Tag Archives: City of London

Spotlight on LPMCL: London Precious Metals Clearing Limited

Within the last 2 months, there have been a series of developments in the London Gold Market, each of which has involved Chinese-controlled banking group ICBC Standard Bank Plc.

  • On 4 April, the London Bullion Market Association (LBMA) announced that ICBC Standard Bank had been reclassified as a LBMA Market Making member for the OTC spot trading markets in gold and silver.
  • On 11 April, ICE Benchmark Administration announced that ICBC Standard Bank had been approved for direct participation in the daily benchmark LBMA Gold Price auctions beginning on 16 May.
  • On 3 May, the LBMA announced in its Alchemist magazine that ICBC Standard Bank had joined the LBMA’s Physical Committee. This committee is responsible for aspects of the physical bullion market such as the LBMA’s Good Delivery List and it also liaises with the LBMA’s Vault Managers Working Party.
  • On 11 May, the relatively obscure but powerful London Precious Metals Clearing Limited (LPMCL) announced that ICBC Standard Bank had joined LPMCL, the first membership addition to London’s monopoly bullion clearing group since 2005.
  • On 16 May, ICBC Standard Bank announced that it had agreed to acquire a London-based precious metals vault currently owned by Barclays. This precious metals vault was built by, and is operated by Brinks, on behalf of Barclays. ICBC Standard says that the vault acquisition will be completed by July 2016.

Therefore, within a period of approximately 6 weeks, ICBC Standard has positioned itself front and centre of the closely protected London bullion trading, clearing and vaulting infrastructure.

[Note: On 1 February 2015, Chinese bank Industrial and Commercial Bank of China (ICBC) acquired a controlling interest in London headquartered Standard Bank Plc, hence the name change to ICBC Standard Bank PLC].

On Monday 16 May 2016, the LBMA also issued its own press release, announcing that ICBC Standard bank had joined LPMCL, and that it would become an ‘active member‘ of LPMCL in early June 2016.

The LBMA press release about LPMCL also quoted LBMA CEO Ruth Crowell as saying:

“I’m delighted to see ICBC Standard Bank join this vital organisation. The LPMCL clearing system is one of the great strengths of the London bullion market. The LBMA welcomes this addition and looks forward to continuing to assist LPMCL in its growth and development.”

Although the same bullion bank representatives, wearing different hats, run, and have always run, all of the precious metals entities that operate in the London market (via a series of different ‘puppet shows’), the ‘assistance’ that the LBMA is now providing to LPMCL is based on the following development that was highlighted by the LBMA CEO at the LBMA conference in Vienna in 2015, when she said:

“I’m delighted to inform you that the London Precious Metals Clearing company took part not only [in the LBMA] review, but we have now agreed to formalise our working relationship, with the LBMA providing Executive services going forward. I’m grateful to the LPMCL directors for their leadership and their support for removing fragmentation from the market.”

Examination of the Barclays / Brinks vault (most likely near Heathrow in the Brinks complex) which ICBC is now acquiring, is left to a future analysis. This article concentrates solely on the LPMCL clearing system, the protected crux of the London precious metals markets, but an entity which is rarely given anything but a passing glance by the financial media in London or elsewhere.

One important point to mention here though is that it had been widely reported in January (initially by Reuters) that ICBC was acquiring another London-based precious metals vault, a vault that had been built by G4S in Park Royal on behalf of Deutsche Bank, and that had then been leased from G4S by Deutsche Bank. See “G4S London Gold Vault 2.0 – ICBC Standard Bank in, Deutsche Bank out” for details.

It turns out that the deal for the G4S / Deutsche Bank vault “did not go through“, according to ICBC. It appears that ICBC considered the Barclays / Brinks vault to be the preferred transaction over the Deutsche / G4S vault, and that when the Barclays / Brinks vault came on to the market, ICBC backed out of the transaction with Deutsche, in much the same as house-hunters change their mind when a better house comes on the market.

The future of the G4S / Deutsche vault is therefore still unknown. Possibly Standard Chartered, which was also mentioned as a name wanting to join LPMCL, could be a potential buyer of the Deutsche / G4S vault?

It’s also interesting to note that “London Precious Metal Clearing Limited (LPMCL) provides formal recognition of companies to provide vaulting services“, not the LBMA.

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LPMCL  – The Company

London Precious Metals Clearing Limited (LPMCL) is a UK private company limited by guarantee without share capital, that was incorporated on 5 April 2001, with a company number of 04195299. LPMCL is classified in Companies House with a Standard Industrial Classification (SIC) code of ‘Administration of financial markets‘. LPMCL has a registered address of C/O Hackwood Secretaries Limited, One Silk Street, London EC2Y 8HQ. Interestingly, this is the same registered address as the London Gold Market Fixing Limited and the London Silver Market Fixing Company Limited, both of which are still active companies and both of which are currently defendants in ongoing New York court class action suits where they and their member banks stand accused of price manipulation in the gold and silver markets, respectively. Hackwood Secretaries Limited is Company Secretary for LPMCL. Hackwood Secretaries is a Linklaters company used for company secretariat services. Linklaters is one of the better known global law firms that is headquartered in London.

LPMCL uses an electronic clearing platform called ‘AURUM’ to clear London-settled precious metals trades. This is done via book entry netting and clearing, entirely using unallocated accounts. The vast majority of the LPMCL clearing trades are processed by HSBC and JP Morgan.

As to the raison d’etre for LPMCL, perhaps the recent LBMA press release sums it up best:

“[the] London clearing system for gold, silver, platinum and palladium [is] managed by London Precious Metals Clearing Limited (LPMCL).

LPMCL operates a central electronic metal clearing hub, with deals between parties throughout the world, settled and cleared in London

Most global ‘over-the-counter’ gold and silver trading is cleared through the London clearing system. The London bullion market clearing banks provide a service to their clients in providing the settlement of gold and silver transfers. Ultimately each clearer has to have access to reserves of physical metal and provides an array of services tailored to each client’s specific needs; the most important of which is intermediating credit and providing credit facilities.

This last paragraph in the press release was cut and pasted by the LBMA from the LPMCL website FAQ under the question: “Can you explain the benefits of the London bullion clearing system as compared with a clearing house?” so it can also be viewed there.

You will notice from the above press release that:

a) LPMCL is critically important due to its role as global clearer for all 4 precious metals, and

b) Access to physical precious metals plays a secondary role in the LPMCL system compared to ‘credit facilities and intermediating credit (i.e. The LPMCL system is a credit-based fractional-reserve system of unallocated metal holdings and transfers).

LPMCL was founded in 2001 by 7 bullion bank founding members, namely, NM Rothschilds, JP Morgan Chase, HSBC Bank USA, ScotiaMocatta, UBS AG, Deutsche Bank , and CSFB (Credit Suisse). Credit Suisse resigned in October 2001, Rothschilds resigned in June 2004, and then Barclays joined in September 2005. Deutsche bank resigned in August 2015. HSBC Bank USA NA resigned on 11 February 2015, and was replaced by HSBC Bank Plc. Gold and silver were the two metals originally cleared loco London by LPMCL’s system. Platinum and palladium clearing loco London was added to LPMCL’s clearing offering in September 2009. UBS (a LPMCL member) and Credit Suisse (a previous LPMCL member) also offer loco Zurich clearing of platinum and palladium.

Including ICBC Standard Bank, the current membership of LPMCL as of May/June 2016 now consists of JP Morgan, HSBC, Scotia Mocatta, UBS, Barclays, and ICBC Standard. Since Barclays is withdrawing from much of its precious metals business in London, and is selling its London vault , its possible that Barclays will resign from LPMCL in the near future.

All LPMCL members either have their own precious metals vault in London, or access to vaulting facilities at London vaults. Many of the LPMCL members also have vaulting facilities in other financial capitals around the world. Here are some of the vault operations for each of the LPMCL members:

  • HSBC – vaults in London, New York (Manhattan) and Hong Kong
  • JP Morgan – vaults in London, New York (Manhattan) and Singapore (Freeport)
  • Scotia – vaults in Toronto and New York (JFK)
  • Barclays – vault in London (being sold), vault in Singapore
  • UBS – vault in Zurich (Kloten) and Singapore (Freeport)
  • Deutsche Bank (ex LPMCL) – trying to sell a lease on a G4S vault in London; has / had a vault in Singapore (Freeport)
  • ICBC Standard – buying vault in London from Barclays. Standard Bank had vaulting facilities at JP Morgan’s vault in London. ICBC has many vaults in China.

ICBC London

Notice also that 4 of the LPMCL member banks, HSBC, JP Morgan, Scotia and UBS are also 4 of the 6 banks represented on the LBMA Management Committee, therefore LPMCL members have a disproportionately large influence on the strategic direction and decision-making of the LBMA.

