In one of the most profound developments in the central bank gold market for a long time, the Hungarian National Bank, Hungary’s central bank, has just announced a 10 fold jump in its monetary gold holdings. The central bank, known as Magyar Nemzeti Bank (MNB) in Hungarian, made the announcement in Budapest, Hungary’s capital.
The details of Hungary’s dramatic new gold purchase are as follows:
Before this month, Hungary’s central bank held 3.10 tonnes of gold.
During the first two weeks of October, the Hungarian National Bank purchased 28.4 tonnes of gold.
This gold purchase raised the central bank’s gold holdings from 3.1 tonnes to 31.5 tonnes, i.e. a 1000% or 10-fold increase.
The Hungarian central bank had not altered its gold reserves since 1986, i.e. 32 years ago.
The 28.4 tonnes of gold was purchased in ‘physical form’, and ‘its repatriation has already taken place‘ to Hungary.
Interestingly, Hungary now holds the same amount of gold as it held 70 years ago.
In conjunction with today’s announcement in Budapest, the Hungarian National Bank put together a very interesting press release on its website (in Hungarian), which I have translated and edited, and which I think is worth reading in its entirety. Therefore, I have replicated it below, adding some bold and underlining in places. The press release is as follows:
“Budapest, October 16, 2018 – In view of the long-term national and economic strategy goals, the Monetary Council of the National Bank of Hungary has decided to increase the gold reserves of the country.
As a result, in October 2018 the Bank’s precious metal holdings were raised from the previous 3.10 tonnes to 31.5 tonnes, a tenfold increase. This is the first time that the Hungarian National Bank has bought gold since 1986.
Following the substantial increase in the Bank’s gold reserves in physical form, its repatriation has already taken place. The possession of precious metal within the country is in line with international trends, supports financial stability and strengthens market confidence in Hungary.
In keeping with the historical role of gold, gold remains one of the safest instruments in the world, and, even under normal market conditions, provides a stability and confidence-building function.
With current holdings of 31.5 tonnes gold reserves, valued at approximately $ 1.24 billion, this size of holdings approaches the historical level that was held by our country at the time of the “golden train”. Within the overall international reserves of the Bank, the share of gold reserves has now risen to 4.4%, which corresponds to the average of non-euro area Central and Eastern European countries.
The role of gold reserves in the nation and in the nation’s economy strategy is becoming more and more appreciated while both the possession and the increase of nations’ precious metals holdings appears to be decisive international trends.
This gold purchase process, based on the strategic decision of the Hungarian National Bank, has increased the domestic gold reserves to 31.5 tonnes. The raising of the gold reserve and the returning of the gold in physical form to Hungary took place in the first half of October 2018.
Increasing and repatriating gold reserves can be considered a significant step in economic history. Since the founding of the Hungarian National Bank in 1924, gold reserves have been maintained, but the stock of that gold has fluctuated considerably over the decades, depending on the purpose of why it was held.
At the end of World War II, Hungary received some 30 tonnes of gold bars and gold coins on the MNB’s legendary “gold train” in the Spital am Pyhrn in Austria. This amount was fully returned to the country after the war while providing cover for the introduction of the new currency of the country, the Forint, thus supporting financial consolidation and the stabilization of the post-war Hungarian economy.
At the end of the eighties, Hungary’s gold reserves, driven by short-term investment objectives, fluctuated between 40 and 50 tons and then, at the time of the change of regime (between 1989 and 1992), the ruling central bank executives decided to reduce to a minimum level of about 3.1 tons, which was the level at the end of September 2018. With the decision of the MNB today in October 2018, the holdings of 31.5 tonnes of gold reserves is now the same as the level of the stabilization period of 1946.
Gold reserves are held for short-term investment and / or long-term stability purposes by national central banks. The current decision of the Hungarian National Bank was led by the goal of stability, and there are no investment concerns behind the holding of gold reserves.
Gold is not only for extreme market environments, structural changes in the international financial system, and deeper geopolitical crises. Gold also has a confidence-building effect in normal times, that is, gold can play a role in stabilizing and defending.
Gold is still considered to be one of the world’s safest assets, whose characteristics can be attributed to gold’s unique properties such as finite supply of physical gold, and lack of credit and counterparty risk given that gold is not a claim against a specific partner or country.
Over the past few years, more and more countries have decided to continue to play a decisive role in the use of gold as a traditional reserve asset, and have raised their gold reserves. This course of action was followed by Poland [a neighbor of Hungary], in spite of the fact that Poland had already one of the highest gold reserves in the region.
When raising domestic gold reserves to 31.5 tonnes, the MNB also paid attention to the international and regional role played by gold in central bank reserves. As a result, the Hungarian gold reserve have now increased to 4.4% which is in line with average international reserve ratio for gold for the Central Eastern European region central banks. This move from the end of the international rankings to the middle of the rankings has progressed, both in terms of size and proportion of gold reserves.
On the occasion of the announcement, the National Bank of Hungary has also published a “Golden Book”, which gives an insight into decisive historical periods of Hungary’s gold, such as centuries of golden coins, the rescue of our national treasures by gold trains, and the recent homecoming of the country’s gold reserves.”
Note that Hungary is a member of the European Union (EU), and therefore the Hungarian National Bank is a member of the European System of Central Banks (ESCB). However, as Hungary is not a member of the Eurozone and does not use the Euro, the Hungarian National Bank is not a member central bank of the European Central Bank (ECB). With Hungary recently under attack from the European Parliament in September, the timing of this new gold purchase by Hungary’s central bank in early October is very interesting, to say the least.
Poland, Austria, Germany, Netherlands, and now Hungary
In addition to this new Hungarian gold purchase, Reuters is reporting that updated data from the IMF shows that Poland continued to increase its gold purchases in September 2018, raising its gold reserve holdings by 4.4 tonnes during the month to 117 tonnes. This follows similar gold purchases that the Polish central bank made in the summer, when the bank bought two tonnes of gold in July and seven tonnes of gold in August.
With almost all of Poland’s gold held at the Bank of England, a relevant question now is how long before Poland also sees fit to repatriate its gold in physical form away from the fractionally-backed LBMA controlled gold trading centre of London. Another of Hungary’s close neighbors, Austria, has itself spent the last 3 years repatriating 140 tonnes of its gold from the Bank of England in London and has nearly completed this repatriation operation now.
Add to this the high-profile Germany Bundesbank gold repatriation program in recent years, and a similar gold repatriation exercise from the Netherlands central bank, and the trend is clear: central banks in Europe have been flocking to shore up their international reserves with gold, because, as in the words of the Hungarian central bank “Gold is still considered to be one of the world’s safest assets”.
One of the most mysterious and unresolved questions in the gold world centers on how much gold reserves the Chinese State, through the Chinese central bank, actually holds. Since October 2016, the People’s Bank of China (PBoC), China’s central bank, has continued to announce unchanged gold reserves each month and persistently claims that its official gold reserves remain static at 1842 tonnes.
That reporting comes through China’s State Administration of Foreign Exchange (SAFE) and is also reported by China to the International Monetary Fund (IMF), as part of the IMF’s International Reserves and Foreign Currency Liquidity (IRFCL) project which collects and disseminates official reserve asset data of the world’s central banks.
This IMF official reserve asset data includes monetary gold holdings, foreign currency reserves, and IMF Special Drawing Rights (SDRs) etc. As can be seen in the below table extracted from the IRFCL database on the IMF website, the figure for China’s monetary gold holdings, which is stated in fine troy ounces, is 59.24 millions, (i.e. 1842.61 metric tonnes). This is also the same gold holdings data that the World Gold Council then extracts from the IMF database and publishes on its own website.
However, as the IMF notes, “Countries participating in this endeavor [IRFCL reporting] do so on a voluntary basis“. The IMF also adds a disclaimer to the data stating “Please note that the re-dissemination of the template data by the Fund (IMF) does not constitute endorsement of the quality of the data by the Fund.”
A Leopard doesn’t change its Spots
China has a long track record of being cagey about providing information on the true state of its monetary gold reserves. For example, in April 2009 it announced that its gold holdings had jumped from 600 tonnes to 1054 tonnes, a figure it had not updated since 2003. No one would believe that China had suddenly just bought 454 tonnes in April 2009. The reality was that China was buying on the quiet, under the radar. As Reuters noted at the time on Friday 24th April 2009:
“China disclosed on Friday that it had secretly raised its gold reserves by three-quarters since 2003, increasing its holdings to 1,054 tonnes and confirming years of speculation it had been buying.“
Again in July 2015, China made a surprise announcement, revealing (or claiming) that its gold reserves had increased from 1054 tonnes to 1658 tonnes. As the Financial Times commented in an aptly titled article “China breaks 6-year silence on gold reserves“, saying that
“China ended years of speculation about its official gold holdings by revealing an almost 60 per cent jump in its reserves since 2009.”
So CHina had broken a 6 year silence, and not suddenly bought 604 tonnes of gold. In July 2015, the PBoC confirmed that it would begin following the IMF’s Special Data Dissemination Standard (SDDS) international reserves reporting template which requires contributing countries to provide updated gold reserve data to the IMF on a regular basis. For a while from July 2015, the PBoC reported monthly increases in its gold reserves each and every month.
However, these monthly updates (of constant monthly gold buying) mysteriously came to a halt in October 2016, after which the PBoC claimed each and every month since then to still hold 1842 tonnes of gold. It has now been a full two years since the Chinese State has claimed to have purchased any gold for its strategic gold reserves. In other words, the Chinese have gone silent again.
Is it naive to believe that a secretive nation which has a long track record of buying gold under the radar only to announce the buying later would suddenly stop this practice? Why would China sign up to providing regular updates to the IMF about its gold buying only to back-track 15 months later and put a lock-down on updates? What to believe?
The Survey Said…
We therefore decided to do a Twitter survey via the BullionStar Twitter account (@BullionStar) to find out what percentage of people actually believe the official Chinese story? As it turns out, pretty much no one believes the official Chinese line, but the results are surprising in what they do show.
In the Twitter poll we asked “How much gold does the Chinese central bank (PBoC) really hold?” and provided four options….:
1842 tonnes as it claims
more than 1842 tonnes but less than 4000 tonnes
more than 4000 tonnes
less gold than it claims i.e. less than 1942 tonnes[
How much gold does the Chinese central bank (PboC) really hold?
Although the 4000 tonnes level might seem like an arbitrary number, it took into account that if China, the world’s second biggest economy, wanted to be towards the top of the major league of the world’s central bank gold holders, then it would need to hold more gold than the claimed gold reserves of major central bank gold holders such as Germany (3373 tonnes), Italy (2451 tonnes) and France (2436 tonnes), as well as at least half the amount of gold that the US Treasury ‘claims’ to hold (which is 8133 tonnes).
The Twitter survey ran for 2 days and had a substantial 2337 respondents casting a vote, which is arguably quite a lot as Twitter surveys go. A full 91% of respondents (2127 votes) do not believe the official figure put out by the Chinese central bank, with only 9% of respondents (210 votes) thinking that the PBoC has 1842 tonnes of gold as it claims.
A very large 40% of respondents (935 people) thought the PboC holds more than 4000 tonnes of gold. Another 15% (351 people) think that the Chinese central bank has more than 1842 tonnes of gold but less than 4000 tonnes. This means that 55% (1286 people) of the respondents thought that the PBoC has more gold than it claims to have.
But equally interestingly, a sizable 36% (841 people) of the twitter poll respondents think that the Chinese State (through the PBoC) has less gold than it claims, i.e. less than 1842 tonnes. This is interesting because the major alternative view of Chinese State gold accumulation is that the Chinese are bound to have more gold than they claim to have because they are stealthy accumulating it, so as to at some point in the future reveal another large jump in its reserves at a time of its choosing, for example, a jump from 1982 tonnes to 3000 tonnes or more.
But the survey shows that while nearly everybody is skeptical about China’s official gold holdings numbers, in addition to being skeptical on the upside, a lot of people are also skeptical on the downside and think that the PBoC doesn’t even have the amount of gold that it claims to have. This, if it was true, would arguably be more newsworthy than the scenario in which the PBoC has more gold than it claims to have, and is something that hasn’t really been discussed anywhere on the Blogosphere or Twittersphere or in the mainstream financial media, as far as I can recall.
Since China is well-known for overstating numbers related to economic data and quantities of all sorts, then it is possible that the Chinese gold has less than 1942 tonnes of gold. Nobody knows. The reason that nobody knows is that neither Chinese, nor any of their central bank contemporaries around the world, ever allows any independent audits of their gold reserves.
Nations’ monetary gold reserves are in nearly all cases treated as state secrets and are often exempt from Freedom of Information Requests. As Chris Powell of GATA is fond of saying, the size and disposition of national gold reserves is a more closely guarded secret than even the existence and location of nations’ nuclear weapons, such is the secrecy that surrounds the topic of monetary gold reserves.
My personal opinion is that the Chinese State has a lot more monetary gold reserves than 1842 tonnes, and even more than 4000 tonnes, that they are constantly accumulating gold. For example its known that the Chinese State buys gold on the London gold market and flies it in their own airplanes to Beijing.
I also think the Chinese have even been receiving large quantities of gold from other central banks behind the scenes in a formal but secret redistribution, for example Banque de Italia sells x tonnes to PBoC (which may sound strange but I heard that this had happened). I also believe China most likely purchased IMF gold in 2010 in the IMF’s secretive ‘on-market’ gold sales, using the Bank of International Settlements (BIS) to price the transfer. Some of the Swiss central bank gold sales in the early 2000s (which look to have actually been executed in the late 1990s and then squared off) are also candidates as surreptitious gold transfers from Western central banks to the Chinese state. Some of these transfers would also point to the probability that China holds some of its gold reserves in the gold vaults of the Federal Reserve Bank of New York (FRBNY) in Manhattan.
So there you have it. A full 91% of survey respondents do not believe the official Chinese position that the Chinese central bank has 1842 tonnes of gold. What to you think? Feel free to leave a comment below with your view.
The first day of each month sees the reporting of a number of statistics about the London Gold Market by the bullion bank led London Bullion Market Association (LBMA). These statistics focus on clearing data and vault holdings data and are reported in a 1 month lag basis for clearing activity and a 3 month lag basis for vault holdings data. Therefore the latest clearing data just published is for the month of August, while the latest vault holdings data is for the end of June.
While LBMA clearing data has been published for many years now, publication of vault holdings data by the LBMA is a recent phenomenon and only began at the end of July 2017. As the LBMA press release at the time stated:
“The physical holdings of precious metals held in the London vaults underpin the gross daily trading and net clearing in London. The net clearing is undertaken by the members of the London Precious Metals Clearing Limited (LPMCL).”
Although in both cases the data reported lacks any granularity and are just rolled up numbers, the two sets of statistics are useful in that they highlight the clear contradiction that exists between the huge volumes of fractionally-backed paper trading in the London Gold Market, and the relatively small quantities of underlying physical gold that sit in the gold vaults of the same institutions engaged in this ‘gold’ trading, quantities which are even smaller when Bank of England and ETF gold holdings are excluded.
Vault Holdings – Underpinning ‘Gold’ trading
Looking at vault data first, at the end of June the LBMA reported that there were 7,684 tonnes of gold held in the eight vaults comprising the LBMA vault system in London. Three of these vaults are owned by clearing members of London Precious Metals Clearing Limited (LPMCL) i.e. HSBC, JP Morgan and ICBC Standard Bank, four further vaults are operated by the security carriers Brinks, Malca-Amit, Loomis and G4S, and the final vault area (which only holds gold) is operated by the Bank of England.
While 7,684 tonnes may seem like a significant amount of gold, much of this gold is held in custody by the Bank of England for its central bank clients, and another large chuck is held in LBMA vaults in London as backing for commercial gold-backed ETFs such as the SPDR Gold Trust. Therefore, these two categories of gold are generally speaking not ‘available’ for use by bullion banks as this gold is owned by other entities (disregarding central bank gold lending and raids on ETFs by bullion banks). Backing out gold custodied at the Bank of England and gold held by ETFs which store their gold in London leaves a far lower figure.
Each month the Bank of England publishes data on the total quantity of gold held in its vaults, having also started publication of this information in 2017, a few months before the LBMA. At the end of June this year, the Bank of England reports that there were 5,179 tonnes of gold held in its vaults. Subtracting this Bank of England gold from the LBMA figure of 7684 tonnes yields 2,505 tonnes of gold in the other seven LBMA vaults combined.
Next, we have to exclude gold held in LBMA London vaults that belongs to ETFs such as those operated by ETF Securities, iShares, the SPDR Gold Trust (GLD), and Source.
The latest figure for the combined London gold holdings of such ETF vehicles is 1507 tonnes, according to an excellent chart which is maintained and calculated on the GoldChartsRUs website, Subtracting 1507 tonnes from the 2505 tonne figure (LBMA – Bank of England) gives a final figure of just 998 tonnes of gold.
There are therefore just shy of 1,000 tonnes of gold in the LBMA London vaults that are not at the Bank of England or that are not earmarked for gold-backed ETFs, and importantly, this gold, as the LBMA stated itself is ‘underpinning‘ the ‘gross daily trading and net clearing in London‘.
The LPMCL Clearing Casino
Next, we can examine the latest clearing figures from the LBMA for the month of August. First a definition: According to the London Precious Metals Clearing Limited (LPMCL) website:
“the clearing statistics represent the net volume of loco London gold transfers settled between the five clearing members of the LPMCL.“
During August, there were 18.9 million ounces (equivalent to 588 tonnes) of ‘gold’ cleared by the LPMCL. Yes, that’s a ‘Daily Average’ figure as reported by the LBMA.
