Tag Archives: GLD

Tracking the gold held in London: An update on ETF and BoE holdings

Just over a year ago, gold researchers Nick Laird, Bron Suchecki, Koos Jansen and myself took a shot at estimating how much physical gold was accounted for in London within the gold-backed ETFs and under Bank of England custody. The results of that exercise are highlighted in September 2015 articles “How many Good Delivery gold bars are in all the London Vaults?….including the Bank of England vaults”, and “Central Bank Gold at the Bank of England”, and also on Nick Laird’s website in a post titled “The London Float” which contains some very impressive charts that visualize the data. Some of the latest updated versions of these charts from www.goldchartsrus.com are featured below.

Given that it’s now just over a year since that last set of calculations, it made sense at this point to update the data so as to grasp how many Good Delivery golds bars held in London is spoken for in terms of ownership, versus how much may be unaccounted for. Estimating gold held in London vaults is by definition a tricky exercise, since it must rely on whatever data and statements are made available in what is a notoriously secret market, and there will usually be timing mismatches between the various data points. However, using a combination of published sources from the Bank of England, the London Bullion Market Association (LBMA), the Exchange Traded Fund websites, and UK gold import/export data, it is possible to produce some factual numbers.

In the Bank of England vaults

Exactly once per year, the Bank of England publishes a snapshot of how much gold it is holding in custody for its central bank and commercial bank customers. This snapshot is featured in the Bank’s annual report which is usually published around July each year, and reports on its financial year-end, as of end of February. In its 2016 Annual Report, the Bank of England states (on page 31) that:

“At end-February 2016, total assets held by the Bank as custodian were £567 billion (2015: £514 billion), of which £135 billion (2015: £130 billion) were holdings of gold”

With an afternoon LBMA Gold Price fix of £888.588 on Monday 29 February 2016, this equates to 151,926,427 fine troy ounces of gold, or 4725 tonnes held in custody at the Bank of England. This equates to approximately 380,000 London Good Delivery gold bars, each weighing 400 fine troy ounces.

The corresponding figure for end of February 2015 was £130 billion, which, valued at the afternoon fix on that day of £787.545 per ounce, equalled 5,134 tonnes. Therefore between the end of February 2015 end of February 2016, the amount of gold held in custody by the Bank of England fell by 409 tonnes. Since, according to World Gold Council data, there were no central bank sellers of gold over that period apart from Venezuela whose gold was predominantly held in Venezuela at that time, then most of this 409 tonne decline must be either due to unreported central bank sales, central bank gold repatriation movements, London bullion bank sales, or some combination of all three.

The year-on-year drop of 409 tonnes came after a previous decline of 350 tonnes to end of February 2015, and before that a drop of 755 tonnes between February 2013 and February 2014. So overall between February 2013 and February 2016, the amount of gold held in custody in the Bank of England’s vaults fell by 1,514 tonnes.

LBMA Ballpark: 6,500 tonnes in London

Up until at least October 2015, the vaulting page on the LBMA website stated that:

“In total it is estimated that there are approximately 7,500 tonnes of gold held in London vaults, of which about three-quarters is stored in the Bank of England.”

This is based on a Wayback Machine Internet Archive page cache from 9 October 2015.

The current version of that page on the LBMA website now states:

In total it is estimated that there are approximately 6,500 tonnes of gold held in London vaults, of which about three-quarters is stored in the Bank of England.

The earliest Internet Archive page cache mentioning 6,500 tonnes is from 8 February 2016. So sometime between October 2015 and February 2016, the LBMA changed its ballpark figure, revising it down by 1000 tonnes. Wayback Machine Archive web crawlers usually update a web page following a change to that page, so its likely that the revision to 6,500 tonnes was done nearer February than October. Using a figure from a LBMA website page is admittedly quite general, but at least it’s an anchor, and someone at the LBMA saw fit to make that actual change from 7,500 tonnes to 6,500 tonnes. In June 2015 (as some readers might recall), the LBMA had said that there were 500,000 Good Delivery gold bars in all the London vaults, which is approximately 6256 tonnes, so perhaps the 6500 tonne estimate was partially based on this statistic from mid-year 2015 that the LBMA was playing catch-up with.

With 6,500 tonnes in London vaults, ~ 75% of which is at the Bank of England, this would mean 4,875 tonnes at the Bank of England, and another 1,625 tonnes at other (commercial) gold vaults in London, mostly at HSBC’s and JP Morgan’s vaults. As per the Bank of England’s annual report as of 29 February 2016, we know now that there were 4,725 tonnes in custody at the Bank, so the LBMA ballpark of 4875 is actually very close to the actual 4725 tonnes reported by the Bank, and the difference is only 150 tonnes. Lets’s move on to the vaulted gold held in London but held outside the Bank of England vaults.

ETF Gold held in London

In the September 2015 calculation exercise, we estimated that there were 1,116 tonnes of gold held in the London vaults within a series of gold-backed Exchange Traded Funds.

The known ETFs and other companies that hold their Good Delivery bar gold in London are as follows:

  • SPDR Gold Trust: GLD. Custodian HSBC London, all GLD gold held at HSBC vault
  • iShares Gold Trust: IAU. Custodian JP Morgan, majority of IAU gold held in London
  • iShares Physical Gold ETC: Custodian JP Morgan, code SGLN
  • ETF Securities: Six separate ETFs – their short codes are PHAU, GBS, ASX GOLD, HMSL, PHPM, and GLTR. Custodian HSBC London
  • SOURCE: Custodian JP Morgan, all gold held in London
  • Deutsche Bank: There are 5 Deutsche Bank ETFs that store gold in London. Custodian is JP Morgan London
  • ABSA/NewgoldCustodian Brinks, London
  • BullionVault: Some of BullionVault customer gold is held in London
  • GoldMoney: *It’s not clear how much gold Goldmoney stored in London so the previous figure from September 2015 is used again
  • VanEck Merk Gold Trust: Custodian JP Morgan London
  • Betashares: Custodian JP Morgan, London
  • Standard Bank AfricaGold ETF: Custodian JP Morgan London

The 1,116 tonnes of gold ETF holdings in London, calculated in September 2015, were as follows, with the SPDR Gold Trust accounting for the largest share:

lbma-vaults-etf-gold-in-london-au-06
2015: Vaulted gold held by gold-backed ETFs in London

The total figure for all gold held in London that we used in September 2015 was the 6,256 tonne figure implied by the LBMA’s 500,000 gold bars statement from June 2015. With 6,256 tonnes in total, and 5,134 tonnes at the Bank of England (as of end February 2015), this left 1,122 tonnes in London but “not at the Bank of England“, which implied that there was nearly no gold in London outside the Bank of England that was not accounted for by ETF holdings. in other words the ‘London Gold Float’ looks to have been near zero as of September 2015.

Assuming 6,500 tonnes of gold held in London in February 2016, and with 4,725 tonnes at the Bank of England in February 2016, we can repeat this exercise and say that the would leave 1,775 tonnes of gold in London but “not at the Bank of England“, as the following chart shows:

2016-lbma-gold-vaulted-in-london
2016 – LBMA vaulted gold held in London: Outside vs Inside Bank of England

Its well-known by now that the tide of significant gold ETF outflows that occurred in 2015 suddenly turned to very strong inflows into gold ETFs beginning in early 2016. Although our gold ETF holdings data was updated using holdings information as of 30 September 2016, it’s still worth seeing how well the latest London holdings of the gold ETFs help to explain this 1775 tonnes “not in the Bank of England” figure. As it turns out, as of the end of September 2016, the above ETFs collectively held 1,679 tonnes of gold, so right now, if there were 1775 tonnes of gold in London outside of the Bank of England, the ETF holdings would explain all but 96 tonnes of this total.

etfs-2016-overview
2016: 1679 tonnes held in ETFs in London – Yellow Bar
etfs-2016-details
2016: Vaulted gold held by gold-backed ETFs in London

Taking a quick look at some of the individual ETF holdings, the massive SPDR Gold Trust is currently holding around 950 tonnes of gold in London. The iShares figure reported in the charts of 214.89 tonnes comprises 2 components a) the London held gold within IAU (which can be seen in this daily JP Morgan weight list), and b) the gold bars held in iShares trust SGLN. The bulk of the ETF Securities figure of 276.68 tonnes represents gold held in PHAU (over 150 tonnes), and GBS (over 100 tonnes). The Deutsche Bank total is quite hard to calculate and comprises gold held in 5 Deutsche bank ETFs. Nick Laird receives daily holdings files for these ETFs from Deutsche Bank and performs a number of calculations such as fractional ounces per ETF unit to arrive at a total figure of 88 tonnes. The SOURCE and ABSA ETFs make up the vast majority of the remainder, with the other entities listed, such as BetaShares and Standard Bank ETF, being immaterial to the calculation.

Central Bank gold at the Bank of England

For the purposes of this exercise, data on central bank gold holdings at the Bank of England does not need to be updated since there hasn’t been any reported gold buying or selling activity by any of the relevant central banks since September 2015 (except for Venezuela), so the ‘known figure’ of 3779 tonnes attributed to identified banks in September 2015 remains unchanged. If anything, since the Bank of England revealed last February that its gold under custody fell to 4,725 tonnes, it means that there are now approximately 946 tonnes of gold at the Bank of England that are not explained by known central bank holders.

Totoal gold held at the Bank of England, February 2016: 4725 tonnes
Total gold held in custody at the Bank of England, February 2016: 4725 tonnes

Given that many central banks around the world will not cooperate in confirming where they store their foreign stored gold, then there are definitely additional central banks storing gold in the Bank of England vaults which would reduce this 946 tonnes of gold with unknown ownership. Therefore some of this total is unknown central bank gold holdings. Some is presumably also gold and borrowed gold held by bullion banks that have gold accounts at the Bank of England. Given that the Bank of England and the LBMA bullion banks maintain a total information blackout about the real extent of the gold lending market out of London, it is difficult to know how much borrowed gold is being held at the Bank of England by bullion bank account holders.

Some of the growth in the SPDR Gold Trust gold holdings this year looks to have been sourced from gold originating from the Bank of England, as was detailed in a July BullionStar article “SPDR Gold Trust gold bars at the Bank of England vaults“, which highlighted that the Bank of England was a subcustodian of the SPDR Golf Trust during Q1 2016. As a SPDR Gold Trust filing stated:

During the quarter ended March 31, 2016, the greatest amount of gold held by subcustodians was approximately 29 tonnes or approximately 3.8% of the Trust’s gold at such date. The Bank of England held that gold as subcustodian.

bank-of-england-known-gold
Bank of England vaulted attributed to individual central banks

Year to Date ETF changes and UK Gold Imports

It’s important to highlight that the 6,500 tonnes figure reported by the LBMA and the 4,725 tonne figure reported by the Bank of England relate to the February 2016 period, while the ETF gold holdings totals calculated above are from the end of September 2016. So there is a date mismatch. Nick Laird has calculated that during the February to September 2016 period, the London gold ETFs added 399 tonnes of gold, and during the same period the UK net imported (imports – exports) more than 800 tonnes of non-monetary gold. Given the apparent low float of gold in London late last year, its realistic to assume that gold inflows into the London-based ETFs this year were mostly sourced from non-monetary gold imports into the UK because there was apparently no other gold at hand from which to source the ETF gold inflows. ETF demand would also help explain the drivers of UK gold imports year-to-date. Note that monetary gold imports (central bank gold trade flows) are not reported by the respective trade bodies since the opaque basket of deplorables (i.e. central bankers) get an unfair exemption, therefore the 800 tonnes of net gold imports into the UK refers to non-monetary gold imports.

UK gold imports to July 2016
Net UK gold imports to July 2016: 735 tonnes 

According to the latest comprehensive trade statistics, from January to July 2016 inclusive the UK net imported 735 tonnes of gold from the Rest of the World. To this figure we can add another 84.6 tonnes of gold that the UK net imported from Switzerland in August 2016. This gives total UK gold imports up to August 2016 inclusive of 819.6 tonnes, hence the statement, the UK net imported over 800 tonnes of gold year-to-date.

UK gold imports from Switzerland, August 2016: 84.6 tonnes
UK gold imports from Switzerland, August 2016: 84.6 tonnes

If 399 tonnes of the 800 tonnes of non-monetary gold imported into the UK during 2016 was channeled into the holdings of gold-backed ETFs, this would still mean that the ‘London Float’ of gold could have been augmented by approximately 400 tonnes year-to-date. However, since most non-monetary gold imports into the UK are for bullion bank customers such as Scotia and Barclays, some of these extra imports could have been for repaying borrowed gold liabilities to central bank customers, and the quantity of gold now held at the Bank of England may be higher than reported by the Bank last February.

londongold2016
Full Overview chart courtesy of Jesse’s Café Américain, highlighting ETF and Bank of England gold holdings – Click the above chart to enlarge it

In summary, given the large UK gold imports year-to-date, there may now be over 7,000 tonnes of Good Delivery gold bars held in London vaults. But the fact that very large quantities of gold bars had to be imported into the London market during 2016 does suggest that our calculations from September 2015 were valid and that there was a very low float of gold in the London market. This float may now be a few hundred tonnes higher given the imports, but there is still an unquantifiably large number of claims in the form of ‘unallocated gold’ holdings in the London market which are liabilities against the LBMA bullion banks.

Remember that the London Gold Market trades nearly 6000 tonnes of predominantly paper gold each and every day. The latest LBMA ‘gold’ clearing statistics show that on average, 18.8 million ounces (585 tonnes) of ‘gold’ was cleared per trading day in September 2016 which on a 10:1 trading to clearing ratio equates to 5,850 tonnes traded per day, and 128,000 tonnes traded during September. So the LBMA administered market nearly trades as much ‘gold’ connected transaction per day as is held in the entire London vaulting network.