LPMCL’s original Memorandum and Articles of Association, signed by representatives of the 7 founding bullion banks can be seen here -> LPMCL Memorandum and Articles of Association October 2001.  One of LPMCL’s main objectives in its Memorandum of Association is:

“to take on and continue the promotion, administration and conduct of precious metals clearing in the London precious metals markets” 

According to the original Articles of Association, the registered ‘Office’ of LPMCL was “New Court, St Swithin’s Lane, London EC4P 4DU“, which is the headquarters of N.M. Rothschild & Sons in London. Rothschilds was also the company Secretary at that time. Interestingly, the respective addresses listed for JP Morgan and HSBC in the Memorandum and Articles of Association document are “60 Victoria Embankment”, and “Thames Exchange, 10 Queen Street Place”, which is the location of JP Morgan’s London precious metals vault, and a supposed location of HSBC’s London precious metals vault, respectively.

Why LPMCL was Established

According to the history section of the LPMCL’s website, the London bullion market first felt the need to develop an electronic clearing  / matching system in the mid-1990s due to a combination of growing trade volumes, technological change, and also the need for better audit trails. This view is backed up by comments from Peter Smith of JP Morgan in a 2009 article for the LBMA’s Alchemist when he said that:

“Thirteen years ago [1996], the bullion clearers were exchanging transfers between themselves by telephone instructions – a situation that was causing considerable problems in the control and audit departments within those banks. Because of those concerns, the clearers realised that the only sensible and secure solution was to develop a central clearing hub, where transfer instructions could be up loaded and matched. This resulted in the establishment of LPMCL in April 2001″

The LPMCL website’s history section also reveals that the initial legwork on automating London precious metals clearing was done by the LBMA’s physical committee, since this committee “comprised the clearing members”.

Until very recently, the LBMA physical committee was exclusively made up of LPMCL members, indeed, the LBMA physical committee literally looks like an alternate venue for LPMCL members to meet up in. For example, in September 2015, the only members of the LBMA physical committee were representatives from the then 5 members of LPMCL, i.e. JP Morgan, HSBC, Scotia, UBS and Barclays.

The addition of ICBC Standard and Standard Chartered to the LBMA Physical Committee was announced in the LBMA’s Alchemist on 3 May 2016. Currently, all 6 LPMCL members – JP Morgan (chair of physical committee), HSBC, ScotiaMocatta, Barclays, UBS, and ICBC Standard Bank are members of the LBMA physical committee, as is Standard Chartered (a potential member of LPMCL), and TD Bank (Toronto Dominion). Note that Standard Chartered and TD Bank are the 5th and 6th member banks of the LBMA Management Committee. Therefore all 6 bullion banks that are on the LBMA Management Committee are also on the LBMA Physical Committee.

The LBMA physical committee membership is rounded off by Brinks (notably, the vault transaction facilitator between Barclays and ICBC Standard Bank) . Note also, that there is a Bank of England ‘observer’ on the LBMA physical committee, an indication of the Bank of England’s keen interest in monitoring the London Gold Market and the gold market’s physical operations and transactions.

The LPMCL history goes on to say that:

“It was subsequently decided that the most effective way of carrying the electronic matching system project forward would be for the clearing members to form a separate company specifically for the purpose of developing and administering such a system. As a result LPMCL was formed in April, 2001.

Obscurely, LPMCL was first incorporated on 5 April 2001 with a name of Itemelement Limited (basically a shell company). It changed name to London Precious Metal Clearing Limited on 2 October 2001 (‘Metal’ singular). It then changed name again on 2 November 2001 to London Precious Metals Clearing Limited (‘metals’ plural). The first tranche of LPMCL directors were then installed in November 2001 from the six remaining founder members companies (excluding Credit Suisse First Boston International since CSFB resigned in October 2001).

OM and LBT Computer Services

Its unclear what, if anything, LPMCL did as a company in 2002, however in April 2003 a press release was issued by Swedish technology company OM revealing that:

“London Precious Metals Clearing Limited (”LPMCL”) has chosen OM as an outsourcing partner for Facility Management of their proposed web-based automated bullion matching system to be provided by LBT Computer Services, an Information Technology service provider and partner to OM.”

We are happy to welcome LPMCL, the leading organization for precious metal clearing, as a Facility Management customer to OM.”

This ‘web-based automated bullion matching system’ is “AURUM”.

The same press release described LPMCL as:

“LPMCL is the administrative company set up by the six clearing members of the LBMA to facilitate the development of an electronic matching system to replace the existing clearing system which is conducted by telephone and / or facsimile.”

In 2003, OM also merged with Finland’s NEX to form OMHEX. Following the merger OM continued to exist as the OM Technology division of OMHEX, providing transaction technology services to the financial and energy industries. OMHEX became OMX in 2004, and was then acquired by NASDAQ in 2007 to form the current group NASDAQ OMX.

However, the relevant entity here is LBT Computer Services, which is still around today as it’s website shows. The LBT web site also still has a short profile of its LPMCL project in the ‘case study’ section of its website, where is states, in a slightly childish way that:

“The LPMCL are the ‘clearing’ organisation for precious metal dealing and are based in London, the centre for such trading. They needed a way of linking together the precious metal bankers to match transactions/deals. They needed to do it in such a fashion that no bank could see anything other than their counterparty bank, and to do it with absolute security. 

LBT built an application that is hosted on the Internet and which connects to each bank via a secure link to collect transactions which it then matches to the counterparty bank’s transactions and send the results back to both banks. It runs 24 x 7, unattended, other than via an on-line link. Unfortunately we cannot say more about this innovative solution.

Why can’t LBT Services say anything more about the LPMCL automated platform? This statement from LBT is perhaps the first clue as to the secrecy, paranoia, and obsessive protectionism that surrounds LPMCL, a company that is the global clearer for all 4 precious metals, yet lies at the heart of the opaque system that is the global precious metals trading system run out of London where real trade-level data that runs through AURUM is never publicly reported.

Between 2003 and the present day, the AURUM platform would obviously have gone through a number of changes, and it may not even be hosted on the LBT platform any longer. Given that lack of publicly available information on the design and functionality of AURUM, its hard to say. There is however a current ‘LPMCL Technical Committee‘ comprising IT and Business Analyst representatives of the member banks (see various Linkedin profiles for details), so perhaps AURUM was brought in-house between the bank members. Many of the in-house systems that AURUM interfaces to would also have changed over the years, requiring various upgrades of the AURUM platform too, and therefore a rationale for the existence of a ‘LPMCL Technical Committee’.

ICBC Standard’s Membership Application to LPMCL

When Reuters reported back in January of this year that ICBC Standard was looking to take on the vault lease for the Deutsche Bank / G4S vault, Reuters also reported in the same article that ICBC Standard had:

“also applied to become a clearing member of the London gold and silver over-the-counter business [LPMCL]”

“These banks are shareholders of the London Precious Metals Clearing (LPMCL) company. They will decide whether to accept or reject ICBC Standard Bank’s application within the next few months.”

“They [ICBC] are applying for clearing membership at the moment, but that’s still subject to a vote, which has not taken place yet”

Therefore, LPMCL’s announcement that it had allowed ICBC Standard to join wasn’t really a surprise. But the application and voting procedure referred to by Reuters gels with the new membership procedure laid out in the Articles of Association of LPMCL, which states that membership of LPMCL is open to “other eligible persons as the directors in their discretion may admit to membership“. (person here means company entities that wish to become members).

In the LPMCL company each ‘member’ (bank) appoints a director. Each director can also appoint an alternate director. During the ICBC membership application, there were 9 directors listed as current directors of LPMCL, comprising 5 directors from each of the 5 members banks of JP Morgan, HSBC, ScotiaMocatta, UBS and Barclays, and 4 alternate directors from all the member banks except Barclays. A list of the current directors names can be seen here.

According to the 2015 annual accounts of LPMCL, the 5 LPMCL directors are Tony Dean (HSBC), Jane Lloyd (Scotia), Andrew Lovell (JP Morgan), Marco Heil (UBS), and Vikas Chamaria (Barclays). The 4 alternate directors are Peter Smith (JP Morgan), William Wolfe (HSBC), Conway Rudd (Scotia) and Daniel Picard (UBS).

Former Deutsche bank LPMCL director , Raj Kumar, has now moved to ICBC Standard Bank and should be in the front running to be appointed a LPMCL director representing ICBC Standard. If Standard Chartered also joins LPMCL, then former Barclays LPMCL director, Martyn Whithead, who moved to Standard Chartered, may also be expected to re-appear as a LPMCL director representing Standard Chartered.

LPMCL’s latest annual Accounts

The most recent set of annual accounts filed by LPMCL at UK Companies House are the accounts for the full year to 31 March 2015. These accounts were, audited by Kingston Smith LLP, signed off on 8 September 2015, and filed with Companies Office on 8 October 2015. The most interesting items in the accounts are as follows:

- 2015 Turnover (Revenue) totalled £223, 599 and is entirely derived from subscription income. This revenue is accounted for on an accruals basis, meaning that it refers to subscription income for the year to 31 March 2014. With 6 bank members of LPMCL for the period under consideration, thats £38,933 per member, which is very small change for investment banks.