This figure is just for clearing volumes, not trading volumes. Gold trading volumes are said to be, according to various LBMA trading surveys in the past, in the region of 10 to 1, or even higher.
With 18.9 million ounces (588 tonnes) of ‘gold’ cleared each day during August, that would equate to 189 million ounces (5880 tonnes) ‘traded’ each day in the London Gold Market. We still don’t know any exact trading volume data in the London market because the LBMA still hasn’t published this data, despite having promised to do so for 4 years now, and being ‘obligated’ to do so by the Fair and Efficient Markets Review (FEMR). See here for details.
But its get better. On a monthly basis, the London Gold Market looks to be trading about 130,000 tonnes of gold (assuming 22 trading days per month). On an annualised basis, the 189 million ounces (5880 tonnes) of gold traded each day in London (based on the August clearing figures and a 10 to 1 trading multiple) and assuming 250 trading days in a year, would imply that 47.25 billion ounces of gold are traded each year in the London OTC gold market, or 1.47 million tonnes of gold.
However, there have only ever been about 190,000 tonnes of gold mined throughout history, with nearly half of that said to be in the form of gold jewellery, and only 38% held in central bank and private hoards. Therefore on a monthly basis, the London gold market looks to be trading about 68% of all the gold ever mined in the history of the world, and on an annual basis, the London gold market looks to be ‘trading’ more than 11 times the amount of gold ever in existence, even though nearly all of this above ground gold is never in fact traded at any given time.
But it gets even more absurd. Recall from earlier in this article that as of the end of June, (the latest month for which LBMA vault and Bank of England vault gold holdings data are available), there were 7,684 tonnes in the LBMA vaults, 2505 tonnes in the LBMA vaults excluding the Bank of England vault holdings, and 998 tonnes in the LBMA vaults when excluding ETF gold holdings stored in London. And note that with LBMA and Bank of England vault holdings fairly static, these figures do not change much month to month.
But each day in the London Gold Market, there are approximately 5880 tonnes of ‘gold’ traded. So the equivalent of 6 times more ‘gold’ than the maximum amount of physical gold that could possibly be underpinning trading is being ‘traded’ every day in London. On a monthly basis, the equivalent of 130 times more gold is being traded than is available as physical gold in the London vaults to underpin trading. And a whopping 1470 times more ‘gold’ is being traded each year in the London Gold Market than is available in physical form in the LBMA vaults in London to underpin trading.
So what is going on? Enormous ‘gold’ trading volumes yet tiny vaulting volumes of real gold. How can that be? The answer is that in percentage terms, the London Gold Market does not trade very much real physical gold, or said another way, nearly all of the gold trading that goes on in London OTC gold market only has a tenuous connection to real gold.
This is because at the heart of the London Gold Market lies the concept of ‘unallocated gold’ accounts and positions, where bullion banks use a fractional reserve bullion banking system to trade huge quantities of ‘gold’ that does not exist. Where trading almost never results in physical delivery, where activity is just leveraged speculation against the US dollar gold price or ‘screen gold’, where more than 99% of transactions are in unallocated positions, and where positions are cash-settled.
“the reality of unallocated bullion trading is that buyers and sellers rarely intend for physical delivery to ever take place. Unallocated bullion is used as a means to have “synthetic” holdings of gold and so obtain exposure to the price of gold by reference to the London gold fixing.
If physical settlement and cash settlement are two mutually exclusive concepts (as they are in our view) and if cash settlement entails a derivatives transaction it follows that, if physical settlement does not take place in connection with unallocated bullion, then unallocated bullion is a form of derivatives transaction.“
But importantly, the London Gold Market, along with COMEX are the two most influential trading venues for gold price discovery and for establishing the international gold price, even though the trading in both venues is far removed from trading physical gold.
So next time you see the LBMA release clearing data and vault holdings data, as it does at the beginning of every month, its worth picturing these two sets of data, not as two distinct datasets, but as two interrelated sets of data where a tiny amount of physical gold in London vaults, ‘underpins’ vast amounts of trading in fictional ‘gold’, and where mainstream financial journalists fear to tread or ask questions as to how this Ponzi scheme came into existence and has been allowed to go on for so long.
In an interesting development on Wednesday 12 September, the Shanghai Gold Exchange (SGE) launched trading of a new Chinese Gold Panda Coin contract on the SGE trading platform. With the addition of this listing, the SGE now offers physical trading of these famous Chinese gold bullion coins alongside its extensive range of physical gold bar and ingot trading contracts. As a reminder the Shanghai Gold Exchange is the largest physical gold exchange in the world, and nearly all gold in the Chinese gold market passes through the SGE.
Launched in 1982, the Chinese Gold Panda used to be produced in troy ounce weight denomination up until 2015 (such as 1 troy ounce and 0.5 troy ounce weights). Then from 2016 onwards, the Gold Panda switched to using metric weights, and is now produced in a 30 gram weights, 15 grams, 8 grams, 3 grams and down to a 1 gram weight. All Gold Panda coins have a gold purity of 99.9%. Chinese Gold Panda coins are produced by China Gold Coin Corporation which is fully-owned by China’s central bank, the People’s Bank of China. The actual fabrication of the Gold Panda coins takes place in Shenzhen Guobao Mint which is owned by China Gold Coin Corporation. China Gold Coin Corporation also coordinates marketing and distribution of gold panda coins on the international market.
Chinese Gold Panda coins are simultaneously legal tender in China as well as being known as commemorative coins. As the SGE said in its announcement announcing the new Gold Panda contract listing:
“The Chinese Panda Gold Coin is the legal currency of the People’s Republic of China issued by the People’s Bank of China (PBoC). It has the dual attributes of national authority and product investment.”
According to the SGE, trading of this new gold panda contract will expand the overall customer base of the Gold Panda, allow the Gold Panda coin to play a greater role in China’s investment gold market, and provide diversification benefits for investors, as well as centralise and improve price discovery for the coin. It will also crucially integrate the gold panda coin market into the wider Chinese gold market through the SGE.
Trading of the 30 gram Gold Panda Coin
Trading details of the new Chinese Gold Panda coin contract are as follows. The contract is a spot trading contract with a trading unit of 30 grams. The price is denominated in Yuan per gram. The minimum price movement is 0.01 yuan /gram. The lot size is 1 unit. The largest single bid quantity is 1000 lots. Delivery method is physical delivery, and delivery time is T+0, i.e. same day. Transactions are executed by matching the prices of buyers and sellers. Trading times for the Gold Panda contract are the same as SGE’s standard trading hours which as 9:00 – 11:30 (morning), 13:30 – 15:30 (afternoon), and a night trading session of 20:00 – 02:30 (i.e. 2.30 am the next morning).
Given that the new contract has a trading unit of 30 grams (which was the trading unit approved by the People’s Bank of China), this means that only the standard Gold Panda coins produced in either 2016, 2017 or 2018 would be eligible for trading, and only in the 30 gram weight. But for this contract listing, there are no different between release years, editions or imagery on the coins (2016, 2017 or 2018), and they are traded under the same contract.
Coins produced in 2015 or earlier, which were manufactured as 1 ounce Gold Pandas would not be eligible. Each year the Chinese Gold Panda bullion coins feature different imagery of pandas on the coin’s reverse of the coin, but with a consistent image of the obverse face of the coin, which is the Hall of Prayer for Abundant Harvests in the Temple of Heaven in Beijing. Examples of the 30 gram Chinese Gold Panda coin designs can be seen on the BullionStar website from 2018, from 2017 and from 2016.
Another factor which facilitated and eased an exchange listing, according to the SGE, is the fact that since 2012,Gold Pandas transactions have been exempt from VAT in China. For trading the new Gold Panda contract, this in practice means that those who are qualified for the Gold Panda’s tax exemption, including individual customers and institutional clients of the SGE can participate. Clients without such as tax exemption, can, according to the SGE, apply to China Gold Coin Corporation for tax exemption.
The first transaction in the new Panda Gold Coin 30g spot contract came in at 278.8 Yuan/gram when trading opened on 12 September. Trading data for the new contract, under the contract symbol ‘PGC30g‘ can be seen in the Daily Trading Report on the SGE website. An impressive 275 kgs of gold panda coins were traded on the first trading day 12 September, with a more modest 43 kgs of coins traded on the following day 13 September.
A Full Launch Ceremony – Chinese Style
On launch day, 12 September, the SGE and China Gold Coin Corporation held a full launch ceremony in Shanghai with speeches from senior PBoC, and SGE staff in front of 200 guests and assorted dignitaries from the Chinese government, Chinese commercial banks and representatives of the Shanghai Free Trade Zone. Short videos of 3 Chinese news reports covering the SGE’s launch ceremony for the Gold Panda contract can be seen on the SGE website’s media page, here and here.
Interestingly, one report on the launch ceremony, (translated from Chinese), concludes with the following paragraph:
“After the ceremony, the Shanghai Stock Exchange, the Shanghai Gold Exchange (SGE) and China Gold Coin Corporation signed a memorandum of cooperation on the development of the Panda General gold coin ETF. The Shanghai Stock Exchange and the Shanghai Gold Exchange signed a memorandum of understanding on Shanghai gold development cooperation.”
Does this mean a new Gold Panda backed Exchange Traded Fund (ETF) is in the works to be launched by the Shanghai Stock Exchange, Shanghai Gold Exchange (SGE) and China Gold Coin Corporation? It looks possible.
Two weeks prior to the launch on 29 August, the SGE also held a training seminar for the Gold Panda coin’s listing which was attended by 79 SGE member companies including commercial banks, securities dealers and bullion companies, which covered trading rules, delivery procedures for the coin (since it’s a physically delivered contract), and tax policy / tax exemption.
Lastly, a number of media reports about the new Gold Panda SGE contract claims that it’s the “only gold coin product in the world to be traded on an exchange market“. For example a report from China focused website GBTimes here states that. However, this is not true. In South Africa, the famous Krugerrand gold bullion coin is listed and trades on the Johannesburg Stock Exchange (JSE) for a long time now. As the JSE website states:
“The JSE offers trading in Krugerrands through a well-regulated secondary market and are traded in the same way as any listed Equity Market instrument, with prices being quoted on the various types (weights) of coin.”
Trading of Krugerands on the JSE is also documented in the South African gold market page of BullionStar’s Gold University gold market profiles.
So although the Gold Panda is not the first gold coin to be traded on an organised exchange, it is one of the few, and given the immensity of the Chinese Gold Market and the importance of the SGE, this development – of gold coin trading on the world’s largest physical gold exchange – is another evolution to watch in China’s constantly evolving physical gold market and should heighten the global profile of Gold Panda coins in other markets around the world.
In recent weeks, global financial markets have been increasingly spooked by an intensifying crisis in emerging market currencies including those of Turkey and Argentina. Add to this the ongoing currency crisis in Venezuela and the currency problems of Iran. While all of these countries have economy specific reasons that explain at least some of their currency weakness, there are some common themes such as a stronger US dollar, high domestic inflation rates, economic mismanagement, reliance on foreign borrowing, and in some cases economic sanctions imposed by the US.
As one currency plummets, this intensifies emerging market risk across the entire asset class, and it’s not unreasonable at this time to at least speculate whether the contagion could spread. The Brazilian Real and South African Rand have come under pressure and in Asia, the Indonesian Rupiah and Indian Rupee are also now weakening against the US Dollar.
It is against this backdrop that physical gold is being increasingly mentioned within these emerging economies, with gold coming to the fore as it always does in times of crisis. It is for this reason that its interesting to take a look at a number of these currencies and examine how gold is playing the role of safe haven for these countries’ citizens as well as creating a challenge for these nations’ leaders and central banks.
Buying up Gold as the Turkish Lira Plunges
With ongoing currency and external debt problems, Turkey, with a population of 90 million, has played a central role in the current currency crisis and remains a catalyst for potential risk contagion across other troubled emerging market currencies.
Turkey’s currency woes come against a backdrop of a stronger US dollar, domestic inflation of 15%, increasing default risk, market skepticism about the independence of Turkey’s monetary policy, and a series of US sanctions against the Turkey economy.
Although the Turkish Lira was already weakening during the early part of the year (falling 6.4% against the US Dollar from January to April), things took a turn for the worse in May with the Lira falling by a further 9% against the dollar during that one month. Another 6% drop in the Lira followed during July. But it was in August that the Turkish currency crisis really accelerated, with the Lira depreciating 28% against the US dollar in an environment of US sanctions and rating agency downgrades of Turkey’s debt.
During the same time frame, the gold price in Turkish Lira rose by approximately 60%, from just under TRY 5000 per troy ounce at the beginning of January, to TRY 7860 per troy ounce at the end of August. This rising local gold price spurred an increase in physical gold demand in the Turkish Gold Market, as reported by Bloomberg at the end of May with “a jump in demand for gold coins” and Turks “buying up gold as the lira plunges in the latest currency crisis”
“Gold priced in lira is more expensive than ever, that’s not deterring buyers, who are looking for a safe haven“
“‘Turkish people have an interesting behavior – they buy gold when the prices are rising, they think it’s gonna rise more,’” said Gokhan Karakan who runs a gold exchange office in the heart of Istanbul’s Grand Bazaar. “People think there is a trend here and choose to buy gold until uncertainty is out of the way.”
Perversely, in August while the Turkey Lira was in free fall, Turkey’s president Erdogan (who is against raising Turkish interest rates) made a nationalistic call for the Turkey public to sell both gold and US dollars and buy Turkish Lira. In a speech to a crowd in the Turkish city of Bayburt on 10 August, Erdogan advised:
“If there is anyone who has dollars or gold under their pillows, they should go exchange it for lira at our banks. This is a national, domestic battle.”
Although not surprisingly the presidential bid to support the Turkish Lira by selling gold did not work (as the local gold price continued to rise), the lesson from Erdogan’s call is clear. Gold is a safe haven and retains its value in times of crisis. Unfortunately Erdogan’s motivations were political, with an irresponsible call to sell one of the only assets that can provide a shelter from the eroding value of the Lira.
Iran – Investing in Safety as the Crisis Intensifies
Iran’s currency, the Rial, has fallen heavily in value against the US dollar this year, losing approximately 60%, from an unofficial rate of about 43,000 Rial at the beginning of January to 110,000 to the US dollar at the end of August. The currency crisis even led to the head of the Iranian central bank, Valiollah Seif, being fired by the Iranian president during July.
This slow motion but steady collapse of the Rial had been ongoing for sometime due to a weak economy, inflation of more than 19%, and economic uncertainty brought on by the fear of US sanctions (such as in April), but accelerated in May when the US administration pulled out of a multilateral nuclear deal on Iran (JCPOA), and subsequently announced two new sets of sanctions against Iran.
The first set of these sanctions, which came into effect on 7 August, included restrictions on Iran’s trade in gold and other precious metals and on Iran’s trade in US dollars. The run up to the first set of sanctions also saw heightened gold accumulation in Iran. The second set of sanctions, which come into effect on 4 November, focus on the Iranian energy and financial sectors, including doing business with the Iranian central bank.
Over the year-to-date as the Rial slid amidst fear of sanctions and then the subsequent reality of those sanctions, the Iranian public (Iran population 82 million) rushed to the safe haven of physical gold, hoarding gold coins and gold bars and pushing demand for physical gold to a 4 year high. As the World Gold Council noted in August when discussing second quarter Iranian gold demand:
“Faced with renewed economic sanctions and a collapsing currency, which caused a huge rise in the local price [of gold], demand for gold jewellery slumped. Instead demand was channelled into gold investment products (which, unlike gold jewellery, are VAT-exempt), pushing demand for bars and coins to a four-year high.
“Demand for physical gold is very high and has been as the currency’s been weakening,” said Massoud Gholampour, an analyst at Novin Investment Bank in Tehran. “People want to invest in something that’s safe if they think that a crisis may be on the way.”
Some of this physical gold demand was met by the Iranian central bank. Triggered by the currency collapse and a rising local gold price, the central bank decided to introduced a gold coin presales scheme designed to dampen down the local gold price, offering 7.6 million gold coins to applicants, over time horizons from 1 month to 6 month maturities. For example the delivery phase of the 6 month maturity presales scheme is active until November.
The Rial’s collapse and eroding value also brought gold to the fore for larger payment transactions in Iran, such as real estate rentals, where for example, one landlord was “asking prospective tenants to pay two gold coins to rent a 95 square metre apartment for one month.”
“I know that many may not be able to afford it….but when I see that the currency I may get from my tenants would have less value compared to the previous month, then that leaves me with no choice. If I continue to rent out my apartment in return for rials, then I would face financial loss.”
Maduro plays the Gold Card as Hyperinflation Reigns
In the hyperinflationary economy of Venezuela, where inflation is now running at nearly 65,000% and is predicted by the IMF to reach 1 million percent before the end of the year, the Venezuelan currency in its various forms continues to hit the headlines.
On 20 August, Venezuela began the replacement of its existing fiat currency, the Bolivar fuerte (strong bolivar), with a new Bolivar Soberano (sovereign Bolivar) at a rate of 1 Bolivar soberano for every 100,000 Bolivar fuerte, effectively knocked five zeros off the fiat currency. This exercise is ostensibly meant to tackle hyperinflation but will, like all previous Venezuelan currency experiments, most likely not be effective and will probably exacerbate hyperinflation.