If gold demand from the Rest of the World ticks up, such as from India, then the London market will not have the luxury of being able to import large quantities of gold in the absence of that excess demand putting upward pressure on the gold price. Until then, the London Gold Market looks likely to continue its physical re-stock with one hand, while trading leveraged paper gold with the other hand, all the while rolling over outstanding borrowed central bank gold obligations, such as the short-term gold deposits held by Banco Central de Bolivia, which will be the subject of an upcoming case study into the hidden London gold lending market consortium.

GLD Sponsor dodges disclosure details of Bank of England sub-custodian in latest SEC filing

In a July 11 BullionStar article, “SPDR Gold Trust gold bars at the Bank of England vaults”, I highlighted that the SPDR Gold Trust (GLD), in it’s Q1 2016 filing to the Securities and Exchange Commission (SEC), disclosed that during the January – March 2016 quarter, the GLD custodian HSBC had employed the Bank of England as a sub-custodian to hold some of the Trust’s gold bars, and that the largest quantity of gold that the Bank of England had held on behalf of GLD during the January – March 2016 period was 29 tonnes.

Note that the financial year-end for the SPDR Gold Trust is 30 September each year, so that its Q1 is October – December, its Q2 is January to March, its Q3 is April – June, and its Q4 is July – September with a year-end at the end of September.

The GLD disclosure for the calendar first quarter of 2016, which revealed details of sub-custodians that the SPDR Gold Trust uses, had begun to appear in the 10-Q filing specifically at the behest of the SEC, which on 29 March 2016 had sent a letter to the GLD Sponsor, World Gold Trust Services, directing the Sponsor to:

In future Exchange Act periodic reports, to the extent material, please disclose the amount of the Trust’s assets that are held by subcustodians.

The letter was sent to World Gold Trust Services by the SEC’s Senior Attorney Office of Real Estate and Commodities, Kim McManus.

To Recap, for the quarter ended 31 March 2016, (which is the SPDR Gold Trust’s Q2), the 10-Q report stated:

“Subcustodians held no gold on behalf of the Trust as of March 31, 2016. During the quarter ended March 31, 2016, the greatest amount of gold held by subcustodians was approximately 29 tonnes or approximately 3.8% of the Trust’s gold at such date. The Bank of England held that gold as subcustodian.

I also pointed out in my previous article that:

Note that the wording of the 10-Q is such that it does not preclude the possibility that the Bank of England also held GLD gold at other times during Q1 2016, since it states “the greatest amount of gold” that the Bank of England held for the Trust was 29 tonnes. This implies that the Bank of England vaults could, at other times during Q1, have held less than 29 tonnes of gold on behalf of GLD.

My early July article also documented that:

“The second quarter saw a 15 tonne shrinkage of GLD’s gold holdings in April, but a very large 64.5 tonne increase in May, and a 81.4 tonne increase in June, making for a Q2 increase in GLD’s gold bar holdings of 130.77 tonnes. Very large 1-day gold bar additions occurred on 24 and 27 June (18.4 tonnes and 13 tonnes respectively). Overall, that’s 307 tonnes added to GLD in the first half of 2016.”

Finally, I also looked forward to the release of the 2nd calendar quarter 10-Q filing with the SEC, saying:

“The SPDR Gold Trust 10-Q for the 2nd quarter of 2016 will be filed with the SEC in about 3 weeks time, at the end of JulyWith the continuing large inflows into GLD in Q2 2016 it will be interesting to see whether the name of Bank of England as subcustodian of GLD reappears in the Q2 filing?”

As it turns out, the Sponsor of the SPDR Gold Trust, World Gold Trust Services, which is a fully owned subsidiary of the World Gold Council, and which is responsible for compiling and submitting GLD quarterly and annual financial reports, actually filed its latest GLD 10-Q report (for the 3 months to June 30, 2016) on 2 August 2016, a few days later than it usually would do for a quarterly report.

BoE-Gold

Smoke and Mirrors

Quite shockingly and in my opinion misleadingly, this latest GLD 10-Q filing only says the following about sub-custodians:

“Subcustodians held no gold on behalf of the Trust as of June 30, 2016. During the nine months ended June 30, 2016, the greatest amount of gold held by subcustodians was approximately 29 tonnes or approximately 3.8% of the Trust’s gold at such date. The Bank of England held that gold as subcustodian.

This 10-Q report is signed by the CEO and CFO of WORLD GOLD TRUST SERVICES, LLC, Sponsor of the SPDR® Gold Trust, namely:

  • Aram Shishmanian, Principal Executive Officer (CEO)
  •  Samantha McDonald, Principal Financial and Accounting Officer (CFO)

In my opinion the latest sub-custodian statement by World Gold Trust Services is misleading in its entirety, as well as being evasive and disingenuous. By failing to address the quarter ended June 30 2016, the World Gold Trust Service CEO and CFO are avoiding disclosure of the quantity of gold that was held by subcustodians of the GLD during April, May and June 2016. Recall the ordinance from the SEC on 29 March:

In future Exchange Act periodic reports, to the extent material, please disclose the amount of the Trust’s assets that are held by subcustodians.

This latest 10-Q statement is not in compliance with the SEC’s directive. It also goes against the spirit of the SEC’s request – since it doesn’t address the holdings of sub-custodian during the quarter that’s being reported on, i.e. the April to June 2016 period. The language used in the latest 10-Q seems to conveniently circumvent the SEC’s disclosure request by using evasive phraseology.

For example, what if the Bank of England as GLD subcustodian held 28 tonnes or 20 tonnes of gold bars on a particular day during the second quarter of 2016, would  Aram Shishmanian and Samantha McDonald not consider this material enough to tell the SEC about. That’s what their signed statement would suggest. More importantly, what would the SEC think about such a non-divulgence of a 28 tonne or 20 tonne sub-custodied position during any day of the April to June 2016 period, when it had specifically asked to be informed of such occurrences via the 10-Q filing? Recall that there were very large increases in GLD’s holdings during May and June, and some huge one-day increases in GLD gold bar holdings on 24 June (18.4 tonnes) and 27 June  (13 tonnes).

SEC

Side by Side Comparison

Let’s take the latest quarter and previous quarter sub-custodian statements and compare them side by side.  For the quarter ended March 31,  2016, the 10-Q report said:

“Subcustodians held no gold on behalf of the Trust as of March 31, 2016. During the quarter ended March 31, 2016, the greatest amount of gold held by subcustodians was approximately 29 tonnes or approximately 3.8% of the Trust’s gold at such date. The Bank of England held that gold as subcustodian.”

 For the quarter ended June 30, 2016, the 10-Q report said:

“Subcustodians held no gold on behalf of the Trust as of June 30, 2016. During the nine months ended June 30, 2016, the greatest amount of gold held by subcustodians was approximately 29 tonnes or approximately 3.8% of the Trust’s gold at such date. The Bank of England held that gold as subcustodian.”

The very fact that the WGTS CEO and CFO revert to repeating a statement that was issued in the previous quarterly report and that applied to the first quarter of 2016, i.e. the statement in red above, shows that they are implicitly evading disclosure of new information from the April to June period. The statement in red is also irrelevant since it had already been disclosed in the previous 10-Q. By bundling it up and referring to the nine months ended June 30 2016, this smoke and mirrors tactic becomes obvious.

Given that it was only on March 29, 2016 that the SEC requested that WGTS disclose sub-custodian information, and that it requested “In future Exchange Act periodic reports … please disclose“ also underscores that the first three months of the nine-month period (i.e. October 2015 – December 2015) are irrelevant, and again highlights the deceptive nature of using a nine month time-frame in the latest statement. The SEC never asked for a disclosure about Q1 (October – December), just for disclosures about the quarters going forward.

Furthermore, the previous quarter disclosure specifically referred to “the quarter ended March 31, 2016”, and not the ‘six months’ ended March 31 2016. So why change the duration reporting to a “nine months ended June 30 2016” phraseology when it was previously a “quarter ended” phraseology? By moving to this ‘nine months’ misleading reporting device, it conveniently masks the disclosure of any sub-custodian details that might be applicable to the April – June quarter, such as Bank of England sub-custodianship of gold bars held within the SPDR Gold Trust.

And furthermore still, if you look at the latest 10-Q you will see that all of the other reporting in the 10-Q, such as financial highlights, divulges full data for three and nine month periods ended June 30, 2016. For example:

“Financial Highlights:

The Trust is presenting the following financial highlights related to investment performance and operations of a Share outstanding for the three and nine month periods ended June 30, 2016 and 2015.”

Therefore, the  financials in the latest 10-Q follow a reporting format of both 3 months and 9 months, but the WGTS does not see fit to report a statement about sub-custodian holdings during the latest 3 month period. This is inconsistent reporting and again points to a desire not to address sub-custodian activity during April – June 2016, specifically at the Bank of England.

Given that the revelation in the previous 10-Q report about the Bank of England being a sub-custodian of the SPDR Gold Trust was quite substantial news, surely the GLD Sponsor would want to address this topic in its subsequent 10-Q, even if it was to say that no GLD gold whatsoever passed through the Bank of England during the April – June period? However, it appears that they chose to construct and craft a selection of words through which to avoid addressing the issue.

Omission of Facts

Each 10-Q report submitted by World Gold Trust Services includes a number of appendices, one of which is an Exhibit 31.1, which is known as the “Certification of Chief Executive Officer, Pursuant to Rule 13a-14(a) AND 15d-14(a), Under the Securities Exchange Act of 1934, as Amended”. For the latest GLD 10-Q, this Exhibit 31.1 includes the statement that:

“I, Aram Shishmanian [WGTS CEO], certify that:

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

I would contend to the above certification, that the latest GLD 10-Q report does omit a statement of a material fact, i.e. disclosure of sub-custodians’ holdings as obligated by the SEC to disclose, or in the SEC’s words “the amount of the Trust’s assets that are held by subcustodians”; and that by omitting this information, the latest 10-Q report is “misleading with respect to the period covered”, which is the 3 months from 1 April 2016 to 30 June 2016.

The statement about sub-custodians in the latest 10-Q does not cover the period covered, i.e April – June 2016. It covers a nine month period. If none of the SPDR Gold Trust’s gold bars were held by sub-custodians during the April – June period, then why not say so?

Conclusion

It would be very interesting to see what the SEC thinks of this latest lack of disclosure from WGTS. It surely will raise some eyebrows at the SEC, since this is not what the SEC intended when it stated in its March 29 letter to WGTS that:

“Since the company and its management are in possession of all facts relating to a company’s disclosure, they are responsible for the accuracy and adequacy of the disclosures they have made.”

It also goes against the spirit of the request from the SEC’s Kim McManus, Senior Attorney Office of Real Estate and Commodities in her 29 March letter, and the promise by World Gold Trust Services’ CFO Samantha McDonald in her March 30, 2016 signed reply to the SEC that:

“We will, to the extent material, disclose in future periodic reports the amount of the Trust’s assets that are held by subcustodians”

I will contact WGTS directly and ask for their opinion on the above, and whatever response is received, if any, I will update readers via this forum.

Execs flee GLD – The revolving door at the SPDR Gold Trust Sponsor

A remarkable but little noticed development has occurred behind the scenes of the SPDR Gold Trust (GLD) over the last 3 years. This development concerns the very high level of executive staff turnover at World Gold Trust Services, the New York based ‘Sponsor’ of the mammoth gold GLD gold-backed Exchange Traded Fund that is listed on the NYSE.

For within the space of less than 3 years, World Gold Trust Services has gone through 4 Chief Executive Officers (CEOs) and 3 Chief Financial Officers (CFOs). By any standard this is a huge amount of senior executives moving through the roles, and would normally ring alarm bells in the corporate governance departments of major institutional investors. Perhaps it has caused concern among institutional investors of the SPDR Gold Trust (GLD), but if it has, it has gone unreported.

New York based World Gold Trust Services (WGTS) LLC is a fully owned subsidiary of the London-based World Gold Council. WGTS is a Delaware registered limited liability company (for-profit) established in 2003 by the World Gold Council and run out of offices at 685 Third Avenue, in midtown Manhattan, New York. The World Gold Council (WGC) itself is a non-profit association registered in Geneva under Swiss Civil Code Article 60. So the structure of the relationship is a non-profit organization, the World Gold Council, owning 100% of a for-profit company, World Gold Trust Services.

Revolving Door

In summary, here are the lists of CEOs and CFOs of World Gold Trust Services between 2013- 2016:

Chief Executive Officers (CEOs) of WGTS

  • Jason Toussaint: April 2009 – left July 2013
  • Kevin Feldman: Appointed June 2013 – Resigned 31st July 2014
  • Aram Shishmanian (acting): 31st July 2014 to 8 September 2014
  • William Rhind :Appointed 8th Sept 2014 – Resigned  9 February 2016
  • Aram Shishmanian (appointed): 10 February 2016

Chief Financial Officers (CFOs) of WGTS

  • Robin Lee : H1 2010 – Left WGTS / WGC December 2014
  • Adrian Pound: Appointed Oct 2013  – Resigned 10 March 2015
  • Samantha McDonald: Appointed March 2015

Last In First Out

On 10th February 2016, the SPDR Gold Trust filed a form 8-K with the US Securities and Exchange Commission (SEC) informing the market that WGTS CEO William Rhind had resigned, effective 12 February. The filing stated that:

“Mr. Rhind’s resignation was a personal decision and was not as a result of any CEO or WGTS performance-related issue or any other matters related to the operations, policies or practices of the Trust.”

On the same day, the board of WGTS (about which more below) appointed Aram Shishmanian, CEO of the World Gold Council, as CEO of WGTS, meaning that Mr Shishmanian is now CEO of both entities:

 “On February 10, 2016, the Board of Directors of WGTS appointed Aram Shishmanian, Executive Director of WGTS, as the Chief Executive Officer of WGTS.”