- For the year to March 2015, LPMCL actually made an operating loss of £64,944 because Administrative Expenses were £288,543. The bottom line loss was a similar figure.

- The biggest components of Administrative Expenses were Computer Service Fees: £151,978, and Legal and Professional Fees: £118,384, which together totalled £270,362.

Computer Service Fees obviously refers to costs in running AURUM, running the LPMCL web site, and possibly other technology costs that can be billable by the member banks to LPMCL such as, for example, electronic communications and interfacing software for sending trades to and receive data from AURUM.  ‘Fees’ suggests a payment to an external provider.

The ‘Legal and Professional Fees’ line item is more unusual. Why would LPMCL need to spend £118,384 on legal and profession fees in one year, which is 41% of total admin expenses, and 78% as large as the ‘computer service fees’? This legal and professional fees line item is also eye-opening since it increased  from £69,194 in 2014 to £118,384, a 71% increase. Auditing fees would be fairly constant from year to year, so there is a relatively new and quite large expense under this category. Could it be a legal expense, and if so why?

AURUM

What does LPMCL’s AURUM actually do?

The London bullion market’s clearing system is a monopoly bullion clearing system run by LPMCL for bullion settled loco London, with “all bullion transactions between the clearing members of the LBMA settled and cleared by The London Precious Metals Clearing Limited.” “Loco London” traditionally meant gold and silver bullion physically held in London. With the rise of the unallocated account transfer system, to what extent unallocated bullion accounts are backed by physical bullion is debatable. The system is now a fractional-reserve credit system. LPMCL’s electronic clearing platform, AURUM, clears all bullion trades via book-entry netting and clearing using unallocated accounts.

Entities trading in the London bullion market maintain a series of unallocated accounts with one or more of the LPMCL clearers. The LMPCL members maintain unallocated accounts between each other used for clearing. The LPMCL also maintain bullion clearing accounts at the Bank of England. Each day, each client of each bullion clearer sends its LPMCL member clearing bank details of bullion trades between that client and its counter-parties. At the end of each trading day, each LPMCL member then processes position settlements by first netting out, in-house, to whatever extent possible, the bullion trades done by its own clients and clients of those clients.

Following this, the LPMCL members send their netted trade data to AURUM which then clears the clearers’ positions. The majority of LPMCL trades cleared are processed by LPMCL members  HSBC and JP Morgan. The clearers also ‘settle’ their own positions with each other between 4pm and 4:30pm each day via broker transfers usually involving  3 brokers. This is done to prevent excessive overnight credit exposure between the clearers. The clearing process also involves “close liaison with the Bank of England and the many overseas bullion depositories“.

According to the LBMA, the LPMCL members:

“utilise the unallocated gold and silver, in accounts they maintain between each other, to make ‘paper transfers’ to settle mutual trades. They also settle third-party loco London bullion transfers, conducted on behalf of clients and other members of the London Bullion Market. This system of ‘paper transfers’ avoids the security risks, costs and impracticality of physically moving metal bars”

An overview of the London clearing process can be read on BullionStar’s Gold University profile of the London gold market here. The LBMA web site also provides a summary here.  A similar summary is also in an article titled “Gold and Silver Clearing “Loco London” Through the Central Hub Developed by London Precious Metal Clearing Ltd” in Issue 55 of the Alchemist , dated July 2009. The most visible part of LPMCL and AURUM is the generally useless high level monthly clearing statistics that the LPMCL has produced each month since early 1997, and that are published on the LBMA website. These clearing statistics report the “net volume of loco London gold and silver transfers settled between clearing members of the LBMA.

For each of gold and silver, the statistics are calculated as daily averages and reported each month as three sets of figures, namely, a figure of millions of ounces transferred per day, the USD value of those ounces transferred per day, and also the number of transfers per day. Note that these clearing figures are just a fraction of what the real underlying trading figures are. Overall  trading figures of the London gold market are anywhere up to 10 times or more larger than the clearing figures would suggest, since the clearing figures are ‘netted’ trading figures.

London-settled gold and silver clearing statistics were first published in January 1997, with the first clearing data reported for the Q4 period 1996. This was prior to the automation of the daily clearing operations through AURUM.

Even back then in 1997, the daily clearing figures for gold and silver through London were baffling and opaque since the daily clearing volumes were huge compared to the quantities of physical gold and silver that exists in the entire world, and there was no granular explanation or categorisation as to the trade types and client types that these clearing figures represented. In this regards, nothing has changed. Then as of now, the LPMCL only reveal that the monthly figures include 3 types of data:

- Loco London book transfers from one party in a clearing member’s books to another member in the same member’s books or in the books of another clearing member.

- Physical transfers and shipments by clearing members

- Transfers over clearing members accounts at the Bank of England

For example, the LBMA clearing statistics for April 2016 state that 16.5 million ounces (513 tonnes) of gold were cleared each day during the month. With 21 trading days in April 2016, that would be 346 million ounces (10,777 tonnes) of gold cleared during April. Since there is said to be a 10 :1 ratio between the amount of gold traded in London and the amount of gold cleared through AURUM, these clearing figures can be rolled up by a multiple of 10.

The trouble with this type of high level reporting is that it doesn’t even reveal the percentage of transfers in each of the above three groups, but physical transfers would be very very small percentage of the total, because, by definition, physical transfers couldn’t be any larger given that there is only a fraction of physical gold being transacted in the world on any given day relative to these gigantic clearing & trading figures.

An article called “Clearing Volume on the London Bullion Market” in Issue 6 of the Alchemist, by Peter Smith of JP Morgan, dated January 1997,  first introduced these predominantly useless clearing statistics and revealed the 3 categories above. Nothing has changed in the reporting since 1997 and this LBMA lack of transparency remains right up to today. Ironically, Issue 6 of the LBMA’s Alchemist was titled ‘Towards Transparency‘ but there was little transparency divulged at that time, and the same opacity of the London bullion market still remains 20 years later.

Issue 6 of the Alchemist also had an introductory editorial from the then chairman of the LBMA, Alan Baker, whose opening line in the editorial was:

The bullion market in London is often criticised by observers for being secretive and lacking in information and data. Unfortunately to an extent this is inevitable given the need for a duty of care to clients which dictates that a high level of discretion is an essential element in so much of the business that takes place in the market, particularly for gold.”

Notice the secrecy is inevitable spin. The LBMA has been making excuses for the lack of transparency for at least 20 years now. Frankly, I don’t agree with any of the above explanations on the need for opacity. It’s a fiction. Reporting of trade volumes in all other markets globally such as equities, bonds, FX, money market and exchange-based commodities, is detailed, publicly available, and usually granular by transaction types and client types, and this does not, and has never, compromised client confidentiality in any of these asset classes. Why then do the precious metals markets, and the gold market in particular need to be the exception? They do not.

The excuses by people such as the ex LBMA chairman are merely helping to protect an entrenched system of opacity in which central banks, sovereign institutions, monetary authorities, the Bank for International Settlements, large bullion banks, and other large operators can move within the gold market without being concerned that any of their transactions and interventions will ever be noticed and reflected in gold price discovery. This is not an efficient market. Far from it. This is a protected and hidden physical trading system upon which is overlaid a massive pyramid of fractional-reserve paper gold trading.

The trade types of the trades from which the massive MPMCL clearing figures are generated could easily be reported by LPMCL and the LBMA, but they choose not to report this information. All positional, transactional, account, account type, and physical allocation data in every database table in AURUM and in every bullion trade database table of each LPMCL member bank could be published publicly while stripping out clients’ account-sensitive data and would still not jeopardize client confidentiality.

Trade Types behind the LPMCL Clearing figures

LPMCL provided one glimpse into London bullion market trade types in October 2003, in an article in Alchemist 32, titled “Clearing the Air Discussing Trends and Influences on London Clearing Statistics“, when the then LMPCL chairman,  Peter Fava, and JP Morgan’s Peter Smith, both involved in the compilation of the original clearing statistics in 1997, were interviewed about “some changes in the nature of the market and over the intervening years that might have had an impact on the reported numbers.” This is the only insight that I am aware of that provided a small window into some of trade types of bullion transactions that are processed through AURUM.