At the same time, the new Bolivar soberano was decreed to be linked to a murky and opaque state issued cryptocurrency called the Petro, at a rate of 3600 Bolivar soberanos to 1 Petro. This Petro is claimed to be backed by Venezuelan oil but there is scepticism that the Petro doesn’t really exist or at least doesn’t exist as a functioning currency.
All of the above sets the new official rate at 1 USD = 60 Bolivar soberano (or 1 USD = 6 million Boliar fuerte), and effectively devalues the Venezuelan currency by 95.8% since the previous official rate was 1 USD > 248,000 Bolivar fuente. The Bolivar fuente in its short life (launched in January 2008) itself had experienced many official devaluations against the US dollar, all the while trading on the black market at far lower values than the official rate. Even the new Bolivar soberano less than a few weeks old is already trading at 87 to the USD, far weaker than the official rate (see https://dolartoday.com).
It was into this tumultuous economic environment that Venezuelan president Maduro last week announced a national gold savings plan for workers, retirees and savings banks (Venezuela population 32 million) that will be launched on 11 September. Although the gold savings plan looked half-baked and flawed (as do most of Venezuela’s recent forays in economic interventionism), the fact of the matter is that yet again, physical gold makes an appearance in the midst of a currency crisis.
Maduro explains his ‘Lingotico’ Gold Savings Plan at a party conference 26 August: Source: EL PAÍS
Maduro’s new plan, known as ‘lingotico’, aims to issue gold backed certificates, backed by small gold bars of 1.5 gram and 2.5 gram weights. The gold will be available for ‘purchase’ by Venezuelans at 3,780 bolivars for the 1.5 gram gold bars and the 2.5 gram gold bars will sell for 6,300 bolivars. However, according to Bloomberg, buyers will receive gold certificates, not the actual gold bars.
Maduro said that the gold for this saving program is sourced from the eastern Guayana region of Venezuela (not to be confused with the neighbouring country of Guyana), which he said the BCV, Venezuela’s central bank had sourced from local gold mines. Interestingly, the gold for this scheme is not being sourced from Venezuela’s central bank gold reserves, as they have either been most likely already sold off are under claim in various gold loans / gold swaps.
In the two short videos below (in Spanish), Maduro, with small gold bars in hand in sealed packaging with the BCV central bank logo, outlines how the scheme will allow Venezuelans to save in gold, and to protect their savings from inflation. The first video was filmed at a Maduro party conference on Sunday 26th August.
The second video, the official launch of the gold savings plan, was filmed at the Casa de la Moneda in Aragua, Venezuela (a BCV banknote and coin facility) and again shows Maduro with a gold bar in hand and ironically is set against a backdrop of huge quantities of Bolivar bank notes, and in the background somewhat bizarrely BCV employees paging through huge quantities of printed banknotes.
The Contagion Spreads
Staying in South America, the emerging market currency crisis has now rippled through to Argentina and to a lessor extent Brazil, with the Argentine Peso plummeting in double digits last week against the US dollar on news that the Argentine government had requested an early activation of an IMF loan, fanning market fears that the Argentine economy will have imminent problems repaying foreign denominated debt.
The Argentine peso has lost more than 50% against the US dollar during 2018 and is now 2018’s worst performing currency. The peso’s plummet during the week forced the Central Bank of Argentina (BCRA) to hike official interest rates to 60% to try to stop the peso selloff, and Argentina,where inflation is running at over 25% per annum, now has the embarrassing distinction of having the highest interest rates in the world.
Elsewhere in South America, the Brazilian Real and Chilean Peso have also begun declining notably in value against the US Dollar, with the Real down more than 20% against the US dollar year-to-date. Further afield, other emerging market currencies are now experiencing possible contagion effects, with the Indonesian Rupee now at its lowest level against the US dollar since the Asian crisis of 1998, and the Indian Rupee now below 71 to the US dollar for the first time ever. Expect to see gold linked to currency stories in these economies as the emerging market crisis continues to brew.
Physical gold takes centre-stage in times of crisis precisely because it has tangible value, is not issued by any central bank, monetary authority or government, cannot be debased and has no counterparty or default risk. The fact that sophisticated physical gold markets exist in most if not all of the economies currently stricken by currency weakness also allows gold, with its deep liquidity, to be quickly harnessed.
In March of this year, the London Bullion Market Association (LBMA) released a series of short videos about various aspects of the London precious metals markets and the role the LBMA claims to plays in those markets. In the words of the LBMA:
“LBMA, the Global Authority for Precious Metals, has released five short films highlighting the pivotal role it plays in the global wholesale precious metals market by setting standards and developing market services thus ensuring the highest levels of integrity, transparency and quality.”
While calling these short clips ‘films’ is a bit ludicrous, the series of videos – which are indeed very short – are as follows, and they can be seen on the LBMA website as well as on the LBMA’s YouTube channel:
‘Who We Are’ (2:33 minutes)
… in which Paul Fisher (LBMA Chairman) and Ruth Crowell (Chief Executive) “discuss the central role that LBMA plays in the global OTC precious metal markets. From setting standards on the purity, form and provenance of the bars to the way in which they are traded.”
How the Market Works – OTC Overview (1:14 minutes)
… in which Jonathan Spall, LBMA Head of Communications “looks at how LBMA is at the heart of the 24-hour a day global OTC precious metals market with its bespoke transactions, which are tailored for clients’ needs.“
[Note: This video is called ‘Market Infrastructure Key Elements’ on the LBMA website.]
Good Delivery (1:08 minutes)
…in which Neil Harby (Chief Technical Officer) “takes you through the stringent Good Delivery criteria – the de facto standard trusted across the world – that enable the global trade in gold and silver bars.“
… in which Sakhila Mirza (General Counsel) and Neil Harby (Chief Technical Officer) “discuss LBMA’s Precious Metals Integrity and Provenance initiatives, ensuring the responsible sourcing of precious metals and the protection and integrity of the global supply chain.“
The commentary of each of the videos is also in transcript form on the LBMA website, and given that the videos are so short, the transcripts are likewise bitesize. While the Good Delivery and Responsible Sourcing videos deal with technical aspects of the the LBMA’s interaction with precious metals refiners, it is the ‘Who we Are’ and ‘How the Market Works’ videos which are worth discussing in the context that neither answers the questions that their titles suggest.
Who we Are
With a title of ‘Who We Are’, a newbie viewer might think that the first LBMA video would provide some insight into who is behind the LBMA and what really goes on in the London Gold Market and London’s other precious metals markets. But not surprisingly, it does not.
Instead, the LBMA’s chief executive Ruth Crowell, and LBMA chairman Paul Fisher take turns in reciting sound bites that focus exclusively on aspects of the physical precious metals markets while ignoring the vast fractionally-backed paper (synthetic) gold market and the secretive London gold lending market.
LBMA video – Who We Are’ (2:33 minutes). Source: YouTube
The video begins with a claim that the LBMA is “the world’s authority for precious metals“. An authority appointed by whom? There is no mention in the video that the LBMA is a private organisation established in 1987 by the Bank of England, or that the original founding members were 6 bullion banks involved in the London Gold Market including Rothschild, J Aron (Goldman Sachs), and Morgan Guaranty (JP Morgan). For details of the LBMA – Bank of England symbiosis, see BullionStar article “Blood Brothers: The Bank of England and the London Bullion Market Association (LBMA)”
Ruth Crowell states that “our Board has an independent Chairman, as well as Non-Executive Directors, which ensure the independence of the governance of the LBMA.” But the chairman she is referring to is of course Paul Fisher, 26 years at the Bank of England, head of the Bank of England’s FX and Gold Division in the 2000s, and an observer on the LBMA Management Committee from at least 2004.
You would be hard pressed to find less of an insider than Fisher for the role of ‘independent’ chairman of the LBMA. But not surprisingly, the LBMA video makes no mention of Fisher’s background. As James Rickards commented at the time of Fisher’s appointment to the LBMA:
For details of what Rickards was referring to, see BullionStar article “From Bank of England to LBMA: The ‘independent’ Chair of the LBMA Board“. In the video, Crowell’s use of the words ‘Non-Executive Directors’ is also misleading since, apart from Fisher, there is only one non-executive director on the Board, Andrew Quinn. Nor does she mention that the LBMA Board still contains a Bank of England observer, namely Andrew Grice.
Crowell states that ‘there are also elected Market Directors who sit on the Board and ensure the market is steering the development of the Association‘, but fails to say that half of these directors, the market makers, are from the powerful bullion banks which dominate the LBMA, such as JP Morgan and UBS.
Nowhere in the ‘Who we Are’ video does it mention that the LBMA system trades vast -quantities of unallocated fractionally-backed synthetic gold positions, that the LBMA publishes no trade reporting of any trades in the London market, that the LBMA Gold and Silver auctions are dominated by its powerful bullion bank members, that the LBMA oversees the secretive London Precious Metals Clearing Limited (LPMCL) clearing cartel for paper gold and silver, and that there is a hidden gold lending / gold swapping market in London between central banks and bullion banks, facilitated by the Bank of England.
Instead, there are multiple references to physical bars and real metal, something that is very thin on the ground in the world of the LBMA, but that gives the impression of a predominantly physical precious metals market, when in fact the opposite is the case. For example, the video refers to the following:
‘the standard-setting organisation that defines how precious metals are refined’,
‘the quality and the integrity of the metal’,
‘mined from rock in the ground, being refined, being transported’,
‘the appearance and the shape of the bars themselves’
‘physically inspect each bar as it comes through the door’
As per usual with the LBMA, this ‘Who we Are’ video also makes claims that the activities of the LBMA promote a ‘transparent market‘, when the exact opposite is the case. This must be some kind of inside joke that they insert into all LBMA media publications, i.e. that the LBMA promotes transparency. For details on how opaque and non-transparent the London Gold and Silver Markets that the LBMA oversees really are, see ‘The Gold Market – Where Transparency means Secrecy’.
The Transcript of the LBMA’s ‘Who we Are’ video can be read below:
Ruth Crowell: The LBMA is the world’s authority for precious metals.
We’re the standard-setting organisation that defines how precious metals are refined, as well as traded around the world. It’s our job to ensure the quality and the integrity of the metal itself, as well as the market participants.
Paul Fisher: Our members are leading firms involved in the full lifecycle of precious metals. From being mined from rock in the ground, being refined, being transported, being stored and then finally being sold, whether as a bar or as a piece of jewellery. These miners, refiners, banks, trading houses, ETF providers, security companies, vaults, even central banks must follow LBMA standards for the benefit of customers around the world.
RC: Our Board has an independent Chairman, as well as Non-Executive Directors, which ensure the independence of the governance of the LBMA. But they’re also elected Market Directors who sit on the Board and ensure the market is steering the development of the Association. Beyond that we have many sub-committees and working groups, in which market participants can be engaged and steering everything that LBMA does.
PF: We provide quality control for the metal produced and we set high standards for business conduct. And we are also the voice of the market for governments, regulators and investors.
RC: We do that through the Good Delivery List and the Global Precious Metals Code. The Good Delivery List defines what’s acceptable when it comes to the appearance and the shape of the bars themselves. It’s also considered the de facto international standard for gold and silver.
The Global Precious Metals Code is a code of conduct which promotes a fair, effective and transparent market. It provides market participants with principles and guidance, to uphold high standards of business conduct. All of this creates confidence in the market for all participants.
We work closely with the commercial vaults, as well as the Bank of England. And the vaults only accept bars which meet the Good Delivery Standards. They also physically inspect each bar as it comes through the door, to make sure that it’s up to standard. As such, they act as the gatekeepers of the Market.
PF: We’re also leading the world in Responsible Sourcing, thanks to the strength of our Responsible Sourcing Programme.
RC: Our aim is to maintain integrity, as well as proactively develop the Precious Metals Market. That means we are always looking forward and anticipating any future needs and requirements.
How the Market Works
For whatever reason, the LBMA decided to split the ‘How the Market Works’ (the London OTC precious metals Market) into 2 separate videos, each of which is very short, lacking in any substance, and whose content is practically pointless.
Viewer discretion is advised because it will surely lead to disappointment for anyone wanting to find out how, for example, the London OTC Gold Market works. Despite the titles, this duo of videos will not tell you, and they are so short that the transcripts of each video are not more than a few sentences long. The entire exercise is a missed opportunity to properly explain details of how the London market really works.
LBMA video – How the Market Works 1 (1:14 minutes). Source: YouTube.
The first video is titled “How the Market Works – OTC Overview” and is just 1 minute 14 seconds long. The second video is titled “How the Market Works – Five Elements” (with an alternative title of “Market Infrastructure Key Elements”, and this is just 2 minutes long. Both videos are narrated by Jonathan Spall, LBMA’s Head of Communications.
The first of these videos claims to “look at how the LBMA is at the heart of the 24-hour a day global OTC precious metals market with its bespoke transactions which are tailored for clients’ needs” but at a mere one and a quarter minutes long, how is this possible even if the will was there? The second of these videos aims to “highlight how the LBMA plays a crucial role in the five main elements that allow the smooth functioning of the global OTC market.”
The (exceedingly short) transcript of the How the ‘Market Works – OTC Overview’ video is as follows:
Jon Spall: Internationally, precious metals are traded on a 24-hour basis. Either for immediate delivery, known as spot, or for a date in the future. LBMA accredited refiners annually refine approximately 5,000 tonnes of gold and more than 30,000 tonnes of silver.
Good Delivery Bars of gold and silver are traded globally in what is referred to as Over The Counter or OTC market. Approximately 25 billion dollars worth of gold is settled each day in the global OTC market, with London at its centre. This means all transactions are conducted between two parties without the need for an exchange.
An OTC market offers flexibility, in that two parties can negotiate bespoke transactions that precisely meet the needs of the customer. For example, in terms of price, amounts to be bought or sold, and time to maturity. It maintains confidentiality and means that all risks, including those of credit, exist only between the two counterparts. Typical market clients include miners, central banks, governments, fabricators, investors, hedge funds and refiners.
Despite its title, this video does not discuss how the OTC market works. The commentary, short that it is, opens with a reference to gold and silver refiners and good delivery bars, which are a very small percentage of trading in London. There is no reference to the fractionally-backed cash-settled synthetic gold claims which make up the vast bulk of trading.
The reference to approx 25 billion dollars worth of gold being settled each day is actually referring to the value of paper gold that is cleared each day by the secretive London Precious Metals Clearing Limited (LPMCL) run by five bullion banks (e.g. 18.7 million ounces of gold equivalent cleared each day in London during March 2018). There is no mention in the video of gold or silver trading statistics since this data is still off-limits to the public despite years of promises from the LBMA that it would publish such information.
This video has no reference to the secretive gold lending market between central banks and bullion banks, a market where outstanding ‘gold deposits’ owned by central banks are constantly passed around between the LBMA bullion banks and never closed.
How the Market Works – Part Deux
The second ‘How the Market Works‘ video, covering “five key market infrastructure elements” of the market is as lacking in detail and revelations as the first, and is again narrated by Jonathan Spall. These ‘key elements’ are LPMCL clearing, good delivery, vaulting, pricing, and unallocated accounts.
How the Market Works – Five Elements (2:01 minutes). Source: YouTube
The secretive LPMCL gets a one line mention with no explanation that its a private company run by JP Morgan, HSBC, UBS, ScotiaBank and ICBC Standard that keeps the either fractionally-backed London gold market afloat. Luckily, you can read about the LPMCL here in ‘Spotlight on London Precious Metals Clearing Limited‘.
Spall says that ‘there are a number of vaults in the London area operated by eight companies, including the Bank of England, which physically hold either gold or silver bars or both’, but this is as far as it goes and there is no discussion of the vault operators or the vault locations. For those interested, some of the vaults locations can be viewed here, here and here, and of course the Bank of England vaults here. While ‘London is home to one of the world’s largest physical holdings of gold’ as the video says, it does not mention the fact that most of this gold is held by central banks and ETFs, and that the bullion bank float of gold underpinning the entire market is quite low. See ‘LBMA Gold Vault Data – How low is the London Gold Float?‘ for discussion of this issue.
On the issue of pricing, the coverage is again lacking in any substance and fails to mention how the bullion banks control this aspect of the market too. There is no reference to price discovery of the international gold price, discovery which predominantly is based on the interactive trading of gold derivatives and cash-settled OTC gold positions between the London OTC Gold Market and COMEX. See ‘What sets the Gold Price – Is it the Paper Market or Physical Market?‘ for details.
And instead of explaining and coming clean about the fact that nearly all trading in the OTC market is in the form of unallocated precious metals positions that are merely claims against bullion banks and that the unallocoated system lies at the heart of the London market, the video merely says that ‘Most OTC transactions settle via unallocated accounts. The customer does not own specific bars, but has a contractual claim against the clearer.’
The video ends with the audacious claim that:
“The LBMA is at the very heart of this global market, providing standards, promoting transparency, instilling confidence, and thus maintaining integrity for all.”
That the LBMA did not make films (or videos) really explaining who runs the show in the London Gold Market, or how that market really works, is not surprising. Anyone acquainted with the writings of ANOTHER will understand this, when he wrote the following lines, which in these circumstances, appear particularly apt:
“Did you think that the high powered world of the LBMA would operate in a fishbowl for all to see? We cannot take what is on the outside as evidence for what is on the inside.”