William Rhind had only been appointed CEO of WGTS on 8 September 2014, and so was CEO for a relatively short period of 17 months. Rhind’s departure looked to be sudden, since more than a month later in March 2016, the SEC was still addressing a letter to Mr Rhind even though he had departed.

When William Rhind was appointed to the CEO position at WGTS in September 2014, the World Gold Council issued a press release in which Aram Shishmanian said:

“Will’s career and experience to date means he is ideally placed to lead our ETF business through the next decade, sustaining and enhancing GLD’s position as the world’s leading physically backed gold ETF…”

This expectation from Shishmanian, that Rhind would be in the job for the next decade, also indicates that Rhind’s departure must have been a shock to the WGTS and WGC boards, especially to Shishmanian, who would not have envisaged that he himself would be back to being CEO of WGTS within 18 months of that statement, and not just in an ‘acting’ capacity, but rather in a full capacity.

Rewinding further, William Rhind had been appointed CEO of WGTS because the former CEO Kevin Feldman had himself resigned, on 31 July 2014, effective 15 August 2014. This too seemed to be a sudden departure because on 31 July 2014, the board had to make Aram Shishmanian “Acting Chief Executive Officer”, suggesting that the Board did not have the time to line up a successor or to run a search campaign.  Shishmanian’s Acting CEO position lasted nearly a month until Rhind’s appointment in September 2014.

In its form 8-K filing with the SEC detailing Kevin Feldman’s resignation, the SPDR Gold Trust statement says that:

“Mr. Feldman’s resignation was a personal decision and was not as a result of any CEO or WGTS performance-related issue or any other matters related to the operations, policies or practices of the Trust.”

Kevin Feldman had only been appointed as CEO of WGTS in late June 2013 when he joined the World Gold Council’s Investment area as an external appointment. This means that when Feldman resigned as CEO of WGTS on 31 July 2014, he had been in that role for about a year only.

Jason Toussaint, the predecessor CEO of WGTS departed in July 2013, and had been in his role since April 2009 following his appointment as head of the World Gold Council’s Exchange Traded Gold (ETG) group (which included the SPDR Gold Trust) in April 2009.

So overall, that’s 4 CEOs of World Gold Trust Services in less than a 3 year period.

 GLD NYSE

A Run on the Pound

Turning to the  number-crunchers, current WGTS CFO Samantha McDonald was appointed by the WGTS board of directors on 10 March 2015 “with immediate effect”, on the day that the previous WGTS CFO Adrian Pound resigned. Pound had been both Chief Financial Officer and Treasurer of World Gold Trust Services. The SPDR Gold Trust 8-K filing to the SEC about Pound’s resignation stated that:

“His [Mr. Pound’s] resignation did not arise from any disagreement on any matter relating to the operations, policies or practices of the SPDR® Gold Trust.”

Adrian Pound had only been appointed as WGTS CFO in October 2013, and so was only in the role for about 17 months, the same duration as William Rhind’s stint as WGTS CEO. Pound’s departure also looks unexpected since it was only announced to the SEC on 11 March 2015, and furthermore, Samantha McDonald took over the role “with immediate effect” and without a transition period.

Prior to October 2013, Robin Lee, the Secretary of the World Gold Council, had been the CFO and Treasurer of WGTS before Pound came in, and Lee signed off the accounts, for example in Q2 2013.  Robin Lee resigned as Secretary of the World Gold Council on 31 December 2014, and looks to have stepped down as CFO of WGTS by October 2013.

So, overall, that’s 3 CFOs of World Gold Trust Services in less than a year and a half.

The Board and Corporate Governance

World Gold Trust Services, the sponsor of the SPDR Gold Trust, has a Board of directors, however, according to a SPDR Gold Trust filing, this Board was only established on 24 January 2013. The Board consists of William J. Shea (Chairman), Rocco Maggiotto, Neal Wolkoff, and WGTS CEO Aram Shishmanian. The Board (Shea, Maggiotto, Wolkoff and Shishmanian) also established an audit committee and appointed Shea, Maggiotto and Wolkoff to serve as members of this audit committee.

As a reminder, Aram Shishmanian is CEO of the World Gold Council and is also CEO of World Gold Trust Services, and is also a board member of World Gold Trust Services. Aram Shishmanian became CEO of the World Gold Council in January 2009.

As CEO of the World Gold Council, Shishmanian has decision rights on the tenure of service and compensation of Shea, Maggiotto, and Wolkoff. In his role as CEO of WGTS, Shishmanian reports to the Chairman of the Board William Shea. This appears to be a very complicated and unusual organization structure of corporate governance. Furthermore, as mentioned above, World Gold Trust Services is a for-profit limited liability company and the World Gold Council is a non-profit Swiss Association. Potentially there could be conflicts of interest between the pursuit of commercial goals through WGTS and the pursuit of non-commercial goals through the WGC, especially as they have the same CEO.

 WGC in Peru

The Rush to Leave?

There are plenty of reasons why executives leave companies, including changes in reporting lines, smaller budgets, changes in job description, lack of opportunities, a fear of the company imploding, or just the pursuit of more attractive opportunities. Some of the above departures would surely fall into one or more of these categories. The short stints of CEO Kevin Geldman, CEO William Rhind, and CFO Adrian Pound are curious though since none of these people really stayed in their roles very long.

CEO Feldman resigned on 31 July 2014, and CFO Pound resigned on 10 March 2015, and CEO Rhind resigned on 9 February 2016. Although I am second guessing, in my view, some or all of these departures could be related to one or both of the following factors:

a) An environment of revenue and cost cuts at the World Gold Council and WGTS during 2014-2015

b) Pressure from the World Gold Council or elsewhere to push through a complicated and stressful ‘consent solicitation campaign’ in 2014 / 2015 that was required so as to alter the SPDR Gold Trust sponsor fee setup that allowed WGTS to collect a greater sponsor fee.

Point a) is pretty self-explanatory but I will illustrate it briefly below.

Point b) will make sense to readers after they have read future BullionStar coverage of the “GLD proxy consent solicitation campaign” which is very complex and quite shocking to the extent of the sheer constant barrage that WGTS unleashed on both institutional and retail GLD holders for months and months in the second half of 2014 and early 2015 to get the required proxy voting majority. This consent campaign eventually got the required ~51% of votes by the end of Q1 2015, and was effective by July 2015, after which WGTS began collecting 0.40% of the GLD NAV as sponsor fees. However, I’ll explain it very briefly.

Before the sponsor fee change, the GLD Sponsor Fee was 0.15% of the Adjusted NAV, or 15 basis points. The Marketing Agent fee (for State Street Global Advisors) was also set at 0.15% of the ANAV. The Trustee fee (to BoNY Mellon) was set at an annual rate of 0.02% of the ANAV, “subject to a minimum fee of $500,000 and a maximum fee of $2 million per year. The custodian’s fee (to HSBC) was approximately 0.06% of the NAV.

As mentioned in BullionStar blog “The funding model of the World Gold Council: GLD Fees and Gold Miner Dues” from June 2015:

Between June 2014 and February 2015, the GLD Sponsor, World Gold Trust Services, ran a protracted and non-stop blitz-like global consent solicitation campaign (using Broadridge and DF King) to try to persuade 51% of the beneficial owners of GLD Shares to consent to (vote for) 2 proposals that WGTS was desperate to push through. These two Sponsor proposals were to:

a) increase the Sponsor fee from 0.15% per annum to 0.40% per annum

b) to be permitted to compensate the World Gold Council and its affiliates for the provision of marketing and other services to the SPDR Gold Trust

Teeing up these 2 proposals for implementation required amendments to the GLD Trust Indenture. Changes of this nature to the Trust Indenture required 51% of GLD Shareholders to consent, hence the consent solicitation campaign. This 51% threshold was eventually reached on 25 February 2015, after which the consent solicitation campaign was halted.”

What WGTS and the World Gold Council did essentially was boost the sponsor fee to themselves while then having the power to pay out the rest of the fees to the other parties, i.e. to the Marketing Agent, Trustee and Custodian. This basically allows WGTS to keep the extra fees for itself and these are used as revenue by the World Gold Council. As you will see below, this strategy started to become lucrative in 2015.

The vast majority of World Gold Council funding has traditionally been made up of member dues (from its gold mining company members) and sponsor fees (from the SPDR Gold Trust). The sponsor fees pass through WGTS and are booked as revenue of the WGC (since WGC fully owns WGTS). This revenue model was altered over 2014/2015 as member dues were phased out and the World Gold Council / World Gold Trust Services eventually pushed through the amendment (by proxy solicitation campaign) to alter the fee structure of the GLD.

According to the WGC annual accounts for the year to 31 December 2014, in 2014, the WGC’s member dues fell to $12.5 million compared to $28.2 million in 2013. In 2014, sponsor fees from the GLD were down to $46.1 million from $75.1 million earned in 2013. This was because of a lower NAV of the SPDR Gold trust, i.e. smaller gold holdings of GLD multiplied by a lower gold price. By 2015 member dues had been phased out to zero and WGC was even more reliant on the sponsor fees from GLD. It appears the gold mining companies no longer were willing or able to fund the World Gold Council.

The WGC’s overall revenue  for 2014 was $61 million, which was $42 million less than 2013 total revenue of $103 million. WGC expenditure for 2014 was $85.3 million, down from $115.7 million in 2013.

Most of the expenditure drop came from reduced marketing development expenditure, with a small drop in general and admin expenditure, and a small reduction in personnel expenditure. With Revenue < Expenditure, the WGC had to eat into its cash, and the group’s cash holdings fell from $63.8 million in 2013 to $45.7 million in 2014, i.e. a reduction of $18.1 million in cash holdings.

Staff numbers at the World Gold Council stayed essentially unchanged in 2014, at 91 in December 2014, vs 92 in December 2013. However a reduction in the workforce was announced in January 2015 in Note 21 of the accounts, which stated:

“Note 21: Subsequent events:

On 20 January 2015, the company announced to its employees that it would be eliminating certain activities that will result in a reduction of its workforce and lower office requirements. It is expected that the costs of the restructuring will be in the region of $15 million. A provision of $11 million was made in the year ended 31 December 2014.”

From the World Gold Council 2015 accounts, by 2015, all WGC member dues (from the gold mining company members) had been phased out to zero, and the bulk of revenue, $66.9 million, came from the Sponsor Fees from the SPDR Gold Trust. Total revenue was $68.8 million. This meant that as of 2015, the GLD (a commercial ETF) was basically funding all of the operations of the World Gold Council (a non-profit association).

The WGC 2015 accounts also show (on page 34) that WGTS paid out the following fees in 2015 to the Marketing Agent, Trustee and Custodian, and some ancillary expenses:
  • Marketing Agent fees: $16.6 million
  • Custodian fees $4.1 million
  • Trustee fees $0.92 million
  • Other GLD Expenses: $4.9 million
  • Total of the above for 2015: $ 26.574 million

Given that the World Gold Council took in $66.9 million as Sponsor Fees from GLD for 2015, that’s a cool $ 40.3 million that the WGC kept out of the total Sponsor fee inflows. Now you can see why they were so eager to push through the consent solicitation campaign in 2014 and early 2015. Furthermore, GLD shareholders are essentially bank-rolling the entire operations of the World Gold Council. I wonder how many GLD shareholders are aware of this?

Finally, WGC expenses for 2015 continued to drop slightly to $82.3 million. Probably the most shocking thing about the 2015 World Gold Council accounts is that the employee headcount had dropped to 51 at the end of 2015 from 91 at the end of 2014. Therefore there were 40 fewer people employed by the group. That’s a 44% reduction in headcount over one year.

My guess is that in a World Gold Council environment of cost cutting over 2014 / 2015 and mass personnel departures, the work environment probably contributed to some of the CEO / CFO departures by the WGTS execs. Furthermore, as you will see in a future post about the ‘GLD consent solicitation proxy vote campaign’, because this was, in my opinion, a very misleading and confusing non-stop campaign that bordered on bullying GLD shareholders, especially the retail shareholders, this could have also taken its toll and resulted in CEO / CFO departures from the SPDR Gold Trust sponsor, i.e. New York based World Gold Trust Services.

In conclusion, it would be interesting to see what the large institutional shareholders of GLD such as Paulson and Blackrock make of this high turnover rate in GLD Sponsor executives, and what their corporate governance and proxy voting teams think of the WGTS driven GLD proxy solicitation campaign and the rather unusual governance structure of the World Gold Council and World Gold Trust Services.

SPDR Gold Trust gold bars at the Bank of England vaults

One of the most notable developments accompanying the gold price rally of 2016 has been the very large additions to the gold bar holdings of the major physically backed gold Exchange Traded Funds (ETFs). This is especially true of the SPDR Gold Trust (ticker GLD).

The gold bar holdings of the SPDR Gold Trust peaked at 1353 tonnes on 7 December 2012 before experiencing a precipitous fall in 2013, and additional and continued shrinkage throughout 2014 and 2015. On 17 December 2015, the gold holdings of the SPDR Gold Trust hit a multi-year low of 630 tonnes, a holdings level that had not been seen since September 2008.

GLD 5 year
SPDR Gold Trust – 5 year chart of gold holdings and gold price. Black line – gold holdings in tonnes. Source: http://www.goldchartsrus.com

By 31 December 2015, GLD ‘only’ held 642 tonnes of gold bars. See above chart. Then as the New Year kicked off in January 2016, something dramatic happened. The SPDR Gold Trust began expanding its gold holdings again, and noticeably so. By 31 March 2016, the Trust held 819 tonnes of gold bars, and by 30 June 2016, it held 950 tonnes of gold bars. The latest figure at time of writing is 981 tonnes of gold bars as of 8 July 2016. (Source: GLD Gold holdings spreadsheet).