Fava was asked about the “changes in the overall pattern of trading activity from certain counterparts”. He then gave a rundown of various bullion trading activities that were showing up in the clearing data. The activities mentioned were:

  • central bank gold deposits, rolling over monthly, and the hedging transactions connected to that borrowing
  • interest rate swaps and longer-term collateralised agreements
  • speculative trading activity on a leveraged, forward basis that is closed out before maturity
  • investment fund participation via spot transactions* (generally netted by the counterparty banks against EFPs – exchange for physicals) but if not netted would show up in clearing
  • interbank market trading (multiple times per day)
  • consignment accounts in physical markets, notably Istanbul, Dubai and India” with purchases out of the consignment account hedged loco London

Since that 2003 article was written, there has been a huge growth in Exchange Traded Fund (ETF) trading, a trading activity that can be added to the above list. In 2014, in the LBMA Silver Price competition proposals, ETF Securities’ bid stated that “our physical precious metal ETCs are created and redeemed for physical metal, with the metal being cleared through the LBMA clearing system and the securities being cleared through the CREST clearing system which is used for LSE trading“.

I have analysed the above London bullion market trade types in more depth, but due to space constraints, I’ll cover this is a future posting, but for now, the point to note is that a lot of London bullion trading activity has very little to do with physical metal movements.

Recall also that Stewart Murray (ex LBMA CEO) had said in a 2011 presentation that investment funds had ‘very large’ unallocated positions in the market.

 “Various investors hold very substantial amounts unallocated gold and silver in the London vaults”

I wonder if investment funds which presume they own unallocated gold or silver (which is just a long unallocated spot position put on by a bank), are aware that their positions are then offset against futures. Some unsophisticated funds might think they are actually hold pooled gold or silver holdings within a London bank vault.

Circling the Wagons: Protection of LPMCL’s clearing monopoly

In 2014, the daily fixing auctions for all 4 precious metals in the London market were moved to new electronic platforms. In the case of gold and silver, competitions were held (organised by the LBMA) to decide on which companies would become the new administrators and calculation agents for the auctions. Ultimately, Thomson Reuters / CME Group secured the contract to run the new Silver auctions (LBMA Silver Price), and ICE Benchmark Administration secured the contract to run the new Gold auctions (LBMA Gold Price). In the case of the platinum and palladium auctions, as to whether a competition was held is debatable, since neither LPPM nor the London Platinum and Palladium Fixing Company (LPPFC) would confirm this when asked. However, the London Metal Exchange was ultimately awarded the mandate to run the new platinum and palladium auctions (LBMA Platinum Price and LBMA Palladium Price).

After Thomson Reuters and CME Group had secured the contract for the silver auctions, CME Group maintained (in a public presentation) on 29 July 2014 that it would soon introduce a centrally cleared platform for these auctions trades so as to widen participation in the auctions and eliminate credit risk between participants.

“[for] Extended Participation, we envisage central clearing via CME Clearing Europe under the auspices of the UK and European regulated authorities which should effectively open the door for most participants.

We’re basically starting the process as soon as possible. Let’s get this up and running by 15thAugust [2014] and then it’s all hands to the pumps on the clearing side so hopefully it will happen soon.

“The work we’ve got to do is to set this up so that’s it’s part of the platform so it’s a level playing field for participants…”

Anindya Boral will be starting to do a big drive to enable cleared transactions through our clearing house and wider participation in August”

In its presentation, CME Group featured a slide which stated that:

“Central counterparty clearing will enable greater direct participation in the London Silver Price”.

We anticipate using CME Group’s London Clearing House – CME Clearing Europe – for the London Silver Price

 By serving as the counterparty to every transaction, CME Clearing Europe will become the buyer to every seller and the seller to every buyer, virtually eliminating credit risk between market participants

However, the CME’s promise of central clearing never happened and its plans to introduce central clearing were mysteriously dropped. See BullionStar blog “The LBMA Silver Price – Broken Promises on Wider Participation and Central Clearing” for full details.

Likewise, when the LME announced that it had been awarded the contract by LPPFC to run the platinum and palladium price auctions, the LME issued a press release on 16 October 2014 stating that it planned to introduce clearing of platinum and palladium auction trades using its clearing platform LME Clear, so as to maximise participation and overcome the credit risk obstacle:

To maximise participation in the London pricing mechanism, the LME also plans to introduce a cleared platinum and palladium servicewhich will mitigate the difficulty associated with participants taking bilateral credit risk in positions.

LME Clear, launched on 22 September 2014, was built specifically to enable efficient clearing of metals exposures and will extend its existing precious metals clearing functionality to clear platinum and palladium.

However, the LME mysteriously pulled its press release a few hours after it had been published, and replaced it with an amended version where the above two paragraphs had been deleted. See BullionStar blog “LPPM – The London Platinum and Palladium Market” for full details.

And so, LME Clear was never introduced for clearing platinum and palladium auction trades.

Similarly, in its Executive Summary proposal submitted to the LBMA in October 2014 to run the new gold price auctions, a contract which it ended up winning, ICE Benchmark Administration (IBA) stated that its solution could employ pre-collateralisation to eliminate bi-lateral credit risk between participants, and therefore widen auction participation. ICE also made reference to the logic of using a centrally cleared model, but was shrewd enough at that point in time to defer to the powerful interests of the clearing members who essentially run the LBMA, knowing that the CME Group and LME clearing solutions for Silver and Platinum/Palladium had been shot down:

“It is through the Oversight Committee that the LBMA will continue to have significant involvement in the auction process, including… the decision on whether to move to a centrally cleared model (until that time, weaker credit names can be accommodated via pre-collateralisation).”

“One of the key benefits of WebICE is its ability to allow clients to participate in the auction process with the same information and order management capabilities as the direct participants. This reduces both operational and regulatory risk for direct participants, even before increasing the number of direct participants or moving to a centrally cleared model.

In its presentation submission to the LBMA in October 2014 during the competition to run the London gold auctions, the LME also seemed to have gotten the message that the LPMCL’s clearing monopoly and its AURUM clearing system were not to be tampered in any proposed LME platform. In a slide titled “Potential credit models” the LME said that a centrally cleared solution “would only be introduced with market support and respecting LPMCL settlement“. See right-hand box in below slide:

LME potential credit models

Likewise, in the slide that followed the above one, the LME again made it abundantly clear that it had got the message that LMPCL was not to be touched – “LME Clear fully respects existing loco London delivery mechanism and participants“:

LME Pathway to cleared solution

The only reference by the LBMA to central clearing counterparties is a short comment on its website about centrally clearing OTC forward trades where it states:

“..members of a common ‘Central Counterparty’(CCP), that has a facility to clear forwards, may novate their trades and thus avoid bilateral credit risk. In the absence of an exchange, the trade remains one of an OTC nature but has the ability to be cleared. This method of credit mitigation is known as OTC Cleared.”

CME Group already offers a very sparsely used (or not even used) centralised clearing service for OTC unallocated gold forwards using collateral or cash margin. “Delivery occurs at LPMCL member banks via book entry transfer of ‘London Good Delivery’ gold, which means unallocated loco London book entry gold claims on an LPMCL bank”.

Not surprisingly, the LBMA web site, says nothing about the pros and cons of centrally clearing OTC spot trades nor is there any discussion about exchange-based trading and clearing of any London bullion trades.

The LPMCL web site mentions an alternative clearing system (a clearing house), but not surprisingly, this approach is only mentioned as a foil for undermining it, as follows:

Q: Can you explain the benefits of the London bullion clearing system as compared with a clearing house?

 A: “…a clearing house usually has a rigid settlement structure, does not provide credit, or assume intra-day or term credit risks, and not being in the banking business, has no ability to use any underlying liquidity. It will thus most likely be less flexible, less efficient and more expensive – particularly as clearing houses by their nature are non-competitive, whereas the London bullion clearing banks compete for clients by providing competitive services and pricing.”

Q: Could a clearing house replace the London bullion clearing system?

“Yes, but it would prove to be less efficient and more expensive than the current arrangement. It would also most likely need strong financial backing and insurance cover – which then directs us back to the London bullion clearing banks, as above, all of whom are first tier global institutions.”

Why is LPMCL being Protected?

In conclusion, why does the LBMA think that LPMCL is a ‘vital organisation’? as the LBMA CEO phrases it.

  • Firstly, LPMCL keeps the entire pyramid of London’s unallocated precious metals trades spinning. By not reporting any trade information, the LBMA and LPMCL keep the entire gold world in the dark about the extent of the London paper gold trading scheme
  • Secondly, LPMCL preserves opacity and prevents public reporting of precious metals trades, including central bank gold lending and gold swaps, and therefore keeps this major gold market trading activity out of focus, with the spotlight off the role of the Bank of England in the London Gold Market.
  • Thirdly, the most powerful banks in the LBMA are the LPMCL members which are also the vaulters in London and the member banks of the LBMA Management Committee. These banks want to maintain the monopoly status quo of LPMCL and to maintain the status quo of the London precious metals vaulting system and their vaulting fees. The same banks run the trading, clearing and vaulting of the entire London bullion system. Perhaps the FCA should be looking at anti-competitive behaviour here, for example vaulting fees, and clearing fees.
  • Fourthly, the current LPMCL system masks huge amounts of trading for the LBMA members banks and brokers. Huge trading makes large trading commissions. The same system generates the need for the banks to provide credit to bullion market participants, which generates interest income.
  • Fifthly, by propping up LPMCL, its member banks can push back on any competing initiatives that are proposing a ‘gold exchange’ in London, such as the exchange initiative that’s backed by the World Gold Council and a number of other (non LPMCL) bullion banks.