Likewise, we cannot take what is in these LBMA videos as evidence of what goes on in the London Gold Market, at the Bank of England, in LBMA Board meetings, or in the dealings of the high powered bullion banks that control the London Gold Market.
With the first half of 2018 now drawn to a close, much of the financial medias’ headlines and commentary relating to the gold market has been focusing on the fact that the US dollar gold price has moved lower year-to-date. Specifically, from a US dollar price of $1302.50 at close on 31 December 2017, the price of gold in US dollar terms has slipped by approximately 3.8% over the last six months to around $1252.50, a drop of US $50.
Since the world’s major gold price discovery hubs of London and New York trade gold in US dollars (or more correctly predominantly trade synthetic gold and derivatives), and since much of the mainstream financial media tends to be very US-centric, the media’s fixation with the US dollar price of gold is probably not surprising. However, it’s not the full story, because in some major national currencies as well as in cryptocurrencies, the price of gold has actually moved higher year-to-date.
From the perspective of an investment bank forex trading desk, where gold is traded as a currency in ‘pairs trades’ against a set of major fiat currencies, the varied movements of gold prices across a range of currencies will not be surprising. Currency prices (including the price of gold) are constantly moving against one another, creating these exchange rates. What’s important to these forex traders is the ‘relative strength‘ of currencies and of gold (and increasingly of cryptocurrencies).
Since the US dollar has had a relatively strong performance year-to-date 2018 against many other fiat currencies, this means on the flip side that many national currencies have weakened vis-a-vis the US dollar. By definition, this also means that the gold price performance year-to-date, measured in any currency which has weakened more in percentage terms against the US dollar than the US dollar gold price has weakened, will actually now be higher in those currencies.
For those with a base currency other than US dollars, or whose wealth or earning power is denominated in currencies other than US dollars, it’s important to keep track of the relative strength / weakness of one’s base currency, and at the same time look beyond the financial media’s headlines, and keep an eye on the gold price in that base currency / home currency.
Let’s look at some examples. Some of the worst relative performances of fiat currencies over the first 6 months of this year have been the Brazilian Real, the Swedish Krona, the Russian Rouble, the South African Rand, and the Indian Rupee, i.e. a mix of developed and emerging market currencies, and a mix of commodity and non-commodity currencies.
Given the very strong performances of cryptocurrencies late last year (especially in December 2017), and their subsequent price reversals since January, the gold price when measured in cryptocurrencies, such as Bitcoin, is also higher over the first half of 2018.
Year-to-date, the Brazilian Real (BRL) has lost more than 17% of its value against the US dollar. However, over the same time, the price of gold in Brazilian Real has gone up by more than 12.5%, rising from BRL 4315 per troy ounce at the start of January to BRL 4858 per ounce at the end of June.
The explanation for this is as follows. At the start of 2018, the US dollar gold price was trading at US $1302.50 per troy ounce, which at the USD / BRL exchange rate of USD 1 = BRL 3.31 at that time translated into BRL 4315 per troy ounce of gold. Fast forward six months and the US dollar gold price ended June $50 lower at US$ 1252.50 per ounce.
Over the same 6 month time period, the Brazilian Real weakened against the US dollar, falling from 1 dollar = BRL 3.31 at the start of January to 1 dollar = BRL 3.88 at the end of June. In Brazilian Real terms, that end of June gold price of US$ 1252.50 per ounce price now translates into BRL 4858 (1252.5 * 3.88). In this case, the rise in the local currency (BRL) price of gold is attributable to the fall in the value of the Brazilian Real. This is a classic example of the gold price adjusting to reflect the weakness in a local currency.
Taking another example, year-to-date, the Swedish Krona has also had a relatively poor performance, falling by more than 11.5% against the US dollar over the first 6 months of 2018. However, during the same time period, the gold price in Swedish Krona has rallied strongly from SEK 10685 per troy ounce to approximately SEK 11210 per troy ounce.
Again, even though the US dollar gold price fell from US$ 1302.50 to US$ 1252.50 during the first half of 2018, the SEK gold price has risen. Why? Because the Swedish Krona has weakened from 1 USD = SEK 8.023 at the start of January to 1 USD = SEK 8.950 at the end of June, meaning that the US$ 1252.50 gold price now translates into SEK 11,210 (1252.50 * 8.95).
During the year-to-date to end of June 2018, the gold price in Russian Rouble (RUB) has risen from RUB 75110 per troy ounce to RUB 78690, an increase of approximately 4.75%. Over this time, the value of the Rouble has fallen from approximately 1 USD = 57.7 RUB at the start of January to 1 USD = 62.8. Again this means that even though the US dollar price of gold has ebbed from US$ 1302.5 to US$ 1252.2 over the first 6 months of 2018, the RUB value of an ounce of gold has increased on the back of the depreciating RUB exchange rate (1302.50 * 62.8).
The story is similar in Indian Rupee. Over the year-to-date 2018, the gold price in Indian Rupee (INR) has risen 3.19% in local currency terms, from INR 83130 per troy ounce to approximately INR 85780 per troy ounce. In this case, over the first half of 2018, the US dollar strengthened from 1 USD = 63.85 INR to 1 USD = 68.45, with the higher Rupee gold price reflecting the US dollar gold price of 1252.50 translated into Rupee at a 68.45 to 1 exchange rate.
The upward price movements of the gold price denominated in Bitcoin are even more startling. From an opening price of approximately US$ 14,110 on 1st January 2018, the price of Bitcoin in US dollars fell dramatically over the first 6 months of the year, to around US$ 6400, i.e. a 55% drop in 6 months.
However, the gold price denominated in Bitcoin more than doubled over the same time frame, rising from 0.09 to 0.20 for the year-to-date. This would mean, for example, that had you traded out of Bitcoin and into gold at the start of 2018, your Bitcoin at that time would have had more than twice as much purchasing power in terms of purchasing gold as it had at the end of June.
A Better Way of Thinking
Given the constant fluctuations in fiat currencies, fixating on the gold price in US dollars, or indeed in any fiat currency, may not be the best way to think about your gold holdings. After all, many savers and investors in physical gold move their wealth and investments into physical gold precisely because it is not linked to fiat currencies and is a gateway out of government induced financial repression.
Remember that physical gold has no counterparty risk, and is not issued by any central bank, government or monetary authority. Physical gold is a mined tangible asset with inherent value and a limited supply.
A better way to think about an investment or holding in gold is perhaps by how much of it you hold. For example, I if had US$ 13,000, which I used to buy ten 1 troy ounce gold Maple Leaf coins, whatever then happens with the gyrations of fiat currencies, I still have those 10 gold maple Leafs and I can think of my holdings of physical gold as 10 gold Maple Leafs, weighing a combined 10 troy ounces.
Savers and investors move into physical gold precisely because it’s a monetary store of value that maintains its purchasing power over time and as such offers an exit from the debasement of fiat currencies such as the US dollar. Buying physical gold and then constantly trying to value it in terms of a fiat base currency is in some ways illogical. Surely a more logical approach is to say, I had x amount of dollars, but now I own X ounces of gold.
The same applies to gold’s role as a safe haven and as a form of financial insurance, i.e. physical gold is a form of wealth preservation in times of monetary and economic crisis. People make an allocation and use the safe harbor of physical gold precisely because it is ring-fenced from the turmoil of fiat currencies and associated central bank and government meddling. Again, surely a better way of thinking would be to say, I had x amount of fiat currency, I used this to buy gold, and now I have X ounces or X kilograms of gold. At a minimum, thinking in this way is a liberation from the constant barrage of mainstream media commentary about the US dollar gold price.
Collectively, the central bank sector claims to hold the world’s largest above ground gold bar stockpile, some 33,800 tonnes of gold bars. Individually within this group, some central banks claim to be the top holders of gold bullion in the world, with individual holdings in the thousands of tonnes range.
This worldwide central bank group, also known as the official sector, spans central banks (such as the Deutsche Bundesbank), international monetary institutions (such as the Bank for international Settlements) and national monetary authorities (such as the Saudi Arabian Monetary Authority – SAMA).
These institutions hold gold as one of their reserve assets. Any gold held by a central bank as a reserve asset is classified as monetary gold. In addition to monetary gold, central bank reserve assets include such things as foreign exchange assets (such as US Dollars) and IMF Special Drawing Rights (SDRs). In general, reserve assets held by central banks are managed according to the criteria of safety, liquidity and return.
Given that central banks don’t generally divulge the gold that they lend, swap or otherwise use as collateral, the question as to whether the official sector actually holds 33,800 of gold, or far less than that amount, is debatable. But for the purposes of this discussion, the amount of gold that the central banking sector holds is not important.
This discussion focuses on why central banks hold gold. This discussion also uniquely draws on actual responses from many of the world’s largest central banks as to why, in their own words, they hold gold. While the common reasons for central banks holding gold range from store of value, to financial insurance, to asset diversification, we thought its best to let the actual gold holding central banks state their case.
Taking the list of official sector gold holders compiled by the World Gold Council (which uses IMF data sourced from the individual banks), the Top 40 gold holders on this list were identified. While most of the Top 40 gold holders are national central banks or equivalent, there are also a small number of international monetary institutions in the Top 40, namely, the Bank for International Settlements (BIS), the European Central Bank (ECB), and the International Monetary Fund (IMF). A similar question was sent out to each bank and institution. The question was:
“in the context that central banks hold gold as a reserve asset on their balance sheets, can Central Bank X clarify the main reasons why it continues to hold gold as a reserve asset?”
The central banks which responded to this question with constructive or definitive answers were as follows:
Germany’s Deutsche Bundesbank, which is most famous recently for repatriating gold from New York and Paris, but which still stores gold in London and New York, placed a particular emphasis on gold’s high liquidity, as well as gold’s powerful role in financial crises and emergencies:
“The part of the Bundesbank’s gold reserves which is to remain abroad could, in particular, be activated in an emergency. Therefore one part will remain in New York following completion of the relocation – the United States has the most important reserve currency in the world – and one part in London, the world’s largest trading centre for gold.
In the event of a crisis, the gold could be pledged as collateral or sold at the storage site abroad, without having to be transported. In this way, the Bundesbank could raise liquidity in a foreign reserve currency. However, these are purely precautionary measures as we are not expecting this kind of contingency scenario at the current time.
Gold is a type of emergency reserve which can also be used in crisis situations when currencies come under pressure.”
In neighbouring Austria, the Oesterreichische Nationalbank (OeNB), Austria’s central bank, also mentioned the liquidity characteristics of gold, its benefits in a crisis, and also gold’s diversification benefits. The OeNB also recently made headlines when it too repatriated some of its gold back from storage in London. The OeNB told BullionStar that:
“Gold is an essential part within our strategy for crisis prevention and crisis handling and is held as liquidity reserve but is also a means to diversity our investments.”
Staying in the region, Switzerland’s central bank, the Swiss National Bank (SNB) highlighted the diversification and risk optimisation benefits of gold, responding that the National Bank holds gold because:
“As part of a good diversification of currency reserves, a certain proportion of gold can help reduce the balance sheet risk. The Swiss Federal Constitution, art. 99 stipulates that the SNB has to hold a part of its currency reserves in gold.
See also the speech given by Fritz Zurbrügg, Vice Chairman of the Governing Board of the SNB; it contains comments on the role of gold in the SNB’s currency reserves: .”
Article 99 of the Swiss Constitution in part says that “the Swiss National Bank shall create sufficient monetary reserves from its profits; a part of these reserves shall be held in gold“.
Fritz Zurbrügg’s speech cited by the SNB, which was mostly a politically loaded SNB attack against the 2014 Swiss gold referendum more than anything else, says in part that gold reserves can be used in crisis management and that the SNB’s gold is “stored in multiple locations for reasons of risk diversification“.
The Polish central bank, Narodowy Bank Polski (NBP), provided a very detailed answer to BullionStar covering gold’s lack of credit risk and counterparty risk and its finite supply, as well as gold’s safe haven and diversification benefits: The NBP said that:
“Gold, due to its attributes is a quite specific asset, and traditionally has been an important component of central bank’s foreign reserves.
The main features which support the unprecedented role of gold at the same time constitute the rationale for holding gold within central bank’s reserves. These are: lack of credit risk, independence from any country’s economic policy, limited size of the resource, physical features such as durability and almost imperishability.
Additionally, gold has been constantly perceived as a safe haven asset, and is particularly desirable in crisis times, when gold prices increase while other core assets’ prices have a downward tendency.”
Moving north to Sweden, the Swedish Riksbank, the world’s oldest central bank, responded to BullionStar with an explanation that its holds gold for liquidity, foreign exchange intervention, and diversification reasons:
“In brief, gold is a financial asset that, like the currency reserve, aims to ensure that the Riksbank can carry out its tasks. The gold can, for example, be used to fund liquidity support or foreign exchange interventions.
The main reason why Sweden still has a gold reserve is because the value of gold does not normally follow the same pattern as the value of the currency reserve. Consequently, the combined value of the gold and currency reserve is more stable than the value of the gold reserve and the currency reserve separately.”
Elsewhere in Europe, the Bank of Greece, Greece’s central bank, told BullionStar that it holds gold because of its safe haven and high liquidity characteristics during crises, crises which notably the Bank of Greece has faced plenty of in the recent past:
“The two main reasons central banks, including the Bank of Greece (typically prudent-oriented organisations), choose to include gold as a reserve asset on their balance sheets, are: 1) its recognition as a safe haven asset during periods of markets’ unrest and 2) the ability of instant liquidation in case of emergency.”
The Bank of Portugal, the Portuguese central bank, kept its answer generic, and seemed to speak on behalf of central banks in general, covering the main arguments why central banks as a group hold gold:
“Gold reserves are kept by Central Banks mostly for safety, liquidity, return and as a diversification strategy. Gold compares extremely favorably to other traditional reserve assets with high-quality and liquidity helping Central Banks to preserve capital, diversify portfolios, mitigate risks and on the medium/long-term Gold has consistently outperformed the average returns of other alternative financial assets.”
The United Kingdom’s official gold holdings are held in the name of HM Treasury, and not, as sometimes thought, in the name of the Bank of England. The Bank of England is custodian of the HM Treasury gold as well as custodian for the gold of many nations, including many of the central banks mentioned in this article. HM Treasury told BullionStar:
“The Government’s official holdings of international reserves comprise gold and foreign currency assets, and (IMF) Special Drawing Rights (SDRs).
HM Treasury appoints the Bank of England as its agent to carry out the day-to-day management of the international reserves. The Bank of England’s ‘Handbook on Foreign Exchange Reserves Management’ sets out the traditional reasons for countries holding gold in their foreign exchange reserves.”
Looking at this Bank of England Handbook, a section titled “The Role of Gold” sums up the UK’s traditional reasons for holding gold:
the “war chest” argument – gold is seen as the ultimate asset to hold in an emergency and in the past has often appreciated in value in times of financial instability or uncertainty;
the ultimate store of value, inflation hedge and medium of exchanges – gold has traditionally kept its value against inflation and has always been accepted as a medium of exchange between countries;
no default risk – gold is “nobody’s liability” and so cannot be frozen, repudiated or defaulted on;
gold’s historical role in the international monetary system as the ultimate backing for domestic paper money.
While the BoE author (John Nugée) questions if gold is suitable for the reserve management strategies of all central banks, he concludes that:
“The traditional view of gold as the ultimate asset still carries weight, and gold also provides an excellent diversification for currency assets; over the very long run there is a significant negative correlation between gold and other assets and a portfolio containing gold will show lower volatility over several business cycles.
Moreover central banks can increasingly manage their gold holdings to enhance returns through gold lending, gold swaps, collateralised borrowing, and so on. “
Notably, apart from South Africa’s answer below, the Bank of England paper is the only reference to gold lending and gold swaps in all the correspondence and references generated by these central bank responses. But it is not surprising that the Bank of England mentions gold lending and gold swaps, since the Bank of England is the world’s centre for these particular central bank activities.
Responding from Sydney, the Reserve Bank of Australia (RBA) told BullionStar that it views gold as financial insurance and to some extent as a form of asset diversification:
“The principal reason the Bank continues to hold some gold is as a contingency against unforeseen events. You may be aware that in 1997 the Bank sold 167 tonnes of gold, reducing its holdings from 247 tonnes to 80 tonnes after it was concluded that the gold holdings provided fewer diversification benefits than some other reserve assets.”
From this annual report, there are a number of reasons stated as to what the National Bank of Romania holds gold as a reserve asset:
“The gold reserve is meant, inter alia, to enhance confidence in the stability of the Romanian financial system and of the leu, being particularly useful in times of heightened economic turmoil (domestically or abroad) or geopolitical tensions.
Unlike other asset types, gold has no solvency risk attached, because it is not “issued” by an authority (such as a government or a central bank).“
Bangko Sentral ng Pilipinas, the Central Bank of the Philippines, also highlighted the themes of gold as a safe haven asset and as a portfolio diversifier, as well as an inflation hedge:
“The BSP, like other central banks, holds gold as reserve asset for the following reasons:
Diversification. By diversifying its reserve assets to include gold, the BSP is in a better position to manage risks and promote stability since gold is not directly influenced by economic shocks and policies. Moreover, its supply and demand are independent from the factors affecting the value of other reserve assets components.
Security. Gold is a real asset and bears no counterparty or credit risk. In times of uncertainty, gold is considered a safe-haven asset.
Inflation hedge. When inflation and inflation expectations are high, gold is considered a hedge against accelerating asset prices. Central banks buy gold to protect their currencies’ purchasing power in the event of an inflation.