This is a year-to-date net change of 338.89 extra tonnes of gold bars being held within the SPDR Gold Trust. See chart below. That’s a 52.8% increase compared to the quantity of gold bars the Trust held at the end of 2015, and a phenomenal amount of gold by any means, since it’s over 10% of annual new mine supply, and also a larger quantity of gold than all but the world’s largest central banks hold in their official gold reserves. Where is all of this gold being sourced from? That is the billion dollar question. Some is obviously being imported from Swiss refineries, but perhaps not all of it.

GLD 6 months
SPDR Gold Trust – 6 month chart of gold holdings and gold price. Black line – gold holdings in tonnes. Source: http://www.goldchartsrus.com

In January 2016, 26.8 tonnes of gold bars were added to the SPDR Gold Trust, while a massive 108 tonnes of gold bars were added in February 2016. The first quarter was rounded off with an additional 42 tonnes of gold bars added in March, bringing the Q1 additions held by GLD’s gold custodian HSBC London to 176.91 tonnes of gold bars. Noticeably, some large 1-day increases in GLD’s gold bar holdings occurred on 1 February (over 12 tonnes), 11 February (over 14 tonnes), 19 and 22 February (over 19 tonnes each day), and 29th February (nearly 15 tonnes), and also on 17 and 18 March (11.9 tonnes of gold bars added each day).

The second quarter saw a 15 tonne shrinkage of GLD’s gold holdings in April, but a very large 64.5 tonne increase in May, and a 81.4 tonne increase in June, making for a Q2 increase in GLD’s gold bar holdings of 130.77 tonnes. Very large 1-day gold bar additions occurred on 24 and 27 June (18.4 tonnes and 13 tonnes respectively). Overall, that’s 307 tonnes added to GLD in the first half of 2016.

Adding the 31.2 tonne addition for July to date gives the 338.89 tonnes addition figure quoted above. Most of this was due to a large 1-day inflow of 28.81 tonnes of gold bars reported on 5 July.

SEC – Reveal the subcustodians

I have detailed the above GLD gold bar holding changes to provide some background and put more color on the important discussion which follows.

While looking through SEC filings of the SPDR Gold Trust last month, I came across some interesting correspondence between the SEC and the sponsor of the SPDR Gold Trust, World Gold Trust Services. World Gold Trust Services is a fully owned subsidiary of the World Gold Council (WGC).

On 29 March 2016, the US Securities and Exchange Commission (SEC) sent a letter to the SPDR Gold Trust (c/o World Gold Trust Services, LLC) essentially telling the SPDR Gold Trust to in future specify in its SEC filings the identities of the sub-custodians that are storing any of the Trust’s gold bar holdings during each reporting period. The SEC’s letter stated:

“We understand that the Custodian may appoint one or more subcustodians to hold the Trust’s gold and that the Custodian currently uses a number of subcustodians, identified on page 18. You also outline risks that may arise in connection with the use of subcustodians. In future Exchange Act periodic reports, to the extent material, please disclose the amount of the Trust’s assets that are held by subcustodians.

The page 18 referred to by the SEC is page 18 of the annual 10-K filing of the SPDR Gold Trust for the year ended 30 September 2015, which includes the following paragraph:

The Custodian is authorized to appoint from time to time one or more subcustodians to hold the Trust’s gold until it can be transported to the Custodian’s vault. The subcustodians that the Custodian currently uses are the Bank of England, The Bank of Nova Scotia-ScotiaMocatta, Barclays Bank PLC, JPMorgan Chase Bank and UBS AG.

In accordance with LBMA practices and customs, the Custodian does not have written custody agreements with the subcustodians it selects. The Custodian’s selected subcustodians may appoint further subcustodians. These further subcustodians are not expected to have written custody agreements with the Custodian’s subcustodians that selected them. The lack of such written contracts could affect the recourse of the Trust and the Custodian against any subcustodian in the event a subcustodian does not use due care in the safekeeping of the Trust’s gold. See “Risk Factors—The ability of the Trustee and the Custodian to take legal action against subcustodians may be limited.”

LBMA above refers to London Bullion Market Association. Note that the SPDR Gold Trust prospectus defines subcustodian as:

“SUB-CUSTODIAN means a sub-custodian, agent or depository (including an entity within our corporate group) selected by us to perform any of our duties under this agreement including the custody and safekeeping of Bullion.”

The SEC letter was addressed to William Rhind who was CEO of World Gold Trust Services, but who actually had resigned as CEO on 9 February 2016, something the SEC should have known since the resignation statement was also filed with the SEC. After receiving the SEC’s correspondence, Samantha McDonald, CFO of World Gold Trust Services, responded by letter to the SEC the next day, 30 March 2016, confirming that:

We will, to the extent material, disclose in future periodic reports the amount of the Trust’s assets that are held by subcustodians. Please be advised that during fiscal 2015, no gold was held by subcustodians on behalf of Trust.

Note that filings with the US SEC use the naming convention 10-K for an annual filing, and 10-Q for a quarterly filing.

Following the stipulation from the SEC to World Gold Trust Services telling it to reveal its subcustodian holdings, its intriguing to note that when SPDR Gold Trust filed its next 10-Q on 29 April 2016 for the quarter ended 31 March 2016, page 15 of this filing revealed that the Bank of England, as subcustodian, had, during Q1 2016, held up to 29 tonnes of gold on behalf of the SPDR Gold Trust. The relevant section of page 15 stated the following:

“As at March 31, 2016, the Custodian held 26,484,117 ounces of gold on behalf of the Trust in its vault, 100% of which is allocated gold in the form of London Good Delivery gold bars including gold payable, with a market value of $32,760,852,177 (cost — $32,291,685,964) based on the LBMA Gold Price PM on March 31, 2016. Subcustodians held no gold on behalf of the Trust as of March 31, 2016.

During the quarter ended March 31, 2016, the greatest amount of gold held by subcustodians was approximately 29 tonnes or approximately 3.8% of the Trust’s gold at such date. The Bank of England held that gold as subcustodian.

As at September 30, 2015, the Custodian held 21,995,797 ounces of gold in its vault 100% of which is allocated gold in the form of London Good Delivery gold bars including gold payable, with a market value of $24,503,317,923 (cost — $27,103,546,125). Subcustodians held nil ounces of gold in their vaults on behalf of the Trust.”

Some Facts

From the above revelations, some facts can be stated:

  • The Bank of England held a maximum of 29 tonnes of gold on behalf of the SPDR Gold Trust on some date during Q1 2016.

Note that the wording of the 10-Q is such that it does not preclude the possibility that the Bank of England also held GLD gold at other times during Q1 2016, since it states “the greatest amount of gold” that the Bank of England held for the Trust was 29 tonnes. This implies that the Bank of England vaults could, at other times during Q1, have held less than 29 tonnes of gold on behalf of GLD.

  • As per the initial WGTS response to the SEC dated 30 March 2016, no gold was held by HSBC’s subcustodians on behalf of GLD throughout fiscal 2015 (1st October 2014 – 30 September 2015). Furthermore, GLD’s 10-Q to 31 December 2015 states that

To this can be added that according to the SPDR Gold Trust’s 10-Q for Q4 2015, “as at December 31, 2015…Subcustodians held nil ounces of gold in their vaults on behalf of the Trust

The GLD 10K (annual) for the year to 30 September 2015, filed on 24 November 2015, also contains a few statements addressing whether gold was held by subcustodians on year-end dates in 2014 and 2013. However, it states that subcustodians did not hold gold on behalf of the SPDR Gold Trust on these two dates. Page 44 states:

As at September 30, 2014, the Custodian held 24,867,158 ounces of gold in its vault 100% of which is allocated gold in the form of London Good Delivery gold bars including gold payable, with a market value of $30,250,898,159 (cost — $30,728,152,437). Subcustodians did not hold any gold in their vaults on behalf of the Trust.”

As at September 30, 2013, the Custodian held 29,244,351 ounces in its vault 100% of which is allocated gold in the form of London Good Delivery gold bars including gold payable, with a market value of $38,792,631,793 (cost — $35,812,777,235). Subcustodians did not hold any gold in their vaults on behalf of the Trust.”

How did Bank of England suddenly become a GLD subcustodian in Q1 2016?

As a member of London Precious Metals Clearing Limited (LPMCL), HSBC maintains gold bullion account facilities at the Bank of England which can be used within its LPMCL gold clearing role. All 6 LPMCL bullion bank members hold gold accounts at the Bank of England. The 6 LPMCL members can also all call on each other for physical delivery of gold and allocation of gold. All of these bullion banks except ICBC Standard are also Authorized Participants (APs) of GLD, i.e. Barclays, HSBC, JP Morgan, Scotia, and UBS. Other AP’s of GLD include entities of Credit Suisse, Goldman Sachs, Merrill Lynch and Morgan Stanley. Many of these bullion banks are also LBMA market makers in gold.

My view is that quite a number of other bullion banks that are members of the LBMA also hold gold accounts at the Bank of England, such as BNP Paribas, Natixis, SocGen and Standard Chartered, otherwise they would not be able to engage in the gold borrowing activities that they are on record of engaging in. If this is the case, then gold bars can easily be moved from central bank accounts at the Bank of England to bullion bank gold accounts at the Bank of England and vice-versa. Only APs of GLD are allowed to create baskets of GLD securities. This creation process requires that when GLD baskets created, APs have to deliver physical gold bars to HSBC.

There are therefore a number of  possibilities to explain how the Bank of England ended up being a sub-custodian for GLD in Q1 2016.

  1. An AP(s) had gold bars stored at the Bank of England, and delivered these gold bars to HSBC at the Bank of England in fulfillment of the GLD share creation process
  1. An AP(s) had an unallocated credit balance of gold with a LPMCL clearer or other entity which had gold stored at Bank of England or access to gold at the Bank of England, and as part of the clearing process the AP converted unallocated credit balances into allocated gold bars held at the Bank of England and delivered these gold bars to HSBC.
  1. An AP(s) borrowed gold from a central bank which had gold bars stored at the Bank of England and delivered these gold bars to HSBC as part of the GLD basket creation process.

The quantity of 29 tonnes is a lot of gold for an Authorized Participant or group of APs to have un-utilised in a vault at the Bank of England. It’s about 2320 large Good Delivery gold bars. Likewise, 29 tonnes is a lot of gold bars for LPMCL members to have as a clearing float at the Bank of England.

Furthermore, if an AP had acquired newly refined gold from a refinery with the intention of delivering it to HSBC as part of the GLD security creation process, why would this gold be delivered to the Bank of England vaults, and not directly to the HSBC vault? It would be more practical to have delivered that gold straight to the HSBC vault.

Therefore, its plausible that at least some of the gold being held by the Bank of England as sub-custodian on behalf of the SPDR Gold Trust was sourced from gold borrowed from central bank gold holdings at the Bank of England.

Bullion Bars Database

There is further support for borrowed gold bars being held by the SPDR Gold Trust during Q1 2016.

Warren James maintains a database of the identities of the gold bars held in the GLD over time which allows comparisons between the gold bullion coming in and out of the GLD. Each bar has a unique signature based on its brand, serial number, and weight. Gold bars coming into the SPDR Gold Trust can be tracked based on whether these bars were previously held in the Trust or whether they are bars coming in that have never been held by the Trust before. When a bar returns to the list after it was previously held but disappeared from the holdings, it’s called dark bullion since its identity is familiar but it’s not known where the bar has been since it left the GLD and re-entered.

Up until 10 February 2016, the percentage of dark bullion bars re-entering GLD that had previously been held by the Trust was about 30% of the inflows. As the inflows into GLD rose sharply from the second half of February, dark bullion entering GLD essentially stopped and nearly all of the bars being added to GLD were bars that had never been held by GLD before. These inflows were a combination of newly refined gold and older bars which are no longer produced. For example, gold bars coming into GLD in February 2016 have included hundreds of bars from the US Assay Offices and Mints, AGR Matthey, Johnson Matthey Plc (Royston), the Australian Branch Royal Mint – Perth, Engelhard, Kazzinc etc, all of which are no longer produced.

The fact that a large amount of older gold bars arrived into GLD from the second half of February onwards would suggest that these bars came long-held holdings in the vaults of the Bank of England, and consisted of borrowed central bank gold.

Some Questions

All of the above poses a number of questions:

  • If this known 29 tonnes of gold was held by the Bank of England as subcustodian for GLD during Q1 2016 but not held by the Bank of England as subcustodian at the end of March 2016, did it physically leave the Bank of England vaults, or was it just transferred to HSBC’s account at the Bank of England?

Note that nothing in the SEC filing rules or directives compels WGTS to specify if the GLD custodian HSBC is holding gold outside its own vaults, so in my view its possible that gold is held by HSBC on behalf of the SPDR Gold Trust at the Bank of England. Indeed, its possible that HSBC even leases vault space in the Bank of England vaults, a sub-leased vault facility. If the HSBC London gold vault is indeed in the location that’s documented here (HSBC’s London Gold Vault: Is this Gold’s Secret Hiding Place?), then it would appear that it’s not big enough to accommodate the entire gold bar holdings of GLD and all other HSBC customers’ gold, especially when GLD holding are and were over 900 tonnes.

  • Since the Bank of England didn’t hold any gold as subcustodian for GLD in fiscal 2015, but did in Q1 2016, how much of these large inflows of gold into GLD in Q1 and Q2 and July this year (documented above) involved metal stored in vaults at the Bank of England? And what changed in the London Gold Market to require gold held at the Bank of England to suddenly be needed to fulfill GLD gold delivery obligations?
  • Why are LBMA practices and customs so lax that it allows HSBC the custodian, not to have written custody agreements with the subcustodians. Surely the US SEC should have picked up on this?
  • Why did the SEC not ask iShares (IAU (which has 3 custodians) and ETF Securities to also alter their SEC filings to reveal subcustodians’ holdings. And for that matter why did the SEC not ask iShares to amend its disclosures to specify subcustodians in the Silver ETF – SLV.
  •  Why do central banks never publish gold bar lists detailing the serial numbers of their bars, and why is the Bank of England so against allowing central banks to do so. There are a number of FOIA requests (including one I made) providing evidence of the Bank of England’s refusal to allow central banks to publish weight lists / bar lists. Could it be that they do not want data on gold bar serial numbers entering the public domain as it would then show that leased and swapped gold is being held by commercial gold ETFs?