As the Financial Times said in October 2015 when reporting about the LBMA’s so-called moves to provide trade reporting in light of other initiatives by the LME / World Gold Council and banks such as Goldman, SocGen, Citibank and Morgan Stanley (and previously including ICBC Standard) to move gold trading on to an exchange platform using exchange defined gold contracts:

“In the other camp is the LBMA, the official body set up by the Bank of England in 1987 to regulate the bullion market, which has close ties to the vaulting banks. Many of its biggest members want physical gold trading in London to remain off-exchange, but have conceded that a move towards all trades being cleared in one place could add transparency.”

Look at what the incumbent LBMA banks do, not what they say to newspapers. What the LBMA – LPMCL co-op (same people, different hats) has just done is welcomed another bank (ICBC Standard) into ‘this vital organisation” (the LPMCL), and the LBMA is now looking forward to “continuing to assist LPMCL in its growth and development.”

ICBC Standard had been in the LME / World Gold Council / Goldman / SocGen/ Citi / Morgan Stanley camp, buton the face of it, ICBC now appears to have deserted that faction and fully aligned with the LPMCL cartel of HSBC / JP Morgan / Scotia / UBS and Barclays. ICBC Standard may have been using the LME / Goldman camp as a bargaining tool with which to exert access pressure to join the LPMCL gang, and now that it has done so, it would be surprising if ICBC continues to align itself with the LME’s upcoming gold exchange proposal. However, as a Chinese controlled bank with long-term planning horizons, ICBC may wish to play a strategic game with a seat at both tables.

HSBC’s London Gold Vault: Is this Gold’s Secret Hiding Place?

HSBC’s main gold vault in London regularly comes under the media spotlight for a number of reasons. These reasons include:

a) the HSBC London vault stores a very large amount of gold on behalf of gold-backed Exchange Traded Funds, primarily the well-known SPDR Gold Trust (GLD)

b) along with the Bank of England vaults and JP Morgan vault, the HSBC vault is one of the 3 largest gold vaults in London

c) the location of the HSBC vault in London is not publicised and so the secrecy creates intrigue

d) HSBC every so often throws out some visual or audio-visual media bait about the vault, most famously in the case of CNBC’s Bob Pisani and his camerman and producer visiting and filming inside the actual vault

Despite all of the above, no one seems to have ever tried to figure out where this gold vault is actually located. Until now.

In some ways HSBC has done a very good job keeping the location of its London gold vault under wraps. The main challenge is where does one begin to look for a vault in London from scratch. At first it would appear that there is nothing in the public domain pointing to the HSBC vault location. This is not entirely true however. The gold bullion activities of HSBC in London stem from two companies that over time became part of the HSBC group. My approach was to start by thinking about which London locations HSBC used to be based at. I took this approach because it became obvious that the HSBC London gold vault being used was still a battered looking old vault space in 2004 and 2005, which was after the entire HSBC company had moved to its spanking new London headquarters in Canary Wharf by 2003.

In New York, the location of the HSBC Bank USA precious metals vault in Manhattan is well-known and is even listed in CFTC documents such as here. The vault is at 1 West 39th Street, SC 2 Level , New York, New York 10018 , which is the same building as 450 Fifth Avenue, which is the former Republic National Bank building that HSBC took over in 1999-2000. This Republic building at 450 Fifth Avenue, when it was being built, “had special vault requirements that reportedly added significantly to the project’s cost“. So its hard to see why HSBC makes such a big deal of not revealing its London vault location.

History of HSBC gold operations in London

In 1993, HSBC Holdings plc relocated its headquarters to London after having acquired Britain’s Midland Bank the previous year. Midland in turn had fully acquired Samuel Montagu in 1974 to form Midland Montagu. Samuel Montagu & Co was a City of London bullion broker, and one of the 5 original gold fixing members of the London Gold Fixing, and in turn, Midland Montagu was also a Gold Fixer. In 1999, HSBC began using the name ‘HSBC’ for the Gold Fixing seat of Midland Montagu.

Between 1999 and 2000, HSBC completed the acquisition of Republic National Bank of New York. Republic National Bank of New York had been a big player in the world gold markets, and in 1993, Republic National had bought one of the London Gold Fixing seats from Mase Westpac, meaning that from 1993 both Republic National and Midland Montagu held Gold Fixing seats, and that HSBC ended up with 2 of the 5 Gold Fixing seats. Therefore, in 2000, following the Republic National takeover, HSBC in London sold one of its newly acquired seats to Credit Suisse.

I also have always thought that the HSBC vault is in central London, and not in some far-flung outer London location. The LPMCL website (www.lpmcl.com) still displays text that says that the bullion clearer’s vaults are in ‘central London locations':

“The five London bullion clearing members each maintain confidential secure vaulting facilities within central London locations, using either their own premises, or those of a secure storage agent…”

Anyone who knows London will understand that ‘central London’ refers to a small number of central districts, and not some broader inside the M25 (ring road) definition. Before moving to Canary Wharf in circa 2003, HSBC occupied a number of buildings clustered around the north bank of the River Thames, including 10 Lower Thames Street (the Banks’ Headquarters), 3 Lower Thames Street (St Magnus House), 10 Queen Street Place at the corner of Upper Thames Street (Thames Exchange – containing a trading floor), and Vintners Place (adjoined to Vintners Hall on the other side of Queen Street Place and Upper Thames Street).

HSBC Bank USA NA (London branch)

Until late 2014, the HSBC entity that was the custodian of the SPDR Gold Trust was “HSBC Bank USA NA (London branch)”. NA means National Association. On 21 November 2014, effective 22 December 2014, the custodian for the SPDR Gold Trust switched from HSBC Bank USA, National Association to HSBC Bank plc.

HSBC Bank USA NA (London branch), until 2015, was also the HSBC entity that was listed as a member of London Precious Metals Clearing Limited (LPMCL) on the LPMCL website. See, for example, September 2009 imprint of LPMCL website. The next step is therefore to see where HSBC Bank USA NA (London branch) was formerly located.

The Financial Services Register (FSA Register) lists HSBC Bank USA, Reference number: 141298, effective from 24 January 2000, with a registered address of Thames Exchange, 10 Queen Street Place, London EC4R 1BE. Recalling the Republic National connection, the previous registered name for this entity was “Republic National Bank of New York”, with the same address, effective from 18 December 1995 to 24 January 2000. The FSA Register entry also lists various well-known names of the HSBC gold world alongside this HSBC Bank USA entity, including Jeremy Charles, Peter Fava and David Rose.

Recalling the Samual Montagu / Midland Montagu connection to HSBC, an entity called Montagu Precious Metals is also listed with an old address at “2nd Floor, Thames Exchange, 10 Queen Street Place, London EC4R 1BQ.

An old gold information website called GoldAvenue from the year 2000, written by Timothy Green, also lists HSBC Bank USA (London branch) address as:

HSBC Bank USA
London branch
Thames Exchange
10 Queen Street Place
London EC4R 1BQ

That same Gold Avenue web page also correctly listed the HSBC New York vault address as:

HSBC Bank USA
452 Fifth Avenue
New York, NY 10018

which is the same building as West 39th Street, New York, in Manhattan.

The precursor to the SPDR Gold Trust was called Gold Bullion Ltd, a vehicle set up by Graham Tuckwell, promoted by the World Gold Council, and listed on the Australian Stock Exchange. Gold Bullion Ltd’s first day of trading was 28th March 2003. Following Gold Bullion Ltd’s launch, the SPDR Gold Trust (GLD) was then launched in 2004, but originally it was called STREETracks Gold Shares, and it even had another former working title of ‘Equity Gold Trust’ in early 2004.

A May 2003 Marketwatch article about Gold Bullion Ltd and the early incarnation of the SPDR Gold Trust (Equity Gold Trust) can be seen here, and a speech by Graham Tuckwell about Gold Bullion Ltd to the LBMA annual conference in Lisbon in 2003 can be seen here.  Most importantly, an early draft Prospectus of Gold Bullion Ltd (in MS Word), dated 10 February 2003, lists the Custodian of Gold Bullion Ltd as:

CUSTODIAN BANK
HSBC Bank USA
Thames Exchange
10 Queen Street Place
London EC4R 1BQ

Therefore, Thames Exchange goes to the top of the list for further consideration, as does it’s neighbour Vintner’s Place. Thames Exchange and Vintners Place were both HSBC buildings and both buildings are situated right across the road from each other, with Queen Street Place literally bisecting the 2 buildings. Queen Street Place is also the road that acts as the approach road to Southwark Bridge, with the 10 Queen Street Place building and the Vintners Place building literally creating a canyon either side of the road.