Moreover, since the Philippines is a gold-producing nation, the BSP can purchase gold from small-scale miners, refine and cast these into gold bars (good delivery bars) that would qualify as reserve asset. Therefore, it can build up its gold reserves without relying too much on external purchases that would have to be paid for in foreign exchange.”
The Reserve Bank of South Africa (SARB) provided what is probably the most comprehensive answer of all the central banks polled, possibly a model text book answer. SARB said that:
the SARB as a central bank can be viewed as a “traditional gold holder” which has inherited gold reserves as part of a legacy and has over time kept its level of gold reserves unchanged to support a broad country strategy. South Africa being one of the main gold producers in the world, it is appropriate for the SARB to hold part of its official reserves in gold to confirm the country’s confidence in the metal.
More in general and similar to many other central banks, the rationale for SARB [holding gold] remains:
Gold acts as a store of value in times of crisis and is therefore seen as a safe-haven for capital preservation
Gold acts as a hedge against inflation. In other words, the price of gold tends to increase as inflation rises
Gold provides some diversification to official reserves – it’s rather low correlation with government bonds and money-market instruments
Gold has an intrinsic value and as a result it is nobody’s liability. As a unique asset class, it is not influenced by a country’s economic policy and outlook
Although short-term gold lending rates are currently very low, this has not always been the case and these rates may increase again, suggesting that it may not forever remain a non-income earning asset. In addition, when investing for longer time periods, gold loans earn positive, albeit low, returns when compared to other asset classes
Gold reserves can be regarded as insurance against unlikely, but extremely damaging events, such as the collapse of financial systems or debt default by major sovereign nations
Banco Central do Brasil, the Brazilian central bank, referenced reserve diversification and store of value in its response to BullionStar:
“The asset allocation of the Brazilian foreign reserves, including Gold, is a strategic decision of the Board of Governors. But, according to some Central Banks best practices, Gold as a commodity may be used as storage of value and to diversify their foreign reserves portfolio.”
While there is some skepticism as to how much gold the central bank of Libya actually has in the aftermath of its recent invasion, the Banque du Liban provided an interesting response on why it still holds gold, i.e. that its prevented by law from selling its gold holdings:
“When the LBP [Libyan Pound up to 1971] was very strong versus the USD in the early seventies ,Banque du Liban bought a large portion of its gold reserves what was very wise as the ounce price was around 42 USD.
Then after the turmoil that plunged the country into war and chaos and in order to preserve the reserves, the parliament issued a law preventing Banque du Liban from trading on gold and consequently from selling the existing reserves. The law is still in force and Banque du Liban is holding now the 15th largest gold reserves worldwide.”
European Central Bank (ECB)
The ECB responded to BullionStar’s question without actually addressing the question and by citing references which not not address the question either. This deflection strategy is not unknown in ECB press conferences. The ECB said that:
The only reference the 4th central bank gold agreement (which was between the ECB and European central banks) makes to gold reserves is that “Gold remains an important element of global monetary reserves“, but does not say why. Interestingly, the ECB’s ‘Foreign Reserves and own Funds” page states that “The ECB’s foreign reserves [which include gold] ensure that the ECB has sufficient liquidity to conduct foreign exchange operations if needed.”
These “foreign exchange operations” are, according to the ECB, mainly foreign exchange interventions, which can be unilateral or concerted (ECB member banks together), and can be centralised (directed by the ECB) or decentralised (carried out by the member banks on behalf of the ECB). So is ECB gold being used as liquidity in foreign exchange operations? The Swedish Riksbank mentioned this use of gold, so it might be an operational tactic of the ECB also.
A number of banks, although they responded, said that they could not comment on the reasons they hold gold. This secretive approach isn’t very logical and is even more surprising given that some of the banks which took this approach are all from otherwise progressive and advanced OECD economies.
The Banco de España, which is a member of the ECB’s Eurosystem alongside such central banks as the Portuguese, German and Austrian central banks, seemed to be particularly secretive as to why it holds gold, and told BullionStar:
“We do not make public comments on the reserve assets policy of the Banco de Espana so unfortunately we cannot help you in your query.”
“Regarding your inquiry on our gold asset, we cannot disclose any information other than the information published on our website due to our confidentiality policy.”
However, looking at the Bank of Japan website, there is nothing material on the site addressing why the BoJ continues to hold a very large amount of gold.
Bank for International Settlements (BIS)
The BIS, headquartered in Basel, Switzerland, is commonly known as the central bankser’s central bank. The BIS is also infamously known for organising and plotting gold price suppression and gold market interventions through its various Gold Pool cartels. As well as holding gold in its own name, the BIS holds gold on behalf of other central banks. Perennially secretive, it was not surprising that the BIS refused to answer BullionStar’s question directly, but at least they replied. The BIS said:
While there is some discussion of gold in BIS Papers 40 and 58, there is no discussion for the reasons why central banks hold gold as a reserve asset.
The cutoff point for this survey was the Top 42 gold holding central banks in the world, as this allowed the inclusion of Australia and Brazil, both of which are large gold holders and both of which are also large domestic gold producers. Between them, these 42 central banks and monetary institutions claim to hold 32,075 tonnes of gold, which is 95% of the 33,790 tonnes of gold claimed to be held by the 100 central banks on the World Gold Council list.
Of the central banks and institutions contacted, 21 replied with definitive responses. Arguably, this is quite a high response rate given that it was surveying a diverse cross-section of central banks from around the world on a subject which central banks are traditionally quite secretive about. Of the central banks in the Top 42 list, emails were sent to all of those that were contactable by email. In a few cases a web contact form was used.
Five central banks were not contactable as they did not have any obvious email address or web contact form. These banks were from Lebanon, Venezuela, Mexico, Taiwan and China. The Chinese People’s Bank of China is notoriously difficult to contact, even for BullionStar which has been writing about the PBoC and the Chinese Gold Market for years.
Four central banks had a bounce back on the email addresses stated on their websites. These were the central banks of Algeria, Egypt, and Indonesia. None of the three banks contacted by web form responded. These were the central banks of India, Turkey, and Saudi Arabia.
Not surprisingly, banks from more developed and democratic countries have a more transparent means of being contacted and they maintain media and communications staff. Therefore it is logical that these banks are more likely to have responded.
Of the 9 central banks and institutions which did not respond within a reasonable time-frame, they were then re-contacted, asking them had they had time to look at the query. Nearly all of these banks still did not reply. These institutions were the US Treasury, and central banks from the Russia Federation, South Korea, Kuwait, Kazakhstan, Belgium, Netherlands, Thailand, and Italy.
Its notable that the US Treasury, which claims to have the largest official gold reserves in the world, 8133 tonnes of gold, did not respond as to why it supposedly holds the largest gold reserves in the world. These supposed US gold reserves are as large as the gold reserves of the next three countries combined (Germany, Italy and France).
The IMF, headquartered in Washington DC, sent a generic reply to say that they had received the query, but they never responded. The Central Bank of Iraq received the query, forwarded it to their operations department, but there was no subsequent response.
Some of these non-responding banks have ‘reasons we hold gold’ sections on their websites or in their annual reports, so for anyone interested, those information sources could be consulted.
In their own words, the reasons central banks hold gold in large quantities are many fold, however there are consistent themes in the central banks’ explanations. Many of the respondents cited gold’s ability to be mobilized in a crisis, that ‘gold holdings can be activated in an emergency’, that gold is an ‘emergency reserve in a crisis’, ‘a contingency against unforeseen events’, a form of ‘insurance’, or as the Bank of England says ‘a war chest’ and the ‘ultimate asset to hold in an emergency’. As such, nearly all central banks referred to gold as a safe haven asset.
Many central banks mentioned gold’s high liquidity, and some referred to the ability to use their gold to raise liquidity in a foreign currency, even for foreign exchange intervention.
Gold’s role as a hedge against inflation was cited in a number of the central bank answers, which explains why central banks look to the gold price as a barometer of inflation expectations.
Many of the banks also pointed out that because of the unique attributes of physical gold, such as limited supply and mined into existence, gold does not have any counterparty risk or credit risk, and because it is not issued by governments, it has no default risk.
The return generating potential of gold was also cited by a few central banks via the use of gold lending, gold swaps and the use of gold as collateral. Interestingly, very few of the banks that responded directly mentioned gold lending, although many of these central banks do engage in gold lending. This in itself highlights the absolute secrecy surrounding all data relating to the gold lending market which is centred in London at the Bank of England and also through the Swiss National Bank in Berne and the Banque de France in Paris.
Many of the respondents also highlighted gold’s portfolio diversification benefits. Because its price is not affected by economic events in the same way as the prices of financial securities, the gold price is not highly correlated with the prices of other assets. Gold therefore brings stability to a reserve asset portfolio.
With such widespread support among the world’s central banks for holding physical gold, as a safe haven, as an inflation hedge, and as a form of investment diversification, their enthusiasm for gold in 2018 looks as strong as it has ever been in any decade of the modern era.
In August 2014, the long-standing and tainted London Silver Fixing daily auction was replaced by a newly launched London Bullion Market Association (LBMA) Silver Price daily auction. Similarly, in March 2015, the infamous London Gold Fixing daily auctions were replaced by revised twice daily LBMA Gold Price auctions.
In both cases, the new auctions, which the LBMA were quick to maintain control over, were trumpeted by the bullion bank controlled LBMA as ushering in an era of improved transparency in gold and silver price discovery within the London Gold and Silver Markets, a marketplace which dominates in setting the international gold and silver prices.
The LBMA Gold Price and LBMA Silver Price auctions are both critical to the world of precious metals, because they derive benchmark reference prices for gold and silver which are used extensively in the valuation of everything from Exchange Traded Funds (ETFs) to OTC precious metals contracts.
The benchmarks are also used as reference prices in all sorts of transactions from sophisticated wholesale market transactions of central banks, refiners and miners, to small quantity gold and silver coin purchases in bullion dealer shops all over the world.
Both benchmarks are also ‘Regulated Benchmarks’ under UK financial market regulations as “policed” by the UK’s Financial Conduct Authority (FCA).
It was therefore surprising that last week on 1 March, ICE Benchmark Administration (IBA), the administrators of the LBMA Gold Price and LBMA Silver Price auctions, issued a ‘Notification’ announcing that from 1 April 2018:
“the LBMA Gold and Silver Prices will not be available on the LBMA website until midnight London time on the date that the prices are set.“
More extensive quotes from the IBA Notification are as follows:
“Please note that effective 1 April 2018, the arrangements for delayed redistribution of the LBMA Gold Price and the LBMA Silver Price will change so that the delay period increases from 30 and 15 minutes to midnight London time.”
“delayed prices are available with no monthly fee, currently with a delay of 30 minutes from publication for the LBMA Gold Price and 15 minutes from publication for the LBMA Silver Price.”
“Any public websites that display the LBMA Gold Price and the LBMA Silver Price (currently with a 30 minute and 15 minute delay respectively) will be required to delay prices to midnight London time.”
So instead of a 30 minute delay, starting on 1 April (April Fool’s Day) the price for the morning LBMA Gold Price auction will not be available until about 14 and a half hours after the auction completes.
For the afternoon LBMA Gold Price auction, the price will only be available to the public about 9 hours after the auction finishes. For the LBMA Silver Price auction, the lag time on the public being able to see the daily reference price will now be 12 hours instead of 15 minutes. That’s a whopping 40 times longer. If only this was an April Fools joke. Alas, it’s not.
Any rational person would therefore conclude that the changes to the auctions being forced in by ICE Benchmark Administration (IBA) can only be described as torpedoing the concepts of price transparency and price discovery.
It should also be remembered that although IBA is the auction administrator, IBA would never make these publication time changes without the blessing of the LBMA, since the LBMA is the intellectual property owner of the benchmarks and the ultimate authority on these benchmarks as well as the gatekeeper on who can take part in these auctions.
“The revised arrangements for delayed redistribution of the LBMA Gold Price and LBMA Silver Price… recently announced by ICE Benchmark Administration (IBA)… are consistent with the timing of the publication of the LBMA Platinum and Palladium prices.”
As a reminder, the LBMA also controls the worldwide pricing for platinum and palladium through the LBMA Platinum Price auction and the LBMA Palladium Price auctions, both of which were awarded to the London Metal Exchange by the LBMA in 2014 during a secretive and non-competitive tender process.
The publication time (to the public) of the platinum and palladium prices is indeed midnight on the day the auctions occur. As the LBMA website states:
“Since 13 July 2015, the prices on the LBMA’s website are displayed with a delay until midnight following the setting of the prices each day.”
Why the worldwide platinum and palladium user base is not up in arms about these platinum and palladium price delays, only they can answer. But it is certainly a spin too far to think that anyone will accept the warped alchemy of the LBMA that because the LBMA Platinum and Palladium prices are ‘freely’ published only at midnight, that somehow this validates the decision of the IBA / LBMA to also roll back transparency in the LBMA Gold and Silver auctions to midnight.
Overall, this price publication time rollback is farcical, but not surprising in the world of the LBMA where black is white and where a step backwards is spun as a step forwards. This development might also be humorous if it wasn’t so important. Especially as the changes are being implemented on 1 April, April Fool’s Day! But the auction prices are important and also very influential in the global gold and silver markets. Hence, it is no laughing matter.
London Gold and Silver Trade Reporting: Not in Your Lifetime
Apart from the regressive step on LBMA auction price timing which will make the London gold and silver markets more opaque, the lack of Trade Reporting for London gold and silver trades is another area that continues to shroud the London Gold and Silver Markets in a virtual blanket of secrecy. That’s right, there are no trades reported in the London gold and silver markets. Zero. And there never have been any trades reported in the London gold and silver markets.
With no trade data, there is no market efficiency. How could there be any market efficiency when the market cannot analyse the trades that have taken place? Insider bullion banks are therefore free to trade gold and silver in the knowledge that the global markets don’t know what the insiders are doing. This also applies to the central banks in the London Gold Market in their buying and selling and lending and swaps transactions. So the London Gold and Silver Markets are not ‘Fair’.
At the end of January, I wrote an article titled “What’s Happening (or Not) at the LBMA: Some Updates” which in part discussed the broken promises on trade reporting made by the LBMA over the last 2-3 years, and the complete lack of progress that the LBMA has made on actually publishing any trade data to the Market. As early as January 2015 (over 3 year ago), the LBMA stated to the UK Regulator’s “Fair and Effective Markets Review” (FEMR) at that time that it would:
“welcome further transparency through post trade reporting, providing the industry with data that at the moment does not exist for the bullion market.”
During the course the next 3 years, the LBMA made many promises about publishing this trade reporting data, none of which came to pass.
For example, in February 2016 for trade reporting, the LBMA claimed that there was a “target delivery date in the second half of 2016”. This never happened.
The next broken promise, made at the LBMA annual conference in October 2016 claimed that”Phase 1 will focus on reporting and will launch in Q1 2017. This reporting covers all Loco London Spot, forward & option trading.” This never materialised.
This was followed by a litany of further promises during 2017 from the LBMA CEO, the LBMA Chairman and the LBMA Legal Counsel that all promised a publication date for trade reporting of early 2018. In May 2017, the LBMA CEO said that “Reporting will begin later this year in a phased approach and, following a period of quality checking the data, it is expected that it will be published in early 2018.“
In August 2017, the LBMA Chainman said that “it is expected that the first data will be published in early 2018“. At the LBMA’s annual conference in October 2017 in Barcelona, the LBMA’s Legal Counsel said that “the data will then be aggregated and published but not until Q1 2018.“
Now that the first quarter 2018 has come and nearly gone, you can probably guess what has happened. The correct answer is …nothing has happened, with the LBMA again totally disregarding its own promises and now unbelievably shifting the trade reporting publication date out an entire year more to “early 2019“. You couldn’t make this up.
And as per usual, there was no LBMA press release about this further delay, only a small reference buried in the back of the latest issue of its in-house magazine, The Alchemist. As per the reference:
“Many members have already begun to report their trades to the LBMA-i platform and many members are being on-boarded. The reporting process will continue during 2018 with a view to establishing a robust data set which will be published in early 2019“.
Nothing more can be said about this trade reporting fiasco other than it must be obvious to everyone that the LBMA and its bullion bank members do not want the transparency that gold and silver trade reporting would provide. Otherwise they would not have spent 4 years on a project which any individual investment bank could start and complete within less than 3 months.
As I said in the conclusion of my January commentary on this topic:
“In this extremely long drawn out exercise by the LBMA, it must be clear by now that the LBMA and its trading members are engaging in this trade reporting project on their own terms, and with little regard for the spirit and recommendations of the Fair and Efficient Markets Review. There is also a trend of missed deadlines, broken promises, and a lack of explanation for the delays.“
To this you can now add another year (to early 2019). Will we be saying the same thing in early 2019, of more missed deadlines? Based on the LBMA’s track record, any bookie worth their salt would probably say ‘Yes’.
This article is in 3 parts and covers a) upcoming trade reporting in the London gold market which is being led by the London Bullion Market Association (LBMA), b) the recent publication by the LBMA of a Guide to the London OTC precious metals markets, and c) an update on monthly vault reporting which the LBMA and the Bank of England launched in 2017.
LBMA Trade Reporting
The lack of trade reporting in the London gold market is possibly one of the biggest ommissions in global financial markets, since the lack of gold trade data totally obscures knowledge of gold price discovery in a market that is predominantly a synthetic paper trading market, but which also plays hosts to the secretive world of central bank gold trading and central bank gold lending.