Audits of the SPDR Gold Trust’s gold bars

The SPDR Gold Trust ‘s gold bar holdings are physically audited twice per year. A partial physical audit is conducted in February/March of each year, and a full physical audit of the bars is done in September of each year. The current auditor is Inspectorate International Limited. In September 2015, Inspectorate conducted the 2015 full count of the Trust’s gold bullion held by the custodian HSBC London. That audit counted  54,807 London Good Delivery gold bars at the “London Vaults of HSBC Bank USA National Association”.  Note that the official custodian of the SPDR Gold Trust changed from HSBC Bank USA to HSBC Bank Plc in late 2014, so this audit should really state HSBC Bank Plc.

Inspectorate then conducted a random sample count audit in early Mach 2016 at the “London Vaults of HSBC Bank Plc” based on a date of 19 February 2016. As of that date, the “account (GLD) held title to 56,913 London Good Delivery, large Gold Bars“. However, this audit was “a statistically random count of 16,493 bars of gold”, based upon the gold inventory as at 19 February 2016, and it was carried out between 29 February and 11 March “at the Custodian’s premises“.

Given that the Bank of England acted as a subcustodian to the SPDR Gold Trust during Q1 2016,  the question arises as to whether  all of the other 40,420 (56,913 – 16,493) bars were at the “Custodian’s premises” during the audit,  or were some of these other bars being held in the Bank of England vaults. It’s not clear why a random sample of 16,493 bars (about 206 tonnes, and 29% of the total holding) was chosen, but it’s about 2/7ths of the gold bars held by GLD.

There is no mention of the Bank of England in Inspectorate’s latest audit report. However, there is nothing to say that some of GLD’s bars were not in the Bank of England at the time of the audit. The audit doesn’t say so one way or the other, and the way its worded means that it doesn’t say all of the inventory is at HSBC’s vault, just that the audit was conducted at HSBC’s vault.

Conclusion

Central banks continue to report leased and swapped gold (gold receivables) as an asset on their balance sheets. This accounting fiction, which doesn’t follow any international accounting standards is a sleight of hand that allows the same gold to appear to be in two places at once. If gold bars that have been leased from central banks are being held in the SPDR Gold Trust, then these gold bars are being double-counted, and GLD shareholders should be made aware that the Trust is holding gold that has been ultimately borrowed from central banks. Using borrowed central bank in an ETF doesn’t put the ETF on the hook, since the ETF owns this gold. But it does mean that the bullion banks will need to return the equivalent amount of borrowed gold to the lending central bank from other sources. Importantly though, this type of activity will overstate the amount of gold held by the combined official sector and ETF sector.

The SPDR Gold Trust 10-Q for the 2nd quarter of 2016 will be filed with the SEC in about 3 weeks time, at the end of July. With the continuing large inflows into GLD in Q2 2016 it will be interesting to see whether the name of Bank of England as subcustodian of GLD reappears in the Q2 filing?

And if gold bars held by GLD are actually stored at the Bank of England vaults when the  full physical gold bar audit is conducted next September, surely the full audit report should require a passage stating that some of the gold bars audited were held at the Bank of England, and not just at the ‘London Vaults of HSBC Bank’? Since the SEC have opened this ‘can of worms’ issue, and created more questions than answers, perhaps it is now in the SEC’s interests to go even further and ask World Gold Trust Services to fully clarify the matters raised above. Otherwise, the GLD gold bar holdings will continue to be a source of intrigue and debate in the gold world.

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.

vaults before a
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.

 

vaults before b
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).

vaults after a
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.

vaults after b
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

dsc_0005_800.jpg

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).

QSP night shot
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.

 

The funding model of the World Gold Council: GLD Fees and Gold Miner Dues

In a little noticed development at the end of March 2015, World Gold Council (WGC) member company Newcrest Mining of Australia ceased to be a member of the WGC, thereby reducing the Council’s membership from 19 to 18 gold mining companies. Newcrest Mining is one of the world’s largest gold mining companies and Australia’s largest gold miner.

This exit by Newcrest Mining from the World Gold Council followed similar exits in 2014 by three other gold mining companies, namely, the very large South African gold miners Anglogold Ashanti and Goldfields, and the mid-sized Canadian gold miner IAMGOLD. These gold miner departures directly impact the World Gold Council’s annual funding because members’ dues constitute an important component of the Council’s total revenue.

The World Gold Council’s annual revenue consists primarily of ‘Member Dues‘ and ‘Sponsor Fees‘. A third income line item, ‘Other Income’, provides a very marginal contribution to the Council’s revenue.

Each gold mining member contributes a US dollar amount each year to the World Gold Council based on the number of ounces of gold produced for that year by that member. Fewer members means less revenue, or alternatively higher members’ dues for remaining members. With the combined Anglogold Ashanti, Goldfields, Newcrest and IAMGOLD producing more than 9 million ounces of gold per year in 2014 (actual production) and in 2015 (forecast guidance), the foregone member dues contributions from these former members will be a big loss to the WGC’s annual revenue, since the lost dues represent about $9 million at $1 per gold ounce members’ dues contribution, or $18 million at $2 per gold ounce contribution.

The departure of Newcrest, Anglogold Ashanti, Goldfields, and IAMGOLD will undoubtedly have been concerning to the Council ‘s remaining directors of the WGC’s board and the Council’s executive management. The departures also leave Barrick, Newmont, Goldcorp and Kinross as the four largest gold miner members in a World Gold Council increasingly dominated by North American, and especially Canadian, gold mining companies.

The WGC’s 18 member list now reads as follows: Barrick, Newmont, Goldcorp, Kinross, Agnico Eagle, Buenaventura, Yamana, Eldorado, Alamos, China Gold, Golden Star Resources,  Primero, Franco Nevada, Acacia, Royal Gold, Silver Wheaton, Newgold, Centerra.

WGC in Peru

 

Sponsor Fees and GLD Trust Indentures changes

The ‘Sponsor Fees‘ revenue line item in the World Gold Council’s consolidated financial statements refers to fees earned by the WGC’s US subsidiary, World Gold Trust Services from the SPDR Gold Trust (also known as GLD due to its exchange ticker symbol). The relative size of such GLD sponsor fees is dependent on the size of the SPDR Gold Trust in any given year. With huge gold outflows from GLD over the last few years and a lower gold price (the combined effect of which shrinks assets under management in the Gold Trust), this ‘Sponsor Fees’ revenue stream, which is 0.15% of the GLD adjusted net asset value (ANAV), has plummeted. The same is true for the Marketing Agent fees earned by the GLD marketing agent, State Street Global Advisors. In total, these two fees are a combined 0.30% of GLD’s ANAV.

More than 640 tonnes of gold have been withdrawn from the GLD since gold holdings of the Trust peaked at 1353 tonnes in December 2012. It’s notable that, as of early June 2015, the SPDR Gold Trust has just dropped out of the worldwide top 10 ETFs list by size, a list that at one time the GLD occupied top place in.

In another little noticed, but critical, development at the end of February 2015, the World Gold Council’s 100% owned U.S. subsidiary World Gold Trust Services successfully attained (after persistent consent solicitations and consent solicitation adjournments) a majority (51%) of SPDR Gold Trust consent votes so as to amend GLD’s trust indenture to a)  increase the sponsor fee from 0.15% per annum to 0.40% per annum, and b) to be permitted to compensate the World Gold Council and its affiliates for the provision of marketing and other services to the SPDR Gold Trust.

When these GLD trust indenture changes are implemented by the SPDR Gold Trust in the near future, it will centralise the payment and disbursement of all GLD marketing agent fees, all GLD trustee fees and all GLD custodian fees to World Gold Trust Services (in addition to the existing ‘Sponsor’ fee), thereby allowing the World Gold Trust Services to revisit the current marketing agent fee arrangement with State Street Global Advisors, while also allowing an increase in the employment of the World Gold Council in the provision of GLD marketing services. These trust indenture changes look primarily to be a revenue generating tactic by the World Gold Council to re-route a larger portion of a shrinking GLD fee pie to itself.

 

Sponsor Fees dominate Members’ Dues

Since the emergence of the SPDR Gold Trust as one of the world’s largest ETFs, sponsor Fees from the GLD account for a far larger share of World Gold Council revenue than Member Dues, despite the World Gold Council still being widely known as a ‘miner funded’ association. Sponsor fees to World Gold Trust Services (i.e. to the World Gold Council) were $93.8 million in 2011 and a whopping $104 million in 2012, allowing 2012 WGC revenues to reach $169 million. Sponsor fees then dropped by 31% in 2013 to $71.5 million, and plummeted further to less than $48 million in 2014. See table 1 below for 2010-2013 data and see separate section below for 2014 calculations.

Table 1: WGC Revenues 2010-2013

WGC Annual Revenues

From 2010 to 2013, the revenue contribution from GLD Sponsor Fees dominated the revenue contribution from WGC member dues, with Sponsor fees running at 55% of total revenue in 2011, 70% in 2011, 61.5% in 2012 and 69% in 2013.

This mix of sponsor fees versus member dues clearly illustrates why the WGC now refers to itself as a commercially driven organisation, as you will see below. It also demonstrates that, in contrast to having diversified revenue streams, the annual revenue of the World Gold Council looks like a one trick GLD pony, or perhaps a two trick GLD and miner pony.

Table 2: WGC Revenues 2010-2013 (percentages)

WGC Annual Rev percentage

The World Gold Council has not yet published its consolidated financial statements for 2014, however, the Council’s 2014 revenues from the SPDR Gold Trust can be calculated from the GLD regulatory filings which are available on the SEC EDGAR database website. Likewise, the World Gold Council’s projected revenue from gold miner member dues can be calculated under various scenarios and assumptions. See below.

Chart 1: World Gold Council Revenues, 2010-2013, $ millions

WGC Revs 2010-2013

Source: WGC Consolidated Financial Statements for the year ended 31st December

 

In 2013, World Gold Council assets totalled $231.7 million (2012 total assets $296.8 million). In 2013, WGC revenues totalled $103 million (2012 revenues $169 million). By any standards, these assets and revenue totals continue to be substantial, despite the drop in both assets and revenues between 2012 and 2013. However, with member departures in 2014-15 and reduced commercial earnings from the GLD, the question becomes, in light of the low US dollar gold price environment, are the WGC’s revenue streams, and in turn, the WGC’s sizable annual expenditure sustainable without dipping into reserve cash funds and investments?

A discussion of this question requires an in-depth understanding of how the WGC’s revenue is generated and how the Council is funded, which in turn requires an understanding of how the World Gold Council is structured.

 

Swiss Verein

The World Gold Council (WGC) is registered as a Swiss ‘Association’ (or Verein) under the commercial register of the Canton of Geneva (officially, the Republic and Canton of Geneva). See Swiss Registre Du Commerce (Federal Commercial Registry Office) extract for the WGC here -> WGC Extrait. The WGC’s company numbers are CH-660-0534987-6 and (IDE/UID) CHE-106.151.454. Numerous organisations established in Switzerland are structured as associations, such as the notorious FIFA, which is registered in Zürich (company number CHE-107.301.064). Coincidentally, both the WGC and FIFA employ KPMG Switzerland as their auditors.

A Swiss association comprises members, and in the case of the WGC, the members are its member gold mining companies from around the world. Member firms of a Swiss association control the assets and earnings of the association, so this was probably why the World Gold Council choose such a structure.

In the original Articles of Association of the Council from 1987, Article 1 Preamble, “Name and Purpose” stated that:

“The Association shall be known as the World Gold Council, an Association. It shall be a non-profit association with legal personality under Article 60 et seq. of the Swiss Civil Code and shall have its principal offices in Geneva, Switzerland. It is organized for the purposes of:

a) promoting the use of gold for jewellery, investment, and industrial applications and as a store of value;

b) research and development leading to new uses of gold and gold products; and

c) collecting and disseminating information about gold.”

Since 1987, the only amendment to the original Article 1 has been a change in wording to state that the Association “shall have it’s principal offices at such locations as the board of directors may determine from time to time” i.e. not in Geneva.

While the Articles of Association describes the Council as a ‘non-profit association‘, this does not mean that the WGC doesn’t strive to make a profit. Many associations, industry associations or otherwise, do make a profit; they just can’t distribute the profit in the normal way a corporation can. However, the WGC does have a draw-down facility for its members that can be used where profits have been created by a liquidity event such as a sale of assets or investments.

Indeed, over the years the WGC seems to have taken a more generous interpretation of its own ‘Purpose’ as stated in its Articles of Association, and now describes itself as a commercially driven marketing organization, and for example, in 2008, it was using the below self-description:

The World Gold Council (WGC), a commercially-driven marketing organization, is funded by the world’s leading gold mining companies.  A global advocate for gold, the WGC aims to promote the demand for gold in all its forms through marketing activities in major international markets.”

A 2009 submission to a Basel Committee consultation also reiterated the same theme:

“The World Gold Council’s mission is to stimulate and sustain the demand for gold and to create enduring value for its stakeholders.”

The WGC is a commercially-driven organisation and is focused on creating a new prominence for gold. It has its headquarters in London and operations in the key gold demand centres of India, China, the Middle East and United States.”

As recently as 2005, the WGC was still being referred to by one of its members as a non-commercial organisation. This reference was made by Anglogold Ashanti. See section below.

Currently, on its website, the WGC describes itself as “the market development organisation for the gold industry“, with aims to “stimulate demand, develop innovative uses of gold and take new products to market.” On a sectoral basis, the WGC focuses on gold mining supply, and demand across the jewellery, technology, investment, and central bank reserve asset management sectors.