You will see below why Queen Street Place is interesting. Queen Street Place is very near the Bank of England and is in the City of London, so it’s under City of London Police protection. It’s also very near the River Thames, as is the JP  Morgan London vault. To get to the Bank of England from Queen Street Place, you literally walk a mintute north up Queens Street, and then a few minutes north-east along Queen Victoria Street and you’re at the Bank of England.

An official HSBC letter-headed note documenting the Thames Exchange address and proving HSBC occupied this building can be seen here. Similarly, an official letter-headed note documenting the Vintner’s Place address, and proving that HSBC occupied that building can be seen here.

HSBC moves out of the City of London – 2002/2003

A Property Week article from 20 April 2000, titled “JLL to mastermind HSBC’s City exodus“, covered the huge HSBC move out of the City to Canary Wharf in the early 2000s:

Army of firms called in to help co-ordinate bank’s relocation to Docklands by 2002

“HSBC has stepped up its retreat from the City of London by instructing agents to open negotiations on the disposal of its outstanding City liabilities.

In one of the most hotly contested pitches of last year, Jones Lang Lasalle has beaten rivals to secure the lead role as strategic adviser for the bank’s relocation to Docklands [Canary Wharf] in 2002.

In addition to JLL, the bank has instructed another seven firms to mastermind the disposal of its 121,000 sq m (1,302,445 sq ft) City portfolio.”

“HSBC has ruled out acquiring freehold or long-leasehold interests and has instructed agents to negotiate the best surrender or assignment of the occupational leases on its 12 City buildings.”

Morgan Pepper is advising on HSBC’s 17-year lease at Thames Exchange, 10 Queen Street Place, EC4. The Scottish Amicable building is currently under offer to Blackstone Real Estate Advisors for £73m.

Insignia Richard Ellis, Chapman Swabey, Strutt & Parker and Wright Oliphant have positions on the bank’s remaining interests in Vintners Place EC3; Bishop’s Court at Artillery Street, and HSBC’s 37,160 sq m (400,000 sq ft) office complex at St Magnus House and Montagu House.

By the time STREETracks Gold Trust (the original name for the SPDR Gold Trust) was launched in 2004, HSBC Bank USA’s address had moved to HSBC’s new headquarters in Canary Wharf, in the Docklands, east of the City of London. By early 2003, Equity Gold Trust also listed the HSBC custodian with the Canary Wharf address.

An article by engineering company Arup  HSBC Headquarters – Canary Wharf – Arup), describing the new HSBC Canary Wharf building, dated 21 April 2004 stated:

“The phased occupation of the [Canary Wharf] building was completed in February 2003 when the last of over 8000 staff moved in, with HSBC Group Chairman Sir John Bond officially opening the building as the Group’s new head office on 2 April 2003.”

However, the old HSBC gold vault did not ‘move’ at the time the rest of HSBC moved lock, stock, and barrel to Canary Wharf between 2002-2003. In fact, the HSBC vault remained where it was in a slightly rundown shabby space with cream-colored walls. See multiple photos of the vault space below. The HSBC vault did however transform from an ‘old’ vault into a ‘new’ vault sometime between 2006 to early 2007. My belief, which I’ll explain below, is that this vault didn’t move, it just received an extensive renovation.

A diagram of the HSBC headquarters in Canary Wharf where the whole London HSBC workforce moved to by early 2003 can be seen below. Notice the car parks in basements B2, B3 and B4. You can also read about the basement construction in the Arup document above. This is not the location for a beat-up old vault that can be seen in the below old gold vault shots. Besides, the vertical pillars/piles in the old and new HSBC vault are nothing like the huge structural pillars/piles found in the HSBC headquarters in Canary Wharf.

The pillars in the old HSBC vault photos are pillars that would be found in an old arched vault, while the support pillars in the new HSBC vault photos are those that would be found in relatively shallow spaces under a road, such as pillars/supports used in the cut and cover New York subway system.

HSBC Headquarters - Canary Wharf
Arup diagram of HSBC Headquarters, Canary Wharf. lower section and basement

HSBC Gold Vault Photos

December 2004:

Here you can see an early gold vault photo of Graham Tuckwell, joint managing director of Gold Bullion Securities, and Stuart Thomas, managing director of World Gold Trust Services, in the ‘old’ HSBC vault in December 2004 checking a HSBC bar list:

DSC_0130_800.jpg

Source: https://web.archive.org/web/20051125081854/http://streettracksgoldshares.com/images/DSC_0130_800.jpg

And another photo, taken at the same time, of Stuart Thomas in the vault in December 2004:

dsc_0178_800.jpg

Notice the very old piping around the top of the walls.

Source:https://web.archive.org/web/20051125082702/http://streettracksgoldshares.com/images/dsc_0178_800.jpg

In fact, there are lots more photos of the inside of the ‘old’ vault on the StreetTRACKS website here https://web.archive.org/web/20060518124841/http://streettracksgoldshares.com/us/media/gb_media.php

June 2005:

See five photos below of vault in June 2005:

DSC_0008_800.jpg

‘Old’ vault looks quite beaten with concrete pillars, old floor, old air conditioning unit, and awful decor, and some type of desk an chair and wiring on the very right hand side of the photo.

http://web.archive.org/web/20070112174208/http://www.streettracksgoldshares.com/images/DSC_0008_800.jpg

http://web.archive.org/web/20070112174517/http://www.streettracksgoldshares.com/images/DSC_0010_800.jpg

http://web.archive.org/web/20070117114104/http://www.streettracksgoldshares.com/images/DSC_0023_800.jpg

http://web.archive.org/web/20070112174136/http://www.streettracksgoldshares.com/images/DSC_0034_800.jpg

http://web.archive.org/web/20070112174218/http://www.streettracksgoldshares.com/images/DSC_0056_800.jpg

October 2005:

Managing Director Stuart Thomas, Director of Corporate Communications, George Milling-Stanley of World Gold Trust Services, and CFO and Treasurer James Lowe (wearing a gold tie) of World Gold Trust Services

DSC_0137_800.jpg

http://web.archive.org/web/20070223040356/http://www.streettracksgoldshares.com/images/DSC_0137_800.jpg

6 more vault shots of gold bars stacked on pallets:

http://web.archive.org/web/20061110002622/http://www.streettracksgoldshares.com/images/DSC_0061_800.jpg

http://web.archive.org/web/20070109203025/http://streettracksgoldshares.com/images/DSC_0055_800.jpg

http://web.archive.org/web/20070110123058/http://streettracksgoldshares.com/images/DSC_0042_800.jpg

http://web.archive.org/web/20070110204026/http://streettracksgoldshares.com/images/DSC_0149_800.jpg

DSC_0149_800.jpg

When the gold is stacked 6 pallets high, as in the above photo, it nearly reaches up to where the pillars start to broaden out. Recall for a moment the definition of a vault. A vault is any space covered by arches, or an arched ceiling over a void. This is why the Bank of England ‘vaults’ are called vaults, because in the old vaults of the Bank of England (before the Bank of England was rebuilt in the 1920s/1930s), the gold was stored in the arched vaulted basements. The pillars in the shots of this ‘old’ HSBC vault look like pillars/piles that are the lower parts of arches, since they taper outwards as they go higher and they are positioned in a grid like formation.

http://web.archive.org/web/20061110002907/http://www.streettracksgoldshares.com/images/DSC_0037_800.jpg

http://web.archive.org/web/20070111113411/http://streettracksgoldshares.com/images/DSC_0065_800.jpg

DSC_0042_800.jpg

You can see how all the pallets of gold were located in a space with quite a lot of walls and chunky support pillars that broaden at the top (i.e. support pillars). Very similar pillars can be seen in old parts of the London Underground pedestrian tunnels, and also in the Vintner’s Hall wine vaults, which is next door to the vaults under Queen Street Place.

The NEW HSBC Vault 2007

During the second half of 2007, a series of 4 photos appeared on the STREETTracks website of a ‘New’ HSBC gold vault in London. The headline title of this series of images was

“The gold in trust at HSBC’s gold vault in London. The gold is being held in Trust for the shareholders of GLD. These images as at June 2007″

 This STREETTracks web page can be accessed via the following link, however, the photos don’t render properly.
June 2007 photos intro
However, I did source the photos in other dated instances from a similar link, and uploaded them. See below.