Trade reporting in the London gold market is also an initiative which the London Bullion Market Association (LBMA) has been promising to establish for more than 3 years, but which as yet has not produced one scrap of gold trade data, as the launch date and publication dates for this trade reporting have been continually pushed out.
In June 2014, in the wake of widespread trading misconduct, the UK Financial authorities launched the “Fair and Effective Markets Review” (FEMR) to improve confidence in the UK’s Fixed Income, Currency and Commodities (FICC) as well as to improve the fairness and efficiency of those markets.
The Review was conducted by the Treasury, the Bank of England and the UK Financial Conduct Authority (FCA) with the help of an independent Market Practitioner Panel drawn from the financial sector.
According to the FEMR, fair markets are those that have features such as market transparency and open access, while efficient markets are markets where trading and post-trade infrastructures provide sufficient liquidity and allow participants to discover and trade at competitive prices.
The FEMR recommendations were published in June 2015, which is now over two and a half years ago. One of the key recommendations of the FEMR report was to promote fairer market structures in FICC markets including improved transparency in over-the-counter markets. The Market Practitioner Panel also recommended that standardized physical markets such as the gold bullion trading market should have post-trade reporting so as to:
“provide an understanding of liquidity, help to dispel some concerns over information abuse” and “work towards levelling the playing field.”
During the review process, the FEMR authorities allowed interested parties to submit their views on the review, and in January 2015, the LBMA submitted a letter to FEMR (c/o the Bank of England) in which it stated that:
“The LBMA would also welcome further transparency through post trade reporting, providing the industry with data that at the moment does not exist for the bullion market.”
While this statement sounds innocuous enough, in a case of trying to steer the FEMR agenda while making it appear to be fully in agreement, the LBMA submission letter also made it clear that its members wanted the “precious metals market” to “report anonymised unique transactional data”.
In its submission, the LBMA further showed its true colours, i.e. that it primarily represents the powerful bullion banks and their central bank clients, as well as representing the interests of the Bank of England, when in a case of managing the expectations of the FEMR, the LBMA stated that “the role of the central banks in the bullion market may preclude ‘total’ transparency, at least at public level.” It also said that “transparency could be increased via post-trade anonymised statistical analysis of nominal volumes, provided by the clearing banks.”
The LBMA also cleverly retained control of the FEMR related agenda as it applied to the gold market when in April 2015 the LBMA launched its own “Strategic Review” of the London bullion market by commissioning the “independent” consultancy EY to undertake the actual strategic review and write a report.
Although the LBMA at the time gave lip-service to transparency and said that it would engage with the global bullion market in shaping this strategic review, the reality was otherwise and, for example, this author’s request for engagement were ignored by the LBMA. Furthermore, the actual EY report and its recommendations were never published and even the well-connected Financial Times in October 2015 said that it had only “seen” a “copy of the recommendations”.
One of the initiatives that supposedly grew out of this EY review was a Request for Information (RFI) by the LBMA to potential financial technology service providers in October 2015. This RFI was to “to assist the LBMA in delivering the EY recommendations from the Strategic Review.”
What exactly the EY recommendations were is unclear, since the EY report was never published, but based on LBMA press releases, the goal of the review in terms of strategic objectives was said to be to enhance transparency, improve efficiency, and expand the use of technology in the gold and other precious metals markets.
The following month in November 2015, the LBMA announced that it had received 17 responses from 20 providers to its RFI queries, and that it had reappointed EY to help evaluate these responses.
Then on 4 February 2016 (i.e. exactly 2 years ago), the LBMA launched a Request for Proposals (RfP) process and asked a short-listed of 5 of the above 20 service providers to submit proposals to deliver a number of services to the London gold market including trade reporting, portfolio reconciliation and valuation curves, and also to build or provide infrastructure to support these services such as a submission interface, trade repository and data warehouse etc.
These services, including trade reporting, would, according to the LBMA press release, “be launched later in 2016”, and more specifically had a “target delivery date in the second half of 2016”.
Then a FEMR Implementation Report from July 2016 made note of the fact that the “LBMA had launched a specific ‘Request for Proposal’ focusing on trade reporting as a priority in response to the market commitment by LBMA members to enhance transparency.”
But strangely, even though the LBMA said in February 2016 that it would launch trade reporting ‘later in 2016’, and even though the July 2016 FEMR noted that ‘trade reporting was a priority’, it was only on 12 October 2016 that the LBMA actually announced the winning entry in the RfP process.
This winning entry was awarded to a joint bid by financial technology service providers Autilla and Cinnober’s Boat Services Ltd. On the same day, the LBMA pushed out the launch date of trade reporting even further into the future and said that “in the first quarter of 2017, the LBMA together with Boat…will launch a trade reporting service”.
At the LBMA annual conference in Singapore on 17 October 2016, the LBMA CEO Ruth Crowell also said in her speech that:
“Now, what are these New Services? First and foremost, Phase One will focus on reporting and will launch in Q1 2017. This reporting covers all Loco London Spot, forward & option trading.”
“Reporting will not only make us more transparent and professional as a market….it will also demonstrate of the size and liquidity of the market for clients, investors and regulators.”
Also, at the same conference In October 2016, Jamie Khurshid, CEO of Boat Services Ltd provided a timeline for the roll-out of the LBMA’s trade reporting, which included the following:
November 30 2016: Completion of design phase & engagement with member firm technology organisations
Q1 2017: Implement customization and configuration of solution
End Q1 2017: Complete on-boarding, certification & training
April 2017: Soft Launch to manage member flow exposure risk
“LBMA-i will be ready to start collecting data in the second quarter” (2017)
“The data will then be vetted before being published later in the year” (2017)
However, in the May 2017 issue of the LBMA’s magazine, The Alchemist, the LBMA had already shifted the trade reporting dates even further out, with the LBMA CEO saying that:
“Reporting will begin later this year in a phased approach and, following a period of quality checking the data, it is expected that it will be published in early 2018.“
Then in the August 2017 issue of the LBMA’s Alchemist, LBMA Chainrman Paul Fisher stated that:
“Market Makers are expected to start reporting in the coming months, followed by other members later in 2017. After a period of quality checking, it is expected that the first data will published in early 2018.“
At the LBMA’s next annual conference in October 2017 in Barcelona, there were a few additional references to trade reporting with the LBMA’s legal counsel saying that:
“From September this year (2017), Market Makers and some full trading Members have started to report trade data into the LBMA-i. The LBMA-i is the reporting hub that is provided by Boat and Autilla.“
“the data is sufficiently anonymous without giving away the underlying client. The data will then be aggregated and published but not until Q1 2018. This is to provide the time to analyse the data and again work with the market to understand what we need to be publishing.“
In this extremely long drawn out exercise by the LBMA, it must be clear by now that the LBMA and its trading members are engaging in this trade reporting project on their own terms, and with little regard for the spirit and recommendations of the Fair and Efficient Markets Review. There is also a trend of missed deadlines, broken promises, and a lack of explanation for the delays. Trade reporting data is being sent internally, analysed heavily, and filtered and scrubbed and sanitized. Nothing as yet has been published, and promised publication dates have been continually pushed out.
The LBMA doesn’t even try to hide this, saying in one of its conference presentations that the “decision to publicise anonymous, aggregate data sits with LBMA and Member firms” and that it requires “a minimum of 3 months to analyse data and agree parameters for public deferral”.
In all of this, gold investors of the world are getting the usual run around. The LBMA’s agenda for implementing trade reporting has far less to do with providing gold trade data to the investing public and the global gold market, and a lot more to do with influencing lobbying efforts with regulators and placating the woolly recommendations of soft touch regulators.
There isn’t even any clarity on what level of trade date will be made available to the public when and if it is finally released. The LBMA claims that the reporting by its trading members is mandatory and covers “all four metals” (gold, silver, platinum and palladium) in “spot, forward, options, deposits, loans and swaps, whether Loco London, Loco Zurich or other locations.”
If so, they should release all of this data, in granular format by category, showing for each metal, trade volumes by transaction type across spot, forward, options, deposits, loans and swaps. Transparency also calls for data that is useful for analysis, like the full suite of trade data that is reported by the world’s securities exchanges, where all trades would be reported, showing price, quantity, trade type (spot, option etc), transaction type (ETF, consignment etc), client counterparty types (central bank, broker, commercial bank, hedge fund, refinery, miner etc).
The LBMA’s reporting when published should also reveal the size of the physical gold market relative to the non-physical (paper) gold market. As the LBMA’s submission letter to FEMR in 2015 said:
“Reporting in the physical market, which currently does not happen, will need to consider market pricing factors such as premiums, shipping/storage, taxes and duties.“
So, yes, its possible that this information on the physical market can be reported. Technically there is nothing preventing this. But will it be reported? Likewise, will the trade data that is published reveal the magnitude of fractionally-backed unallocated gold trading that accounts for over 95% of daily London gold market turnover?
Another area critical for trade reporting report is central bank gold trades and central bank gold lending and gold swap related trades. Will central bank trades be reported as a grouping? Highly unlikely, as the LBMA already said that “the role of the central banks in the bullion market may preclude ‘total’ transparency, at least at public level.
But as I see it, almost none of the above will be reported by the LBMA, and the most we can expect per metal is a gross trade turnover figure rolled up by month, which is a figure that is practically useless in revealing anything about the real workings of trading in the London precious metals markets.
The LBMA Guide to the OTC Precious Metals Market
In early November 2017, the LBMA published an updated “Guide to the Global OTC Precious Metals Market”. The guide in pdf format can be opened here. The relevant LBMA press release is here. The guide is edited by Jonathan Spall, consultant to the LBMA, with input also from Aelred Connelly PR Officer to the LBMA.
On first reading, although well presented, it becomes apparent that this new Guide does not contain very much new information at all, with most of the information in the guide either already on the LBMA website, or taken from other LBMA publications and tweaked slightly. More recent developments such as London vault reporting or the LBMA Gold Price are included, but only the type of content that was already in the associated LBMA press releases.
If you didn’t know anything about the London gold market, this guide might provide some introductory detail, but other than that, it’s like a standard reference text which would be found in a reference library.
Unbelievably, this updated LBMA guide claims that it seeks to “make the moving parts of the market transparent”. However, in reality, it provides very little detail on transparency, so this claim rings hollow.
There is nothing revealed in the guide as to how the market really works, who the influential players are, and no data that would reveal the real state of the market, i.e. the fractional backing of unallocated accounts, the level of outstanding gold lending, the working of the gold vaults, how gold ETFs are allocated to and from what sources they are allocated from, how the Bank of England interacts with the commercial bullion banks and its client central banks, the trading volumes in the market and what transaction types they refer to etc.
This is a pity and a missed opportunity, since if it wanted to, the LBMA could have revealed how the moving parts of the market really work. But it is not surprising, since in its public and media interactions, the LBMA essentially acts as gatekeeper, regulating and filtering the information that it allows to be disclosed about the London gold market.
Structure of the Guide
Excluding the introduction and appendices, there are 22 sections in the guide. As well as gold and silver, the guide also covers the London Platinum and Palladium Market (LPPM), and the good delivery system for platinum and palladium.
TABLE OF CONTENTS
London Bullion Market Association
London Platinum and Palladium Market
London Good Delivery – Gold and Silver
Good Delivery – Platinum and Palladium
London Precious Metals Clearing Limited
Precious Metal Accounts
Lending and Borrowing Metal
Precious Metal Benchmarks
Bank of England
Futures Markets and Exchange
Key Facts about Precious Metals
Market Trade Statistics
Central Bank and Governmental
Ownership of Gold
Properties of Precious Metals
Frequently Asked Questions
Looking at the table of contents, the sections which would appear to be of particular interest and worth scrutinizing to see if they provide any new information are as follows:
Section 4: The Price
This section has short discussions of things like characteristics of the price (troy ounce, fineness etc), that are mostly taken from a page on the LBMA web site. Most importantly, this section does nothing to illuminate important questions about ‘price discovery’ or ‘where does the internationally quoted gold price come from?’.
There is nothing in this section about price discovery or that the prices on COMEX and the London OTC market create the international gold price. COMEX is mentioned elsewhere in the guide not in relation to price discovery.
You have to read between the lines to see how the guide addresses the issue of trading and price. It first says that it’s a wholesale market price [true]. It then mentions delivery location of London – i.e., ‘loco London’. All it says is as follows:
“The standard delivery location of gold and silver is London – Loco London. This is ultimately an account held with a clearing bank for precious metals and backed by metal held in a vault in London that forms part of the clearing system.”
However, this paragraph fails to mention that these are fractionally-backed unallocated positions, and that the position in the account with a clearing bank is a synthetic cash-settled gold derivative and really not backed by gold. The ‘backed by metal held in a vault in London’ is therefore misleading and disingenuous, since there is not necessarily any gold backing an ‘account held with a clearing bank’.
Section 4 then ends with a baffling and confusing paragraph which looks deliberately designed to mislead with a title of “The Metal’ Not the Account”, which says:
“Clearly, gold, silver, platinum and palladium are all traded metals. It is an important distinction that it is not unallocated or allocated metal that is traded, but the metal itself.
The terms ‘allocated’ and ‘unallocated’ simply reflect the type of account over which the metal clears post trading of the underlying metal.”
This line, that “it is not unallocated or allocated metal that is traded, but the metal itself” looks like an attempt by the author to try to justify that all trading in the London market is trading of underlying metal. However, when an unallocated position is traded, it is just a claim on a bullion bank that is being traded. There is no specific metal. Its is just a liability to a bullion bank that is traded. And since these positions are fractionally-backed, it is not metal which is being traded. So, its mischievous to say that “the metal itself” is being traded. Perhaps the LBMA should be asked “Show me which underlying metal is being traded?”
Section 7: London Precious Metals Clearing Ltd (LPMCL)
The LPMCL is one of the most important components of the London gold and silver markets since all trades that flow through these markets are cleared through LPMCL. But strangely, this section say very little about LPMCL and there is no discussion of the London precious metals clearing statistics or what they represent. This section merely says that LPMCL is a:
“daily clearing system of paper transfers whereby LBMA members offering clearing services utilise the unallocated precious metals accounts they maintain between each other” and that LPMCL lies at the heart of the Loco London (OTC) system”
This section could have actually provided real detail in LPMCL. But it didn’t. It just takes some text from the LPMCL website. The LPMCL subsection also has no explanation of the AURUM system and the fact that it its unallocated metal that is being cleared.
In fact, this entire LPMCL section is misleading because the section is titled “London Precious Metals Clearing Limited” and apart from a few introductory paragraphs about LMPCL, the rest of the section is devoted to physical gold vaulting, with sub-section headings such as” Vault Managers”, “Vault Operators Accreditation Scheme”, “Weighing Gold”, “Weighing Silver”, “Traditional Weighing”, “Weighing Platinum and Palladium”, “Scales”.
But clearing of paper transfers (which LPMCL’s AURUM processes) is not related to vaulting of physical metal. Allocating metal is distinct from the clearing of trades in AURUM. It’s a separate step. Notably, this section also doesn’t mention who the member banks of LPMCL are. They are HSBC, JP Morgan, Scotia, ICBC Standard, and UBS. Could it be trying to draw attention away from the names (the bullion banks) that actually run the LBMA?
Notably also, in the LPMCL website under Definitions, there is a definition for Paper Gold:
“A term used to describe gold contracts such as loco London deals and future contracts which do not necessarily involve the delivery of physical gold.”
Section 8: Precious Metal Accounts
This section begins with the strange, and misleading comment that “it’s the metal that’s being traded”:
“The Metal not the Account
Clearly, gold, silver, platinum and palladium are all traded metals. It is an important distinction that it is not unallocated or allocated metal that is traded, but the metal itself.”
Given that the LPMCL website definition of unallocated metal is an “amount of that Precious Metal which we have a contractual obligation to transfer to you”, the “metal not the account” statement above makes little sense and is illogical.
Section 9: Lending and Borrowing
The first subsection of section 9 is titled “Deposits and Leases”, but there is no mention that bullion banks predominantly do the borrowing or that the central banks predominantly do the lending, nor of the level of outstanding loans from central banks to bullion banks.
In a subsection called “Lending Allocated Metal”, it mentions official central bank holdings of 33,399.2 tonnes in July 2017, but makes no attempt to comment on how much of this metal is lent out:
As of July 2017, it has been calculated by the World Gold Council (using data from the International Monetary Fund’s International Financial Statistics) that the world’s central banks hold 33,399.2 tonnes of gold. A listing appears in section 22.
But the question must be asked, why does the LBMA need to resort to quoting figures from the WGC which are in turn just figures reported to the IMF when the LBMA can get lending info from its member firms about gold lending activity, and from the Bank of England.
This subsection also states that central banks lends to commercial banks. But there is no mention of which central banks and commercial banks are involved, or the level of gold lending by central, or the length of deposits, or whether they roll over the loans and for how long.
Interestingly, the same subsection confirms that if a central bank lends out its allocated gold bars, it doesn’t get back the same bars. As the text says:
“Therefore, allocated metal becomes unallocated when it is lent but can be returned as allocated. Albeit, it will be returned with different bars and will likely be of a (slightly) different weight.
‘’…it’s not possible to lend allocated metal. Allocated metal is associated with specific bars in an account and, clearly, it is not possible to lend specific bars and expect to get the same ones back while receiving a return”
Section 12: Bank of England
There is nothing new in this section, and only vague references of how central banks in the London gold market lend and swap gold with bullion banks.