Although the registered office of the WGC is in Geneva, the WGC’s head office is now in London, and has been for a long time. As the WGC financial statements say, “the WGC’s principal place of business is London“.

Under the Registrar of Companies (England and Wales), the World Gold Council is registered as an overseas company, specifically, a non-profit association under Swiss Civil Code Article 60, foreign company number FC014324, with a registered office in Geneva. The Council is also registered as a UK establishment company with a company number of BR012707.

The WGC maintains offices in 8 other cities around the world apart from London, namely, New York, Hong Kong, Shanghai, Beijing, Singapore, Tokyo,  Mumbai, and Chennai. Note that the offices are all either in large global financial centers or else in large cities within the largest gold consuming nations. World Gold Council offices previously maintained in Dubai, Istanbul, Cairo and Jeddah were closed in 2011.

Note that the usage of the name ‘World Gold Council’ as applied by the WGC itself can refer to ‘The World Gold Council, An Association and it’s subsidiaries or affiliates ( together or alone “World Gold Council”)‘.

The WGC has approximately 20 fully owned subsidiaries, the most important of which (from a revenue generating perspective) is the US-based fully-owned subsidiary World Gold Trust Services LLC (WGTS) which earns the sponsor fees on the SPDR Gold Trust (GLD). World Gold Trust Services LLC, is a Delaware registered company, incorporated on 17 July 2002, with Delaware company number 3548735. See here for the original Certificate of Formation of WGTS, here for amended and restated LLC agreement of WGTS (the sole member of which was the World Gold Council), and here for the original funding agreement between the WGC and WGTS dated October 2004.

 

Newcrest reception

 

Newcrest Mining’s departure

In early April 2015, I spotted that the WGC’s membership page had been amended to state a membership total of 18. The exact wording on the membership page on the WGC’s web site now reads as follows:

“The World Gold Council’s 18 Members are some of the world’s most forward-thinking gold mining companies. They are headquartered across the world and have mining operations in over 40 countries.

Using the Internet Archive (aka Wayback Machine) to view what this web page stated prior to the above update, the most recent imprint of this web page was 23 March 2015, and it stated:

“The World Gold Council’s 19 Members are some of the world’s most forward-thinking gold mining companies. They are headquartered across the world and have mining operations in 47 countries.”

Looking at the amended list of members versus the previous member list, the missing company was Newcrest Mining. The reference to Newcrest on the WGC web site (before it was deleted) was as follows:

“Headquartered in Australia, Newcrest Mining is a gold producer with mining operations in Australia, Papua New Guinea, and Indonesia and in Cote d’Ivoire in West Africa. The company has a global workforce of over 19,000 people.

Website: http://www.newcrest.com.au

I then emailed Newcrest Mining investor relations / communications asking for confirmation as to whether Newcrest had left the World Gold Council, and if so, the rationale for leaving. Newcrest did not reply to my email.

I then emailed the World Gold Council. My query about Newcrest to the World Gold Council was part of an email with a number of other questions, some of which the WGC media team did reply to, and some of which, including the Newcrest question, they chose not to answer.

Another source confirming the Newcrest Mining departure from the WGC is the Newcrest web site itself, and its Internet Archive imprints. On the Newcrest website under the board of directors’ biographies, as late as 12th April 2015, Newcrest CEO Sandeep Biswas was still listed as a director of the World Gold Council, while Newcrest CFO Gerard Bond was still listed as an alternate director of the Council. These bios listings were then amended during April to delete the references to NewCrest’s directorships on the board of the World Gold Council. See the current Newcrest board of directors web page here.

 

Anglogold Ashanti and Goldfields

Anglogold Ashanti and Goldfields, the two South African gold mining companies, both departed from the World Gold Council circa June 2014. Anglogold Ashanti and Goldfields were both listed as members on 17th May 2014 (when the total membership was 21), then Anglogold Ashanti and GoldFields had both departed from the World Gold Council by late June 2014, but Silver Wheaton had joined, so the total membership suffered a net reduction of one member and became 20. Despite the name, Silver Wheaton sources both gold and silver, via precious metal revenue streaming, not directly by mining.

Mining publication ‘Mining Global‘ covered the Anglogold Ashanti and Goldfields departures from the WGC in an article on 4 July 2014, when it reported that both companies explained their departures in terms of cost savings:

“We have left the WGC, which is part of our broader focus on costs,” AngloGold Ashanti senior VP for investor relations and group communications Stewart Bailey confirmed.

“The reason for Gold Fields’ departure from the WGC was purely a cost decision,” Gold Fields spokesperson Willie Jacobsz said in an email.

Members pay per ounce of metal produced and with all the cost-cutting we’ve seen, especially here at Gold Fields, we’ve had a look very carefully at our membership of all sorts of organizations around the world.”

By November 2014, Canadian gold miner IAMGOLD had also departed the Council, bringing the total membership down to 19.

According to a Reuters article in November 2014, IAMGOLD was “withdrawing from the World Gold Council as it reduces its corporate memberships to save money.”

Six Months’ Notice

Therefore, within 10 months of each other, 4 gold miners, 3 of which are major players worldwide and one of which is a mid-sized player, departed from an organisation whose aim is to promote the potential of gold globally and to increase demand for gold worldwide. Ironically, in respect of the World Gold Council’s effectiveness or lack thereof in boosting the gold price (which it claims is not its raison d’être), at least 3 of these gold miners (and probably Newcrest also) departed from the Council because they needed to save money in an environment of a sustained downtrend in the US dollar gold price.

Any World Gold Council member gold mining company that wishes to terminate its membership of the WGC needs to give the WGC 6 months’ notice of such departure, as per the WGC’s Articles of Association. Therefore, South African miners Anglogold Ashanti and Goldfields would have given notice termination to the WGC in about December 2013. Canadian miner IAMGOLD would have given termination notice in about May 2014. And finally, Newcrest Mining of Australia, which lapsed it’s WGC membership at the end of March 2015, would have needed to give termination notice to the WGC in late September 2014. See below for the relevant clause of Article II of the WGC’s Articles of Association on termination of membership.

resignation 6 mths

As recently as October 2013, the World Gold Council had 23 members, specifically 18 full members and 5 ‘Associate’ members. These 5 associate members were Franco-Nevada, Hutti Gold Mines, Royal Gold, China Gold, and Mitsubishi Materials Corp. Full members were known as Category A members in the Articles of Association, while Associates were known as Category B members. WGC then abolished the associate member category in 2013.

By mid November 2013, four of these five associate members had transferred to full membership and the Council then had 22 full members and no associate members. At the same time (October – November 2013), Indian gold mining company Hutti Gold Mines ceased to be listed as a member.

Mitsubishi Materials Corp then departed the member list in the first week of January 2014, bringing the total membership down to 21 members.  And as explained above, then Anglogold Ashanti, Goldfields, IAMGOLD, and Newcrest Mining all departed and Silver Wheaton joined.

Going back even further to April 2012, membership of the WGC totalled 24 companies with Coeur d’Alene Mines also a member.

The current role call of the membership list of the World Gold Council (18 members) now reads as follows: Barrick, Newmont, Goldcorp, Kinross, Agnico Eagle, Alamos Gold, China Gold, Golden Star Resources,  Primero, Eldorado Gold, Franco Nevada, Acacia, Yamana Gold, Royal Gold, Silver Wheaton, Newgold, Centerra Gold, Buenaventura. Note that Acacia was formerly known as African Barrick Gold.

Of the current 18 members, Barrick, Newmont, Goldcorp and Kinross (in that order) have the largest annual production and are 1st, 2nd, 4th and 5th in the current worldwide top 10 gold producers list . Anglogold Ashanti, GoldFields, and Newcrest, were numbers 3, 6 and 7 on the same list, so their departure from the WGC is a significant blow to the World Gold Council’s members’ dues revenues, which, as explained below, are calculated based on ounces of gold production, billed every three months, and these four gold miners produce more than 9 million ounces of gold per annum.

 

WGC Source Documents

Neither the WGC’s annual consolidated financial statements nor the WGC Article of Association are published on the World Gold Council web site. However, these documents are key to understanding the finances of the World Gold Council. These documents can be viewed here:

2011: WGC Accounts to 31 Dec 2011

2012: WGC Accounts to 31 Dec 2012

2013: WGC Accounts to 31 Dec 2013

(All WGC consolidated financial statements are audited by KPMG SA, Geneva)

WGC Articles of Association amended September 2011

WGC Articles of Association amended July 2012

WGC Articles of Association amended April 2013

Additionally, the SPDR Gold Trust filings on the SEC Edgar website are essential sources for understanding the sponsor fees generated by GLD, which generate revenue for World Gold Trust Services, and the revenue of which in turn is passed through to the World Gold Council and appears in its consolidated financial statements. These GLD filings also shine a light on the World Gold Trust Services’s persistent attempts (ultimately successful) to amend the SPDR Gold Trust “trust indenture” so as to centralise the payment of the marketing agent fee, the trustee fee, the custodian fee and the sponsor fee to World Gold Trust Services.

I asked the World Gold Council on numerous occasions and through numerous channels as to when it’s 2014 consolidated financial statements would be published, but they declined to answer. The 2014 WGC accounts have to be approved by the WGC board of directors prior to the WGC AGM, so if the AGM has not yet taken place, this could suggest that the 2014 consolidated financial accounts have not been approved. If the AGM has taken place (which I could not ascertain), then the delay in publishing the 2014 financial statements must be for some other reason.

 

Recent Departure of WGC CFO and WGTS CFO and CEO

Coincidentally, the Chief Financial Officers of both the World Gold Council and it’s US subsidiary World Gold Trust Services have departed recently. The  Council’s executive team web page still listed Robin Lee as World Gold Council CFO as recently as 15th March 2015 (but not the week after), although Lee’s LinkedIn profile lists his tenure at the WGC as ending in 2014. Emails to Lee’s WGC address currently respond with the message “Please email Sidney Chan, the new CFO, on all CFO matters“. An email I sent to Sidney Chan about the 2014 financial accounts went unanswered.

According to the most filing on the Swiss registry, the authorised signatories for the WGC are still the President, Randall Oliphant, the CEO, Aram Shishmanian, the CFO, Robin Lee, and KPMG SA of Geneva.

Regarding the GLD Sponsor, World Gold Trust Services, it’s CFO, Adrian Pound, resigned on 10th March 2015. This was 2 weeks after the GLD Sponsor ultimately attained a 51% majority of GLD votes so as to amend the GLD trust indenture. An SEC filing for the SPDR Gold Trust stated:

“On March 10, 2015, Adrian Pound resigned as Chief Financial Officer and Treasurer of World Gold Trust Services, LLC, or WGTS, the Sponsor of the SPDR® Gold Trust. His resignation did not arise from any disagreement on any matter relating to the operations, policies or practices of the SPDR® Gold Trust.”

Adrian Pound’s LinkedIn profile currently (as of early June 2015) states “Actively seeking new opportunities“.

It’s quite unusual for the 2 CFOs who were most responsible for the WGC 2014 financial statements to both now be gone from the employment of the World Gold Council old Trust Services, and the 2014 accounts have still not been published.

Additionally, on 31 July 2014, World Gold Trust Services CEO Kevin Feldman also resigned. This was just over one month after WGTS began its consent solicitation campaign with GLD Shareholders to change the Trust Indenture to the benefit of WGTS and the World Gold Council.

“On July 31, 2014, Kevin Feldman resigned as Chief Executive Officer of World Gold Trust Services, LLC (‘WGTS’), the sponsor of the SPDR® Gold Trust (the “Trust”), effective as of August 15, 2014. Mr. Feldman’s resignation was a personal decision and was not as a result of any CEO or WGTS performance-related issue or any other matters related to the operations, policies or practices of the Trust.”

It’s not clear from Kevin Feldmand’s LinkedIn profile as to what he is doing now. After Kevin Feldman resigned, Aram Shishmanian, CEO of the World Gold Council, was appointed as acting CEO of WGTS on 31 July 2014 and remained as acting CEO until 8 September 2014, at which point William Rhind was appointed as CEO of WGTS.

 

World-Gold-Council-AGM

Member Dues – The Details

The annual membership ‘dues’, or fees, that the member gold mining companies pay to the World Gold Council can fluctuate widely each year. These member dues totalled $56.4 million in 2010, but only $36 million in 2011. Likewise, members’ dues totalled $60.2 million in 2012, but in 2013 were just under half of the 2012 figure, reaching only $28.2 million.

Table 3: World Gold Council miner Member Dues  2010-2013, US$ millions

member dues

 

Although the number of members in any given year will have an impact on total members’ dues revenue, the wide fluctuations in annual member dues shows that the per member annual fee itself (which can fluctuate each year) is the most important determinant in the equation.

Chart 2: World Gold Council annual Member Dues  2010-2013, US$ millions

WGC members dues bar chart 2010-2013

Another important consideration is that, in an organisation which had more than 20 members in each of the years’ 2010-2013, the “Top 10″ members’ dues in all of those years accounted for over 90% of all members dues, which illustrates the critical importance of the large gold miners to the funding of the World Gold Council.

In 2010, the Top 10 miners contributed practically all (97.67%) of members dues, and this percentage remained over 90% for 2011-2013. See Table 4:

Table 4: World Gold Council “Top 10″ Members’ Dues 2010-2013, US$ millions

WGC top 10 member dues 2010-2013

In April (2015), I emailed the WGC and asked how it’s member dues were calculated and whether it was based on a metric such as ounces of gold produced by each company each year, size of gold reserves of each company, market cap of each company or some other way. In other words, was it based on a formula?

