On 29 August, the London Metal Exchange (LME) began publication of a set of daily reference prices for gold and silver. These reference prices aim to capture and reflect paper gold and silver market prices as at 10:30 am, 12:00 midday, and 3:00 pm London time.
Anyone familiar with the former London gold and silver fix auctions, or the successor LBMA Gold Price and LBMA Silver Price auctions, will know that the LBMA gold auction is conducted twice daily at 10:30 am and 3.00 pm London time, while the silver auction is held once daily at midday. These auctions are also for unallocated book entry gold and silver (paper gold and silver) in the London market. ICE Benchmark Administration (IBA) is the auction administrator for both of these LBMA auctions.
As these new reference prices published by the London Metal Exchange are timed to report ‘market’ prices for gold and silver at exactly the same times as the LBMA Gold and LBMA Silver auctions, they add an element of future competition between the LME and ICE in the benchmark price provision business. However, the LME’s prices for both gold and silver are calculated at each of the 3 times of the ICE / LBMA auctions, i.e. at 10:30am (LBMA morning gold auction), 12:00 (LBMA silver auction) and 3:00pm (LBMA afternoon gold auction), periods which the LME describes as having ‘peak liquidity’.
In July 2017, the LME launched a suite of gold and silver futures contracts (LME Gold and LME Silver) for the London market, 2 of which are Spot daily contracts in gold and silver, respectively. Under the hood, these new gold and silver daily reference prices published by the LME are just volume weighted average prices (VWAP) of these LME Gold and LME Silver spot contracts calculated over a 2 minute window at the relevant times each day (i.e. 10:30 am, midday, and 3:00 pm) based on trades on the LMEselect trading platform. These contracts also represent claims on unallocated book entry paper gold and silver in the London market.
Therefore, the LME reference prices are not based on any auction trades, and merely use prices ‘discovered’ (generated) on the LME’s own trading platform at the time of the LBMA / ICE auctions. Given that these new LME reference prices only began to be published on 29 August, there are only about 50 daily data points so far for each of gold and silver. All prices since 29 August can be seen on the LME website for gold and silver.
Different But Similar
But are these LME prices the same as those generated by the ICE / LBMA daily auctions? No, they are not the same, but they are similar. The reason both sets of prices are not the same is that they are derived differently. The LBMA price resulting from an auction is the price derived in the final round of an auction when the imbalance between the auction’s buy and sell volumes is in tolerance (less than 10,000 ounces). The LME reference prices are average prices calculated (and volume weighted) using trades executed on the LME’s trading platform over a 2 minute interval from the start of an auction until 2 minutes after the start of an auction.
The LBMA auction prices and the LME reference prices are similar in that they are both based on market activity over similar time periods within the wholesale gold and silver markets, and in practice (or at least in theory), arbitrage trading should act to keep prices in the OTC market, and in the LBMA auctions, and in COMEX precious metals futures trading, and in LME gold and silver futures trading in line with each other.
Like their predecessors the London Gold fix and London Silver fix, the LBMA Gold Price and LBMA Silver Price are used every day to value everything from ISDA contracts to gold-backed ETFs, and the daily auction prices are also referenced widely in the global precious metals industry to execute trades involving miners, refineries, bullion banks, central banks, jewellers and coin shops. In short, these LBMA gold and silver reference prices are the dominant incumbent reference prices, and they also qualify as Regulated Benchmarks regulated by the UK Financial Conduct Authority. But will anyone end up using these new LME precious metals reference prices? Possibly, but it could it a while.
In 2018, the LME intends to offer trading based on its new gold and reference price reference levels. According to a Reuters article from 10 October:
“As of mid-2018 participants will be able to trade at those prices, Chamberlain [LME CEO] said, with technology being developed to match buy and sell orders for execution at the settlement price.
‘Benchmarks take a long time to evolve,’ he said. ‘What we can do is put in place the infrastructure, show that we have day after day of robust prices, but ultimately it is for end-users to decide what they want to use.'”
Being able to trade at the LME reference prices will add more relevance to the published numbers and could add legitimacy in terms of market data and financial media interest.
Right now the LME gold and silver reference prices are published daily and are “available for market participants to use free of charge.” But real world usage in the sense of being used to value precious metals funds, contracts or transactions looks to be a case of “down the road” rather than today.
Ideally the London gold and silver markets do not need an additional benchmark reflecting fractionally-backed unallocated gold and silver trading, but a benchmark and reference price reflecting the trading of real physical gold and silver. However, as the LME has chosen not to upset the status quo of the London unallocated trading system, a system which remains one of the key determinants of the international gold price, then real physical gold and silver reference prices in the London market will unfortunately remain a pipe dream.
On 5 February, the Financial Times of London (FT) featured a story revealing that the London Bullion Market Association (LBMA) plans to begin publishing data on the amount of real physical gold actually stored in the London precious metals vaulting network. The article titled “London gold traders to open vaults in transparency push” can be read here (accessible via FT subscription or via free monthly FT read limit).