“The Bank provides safe custody for the United Kingdom’s gold reserves (owned by Her Majesty’s Treasury) and for other central banks. This supports financial stability by providing central banks with access to the liquidity of the London gold market. It also provides gold accounts to certain commercial firms (including members of the LBMA) that facilitate access for central banks to the global OTC gold market.”
Section 14: Physical Market
This section is short and only addresses consignment stocks and inventory financing. Its quite telling that a Guide to the London OTC gold market only has one section (out of 22) about a ‘Physical gold market”. In a real, specialized physical gold market (not London), this would takes many pages to cover. The intro to this section even tacitly admits that loco London trading has nothing to do with the physical gold market:
” However, unlike Loco London trading, the physical market can require knowledge of a myriad of specific country requirements, the logistics and costs of moving precious metal around the world in various forms prior to fabrication, the manufacturing costs at the various refineries and sourcing refining/manufacturing capacity.”
Section 21: Market Trade Statistics
This section is as good as blank given that there are no gold market trade statistics. This page just gives some sketchy information about the delayed gold trade reporting project (see above).
Section 22: Central Bank and Government Ownership of Gold
For such a promising sounding section, based on the title, this section is a real letdown and has nothing in it except a short introduction followed by a replicated table of World Official Gold Holdings sourced from the World Gold Council.
This new updated LBMA Guide is in some ways similar to a ‘Limited Hangout’ as the term is used in the intelligence community, i.e. revealing partial truth while keeping the main body of information hidden, and acting as gatekeeper to drip feed some information.
In other words, some information is ‘hung out’ while the main body of information is kept hidden. The public see the information that is offered and thinks “this is useful, this source is credible” but then the public inquires no further. The LBMA can point to the fact it is ‘transparent’ about the gold market, while actually not revealing anything at all important about the real workings of said market. The LBMA has drip fed some information to the public while actually acting as gatekeeper and preventing any critical information from reaching the market.
One of the characteristics of a limited hangout is that nothing new is really revealed about the subject matter being discussed. This is exactly what the LBMA guide is. All of the information contained in the guide is already on the LBMA website or else within LBMA press releases.
There is also a failure to discuss the most important areas of the London Gold Market including the fractional reserve nature of unallocated gold accounts, what the daily gigantic trade volumes in gold and silver are based on, how the London OTC gold market that trades huge quantities of synthetic gold positions continues to set the international gold price, the extent of gold lending in the London market and who are the lending central banks and who are the borrowing bullion banks, the real role of the Bank of England in the London market and the lending market, how the LMPCL clearers maintain gold accounts at the Bank of England.
This goes back to the theme of transparency and secrecy that I discussed in a presentation in Singapore October 2016 titled “The Gold Market – Where Transparency means Secrecy”, a transcript of which can be read here.
This also relates to the topic of market efficiency and availability of market data and information. Because, a market which is secretive and which is not transparent, such as the London Gold Market, cannot be efficient, because some market participants, namely bullion banks and central banks, have an informational advantage over other participants.
And remember that the London Gold Market creates the international gold price, so the transparency of this market is not just a theoretical issue, it has real world implications for everyone who owns and transacts in physical gold around the world.
Vault Holdings Reporting
Last year in 2017, both the Bank of England and the London Bullion Market Association (LBMA) for the first time began publishing monthly data showing the quantities of physical gold and silver held in the wholesale precious metals vaults in London.
The Bank of England data covers monthly gold holdings held by its central bank and commercial customers in the Bank of England’s gold vaults. Note that the bank of England does not store any silver. The LBMA publishes monthly data on both the gold and silver held in the vaults of the 8 commercial vault operators which comprise its vaulting network.
Both sets of data are published on a 3-month lagged basis. The Bank of England began to independently publish its monthly gold vault data at the end of the first quarter 2017, and the first month’s figures for the end of December 2016 revealed that the Bank’s gold vaults held 5102 tonnes of gold. See “Bank of England releases new data on its gold vault holdings” for more details. Prior to 2017, the Bank only published gold vault holdings data once a year in its annual report.
The LBMA began publishing its vault data at the end of July 2017. Prior to that the LBMA had never published any data addressing precious metals holdings in its London vaulting network.
When the LBMA published its first set of data at the end of July, it stated that as of 31 March 2017 there were 7449 tonnes of gold and 32078 tonnes of silver in the vaults of the 8 commercial vault operators that comprise its vaulting network. See “LBMA Gold Vault Data – How low is the London Gold Float?” from 2 august 2017 for more details.
For some reason, the first set of LBMA was on a 4-month lagged basis, however, since then they have since caught up to reporting on a 3-month lagged basis.
Since it’s now 6 months since the LBMA first released its vault data, it’s timely to do a short update on the more recently published vault data from both the LBMA and the bank of England, starting from the end of March 2017.
At the end of March 2017, the Bank of England was storing 5081 tonnes of gold in the vaults under its headquarters building in London. As of September 2017 (the latest month published), the Bank of England was storing 5220 tonnes of gold. Therefore in that 6 month period, net gold holdings in the Bank of England’s vaults increased by 139 tonnes, or 2.73%. There were net additions of gold to the Bank’s vaults in 5 of those 6 months, but nothing really significant stands out. A net 43 tonnes were added in April, 33 tonnes in June, there was a net decline of 8 tonnes in July, and a net addition of 56 tonnes in September.
See chart below for a graphical representation of these Bank of England vault holdings changes.
Over the 6 month period from month-end March 2017 to month-end September 2017, the LBMA precious metals vaults saw a net inflow of 294 tonnes of gold, or a 3.95% increase. There were net additions over the same 5 months as the Bank of England witnessed. On an aggregate basis, total gold holdings rose from 7449 tonnes to 7743 tonnes with large net inflows of gold bars appearing in the LBMA vaults in April with 47 tonnes added, 45 tonnes added in June, 86 tonnes added in August, and September saw the highest inflow with 157 tonnes of gold added. Only July 2017 saw net outflows of 59 tonnes of gold bars.
See chart below for changes to these LBMA vault holdings totals.
Adding the gold inflows of 294 tonnes in the LBMA vaults to the gold inflows of 139 tonnes in the Bank of England vaults, this means that over the 6 month period being discussed, the total amount of gold stored in all the London wholesale gold vaults increased by 433 tonnes, which is the equivalent of just under 35,000 Good Delivery gold bars, each weighing approximately 400 ounces. Gold-backed ETFs which store their gold in London only added about a net 40 tonnes of gold over the same period, so could only explain a small part of the total increase.
The LBMA vaults on an aggregated basis added 1794 tonnes of silver over the same 6 month period to the end of September 2017. Total silver holdings rose from 32078 tonnes to 33873 tonnes. This was a net increase of 5.6% in the total silver quantity held in the vaults. The largest net inflows were in April with 749 tonnes added, and June with 658 tonnes of silver added. Silver-backed ETFs which hold their silver in London actually saw net outflows over the 6 month period in question, so these movements do not explain the large 1794 tonnes of silver added to the London vaults over this time.
Recently, Russian television network RT extensively quoted me in a series of articles about the US Government’s gold reserves. The RT articles, published on the RT.com website, were based on a series of questions RT put to me about various aspects of the official US gold reserves. These gold reserves are held by the US Treasury, mostly in the custody of the US Mint. The US Mint is a branch of the US Treasury.
As the subject matter of US gold reserves is broad and wide-ranging, the RT questions and my answers and opinions covered a lot of material and RT therefore decided to divide it’s coverage into 2 articles. The first RT article covered the lack of transparency into the US gold reserves, the fact that has never been any of independent audits of the gold, and the fact that a lot of gold bars that the US claims to hold are actually low purity gold bars which do not conform to international industry standards on tradable wholesale gold bars (i.e. Good Delivery standards).
The first article also touched on the international reaction to and the effects on the US dollar that might unfold if the US gold reserves were found to be less than they are claimed to be.
The second RT article looked at the gold holding strategies of China and the Russian Federation, where the central banks of both nations have been actively accumulating their national gold reserves over the last 10-15 years, and where both central banks have been vocal about this monetary gold accumulation, possibly in preparation for a future return to a gold-backed monetary standard.
The second RT article also explored the scenario under which both China and Russia could have significantly more gold accumulated than they have publicly divulged, a situation which if revealed would put the spotlight back on to the claimed gold holdings of the US Treasury.
Following the RT articles, on 11 January, Beijing-based Chinese business and financial website BWChinese picked up on my quotes in the second RT.com article, and in a geo-political article about oil, the Renminbi, the US Dollar and gold (written in Chinese), the Chinese website linked the gold accumulation of China and Russia to part of a strategy of moving away from the dominance of the US dollar. The BWChinese article (in Chinese) can be seen here.
Then finally on 16 January, Moscow headquartered Sputnik news agency, in an article titled “Chinese Media Explain How Russia & China Can Escape ‘Dollar Domination”, profiled the BWChinese article, and essentially (and conveniently) summarized the entire Chinese article back into English. Interestingly, there was therefore coverage of the topic of official US gold reserves from Moscow across to Beijing, and back to Moscow again, all within the space of a week and spanning 3 media publications, namely RT, BWChinese and Sputnik.
As background to this media coverage, this blog post looks at the topics covered in the RT.com articles, and details the opinions and material that formed the basis to the original RT articles.
The claimed physical gold held by the US Government
The US Government claims to hold 8133.5 tonnes of physical gold in its official reserves. However its impossible to verify this number because the entire story around the US gold reserves is opaque and secretive. Therefore, it’s impossible to say how much, or how little, physical gold the US actually has. This is so because there has never been a full independent audit of the US gold reserves, and the custodians of the gold (the US Mint and the Federal Reserve of New York) will not let anybody into the vaults to view the gold or to count it.
Even the details that have been provided on the supposed US gold holdings show that a majority of the gold bars are low purity and in weights that don’t conform to industry standard ‘Good Delivery” gold bar specifications.
The US Government gold reserves are held in the name of the US Treasury and are supposedly held in Fort Knox, Kentucky, and West Point, New York, and in the US Mint in Denver. And further small amount of US Treasury gold (5%) is supposedly held in the vaults of the Federal Reserve bank of New York (FRBNY). The US Treasury reports on this gold in a monthly report called “Status Report of U.S. Government Gold Reserve”.
Of the 8133.5 tonnes, this means, based on the official reporting, that:
58% is allocated to Fort Knox, Kentucky: 4583 tonnes
20% is allocated to West Point, New York State: 1682 tonnes
16% is allocated to US Mint Denver, Colorado: 1364 tonnes
5% is allocated to the NYFED: 418 tonnes
Afur ther 1% of the US gold reserves are listed by the US Treasury as being in working stock of the US Mint (a figure which never changes), which is 86 tonnes (or 2,783,218 ounces). This working stock probably represents a loan of gold that the US Mint took from the gold stock, that is now a liability of the US Mint to the US Treasury. So overall, 7629 tonnes of the gold is supposedly held between Fort Knox, West Point and Denver, and these holdings are said to be held over 42 gold storage compartments.
Interestingly, both the Fort Knox depository and the West Point facility are adjacent to US army bases. But the US Mint facility in Denver is not. Notably, the US Mint website was recently updated and no longer claims that any US gold is stored in Denver. See BullionStar blog “Is there any gold bullion stored at the US Mint in Denver?” for more details.
A “Good Delivery” gold bar, as traded and accepted on the international wholesale gold market, and as generally held by central banks across the world, has to satisfy the following criteria:
Have a minimum gold content of 350 fine troy ounces (approx 10.9 kilograms) and a maximum gold content of 430 fine troy ounces (approx 13.4 kilograms).
Have a minimum acceptable fineness is 995.0 parts per thousand fine gold
US Official Gold Inventories – Low Purity Bars
Surprisingly, there are gold bar weight lists in the public domain detailing all of the gold bars that the US Treasury claims to hold. These weight lists were included as part of a submission to a June 2011 US House Committee on Financial Services hearing on oversight of US gold holdings.
The US Treasury gold claimed to be stored at the Federal bank of New York (FRBNY) vaults is listed in another weight list which can be seen here (http://financialservices.house.gov/uploadedfiles/112-41.pdf) starting on page 132 of the pdf (or page 128 of the document). According to this inventory statement, about 5% of the US Treasury’s gold is held at the FRBNY in the form of 31,204 bars stored in 11 compartments (listed as compartments A – K). See BullionStar blog post “The Keys to the Gold Vaults at the New York Fed – Part 3: ‘Coin Bars’, ‘Melts’ and the Bundesbank” for screenshots of the actual weight list of US Treasury gold listed as being at the FRBNY. You will notice that a lot of the gold bars, about 50 tonnes worth, are very old bars, and are listed as being in the form of low gold purity coin bars, bars that were fabricated from melting down gold coins.
These weight lists states that there are just under 700,000 gold bars in Fort Knox, West Point and Denver combined, and 31,000 bars held with the NY Fed vaults in New York.
Two short tables summarising the weight and purity of the US Treasury’s gold bar weight lists can be seen at the Goldchat blog site in an article titled from March 2014 titled “US deep storage gold reserves bar list made public“. These tables are as follows:
However, the Fort Knox – West Point – Denver weight list shows that nearly all the gold bars in Fort Knox and Denver are “coin bars”, again gold bars that were produced from melting down gold coins. Many of the gold bars listed as being in West Point are also coin melt bars. Around half of the US Treasury’s gold bars at the Federal Reserve Bank of New York are also in the form of coin bars.
In general, most of the US Treasury gold comprises bars that are either smaller and larger than the weights of Good Delivery bars and that are of low-grade purity bars (below the required purity of Good Delivery bars); e.g. a lot of the gold bars that the US treasury claims to hold have gold purity of 0.90 or 0.9167. Overall, less than 20% of the gold supposedly held between Fort Knox, West Point and Denver is Good Delivery Gold.
Without looking at a US Treasury weight list of claimed gold bar holdings, there are other data points which collaborative that the US official gold stock contains a lot of coin bar gold and other non-industry acceptable gold.
In March 1968, the London Gold Pool collapsed primarily because the US Fed and US Treasury did not have any Good Delivery Gold to supply to the London market. Bank of England memos at that time make this very clear as they say that:
“It has emerged in conversations with the Federal Reserve Bank that the majority of the gold held at Fort Knox is in the form of coin bars, and that in certain cases these bars have a gold content of less than 350 fine ounces. If the drain on U.S. stocks continues it is inevitable that the Federal Reserve Bank will be forced to deliver what bars they have.
Capacity to further refine coin bars to the current minimum fineness of .995 in the United States is entirely inadequate to cope with conversion on the scale that would be required if the Americans wished to continue to deliver bars assaying .995 or better. Equally the capacity in the U.K. is inadequate for this task.”
“it would appear that the circumstances might well be such that very few bars of the current acceptable fineness could be found” (by the Americans).
Additionally, nearly half of the US Treasury gold auctions over 1978-1979 were of coin bars, suggesting that the US Treasury did not have sufficient access to good delivery gold even back then, and that it had ran out of good delivery gold by 1979.
Between May 1978 and November 1979, the US Treasury engaged in 23 gold auctions, and started by selling 8.05 million ounces of high grade gold (99.5% fine) before switching to selling 7.75 million ounces of low grade gold (90% fine). That was over 15 million ounces (466 tonnes) of gold in total auctioned by the Treasury. The last US Treasury auctions were on 16 October 1979 when 750,000 ounces of low grade coin bars, and finally on 1 November 1979 when the Treasury auctioned 1,250,000 ounces of low grade coin bars.
Note, that Deutsche Bundesbank ‘officially’ holds some of its gold in the vaults of the New York Fed, and has never been on record as having held gold in the US Mint’s Fort Knox depository. But the delays on the Germans repatriating their gold from the US to Germany in 2013 – 2014, and the fact that a lot of bars had to be smelted into new bars suggests that whatever source it came from, it was from a source that supplied low-grade gold coin bars. Could it have been Fort Knox?
Impact on US position in global economy due to Russia and China increasing their official gold holdings
China and Russia have both been aggressively accumulating their official gold reserves over the last 10-15 years. The Bank of Russia, on behalf of the Russian Federation, claims to now hold 1828 tonnes of gold. The People’s Bank of China (PBoC), on behalf of the Chinese state, claims to hold 1842 tonnes of gold.
However, a decade ago, the Bank of Russia only held 400 tonnes of gold. And in 2001 the PBoC held less than 400 tonnes. But now both these nations hold a combined 3670 tonnes of gold. See BullionStar blog “Neck and Neck: Russian and Chinese Official Gold Reserves” from October 2017 for more details.
Interestingly, both Russia and China publicize and promote their accumulations of gold and publicly refer to gold a strategic monetary asset. They make no secret of this On the flip side, the US does the opposite, and constantly downplays the strategic role of gold. China and Russia appear to view gold as the only strategic monetary asset that can provide independence from the US dollar.
So there is a shift occurring in terms of Russia and China building up their gold reserves, to maybe in future have gold-backed currencies, and to move away from the global dominance of the (unbacked by gold) US dollar.
And even if the dollar is backed by oil (petro-dollar), the gold accumulation by China and Russia can still be seen as part of a strategy to move away from international trade denominated in US dollars.
Additionally, both China and Russia could conceivably be holding a lot more gold than they declare in their official gold reserves. China through other entities such as SAFE, or the large Chinese commercial banks, and Russia through entities such as the Gokhran.