I also asked about the interaction between the level of Members’ Dues and Sponsor Fees as follows:

“Member dues seem to be able to fluctuate quite substantially between years. For example, in 2012, members dues were $60 million whereas in 2013, member dues were only $28 million. This appears to be because the other main source of WGC revenue, Sponsor Fees, was a lot higher in 2012 than in 2013, thereby allowing the Council to reduce the member dues for 2013. Would it be correct to say that the level of member dues charged in a given year is to some extent influenced by the  Sponsor Fees generated in that particular year?”

The WGC media team merely replied to my questions as follows:

“Member fees are defined each year and will be set to reflect a wide range of market conditions and objectives. The World Gold Council has additional revenue streams, including a fee share from SPDR GoldShare (GLD). How fees are allocated is a private business decision.”

In its statement “How fees are allocated is a private business decision”, the WGC must be referring purely to member dues (which it here called member fees), because the Sponsor ‘fees’ charged by World Gold Trust Services to the SPDR Gold Trust are not a private business decision, they are publicly specified in the Trust Indenture and Prospectus of the SPDR Gold Trust, and also in the numerous SEC filings that GLD makes multiple times per year. The SPDR Gold Trust sponsor fee is currently 0.15% per annum.

The members’ dues allocation is not really a private business decision, it’s more of a goal-seek using a simple formula and a budget projection of revenues and expenditures, taking into account GLD sponsor fees.

Since the WGC media team response did not provide much useful information nor refer me to any useful data sources, we need to turn to the WGC consolidated financial statements, and the Articles of Association, and the GLD filings, which all do provide a lot of useful answers. It turns out that the members’ dues are based on the annual gold production of each member, based on quarterly production summaries submitted to the WGC by each member. It would have been very easy for the World Gold Council to explain this to me, but they chose not to for whatever reason.

 

Quarterly Gold Production

In the Notes to the WGC 2013 consolidated financial statements, section 3 “Significant accounting polices, Revenue” states that “Members’ dues are assessed and recognised quarterly on an accruals basis. These revenues are recorded at their estimable net collectible amounts.

In the Notes to the 2013 consolidated financial statements, section 19 “Related party transactions” it states that in 2013, the year in which total members dues were $28.24 million, the Top 10 members’ dues totalled $26 million, representing 92.10% of total members’ dues. (the 2012 figures were total members’ dues of $60.18 million, with the top 10 members contributing $55 million, representing 91.45% of total member’s dues).

The WGC Articles of Association, specifically , Article VIII ‘Dues’, provides in-depth information on how the member dues are calculated. Article VIII explains how each member’s dues are calculated using a formula based on quarterly gold production multiplied by X US dollars per ounce (where X seems to be at least >= 1).

As Article 8.01 states:

Dues

After every quarter, each member is expected to report its quarterly gold production to the WGC as soon as practicable. Quarterly production consists of either “ounces of refined gold” or “gold content of ore and concentrate” primarily under the operational control of that member, and then various other proportions for other operations in which that member may have an interest etc etc.

Because gold royalty/streaming companies are now also members of the WGC, i.e. Royal Gold, Silver Wheaton and Franco Nevada, the Articles of Association (2013 version) also addresses how the member dues of such companies are calculated. The formula for the member dues of a royalty/streaming company is simply that company’s annual US dollar revenue divided by the average gold price for the previous year, payable in 4 installments. So that’s $1 per ounce of gold. For example, if a royalty company had $300 million in revenue, and the average gold price was $1200 during the year, the member’s dues to the WGC would be $300m / $1200 = $250,000.

quarterly prod and dues

quarter prod calcs and dues

Before the ‘Associate’ member category was discontinued in 2013, the WGC charged ‘Reduced Dues’ or ‘Associate Dues’ to associates (category B members), as opposed to ‘Regular Dues’ for Full members (Category A members). These “associate dues” were specified as “a fixed annual fee in US dollars”, and not a per ounce dollar amount.

 

Per ounce dollar amount – some examples

In 2001, a Telegraph article reported thatThe Gold Council will announce this week that it has increased its membership fees from $1 per ounce mined to $2.

Back in 2003, a ‘Minesite’ article about the WGC said that the “subscription to the World Gold Council … amounts to US$2 for each ounce of gold produced.

An Anglogold Ashanti presentation from 2005 (when Anglogold Ashanti was a WGC member) said that the World Gold Council’s “income from member dues” was “$1.75 for every production ounce.” The same 2005 presentation also pointed to some of the limitations of the WGC such as it being non-representative, suffering from funding constraints, and also as being “non-commercial“. As to when the World Gold Council went from being non-commerical to ‘commercially driven’ is not clear, but it seems to have been somewhere between 2005 and 2008, as the GLD became more important to total revenues.

AG As slide 2005

AG As slide text 2005

 

The Per Ounce Formula – Retrofitting

We now know that the World Gold Council uses a simple ‘US dollar per ounce of gold production‘ formula when setting annual members’ dues, and that it can be a round figure dollar amount such as $1 or $2 per ounce, and also can be a dollar and cent amount such as $1.75 per ounce. Let’s take a quick look at annual gold production figures for 2013 using the top 10 gold miners as a proxy to see how closely they fit in with this formula.

Members’ dues were $28.24 million in 2013, with the top 10 members contributing $26 million, or 92% of the total. A February 2015 article by Mining.com provides estimated annual gold production statistics for the” world’s top 10 gold producers” in 2013 and 2014.

With Moz = millions of troy ounces, in 2013 Barrick produced 7.17 Mozs of gold, Newmont 5.07 Moz, AngloGold Ashanti 4.11 Moz. Goldcorp 2.67 Moz, Kinross 2.63 Moz, Newcrest Mining 2.36 Moz, Gold Fields 2.02 Moz,  Polyus Gold International (Russian miner) 1.65 Moz, Sibanye Gold Limited (South African) which split from Gold Fields in February 2013 mined 1.43 Moz, and in 10th position was Agnico Eagle Mines Ltd with 1.1 Moz.

Barrick Newmont

 

These 10 miners produced 30.22 Moz of gold in 2013. Excluding WGC non-members Polyus and Sibanye, the production figure was 27.14 Moz. Excluding Agnico Eagle (which mined 1.1 Moz), the top 7 produced 26.03 Moz. So, it looks like the World Gold Council charged its members a subscription dues of about $1 per ounce of gold production in 2013. Let’s call it a round $1 per ounce. You could add back Agnico Eagle and a few other miners such as Yamana and Buenaventura to arrive at 28 Moz. This would account for the 2013 members’ dues of $28.24 million, so the real fee might be a few cents less than a dollar. However, a dollar is roughly in the ballpark of what the members’ dues charge looked to be, and its easy to conceptualise.

This would also suggest that in 2012, when members’ dues totalled $60.17 million, that the World Gold Council charged its members $2 per ounce of gold produced or thereabouts.

Chart 3: Top 10 Gold Miners 2013, millions ounces, data from Mining.com

top 10 gold producers 2013

Data: Mining.com

 

GFMS published slightly different top 10 gold miner production figures to Mining.com for 2013 production. The GFMS 2013 data in tonnes, via Mineweb was:  Barrick 222. 9, Newmont 157.5, Anglogold 127.7, Goldcorp 82.9,  Kinross, 77.7, Navoi (Uzbek) 70.5, Newcrest, 73.5, Goldfields 58.1, Polyus 51.3, Sibanye 44.5 tonnes. These tonnes figures, when converted to ounces, gives a total of 31,076,190 ozs, or 31.1 Moz.

Excluding Polyus, Sibanye, and Navoi, then the Top 7 producers, who were all members of the WGC in 2013, produced 25.8 Moz in 2013. So, these GFMS figures also support the assumption that the WGC charged its members a member dues of about $1 per ounce in 2013.

Similarly, in 2011, it looks like members contributed about $1 per ounce of production or a little more (using figures from Mining.com), and possibly an amount between $1.66 and $1.75 per ounce in 2010. Therefore, although 2014 World Gold Council financial statements not yet published, it’s still possible to project the contribution of members’ dues to total WGC revenue, using 2014 gold production statistics and assumptions of various dollar contributions per ounce as member dues.

 

Applying the Per Ounce Formula to 2014

Again using Mining.com provided data, in 2014, Barrick reported 6.25 Moz in gold production, Newmont 4.85 Moz, AngloGold Ashanti 4.44 Moz, Goldcorp 2.87 Moz, Kinross 2.71 Moz, Newcrest Mining 2.33 Moz, Gold Fields  produced 2.22 Moz,  Polyus Gold 1.7 Moz, Sibanye Gold 1.59 Moz, and in 10th position Agnico Eagle with 1.43 Moz.

Let’s assume that the date on which Anglo Gold Ashanti and Gold Fields departed from the World Gold Council was 30 June 2014, so only half their 2014 production can be included (They departed sometime in May or June according to the WGC web site). Excluding non-members of the WGC, Polyus and Sibanye, and also excluding half of the 2014 production of Anglogold Ashanti and Goldfields, gives a total gold production from the above eight miners of 23.77 Moz. Add in two other World Gold Council companies to bring the list back to ten miners. In this case, I add in Yamana, which reported 2014 production of 1.4 Moz, and Buenaventura with 0.85 Moz in 2014, so in total, this top 10 list would represent about 26 million ounces.

 

Chart 4: Top 10 Gold Miners 2014, millions ounces, assuming 50% contribution from Anglogold Ashanti and Goldfields, and also assuming Yamana and Buenaventura in Top 10

2014 WGC members production

Data: Mining.com

 

Beyond the Top 10 gold producers

The list of gold producers outside the worldwide Top 10 includes many gold mining companies who are not members of the World Gold Council, and some who are not purely or primarily gold miners. Therefore, the drawback with a published top 20 list of miners that produce gold, such as one by Mineweb here, is that many miners on the top 20 list from positions 8 up to 20, such as Navio, Polyus, Sibanye, Randgold, Harmony, Shandong, and China National Gold are not members of the World Gold Council, and some listees such as Freeport and Glencore are not primarily gold miners. The only two that make the 8-20 positions ranking, and that are also WGC members, are Agnico Eagle and Yamana.

According to Mineweb’s Top 20 list for 2014, World Gold Council member listees (including Anglogold Ashanti, GoldFields, and Newcrest) produced 874 tonnes (28.1 Mozs) of the Top 20’s total 1311 tonnes production, or 66% of the Top 20 total.

Excluding Anglogold Ashanti, GoldFields, and Newcrest, the remaining Top 20 miners that are also World Gold Council members produced 595 tonnes (19.13 Mozs), or 45%, of the 2014 top 20 total. So, the WGC now only represents less than half of the Top 20 gold producers (by ounces produced).

Since this worldwide top 20 list is problematic to an analysis of the WGC,  a top 20 list (or all 21) that comprised WGC members in 2014, has to be reconstructed.

Beyond Agnico Eagle and Yamama (and Buenaventura), some other WCG members such as 2014 member  IAMGOLD with 844,000 ozs, and current member Eldorado Gold with 790,000 ozs, also produced reasonable amounts of gold in 2014.

 

Chart 5: Smaller WGC Gold Miners 2014, millions ounces produced

wgc smaller members ounces

Data: Company websites, results presentations and results reports

 

Overall, the following eleven WGC member gold miners and gold royalty/streamers produced about 4.3 million ozs of gold or gold equivalent ounces in 2014:

IAMGOLD (844,000 ozs), Eldorado (790,000 ozs), Acacia (719,000 ozs), Centerra (621,000 ozs), Newgold (380,000 ozs), Primero (225,000 ozs), Royal Gold* (178,000 ozs), China Gold (163,443 ozs), Silver Wheaton* (142,800 ozs), Alamos (140,500 pzs), Franco Nevada* (92,774 ozs).

These production figures were sourced on company websites, company results presentations and end-of-year financial reports, but are listed here purely as indicative figures. Note also that * = Royalty company or Streamer company, and the ounces figures listed for these companies are for gold equivalent ounces (GEOs) or similar, and haven’t been cross-referenced with other sources.

So in total, the members of the WGC members still produced just over 30 million ounces of gold in 2014. Newcrest still contributed a full year in 2014, and the assumption is that Anglogold Ashanti and Goldfields still contributed about half a year. The impact on member dues will become more apparent for 2015 revenue. Even though Anglogold Ashanti and Goldfields left in 2014, some of the smaller members have now increased production, and the top 10 members now look as if they are contributing about  86%-87% of total member dues.

At $1 per ounce, member dues for 2014 would be about $30 million.

It would be logical for variable members’ dues for a forthcoming year to be set towards the end of the preceding year. With 2013 sponsor fees from the SPDR Gold Trust well down on 2012 due to gold outflows from the GLD and a lower gold price, the World Gold Council board would probably have decided that member dues should increase for 2014. Therefore a more realistic members’ dues for 2014 would be $2 per ounce or even higher. Given that both Alglogold Ashanti and Goldfields both exited from the World Gold Council around June 2014, this would suggest they informed the WGC of their intention to leave in about November/December 2013.

November/December 2013 may have been the time at which the WGC informed members of revised members dues for the year 2014. And since Anglogold and Goldfields decided to leave, because of a need to save costs, it would be logical to assume that the 2014 member dues were higher than in 2013, and possibly high enough that an increase in members’ dues forced the South Africans to balk and walk away. This would suggest a 2014 contribution per ounce of gold produced of $2 or $2.50 and maybe, but less likely, as high as $3 per ounce.

Table 5: 2014 Projected WGC Members’ Dues, US$ millions

projected member dues 2014

 

Interestingly, for Q1 2015, Newcrest Mining increased gold production to 610,186 ozs,  from 577,110 oz in Q4 2014, so on an annualised basis, Newcrest may produce about 2,440,000 ozs in 2015.  With Newcrest Mining having exited from the WGC at the end of Q1 2015, this substantial member’s dues will also be missing from the 2015 revenue numbers, as will the 2.2 million projected 2015 ounces from Goldfields, the 4.0 million – 4.3 million ounce 2015 guidance for Anglogold Ashanti, and the 820,000 – 860,000 ounce 2015 guidance from IAMGOLD.