This new LBMA ‘monthly vault data’ will, according to the FT’s sources, be published on a three-month lagged basis, and will:
“show gold bars held by the BoE, the gold clearing banks, and those [vaults] operated by the security companies such as Brink’s, which are also members of the LBMA.”
The shadowy source quoted in the FT article is attributed to “a person involved in setting up the programme”, but at the same time, although “the move [to publish the data] is being led by the LBMA“, the same LBMA ”declined to comment” for the FT story. This then has all the hallmarks of a typical authorised leak to the media so as to prepare the wider market for the data release.
On 16 February, the World Gold Council in its “Gold Investor, February 2017” publication featured a focus box on the same gold vault topic in its “In the News” section on page 4, where it states:
“Enhanced transparency from the Bank of England
The Bank of England is, for the first time, publishing monthly data revealing the amount of gold it holds on behalf of other central banks.
As a leading custodian of gold, with one of the largest vaults in the world, the Bank of England’s decision is highly significant. Not only will it enhance the transparency of the Bank’s own gold operations; it will also support the drive towards greater transparency across the gold market.
The data reveals the total weight of gold held within the Bank of England’s vaults and includes five years of historical data.”
The Proposed Data
Based on these two announcements, it therefore looks like the gold vault data release will be a combined effort between the LBMA and the Bank of England, the blood brothers of the London Gold Market, with the Bank of England data being a subset of the overall LBMA data. While neither of the above pieces mention a release date for the first set of data, I understand that it will be this quarter, i.e. sometime before the end of March. On a 3 month lagged basis, the first lot of data would therefore probably cover month-end December 2016, because that would be a logical place to start the current dataset, rather than, for example, November 2016.
While the Bank of England data looks set to cover a 5 year historical period, there is no indication (from the FT article) that the wider LBMA vault data will do likewise. From the sparse information in the FT article, the LBMA data will “show gold bars held“. Does it mean number of gold bars, or combined weight of gold bars? What exactly it means, we will have to wait and see.
The Bank of England data will capture “total weight of gold held“. Notice that in the above World Gold Council piece it also states that the data will cover the amount of gold that the Bank of England “holds on behalf of other central banks.” There is no mention of the amount of gold that the Bank of England holds on behalf of commercial bullion banks.
Overall, this doesn’t exactly sound like it is “enhancing the transparency of the Bank’s own gold operations” as the World Gold Council puts it. Far from it. Enhancing the transparency of the Bank of England’s gold operations would require something along the lines of the following:
Identities of all central banks and official sector institutions (ECB / IMF / BIS / World Bank) holding active gold accounts at the Bank of England. Active gold accounts meaning non-zero balances
Identities of all commercial / bullion banks holding active gold accounts at the Bank of England
A percentage breakdown between the central bank gold held in the Bank of England vaults and the bullion bank gold held in the Bank of England vaults
An indicator for each gold account as to whether it is a set-aside earmarked custody account or whether it is a fine troy ounce balance account
Information for each central bank and official sector institution as to whether any of “its” gold is lent, swapped or repo’d
Information for the bullion bank gold accounts as to whether the gold recorded in those accounts is borrowed, sourced from swaps, sourced from repos, or otherwise held as collateral for loans
Information on the gold accounts of the 5 LPMCL clearing banks showing how much gold each of these institutions holds each month and whether the Bank of England supplies physical gold clearing balances to these banks
Information on when and how often the London-based gold-backed ETFs store gold at the Bank of England, not just using the Bank of England as sub-custodian, but also storage in their own names, i.e. does HSBC store gold in its own name at the Bank of England which is used to supply gold to the SPDR Gold Trust
Information on whether and how often the Bank of England intervenes into the London Gold Market and the LBMA Gold Price auctions so as to supply gold in price smoothing and price stabilisation operations in the way that the Bank of England’s Terry Smeeton seems to have been intervening into the London Gold Market in the 1980s
Information on the BIS gold holding and gold transactions settlements accounts at the Bank of England and the client sub-account details and central bank identities for these accounts
Information on gold location swaps between gold account holders at the Bank of England and gold accounts at the Federal Reserve Bank of New York, the Banque de France, and the Swiss National Bank, and BIS accounts in those locations
Gold for oil swaps and oil for gold swaps
Anything less is just not cricket and does not constitute transparency.
And its important to remember that any publication of gold vault data by the LBMA and Bank of England is not being done because the LBMA suddenly felt guilty, or suddenly had an epiphany on the road to Damascus, but, as the FT correctly points out:
“the LBMA, whose members include HSBC and JPMorgan, hopes to head off the challenge and persuade regulators that banks trading bullion should not have to face more onerous funding requirements.”
The Current Data
As a reminder, there is currently no official direct data published on the quantity of real physical gold bars held within the London gold vaulting system. This vaulting system comprises the vaults of eight vault operators (see below for list).