2007 George Milling-Stanley and possibly a bearded Stuart Thomas – June 2007

dsc_0127_800.jpg

George Millin-Stanley’s watch puts the time at 11:45am.

https://static.bullionstar.com/blogs/ronan-manly/wp-content/uploads/2016/04/dsc_0127_800.jpg

Milling-Stanley and 3 others – probably from State Street and BONY – June2007

dsc_0102_800.jpg

https://static.bullionstar.com/blogs/ronan-manly/wp-content/uploads/2016/04/dsc_0102_800.jpg

New vault – wide angle shot 2007

dsc_0018_800.jpg

https://static.bullionstar.com/blogs/ronan-manly/wp-content/uploads/2016/04/dsc_0018_800.jpg

2nd wide angle new vault shot 2007

dsc_0005_800.jpg

https://static.bullionstar.com/blogs/ronan-manly/wp-content/uploads/2016/04/dsc_0005_800.jpg

The MarketWatch website and a GLD SEC submission mentioned the ‘new’ vault move in an article on 11th January 2008:
“…StreetTracks Gold Shares, a wildly popular exchange-traded fund so awash in investor cash that its backers recently scrambled to find a bigger vault to accommodate their ever-growing horde of the precious metal, now valued at $18 billion.”
“Because the StreetTracks reserve expanded faster than expected, its managers had to move the stores to a bigger vault about six months ago to make more room, says George Milling-Stanley, a spokesman for the gold council.”
Graham Tuckwell, Chairman of ETF Securities, also referred to the ‘old’ and ‘new’ vaults at the LBMA Conference in Hong Kong in November 2012. On page 3, section C “Is the Gold Really There?”, Tuckwell shows 2 photos to the audience, one from “10 years ago” and one a recent photo. In the old photo, which is probably this photo
 he says “the fellow on the left is a 10-year younger version of me“. He also says: “That was the old vault when we started doing it, and you can see that we are doing a bit of a check“.
Then Tuckwell goes on to say: “This photograph was taken just over a year ago on a recent vault visit“… “Our gold, from the London product, the GBS, is on the left and the gold from the US product, the GLD, is on the right in this picture“. GBS was the Australian product and GLD being the State Street product, listed in November 2004.

As it turns out, there are vaults beneath the road under Queen Street Place, between 10 Queen Street Place (Thames Exchange) and Vintners Place, and these vaults were renovated during the period that would coincide with the HSBC London gold vault transforming from an ‘old’ vault to a ‘new vault’.

George Milling-Stanley in New Vault

Southwark Bridge and The Queen Street Place Vaults

Southwark Bridge is a bridge over the River Thames connecting the City of London (financial district) on the north bank of the river, to the area of Southwark on the south bank. The first Southwark Bridge (Queen Street Bridge) opened in 1819 and was an arched bridge with “vaults under the north abutment of the bridge“. There is also a reference to the vaults under Queen Street Place in a 1908 Corporation of London Record Office record.

A second bridge, the current Southwark Bridge, replaced the earlier bridge, and it opened in 1921.

A book titled ‘Design Applications of Raft Foundations‘, when discussing the development that became Vintners Place, mentions the vaults under Queen Street Place and shows that the vault space begins maybe 2.0 metres under the roadway, and with the vault space height being about 5 metres high which looks a very similar height to both the ‘old’ and ‘new’ HSBC vault spaces.

Q St Vaults

vintners and vaults

 

In fact, there were up to 17 vaults under Queen Street Place judging by a planning application from 1992 which listed a Vault Q (assuming Vaults A – Q), and the application said that the vaults had been used for storage.

Vault Q 1992

 

Alterations to Vaults under Queen Street Place

Keeping in mind that the ‘old’ HSBC gold vault became a ‘new’ HSBC gold vault sometime in 2006, or early 2007, then the following, in my view, becomes highly relevant. In September 2004, a building control planning application was submitted to City of London planning department for Alterations to Vaults in the Thames Exchange building at 10 Queen Street Place. See link for the application. See screenshots also.

http://www.planning2.cityoflondon.gov.uk/online-applications/buildingControlDetails.do?activeTab=summary&keyVal=ZZZZWDFHXC664

10 Queen Street Place - Alteration to Vaults application - 15 September 2004

10 Queen Street Place - Alteration to Vaults application - Date 15 September 2004

Fit Out of Vaults under Queen Street Place

Following this in November 2005, another building control planning application was received by the City of London planning department for “Fit out of Vaults between 10 Queen Street Place and Vintners Place“. See link below and also screenshots.

http://www.planning2.cityoflondon.gov.uk/online-applications/buildingControlDetails.do?activeTab=summary&keyVal=ZZZZWDFHXC269

Fit out of vaults between 10 Queen Street Place and Vintners Place - Vaults application - 4 November 2005

Fit out of vaults between 10 Queen Street Place and Vintners Place - Vaults application - Date 4 November 2005

Thames Exchange – 10 Queen Street Place

Blackstone bought Thames Exchange from Scottish Amicable in 2000 while it was still being leased to HSBC. HSBC then surrendered the lease of the building when it moved to Canary Wharf in 2003. Blackstone then renamed Thames Exchange to 10 Queen Street Place and began renovating it while leasing it to City law firm SJ Berwin for its new London headquarters. However, SJ Berwin only moved its London headquarters from Gray’s Inn Road to 10 Queen Street Place sometime between February and April 2006, so the renovations appear to have gone on during 2003-2005. Norwich Property Trust purchased 10 Queen Street Place from Blackstone in 2006, after it had been renovated. Notably, Norwich retained TFT Consultants to inspect 10 Queen Street Place. TFT Consultants states in a case-study on its website that:

 “We inspected this prominent riverside mixed-use building including extensive vaults underneath Southwark Bridge approach road and prepared a TDD report for Norwich Property Trust.”

Property investor Jaguar bought the 10 Queen Street Place building from Norwich in 2008, and then the Malaysian haji pilgrims fund purchased 10 Queen Street Place from Jaguar in September 2012.
Coincidentally, Vintners Place, which adjoins Queen Street Place on the other side of the vaults was also sold in September 2012 when Downtown Properties and a South Korean consortium bought it from Atlas Capital. The tenants at the time included Jefferies International, and Sumitomo and Thomson Reuters. Vintners Place also adjoins Thames House, Five Kings House, and The Worshipful Company of Vintners also has its headquarters in a building called Vintner’s Hall on the corner of Queen Street Place and Upper Thames Street.

The Plans of the Vaults under Queen Street Place

Detailed plans of the vaults under Queen Street Place before and after the ‘Alterations’ and ‘Fit Out’ can be seen here ( Vault Plans – Before 10 Queen Street Place – Vaults – Lower Ground Floor Plan – Before alterations) and here (Vault Plans – Proposed 10 Queen Street Place – Vaults – Lower Ground Floor Plan – After alterations). Both sets of plans were drawn up by Hurley, Robertson Architects. Click on the links to bring up the actual pdf files of the full plans.

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Vaults under Queen Street Place – old layout – dated 28 November 2002

 

And more zoomed in. Notice all of the individual vaults and doors, and all of the walls with rows of pillars marked between the walls.

 

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Vaults under Queen Street Place – old layout zoomed in

 

Compare the above plans to the ‘proposed’ plans. In the proposed plans, which are revision C08 dated 06 April 2006, all of the individual vaults have been removed by removing all the doors and walls, leaving just rows of pillars, and beams (given that it’s a top-down view looking down).

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Vaults under Queen Street Place – proposed vaults – 2006 updates

You can see the changes a bit more clearly in the following slightly zoomed in version. Notice the facilities added on the right, such as toilets, kitchen, changing rooms, office, telecoms room etc, and also the rows of supports/ pillars on the left hand side, which is about 7 rows of supports / pillars in the open space, 5 of which run at the same angle, then there is a V shape where the pillars then run at a different angle.

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Vaults under Queen Street Place – proposed vaults – 2006 updates – zoomed in

Anyone who has the inclination, given these sets of plans of the vaults under Queen Street Place, please check back over the photos of the ‘old’ HSBC vault and ‘new’ HSBC vault and decide for yourself if the photos in the ‘old’ cramped vault with the pillars and cream wall is reminiscent of the pre-alteration plans above. Likewise, decide for yourself if the ‘new’ HSBC London gold vault with the open plan design and layout of vertical steel support columns looks like the plans above of the ‘proposed’ alterations and ‘Fit Out’ of the vaults under Queen Street Place.

When G4S built its subterranean gold vault in Park Royal, London in 2013 / 2014, it fitted it out the area beside the vault with toilets and a kitchen – See second last sentence in red box below from the G4S building contractor document. Because, if you are working down in a vault all day, there will need to be toilets and a kitchen area, as well as changing rooms, phones and desktop computers etc. For background to G4S vault, see “G4S London Gold Vault 2.0 – ICBC Standard Bank in, Deutsche Bank out“.

 

GT4

 

The Pisani Files – “This is it folks, this is the Motherlode!”

Now we come to the Bob Pisani videos that were filmed by CNBC in the HSBC London gold vault in 2011. I say videos in plural because there are 4 video segments, and actually 5 segments in total including a trailer. The videos are quite exciting and fast-paced but frustrating because the camera is quite shaky and moves around rapidly for a lot of the vault segments, possibly on purpose. The background music is quite catchy also (at first).