In total, somewhere between 9.46 million – 9.80 million ounces of gold production that otherwise would be factored into WGC 2015 revenues will now be missing. At $2 per ounce, this is nearly $20 million, and starts to look like quite a big hit for the WGC’s annual budget to take.

GLD NYSE

 

SPDR Gold Trust (GLD) – Sponsor Fees

Between 2010 and 2013, the majority of the World Gold Council’s revenue was earned via ‘Sponsor fees’ accruing to the Council’s fully owned US subsidiary World Gold Trust Services LLC (WGTS) in return for acting as ‘Sponsor’ to the SPDR Gold Trust. These sponsor fees were 55% of World Gold Council total revenue in 2011, 70% in 2011, 61.5% in 2012 and 69% in 2013.

A board of directors was established for WGTS in January 2013. According to Reuters, the members of the board of directors of WGTS are William Rhind, the WGTS CEO, William Shea, chairman of the board, Aram Shishmanian, CEO of the World Gold Council, and also two other directors Neal Wolkoff and Roco Magiotto. Andrian Pound, the ex CFO, was also listed as a member of the board when the director list was drawn up by Reuters.

Within the SPDR Gold Trust (GLD) structure, the sponsor fee is payable monthly in arrears to World Gold Trust Services and is currently accrued daily at an annual rate equal to 0.15% of the adjusted net asset value (ANAV) of the Trust. The sponsor fee that World Gold Trust Services will earn will soon change to 0.40% per annum – see discussion below on the  recent GLD consent solicitation. Because the sponsor fee in the GLD is specified as a percentage of the Trust’s asset value, as the asset value of the Trust increases, the sponsor fee naturally increases. Conversely, as the asset value shrinks, the sponsor fee does likewise.

Looking at historical GLD holdings data (see spreadsheet xls link on webpage here), the amount of gold held in the SPDR Gold Trust rose sharply between 2006 and 2010. From a daily average gold holding of 372 tonnes during 2006, the daily average gold holding increased to 499 tonnes during 2007, 669 tonnes in 2008, 1068 tonnes in 2009, and 1233 tonnes in 2010. This 1200+ tonne average daily gold holding in the Trust was maintained in 2011 and 2012, at 1238 tonnes and 1244 tonnes, respectively.

Therefore, on the back of very strong growth in the asset value of GLD in the years up to and including 2012, the sponsor fees earned by the World Gold Council (via its subsidiary WGTS), also grew strongly. This direct “GLD Asset Value ~ Sponsor Fee” relationship allowed the World Gold Council to generate sponsor fee revenue of $72.8 million in 2010, $93.8 million in 2011, and $104 million in 2012.

Table 6:  Sponsor Fees to WGTS (& WGC) from SPDR Gold Trust (GLD), 2010-2013, US$

sponsor fees 2010-2013

Gold holdings only began exiting the GLD in a significant way in 2013, a downtrend which continued in 2014. In 2013, the average gold holding in the Trust fell to 998 tonnes, and then fell further to an average of 779 tonnes for 2014.

As cash and gold flowed out of the GLD in 2013, the sponsor fee took a large hit and fell to $71.5 million for the 12 months to December 2013 from $104 million in 2012. You will also see below that the total sponsor fee for 2014 fell a further 33% to $47.8 million for the year ending 31 December 2014.

Outflows of cash and gold from GLD continued in 2015, and for the five months from January 2015 to May 2015 inclusive, the daily average amount of gold held in the GLD was 742 tonnes. As of early June 2015, the GLD only holds 708 tonnes of gold, about the same as it held in September 2008. This is why, as mentioned in the introduction, the GLD has now fallen out of the Top 10 ETFs worldwide, by size.

Although the World Gold Council has not yet published its 2014 consolidated financial statements,  it’s very easy to calculate exactly what the GLD sponsor fees were in 2014 (and also in Q1 2015) because they are published in detail in up-to-date GLD regulatory filings (which are unaudited financial statements). GLD uses a fiscal year from October to the following September, so it has a year-end on 30 September. So, to calculate the GLD sponsor fees between January 2014 to December 2014, all you have to do is subtract Q4 2013 from the full GLD fiscal year figures in its 10-K filings and add Q4 2014 from its 10-Q filing, or else add up four quarters in four of the 10-Q filings.

To check that this type of calculation makes sense, we can work out what Jan -Dec 2013 fiscal year sponsor fees  would be just using GLD filings data.

The GLD sponsor fee for the 3 months to end of December 2012 was $28.006 million. The sponsor fee for the 3 months to end of December 2013 was $13.245 million. (GLD 10-Q for quarter-end Dec 2013) The sponsor fee for the year ended 30 September 2013 was $86.152 million (GLD 10-K for year-end Sept 2013).

(86.152m – 28.006m) + 13.245m = 71.391m

This $71.391 million is very close to the World Gold Council’s reported sponsor fee figure of $71.479 million for fiscal year January – December 2013. Therefore, the same approach can be used to calculate the 2014 full year figure.

 

2014 GLD Sponsor Fees: $47.8 million

For the year ended 30 September 2014, GLD sponsor fees only totalled $50.148 million (10-K). For the quarter ended 31 December 2013, sponsor fees were $13.245 million (10-Q). For the quarter ended 30 December 2014, sponsor fees were $10.928 million. This produces GLD sponsor fees for the January to December 2014 fiscal year of $47.841 million.

Table 7:  Sponsor Fees to WGTS (& WGC) from SPDR Gold Trust (GLD), 2014, US$

GLD 2014 spon fees

Given that the calendar year 2013 GLD sponsor fees of more than $71 million looked very low relative to the comparable full year figure of $104 million in 2012, the 2014 total of $47.8 million looks shockingly low on a relative basis. This is 33% below the 2013 GLD sponsor fee, and a massive 54% less than the 2012 GLD sponsor fee. Which is why the recent consent solicitation by World Gold Trust Services to alter the terms of the trust indenture looks increasingly interesting.

 

World Gold Council Expenditures

World Gold Council total expenditures were running at $84 million for 2010, $108 million in 2011, $117 million in 2012, and nearly $116m in 2013 (so for the 2011-2013 period, expenditures were averaging over $113 million per year). In each of the four years featured in the table, market development expenditures  account for roughly half of annual expenditure, with personnel, and general & administrative expenditures comprising the other half. Nearly all sub categories of expenditures within these three main categories have risen sharply in the 2010-2013 period. The strong revenues generated from GLD sponsor fees have most definitely facilitated this huge expenditure increase over 2010-2013. Without GLD, the World Gold Council’s member dues would not have covered even half this expenditure.

Table 8:  WGC Operating Expenditures, 2010-2013, US$

WGC exp 2010-2013

As an illustration of what the World Gold Council spends on itself, consider the real estate that the World Gold Council occupies.

WGC Offices in London and Manhattan – No expense spared

Since the WGC first opened an office in London at 6 Carlton Gardens in 1987, it was moved address quite frequently within central London, always within the plushest of London locations,  first to 10 Haymarket in 1991, then to 45 Pall Mall in 2000, then to 55 Old Broad Street in the Square Mile in 2003, and most recently in 2010 to 10 Old Bailey (still in the City of London). To the World Gold Council, image and location seem to be critical.

The rationale for the 2003 London move from Pall Mall to Old Broad Street was explained by then CEO James Burton in 2008 as follows:

“We wanted to be in the City…We firmly believe that a central component of the gold story is investment.

In a June 2011 statement, it was announced in New York that the World Gold Council had:

“signed a 10-year, 11,500-square-foot lease to relocate to 510 Madison Avenue, more than doubling the size of its New York City headquarters. The World Gold Council will be moving from 4,948 square feet at 424 Madison to occupy the entire ninth floor of the recently developed building at 510 Madison Avenue in Midtown Manhattan.”

“The World Gold Council will build out the space to mirror its London headquarters, designed by British architect Peldon Rose.”

“Their [the WGC’s] new home at 510 Madison will help shape their corporate image not only as an advocate for the gold industry but as a leader in the global investment community as well.”

Turning back to London, the new WGC London headquarters (occupied in 2010) is a fully redesigned building in Old Bailey can be seen here in this Peldon Rose project profile, which notes that:

“The new Old Bailey location allowed us to work with truly striking architecture. So once we had a sound understanding of the building, we set out to create a modern space that looks like it was built from scratch especially for the World Gold Council.”

“the office interiors – with their Wenge veneers sitting next to white glass partitions and floating walls – are full of drama. Of course, we couldn’t entirely leave out the gold, but we kept it subtle, with pendant lighting and inlaid carpeting to soften the design”.

An April 2012 feature on Peldon Rose shed more light on the Council’s London HQ, revealing that:

“In the World Gold Council offices an innovation room was created. Peldon Rose was conscious about the importance of creating a room that was completely different from the rest of the formal office space. This area has been furnished with off -the-wall iconic pieces of furniture and has an electronic wall that will digitally copy anything that has been written down, capturing spur of the moment brain storm ideas.”

What the above glossy corporate architect-speak does not mention, but which is buried in the WGC financial statements, is that:

“In the prior year [2010] due to rental conditions, it was not expected that the contract for the former London office in Old Broad Street would be re-let, and as such an onerous provision of US$ 1.5 million (£971,000) was recognised.

A tenant was eventually found for the Council’s Old Broad Street office in 2011 and the lease was then re-assigned to that tenant. However, more persistent lease problems flared up due to the New York office move:

“Other provisions include an onerous lease contract in New York for a non-cancellable lease for office space.  Due to changes in its activities and a requirement for larger office space, the World Gold Council had ceased using this space in September 2011. The facilities have been sub-leased for the remaining lease term, but changes in market conditions have meant that the rental income is lower than the rental expense. The obligation for the discounted future payment, net of expected rental income has been provided.”

In other cities around the world, the World Gold Council also maintains offices in some of the most prestigious office towers, such as the 57th floor (near the top) of the Republic Plaza, on Raffles Place in Singapore, one of Singapore’s tallest skyscrapers; the 19th floor of 2 International Financial Centre, Hong Kong island’s pre-eminent landmark; and the 48th floor of the skyscraper at 1717 Nanjing Road in Shanghai.

 

Will 2014 revenues have covered the expenditure trend?

If 2014 members’ dues were based on $1 per ounce of gold produced (and so totalled about $30 million), when added to the relatively small 2014 GLD sponsor dues of $47.8 million, and about $4 million in other income, this would only bring total 2014 revenues to about $82 million, the same as the 2010 spend.

Members’ dues for 2014 of $2 per ounce would bring in another $30 million, bringing 2014 total revenues up to about $112 million, just short of the average WGC annual expenditure for the three years prior to 2014. Therefore, the WGC may even have raised member dues above $2 per ounce in 2014, for example to $2.50 per ounce of member gold produced.

Obviously the World Gold Council CFO and team would have been projecting all of the above 2014 budget estimates during 2013. Indeed, it is required as per the WGC Articles of Association. Article IX of the WGC Articles of Association, “Financial Provisions”, section 9.01 Annual Budget states that “An annual budget, setting forth an estimate of revenues, expenses and financial reserves, if any, for the succeeding fiscal year [January to December] shall be prepared under the direction of the CEO, and approved by the Board.

WGC Budget Adjustment

In 2013, WGC Operational Expenses of $115,759,000 exceeded Total Revenue of $103,135,000, causing a deficit in results from Operational Activities of $12,624,000. These deficits ultimately have an adverse effect on the Council’s equity reserves. It will be interesting to see how the revenue to expenses equation pans out for fiscal year 2014 when the WGC’s consolidated financial statements for 2014 are eventually published.

The falling gold price in US dollar terms has hit the World Gold Council from all sides. A lower USD gold price has put gold miners into cost cutting mode, and made them more likely to reject higher World Gold Council members’ dues by departing. The lower USD gold price has also undermined the institutional investor base that was a large part of the success of the GLD, and so has undermined WGTS GLD sponsor fee revenue.

The WGC’s revenue model appeared at first glance to be one where the Council had essentially full control over members dues and a lot less control over GLD fees. However, in June 2014, World Gold Trust Services moved to exert full control over all of the fees of the SPDR Gold Trust via initiaing some critical changes to the sponsor fee calculation and the GLD trust indenture via a consent solicitation to GLD shareholders. This is likely to see the World Gold Council gain far more revenue from the GLD in the near future.

5th ann GLD

 The GLD Consent Solicitation – Flogging a Golden Goose

Between June 2014 and February 2015, the GLD Sponsor, World Gold Trust Services, ran a protracted and non-stop blitz-like global consent solicitation campaign to try to persuade 51% of the beneficial owners of GLD Shares to consent to (vote for) 2 proposals that WGTS was desperate to push through. These two Sponsor proposals were to:

a)  increase the Sponsor fee from 0.15% per annum to 0.40% per annum

b) to be permitted to compensate the World Gold Council and its affiliates for the provision of marketing and other services to the SPDR Gold Trust

Teeing up these 2 proposals for implementation required amendments to the GLD Trust Indenture. Changes of this nature to the Trust Indenture required 51% of GLD Shareholders to consent, hence the consent solicitation campaign. This 51% threshold was eventually reached on 25 February 2015, after which the consent solicitation campaign was halted.

To fully understand the significance of the consent solicitation process that took place between June 2014 and February 2015, and the upcoming changes to the  GLD fee structure in the near future, requires an understanding of the GLD Trust Indenture and the GLD Marketing Agent Agreement, as well as an understanding of how the GLD Sponsor and current GLD Marketing Agent are currently compensated versus how they will be compensated in the future. This will also allow a better understanding of the Sponsor’s real (as oppossed to stated) motivations behind the consent solicitation campaign.

Part 2 of this World Gold Council funding series analyses the GLD Consent Solicitation campaign and further considers the GLD golden goose future fee structure.