Once a year in its annual report, the Bank of England provides a Sterling (GBP) value of gold held by its gold custody customers, while the LBMA website states a relatively static total figure of “approximately 6,500 tonnes of gold held in London vaults” that it claims are in the vaults in its network. But beyond these figures, there is currently no official visibility into the quantity of London Good Delivery gold bars held in the London vaults. There are, various ways of estimating London gold vault data using the Bank of England annual figure and the LBMA figure together with Exchange Traded Fund gold holdings and central bank divulged gold holdings at the Bank of England.
The September 2015 estimates calculated that there were 6,256 tonnes of gold in total in the London vaults, with 5,134 tonnes at the Bank of England (as of end February 2015), and 1,122 tonnes in London “not at the Bank of England“, all of which was accounted for by gold-backed ETFs which store their gold in London. These calculations implied that there was nearly zero gold stored in London outside the Bank of England that was not accounted for by ETF holdings.
The “Tracking the gold held in London” estimates from September 2016 used a figure of 6,500 tonnes of gold in total in the London vaults, and showed that there were 4,725 tonnes inside the Bank of England vaults, of which about 3,800 tonnes was known to be held by central banks (and probably a lot of the remainder was held by central banks also) and that there were 1,775 tonnes of gold outside the Bank of England. The article also calculated that there were 1,679 tonnes of gold in the gold backed ETFs that store their gold in London, so again, there was very little gold in the London vault network that was not accounted for by ETFs and central bank gold.
The Vaults of London
Overall, there are 8 vault operators for gold within the LBMA vaulting network. These 8 vault operators are as follows:
The Bank of England
HSBC Bank plc
JP Morgan Chase
ICBC Standard Bank Plc
Malca-Amit Commodities Ltd
G4S Cash Solutions (UK) Limited
Loomis International (UK) Ltd
HSBC, JP Morgan and ICBC Standard are 3 of the London Gold Market’s clearing banks that form the private company London Precious Metals Clearing Limited (LPMCL). The other two member of LPMCL are Scotia Mocatta and UBS. Brink’s, Malca-Amit, G4S and Loomis are the aforementioned security companies. The LBMA website lists these operators, alongside their headquarters addresses.
Bizarrely, the FT article still parrots the LBMA’s spoon-fed line that the vaults are “in secret locations within the M25 orbital motorway”. But this is far from the truth. Many of the London vault locations are in the public domain as has been covered, for example, on this website, and the FT knows this:
It’s slightly disappointing that we spend time and effort informing the London financial media where some of the London gold vaults are, and then they continue to parrot the LBMA’s misleading “secret locations” line. I put this fake news down to a decision by the FT editors, who presumably have a stake in playing along with this charade so as not to rock the boat with the powerful investment banks that they are beholden to.
The FT also reminds us in its article that “last year a gold vault owned by Barclays, which can house $80bn of bullion, was bought by China’s ICBC Standard Bank.“
This Barclays vault in London was built by and is operated by Brink’s, and presumably after being taken over by ICBC Standard, it is still operated by Brink’s. Logistically then, this ICBC Standard vault is most likely within the Brink’s complex, a location which is also in the public domain, and which even hosts an assay office as was previously mentioned here over a year ago. The Barclays vault (operated by Brink’s) is even mentioned in a Brink’s letter to the SEC in February 2014, which can also be seen here -> Brinks letter to SEC February 2014.
Given the fact that there are eight sets of vaults in the London vault system (as overseen by various groups affiliated to the LBMA such as the LBMA Physical Committee, the LBMA Vault Managers Working Party, the gold clearers (London Precious Metals Clearing Limited), and even the LBMA Good Delivery List referees and staff, then one would expect that whatever monthly vault data that the LBMA or its affiliates publishes in the near future, will break out the gold bar holdings and have a distinct line item in the list for each vault operator such as:
HSBC – w tonnes
JP Morgan – x tonnes
ICBC Standard – y tonnes
Brink’s – z tonnes
At the LBMA conference in Singapore last October, there was talk that there were moves afoot for the Bank of England to begin publishing data on the custody gold it holds on a more regular basis. It was also mentioned that this data could be extended to include the commercial bank and security carrier vaults but that some of the interested parties were not in favour of the idea (perhaps the representative contingents of the powerful HSBC and JP Morgan). Whatever has happened in the meantime, it looks like some data will now be released in the near future covering all of the participating vaults. What this data will cover only time will tell, but more data than less is always welcome, and these data releases might also help show how near or how far we were with earlier estimates in trying to ascertain how much gold is in the London vaulting system that is not accounted for by ETF holding or central bank holdings.
Revealing the extent of the gold lending market in London is critical though, but this is sure to remain a well-kept secret, since the LBMA bullion banks and the Bank of England will surely not want the general market to have any clue as to which central banks don’t really have any gold while still claiming to have gold (the old gold and gold receivables trick), in other words, that there is serious double counting going on, and that some of the central bank gold has long gone out the door.
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