on how Bridgewater acquires its exposure to gold, assuming that its funds actually have exposure to gold. But my guess is that at least some of Bridgewater’s funds do hold gold, and probably hold real physical allocated gold.

Stanley Druckenmiller and Duquesne

Finally, the Sprott infographic features Stanley Druckenmiller, founder and former chairman and president of Pittsburgh-based Duquesne Capital Management, and also former portfolio manager of Soros’ Quantum Fund. In 2010, ‘Stan’ Druckenmiller wound down Duquesne Capital since he claimed it was becoming harder to deliver consistently high returns, but he continued to manage his own wealth through Duquesne Family Office LLC, which is based out of Manhattan.

According to the infographic, in early 2017 Druckenmiller said:

“Gold was down a lot, so I bought it.”

Stan Druckenmiller

Stan Druckenmiller, Duquesne 

This quote was reported in a 8 February 2017 Bloomberg article which itself was based on a CNBC interview from 7 February:

“I wanted to own some currency and no country wants its currency to strengthen,” Druckenmiller said Tuesday in an interview. “Gold was down a lot, so I bought it.” 

As per usual, Bloomberg doesn’t bother to find out or mention what form of gold exposure Druckenmiller was referring to in that interview.

Strangely, Bloomberg says that Druckenmiller bought gold in late December and January having previously sold his ‘gold’ on election night in November when Trump was elected. I say strangely because Druckenmiller is known for getting his US dollar ‘gold exposure’ via the gold-backed ETF the SPDR Gold Trust (GLD) however, the Duquesne Family Office 13F filings with the SEC don’t show GLD activity in Q4 2016 or Q1 2016.

Looking at recent Duquesne Family Office 13F filings which show reportable equity holdings (including GLD since GLD is a listed security and is basically like a share), the last time Duquesne Family Office had a long exposure to the SPDR Gold Trust was in Q1 2016 when it held 2,016,000 call options on the SPDR Gold Trust (Cusip 78463V907) which at the time had a notional exposure of $237.16 million. Druckenmiller had purchased 2,880,000 call options on GLD during Q2 2015 but reduced this to 2,016,000 calls during Q1 2016. Duquesne has not held any SPDR Gold Trust shares or options since Q1 2016.

However, looking at the Duquesne 13F filings for Q3 2016, Q4 2016 and Q1 2017, there are some interesting changes in reported holdings of some gold mining equities over this period.

As of the end of September 2016, Duquesne reported holding 1.8326 million Barrick Gold shares and 530,800 Agnico Eagle Mines shares. Then, as of the end of December 2016, neither of these stocks appeared on the Duquesne 13F list.

However, as of the end of March 2017, both Barrick and Agnico reappeared on Duquesne’s filing, with Druckenmiller’s family investments holding 2.85 million Barrick Gold shares, and 882,900 Agnico Eagle Mines shares. Barrick Gold, headquartered in Canada, is the world’s largest gold mining company. Agnico Eagle, also headquartered in Canada, is another large gold mining company.

The timing of Druckenmiller saying that he sold his ‘gold’ on election night in November 2016 and the bought gold in late December 2016 and January 2017 fits very well with the Duquesne trades of selling Barrick Gold and Agnico Eagle so that they appeared in the Q3 13F, but not in the Q4 13F and then reappeared in the Q1 2017 13F. If this is the case, then Druckenmiller’s Duquesne does not hold gold but holds gold mining equities, and Druckenmiller’s recent references to buying gold are really references to holding common shares in publicly-traded gold mining companies.

Duquesne, however, could hold other ‘gold exposures’ such as gold futures or even real physical allocated gold. But due to the non-obligation of these investment pools to report holdings, this is unclear.

I also sent an email to Stan Druckenmiller at his Duquesne address, asking him:

“Does Duquesne Family Office hold physical gold as part of its exposure to gold within its investments, or is the exposure some other type of long gold exposure such as the gold-backed ETF GLD?”

However, as of the time of writing, Druckenmiller has not responded.

Druckenmiller’s gold exposure via GLD calls between Q2 2015 and Q1 2016 also deserves some commentary. Readers of this website will know that holding a gold-backed ETF such as GLD is not the same as owning real physical gold. Although the Trust behind GLD holds gold bars, GLD units just provide exposure to the US dollar price of gold and there is no conversion option into real gold. With GLD, the holder is a shareholder and not a gold holder. There are many other concerns with GLD, all of which are documented on a BullionStar infographic.

However, Duquesne’s ‘exposure’ is even one more step removed from gold since it was in the more of a derivative (call option) on an underlying (GLD) which itself does not provide ownership of any gold to the holder. So in some ways this could be called a second order derivative.

Paulson & Co

Although Sprott’s infographic doesn’t feature John Paulson of hedge fund firm Paulson & Co, maybe it should have. However, on second thoughts maybe not, because Paulson & Co is currently the 6th largest institutional holder of SPDR Gold Trust (GLD) shares, which as explained above, is not the same as owning real physical gold. According to its latest 13F filing, Paulson & Co holds 4,359,722 GLD shares worth a sizeable $500 million.

John Paulson (far left)
John Paulson (far right), along with Jim Simons of Renaissance (middle) and George Soros (left) 

Paulson also launched a specific gold fund in 2010 which is now called the PFR Gold Fund, named after Paulson, and the two managers who used to run the fund, namely, Victor Flores and John Reade, hence the PFR. Reade has now left Paulson & Co, and moved to the World Gold Council (WGC), which derives the majority of its revenue from…wait for it….the SPDR Gold Trust, since WGC’s 100% owned subsidiary World Gold Trust Services is the sponsor of the GLD.

According to HedgeTracker, the PFR Gold Fund has a “long-term strategy focus investing in mining companies and bullion-based derivatives“, so again you can see that this is nothing to do with owning and holdings real physical allocated gold.

Conclusion

After this whirlwind tour, we know the following:

RIT Capital Partners Plc claims to hold gold but really holds a) gold futures which provide notional long gold exposure and b) a BlackRock fund which invests in gold mining shares.

Greenlight Capital holds allocated gold in all of its hedge funds (and they are good about replying to emails).

Bridgewater Associates probably holds gold exposure across at least some of its funds. Given Ray Dalio’s grasp of the importance of real physical gold, I would be surprised if Dalio’s funds do not hold real physical gold. But Dalio is a hard man to track down, so the jury is still out on this one.

Stan Druckenmiller’s Duquesne Family Office had a large exposure to the SPDR Gold Trust via call options in 2015 and early 2016 but then closed this exposure. Duquesne also invests in gold mining equities Barrick Gold and Agnico Eagle Mines, and this could be what Druckenmiller is referring to when he said he sold and then bought back gold.

Paulson is a big fan of the SPDR Gold Trust, a vehicle which is in no way the same as owning physical gold, because it merely provides exposure to the US dollar price of gold.

If and when the paper gold market implodes and the price of real physical gold diverges from the paper price of gold, the world’s billionaire investors will need to line up their ducks and explain to their partners and shareholders if they actually hold tangible physical gold bars, and if not why not.

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

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

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

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A Deal Telegraphed in November

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

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

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

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

Purchase Price

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

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

Motivations for Acquisition

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

BullionStar Bars by Heraeus and Argor-Heraeus

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

Conclusion

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

Further information

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

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

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

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

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