1. The Motherlode

The first video is on a CBNC web page and embedded in an article titled “Gold’s secret hiding place”, however the video is titled “Gold Rush – The Mother Lode”. Its dated Wednesday, 31 Aug 2011 with a byline of “CNBC’s Bob Pisani recently got an exclusive inside look at the HSBC gold vaults in London, where the gold for the SPDR Gold Trust (GLD) is stored.” The video is  4:55 mins long, and introduced by Pisani from the New York studio. The vault shots begin at 1:18, and interestnigly, at 0:40 mins, the camera is in a vehicle travelling down Lower Thames Street.

http://www.cnbc.com/id/44343442

2. Gold’s Secret Hiding Place

Let’s call this 2nd video “Gold’s Secret Hiding Place”. This version, which is different to the Motherlode, is on YouTube. I’m not sure of the official segment name. This version is 5:06 mins long, and Bob says the vault is “in a super-secret location only known to a few people”. This is also the version where Bob hands in his cellphone and travels in a blacked-out vehicle saying “we have no idea where we’re going. We only know our final destination. The vault!”

There is a neat online app called Pause House which allows you to look at any YourTube clip frame-by-frame, and can be used on the above clip for those who want to get a good look at the vault interior. (Pause House).

3. The Third version

Lets call this the Third version. Its 2:43 mins long. Pisani starts on Waterloo Bridge on the River Thames and he points towards Westminster Bridge (the exact opposite direction to Southwark Bridge). Then he is in the blacked-out vehicle, and then in the vault from 1:04 mins. At this stage the music might be annoying, so luckily, there is no background music when Bob talks in the vault.

 

4. Inside the Secret Vault

This clip is 2:42 mins long and is dated Thursday, 8 Mar 2012 with a byline of “CNBC’s Bob Pisani gets unprecedented access inside the largest private gold reserve in the world.” Its slightly similar to version 3 above

http://video.cnbc.com/gallery/?video=3000077579

5. Version 5 is just a 31 second trailer about the CNBC 2011 gold series, published in March 2012, with gold vault footage only appearing for a few seconds.

https://www.youtube.com/watch?v=gUSqbqYOnRY&feature=youtu.be

2005 vs 2011

There is one sentence in both “Motherlode” and “Gold’s Secret Hiding Place” that I consider very interesting. And it relates to the ‘old’ and ‘new’ vaults. What Bob Pisani says has obviously been told to him by someone at HSBC, since he would not know anything about the vault in advance.

At 3:37 mins in Motherlode, Pisani says  “In 2005, there was less than 200 tonnes of gold here, now there’s 6 times as much“. 

At 4:05 mins in  Gold’s secret hiding place, Pisani says “In 2005, there was less than 200 tonnes of gold in this vault backing the GLD. Now there’s 6 times as much.”

Pisani is essentially saying, probably without realising, that it is the same vault. i.e. that the vault in 2005 is the same vault as in 2011. However, given that the vault in 2005 was the ‘old’ vault, and that the vault in 2011 was the ‘new vault’, this suggests that it is the same space, and that the vault space was just renovated. It therefore supports the view that the vaults under Queen Street Place are a very strong candidate to be the HSBC London Gold Vault that stores the GLD gold and the ETF Securities gold.

Fruiterers Passage

You might have spotted above that one of the existing vaults under Southwark Bridge was turned into a riverside walkway. This was probably vault Q, which looked to be the vault nearest the river. This walkway runs under the beginning of the abutment on the north of SouthWark Bridge and is called the slightly humorous name ‘Fruiterers Passage’. The Passage was opened circa the year 2000 (and named after the Worshipful Company of Fruiterers), and is ornately tiled with ceramics, even around its pillar enclosures. Take a look at a photo of Fruiterers Passage and compare it to a photo of the new ‘HSBC’ gold vault that features the yellow-painted steel support pillars. The dimensions and spacings of the pillars in both photos look very similar, even identical.

Fruity

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A video walk-through (2:45 mins) of Fruiterers Passage can be seen here. The first 20-30 seconds shows Southwark Bridge, and then the walk through the Passage begins:

Although there are lots of security cameras around the City of London, the cameras in Fruiterers Passage and security warnings near the entrance to the Passage seem particularly explicit.

CCT 1

Sign

Size Matters

A MarketWatch article from 11 January 2008 quoted  George Milling-Stanley as saying that the vault was sizable but “not quite as big as a cricket pitch.” On another occasion, Milling-Stanley used another sporting analogy and described the ‘new’ vault as “about the size of a football field“. Can a sporting analogy (or two) help determine the size of the HSBC London gold vault? Possibly, but it’s not as clear-cut as you might think.

Notwithstanding that a ‘cricket pitch’ is the (smallish) 22 yard strip between the wickets, the quotation was presumably referring to a ‘cricket field’.  However, there is no standard shape of a ‘cricket field’, let alone standardised dimensions, since the ICC rules only state that the field can be circular or oval with a variable diameter of between 450 and 500 feet on the ‘long’ side (sometimes giving 16,000 sq yards). Regarding Milling-Stanley’s ‘football field’, analogy, it’s not clear whether this analogy was intended for a US audience or non-US audience. So it could mean ‘American’ football, or soccer or rugby.

In soccer, there is no standard size ‘field’. The sidelines (touch lines) have to be between 100 and 130 yards (110 to 120 yards for international matches), while the goal lines (end lines) must be between 50 and 100 yards (70 to 80 yards) in international matches. This could result in over 7000 sq meters or over 1.75 acres. The American football field is thankfully standardised, being 120 by 53.33 yards or 6400 sq yards.

Overall, Milling-Stanley’s descriptions give a flavour for permissible dimensions, but based on Bob Pisani’s video tour, I see the vault as a rectangular space but not quite as big as a soccer pitch. So lets look at the space in Google Earth. I’ve just added a yellow rectangle for illustrative purposes to show where the vaults under Queen Street Place are located.

QSP 3D
Bird’s Eye View – Queen Street Place looking north from Southwark Bridge – 10 Queen St Place on right, Vintners Place on left

See also some cross-sectional plans that were part of the 2004 Blackstone Thames Exchange planning applications (Cross Section width 10 Queen St Place – from river view and Cross Section length 10 Queen St Place).

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Night shot – Queen Street Place without traffic

The Marketwatch January 2008 article also said that the HSBC vault was “located on the outskirts of London” but how would the journalist know this since the same article also said that “a spokeswoman for HSBC declined to provide vault details, citing security policies”. As financial journalists mostly repeat what is told to them, I think this “located on the outskirts of London” bone was thrown out as a red-herring, and means the exact opposite.

Conclusion

At its peak holdings in December 2012, the SPDR Gold Trust stored 1353 tonnes of gold. Some observations from looking at the vault space in the Pisani videos and from talking to other people, are that:

a) the HSBC vault looks quite full in 2011, but it still looks like the space would be hard pushed to store the 1200 tonnes of gold that Pisani says were there

b) based on modelling the number of realistic-sized pallets that could conceivably fit into the Queen Street Place vault space (as per the vault plans), it also seems that it would be hard pressed to store 1,200 tonnes, unless they were crammed in. And the pallets in the CNBC segments are not fully crammed in to the space.

Remember also that the 1200 tonnes of gold reference only referred to the SPDR Gold Trust holdings in mid-2011 around the time the CNBC video segment was filmed. See blue line in chart below (chart from www.sharelynx.com) for GLD holdings over its lifetime. HSBC is also the gold custodian for ETF Securities’ gold-backed ETF which held about 170 tonnes at the time of Pisani’s visit. That would be nearly 1,400 tonnes of gold just between the GLD and ETFS holdings, which would be about 228 piles of pallets stacked 6 high crammed in. Furthermore, that’s not even taking into account any gold holdings of other HSBC customers, and Pisani also says in the videos that HSBC confirmed to him that its vault also stores gold for a range of clients.

SPDR 2

When GLD held 1353 tonnes in December 2012, this in itself would be 225 piles of pallets, each 6 high. ETFS held about 170 tonnes in December 2012 also, which would be another 28 piles of pallets stacked 6 high. If this location is the famous storage area for the SPDR Gold Trust then possibly during the boom times when GLD holdings peaked, the HSBC vault may not have been big enough to accommodate the GLD gold let any other gold. Which would mean that HSBC was storing GLD gold elsewhere such as at the Bank of England vault,  or the JP Morgan vault, both very close to Queen Street Place. It would also mean that GLD sources new gold inflows from gold that is at the Bank of England, i.e. leased central bank gold.

Another point to consider is that if the vaults under Queen Street Place are the correct location for the HSBC vault, then where did the gold that was being stored there in late 2005 / early 2006 go to during the vault alterations? This would have been at least 200 tonnes of gold as of late 2005, rising to over 350 tonnes of gold by late 2006. As the Bank of England is literally up the road from Queen Street Place,  moving it to the Bank of England vaults would be the most likely option during the renovation.

In summary, using publicly available information and evidence, I have described where I think the HSBC London gold vault may be located. Whether I am correct is another matter.