If China and Russia combined showed that they held more gold on a combined bases than the US, this would, even symbolically, be a low to the US dollar and to the position of the US in the global economy.
Is it Still Important for a Country to Hold Vast Gold Reserves
Yes. Gold is an asset of last reserve for central banks. Gold is a high-quality asset, analogous to a war chest. Countries with larger gold reserves are more immune to crises. And if gold is revalued in a new international monetary system, the countries with more gold will be more powerful monetarily.
Physical gold is highly liquid, it doesn’t have any counterparty risk, it’s a safe haven asset in times of crisis, and its an asset that can be called upon for liquidity by central banks in times of monetary crises.
Central banks can also activate gold by lending, leasing and swapping part of their gold holdings to generate a return. Most central banks value gold at market prices on their balance sheets, which creates one of the most valuable assets on most central banks’ balance sheets.
Is Holding Physical Gold becoming an Outdated Concept in the Western World
It’s true that western investors seem to now place less emphasis on ownership of physical gold relative to the past. For example, look at the huge growth of over-the-counter trading in London of synthetic fractionally backed gold positions and the huge growth of gold futures trading on venues such as the COMEX, both of which are mostly cash-settled and both of which have very little to do with any underlying physical gold holdings. The growth of gold-backed ETFs where the holders cannot take delivery of any gold is also symptomatic of this dislocation. However, these trends are in the institutional space.
Physical gold demand among retail investors is still very strong. Just look at some of the large physical gold markets such as Germany, Switzerland, Austria and the US and Canada where retail investors still know the value and benefits of holding real physical gold, as opposed to paper promises.
If the US doesn’t have as much Physical Gold as it Claims, what does it mean for the US Dollar in International Trade.
If the US was shown to have less physical gold that it claims to have, it would have a negative effect on the US dollar is indirect ways, but not through an immediate weakening of the US dollar or an immediate shift away from using the US dollar for international trade.
Firstly, proof of lower US gold reserves than claimed would add pressure for a full independent audit of all US gold reserves. It would also put the spotlight on the gold reserves of other major trading blocs such as the Eurozone and China and Russia, and open up a debate as to what is the role of gold in the international monetary system. Which is something the US government constantly tries to avoid (i.e. discussion about gold). It might also precipitate a move by nations which seek to replace the US dollar to advance their agendas in introducing an international monetary system backed by gold, knowing that the US would be on the back foot.
It would also then refocus attention on international holders of US dollars pre-August 1971 when Nixon closed the gold window, because after all those outstanding dollars held at the time by foreign central banks are still technically convertibility into gold at the official gold price of the time.
Indirectly, if the US Treasury gold holdings were seen to be falsified, it would also add pressure on the central banks that claim to hold gold at the Federal Reserve Bank of New York to prove that they too hold the amount of gold they claim to on US soil.
Can We Expect a Proper Audit of US Treasury Gold Reserves
A proper audit of the US Treasury gold reserves would be in the form of a full and independent audit of all US Treasury claimed gold reserves at the same time, i.e. across the 4 claimed storage locations. Weighing all gold bars, checking assays and publishing a full weight list in the public domain. It would have to be conducted by a fully independent auditor.
Can we expect such as proper audit of the US gold reserves? No, never. The chances of that ever happening are practically zero since the US Treasury (via the US Mint) does not even let anyone in to see the US gold reserves. Nor does the NY Fed ever let anyone in to see all of the US gold (and foreign held gold) claimed to be held in the NY Fed vaults. There has never been at any one time a full physical independent audit of all the gold which the US Treasury claims to hold.
Even a summary explanation of the US gold ‘audit’ history is confusing and convoluted. Try explaining it to someone, and they will quickly come to the same conclusion.
For example, the physical gold audit at Fort Knox in 1953 was only conducted on gold within 3 compartments and this represented only 13.6% of the gold claimed to be held in Fort Knox at that time. Anyway, this historic audit is so long ago it is irrelevant since much of the US gold was sold off in the 1950s and 1960s.
There have supposedly been audits of the US Treasury gold since 1973, but these have been partial, confusing and have dragged out over many years (continuing audits), and most importantly, these audits have never been conducted by an independent auditor.
Over October and November 1974, a physical audit was carried out on 21% of the gold held at Fort Knox. This audit was done by the General Accounting Office (GAO), in conjunction with auditors from the US Mint, the Bureau of Government Financial Operations (BGFO), US Customs, and the Treasury Department’s Office of Audit.
In June 1975, the US Secretary of the Treasury ordered a continuing audit of all US Government-owned gold, with a target of auditing 10% of US gold every year. A committee comprising the US Mint, the US Bureau of Government Financial Operations (BGFO) and the Federal Reserve Bank of New York were appointed to carry out these continuing audits. Continuing audits were undertaken between 1975 and 1986, after which the Treasury claimed that 97% of all US gold had now been audited.
By September 1982, the continuing audit program had supposedly audited 100% of the gold stored at Fort Knox. By September 1984, the continuing audit program had supposedly audited 99.9% of the gold stored at the Denver Mint.
But in 1983, the US Department of Treasury’s Office of the Inspector General (OIG) issued revised audit guidelines and more than 1,700 tonnes at Fort Knox and Denver being supposedly re-audited between July 1983 and July 1986.
Then from 1986 to 1992, the US Mint supposedly undertook additional audits of gold storage compartments that hadn’t been placed under official joint seal by the continuing audits committee.
In 1993 the OIG took over the annual audits of US Mint held gold. By 2008, all the gold held by the Mint had been placed under official seal. In 2010, the OIG claims to have renewed the joint seals on all 42 gold storage compartments at the US Mint storage facilities.
These annual audits merely consist of checking the official joint seals put on the vault compartment doors during the continuing audits from 1974 until 1986,
There should be 13 annual audit reports of the continuing audit. But 7 of these audit reports are missing and neither the OIG or the Treasury Department, or the National Archives can produce them.
Is physical gold still moving from West to East
Yes, there is a trend of physical gold moving from West to East, much of which goes to China and India. In the case of China, gold imported into the Chinese market cannot easily flow back out of China due to general prohibitions on gold exports out of China. And so it stays there and is accumulated by the Chinese population. The People’s Bank of China (PBoC) (Chinese central bank) has also been accumulating gold reserves, some of which it buys on the international gold market (e.g. in London) and transports by air to Beijing.
In the case of India, much of the gold imported into India stays there as is it horded by the Indian population. Net imports of gold into India are nearly as high as gross gold imports, since gold exports from India are quite low (mostly in the form of gold jewellery).
A final Point – Chinese gold at the NY Fed: 600 tonnes
After translating the 11 January BWChinese article from Chinese into English, I noticed that the last few paragraphs discussed Chinese gold being held at the Federal Reserve Bank of New York, and the inability of the Chinese to get this gold back. The relevant paragraphs are as follows (which I translated and re-edited):
“A BWC Chinese network report mentioned that the Federal Reserve had on several occasions rejected China’s request to ship back about 600 tonnes of gold reserves stored in underground vaults in the New York.
Some analysts said at the time that for China to overcome the sanctions imposed by the United States, it had no choice but to use gold as collateral. A report by People’s Daily’s “IFC” in December 2012, “How Much Gold Has Been Pocketed by the United States” has been confirmed:
It is reported that more than 60 countries have allocated some or most of their gold reserves hidden in the New York Federal Reserve Bank’s underground vault.
Some experts said that China once had shipped 600 tons of gold reserves to the United States and continuing its search, found that China first deposited its gold reserves with the United States in 1990.”
This is the first time I have heard of such a scenario. Perhaps its true. If its true, it could mean that the People’s Bank of China (PBoC), the agent of the Chinese State, could still be holding a significant quantity of its gold in the vaults of the NY Fed, that the Fed will not return. There again, maybe it’s not true, or my translation might be wrong. Perhaps a native Chinese speaker can read the text and translate it into English properly. The text is as follows:
Although the US is very secretive about its official gold reserves and their storage, so too are the Russians and the Chinese. But whereas the Americans downplay the role of gold as a monetary asset, the Russians and Chinese do the opposite and openly talk about the strategic importance of gold.
I find it interesting that it takes a Russian media publication and a Chinese media publication to openly discuss the state of the US gold reserves, while at the same time the mainstream US financial media will never do any serious investigative analysis of the official gold reserves in their own country.
What would Trump make of all of this? Especially since he is supposed to like the shiny stuff himself. Perhaps an enterprising US reporter can ask Trump next time they are in the same room. Perhaps trump would tell him to get “out’. Perhaps not. last word goes to Trump, who in March 2015 said the following in interview with WMUR-TV, New Hampshire, in a segment called ‘Conversation with the Candidate’,:
“In some ways, I like the gold standard and there is something very nice about it but you have to go back at the right time… We used to have a very solid country because it was based on a gold standard for it.
We do not have that anymore. There is something very nice about the concept of that. It would be very hard to do at this point and one of the problems is we do not have the gold. Other places have the gold.“
On the afternoon of Monday, August 21, US Treasury Secretary Steven Mnuchin, Senate Majority Leader Mitch McConnell, Kentucky Governor Matt Bevin, and Kentucky Congressman Brett Guthrie took a visit to the vault of the US Mint’s gold depository in Fort Knox, Kentucky, a vault which, according to the US Treasury, holds gold bars containing 147,341,858 fine troy ounces of gold (4583 tonnes of gold).
The trip was notable in that it is one of the rare occasions in history that a US political/congressional delegation has ever visited the Fort Knox depository, and Mnuchin is now only the 3rd treasury secretary ever to make this visit.
The trip was also notable in that unlike previous political excursions to the vault, the Mnuchin-led visit was very low-key, it was announced to the media and public at extremely short notice, and there is no evidence that any media representatives participated, or at least if they did, they have kept very quiet about it.
In contrast, the previous congressional visit to the Fort Knox depository in September 1974 was heavily publicised in advance, was accompanied by 100 news reporters and photographers, and it even documented the visit via photographs and film which were released to the public.
Mnuchin’s visit to the vault merely appears to have taken the form of a quick peek into one of the cramped vault compartments within the Fort Knox vault, and therefore can only be seen as an odd PR stunt whose real intent remains unclear, which does nothing to improve the transparency of the notoriously secretive gold depository, and which on balance has now re-opened scrutiny on how much gold is, or is not, actually stored in the compartments of the Fort Knox vault.
The trip to the Fort Knox vault was only announced by Mnuchin on Monday morning, August 21 (the morning of the Fort Knox visit) during a speech to the Chamber of Commerce in Louisville, Kentucky, which Mnuchin and Mitch McConnell were attending.
As Grace Schneider, a business reporter for the Louisville, Kentucky based Courier-Journal tweeted that morning:
So Mnuchin announced the visit literally a few hours before it took place. Fort Knox is located about 40 miles south-west of Louisville. In his Monday morning speech at the Chamber of Commerce, the Washington Examiner reports that Mnuchin made the bizarre comment that “I assume the gold is still there”. McConnell, at the same time, quipped that “we’re going to find out”. Mnuchin’s comment is bizarre because as US Treasury Secretary, he is top official of the US Treasury.
The US Treasury owns the gold in Fort Knox. The US Mint is just the custodian. The Director of the US Mint and all other senior officials report to Mnuchin. At any time, Mnuchin can get a full and complete high-level briefing on the real status of the US gold reserves. He can also get a full de-briefing on the extent to which the US gold reserves have been audited over the years – or not audited as the case may be. To say that he assumes the gold is still there shows either a flippant view of the expected accountability of a US Treasury Secretary, or else a disregard for the responsibility to which the US public has entrusted him.
It’s not clear whether any journalists actually accompanied the politicians on last Monday’s visit to the Fort Knox depository. An article by an AP journalist from Kentucky named Adam Beam was published on August 22, the day after the visit to the Fort Knox depository.
Beam, based in Frankfort, Kentucky is listed as a Kentucky Statehouse reporter for AP, so would presumably, due to this role, be well-known in Kentucky political circles and would have privileged access to the Mnuchin & Co delegation. AP’s Beam wrote that:
“Inside the famed vaults at Fort Knox, Senate Majority Leader Mitch McConnell held a 27-pound gold bar in his hands Monday as part of the first civilian delegation to see most of the country’s bullion reserves in more than 40 years.”
But AP’s Beam also wrote in the same article that:
“in an interview, McConnell said he could not say much about the visit for security reasons”
suggesting that Beam may not have been on the actual visit to the vault, because if he was, he would have no need to interview McConnell and could have recorded the vault details himself. if the AP Kentucky Statehouse reporter wasn’t even on the visit, what hope was there for other reporters?
As far as I can see from related coverage, there are no photos of any of the delegation either inside the depository. This would suggest that there were no media photographers nor camera people present inside the vault. For such a historic trip, this is itself quite bizarre. Until that is, you realize that in 1978, the US Mint made the internal plans and structures of Fort Knox classified, which effectively bans any photography or filming from inside the depository.
Only One Compartment Viewed
The same AP article quoted Kentucky Governor Matt Bevin as saying that [Fort Knox] “officials had to cut a seal to open the vault for them“. What Bevin means is that the seal on the door of one of the compartments in the vault was cut so that they could open the door to the compartment. According to the US Mint, Fort Knox stores US Treasury gold bars in 13 compartments within the Fort Knox vault. See BullionStar article “Second Thoughts On US Official Gold Reserves Audits” for details.
By opening just one of the 13 compartments for Mnuchin & Co to peer into, that leaves 12 of the supposed gold storage compartments that were not opened. Still, this didn’t stop Mnuchin stating on Twitter that “Glad gold is safe“. This is a ridiculous statement from a US Treasury Secretary when you consider what the actual visit consisted of, and it would be remiss of the US public to put any trust in it.
Kentucky Governor Matt Bevin also said something similar in a radio interview following the vault visit, i.e. that the delegation only saw a subset of the supposed gold. Interviewed by Newradio 840 WHAS, and quoted by televison channel WHAS 11, Governor Bevin said:
“I didn’t see every bit of it [the gold], but the amount that I saw was impressive”
The US Treasury Secretary takes a quick look into one of 13 compartments in the vault and says “Yep, the gold is safe, it’s there“. Imagine a commercial gold vault operating on the basis of how Fort Knox operates. It couldn’t. I have been in BullionStar’s precious metals vault in Singapore. I have looked around. There are a lot of gold bars, silver bars, gold coins and silver coins. But I couldn’t say based on a quick casual observation that ‘yep, all the gold and silver is there’.
That’s why there is a rigorous inventory system at BullionStar, and that’s why BullionStar employs a transparent multi-layered auditing system comprising 5 different audit schemes that are all accessible to customers. To ensure that at any given time, both BullionStar staff and customers know exactly what is inside the BullionStar vault.
But the US Treasury seems to think its sufficient that a quick unrecorded trip by 4 US political insiders can somehow instill confidence that all the gold that is claimed to be in Fort Knox is actually there. In case readers may think BullionStar is being unfair to the US Treasury, its worth noting that there have been many articles published on the BullionStar website by Koos Jansen that highlight the myriad of inconsistencies about the supposed gold reserves stored at Fort Knox and US government auditing of said gold reserves. See for example:
As a freebie trip for 4 select political insiders, last Monday’s trip to Fort Knox was undoubtedly a memorable one for them. In the same radio interview Bevin said that:
“This is like the mother of all field trips. This is pretty cool”
But as a validation and verification of over 56% of the supposed US Official Gold Reserves, the visit was a complete farce. Announced the morning it took place. No evidence that any media were allowed to participate. Only peeked into one of the 13 storage compartments. And then to round it off, Mnuchin (an ex Goldmanite) tweets that ‘Glad gold is safe“. You couldn’t make this up. And finally, no mention of the fact that most of the gold bars even supposedly stored in Fort Knox are low purity ‘coin bars’ made from melted down gold coins. In fact, of all the gold bars reported to be held within the US Gold Reserves, only 16% of these bars are of LBMA Good Delivery size and purity range.
On August 10, the Wall Street Journal (WSJ) published an article about the Federal Reserve Bank of New York (FRBNY) custody gold and the NY Fed’s gold vault. This vault is located under the New York Fed’s headquarters at 33 Liberty in Manhattan, New York City.
The article, titled “The Fed Has 6,200 Tons of Gold in a Manhattan Basement – Or Does It?”, can be read on the subscription only WSJ site here, but is also viewable in full on both the Fox News Business and MorningStar websites, here and here. It also appeared on the front page of the Wall Street Journal print edition on Friday, August 11.
The NY Fed offers a ‘custody gold’ storage service to its customers, customers which are exclusively foreign central banks and international financial institutions, except notably, the US Treasury is also a gold storage customer of the NY Fed. The Fed’s gold vault, which is on level E (the lowest level) of its basement area under its downtown Manhattan headquarters, open in 1924, and has been providing a gold storage service for foreign central banks since at least the mid-1920s. Custody gold means that the NY Fed stores the gold on behalf of its customers in the role of custodian, and the gold is supposed to be stored on an allocated and segregate basis, i.e. “Earmarked gold”.
NY Fed stored gold has risen in public consciousness over the last few years arguably because of recent Bundesbank gold repatriation operations from New York as well as also similar gold repatriation from the central bank of the Netherlands. The moves by the Chinese and Russian central banks to actively increasing their gold reserves have also put focus on whether the large traditional central bank / official sector gold holders (such as Germany, Italy and the International Monetary Fund) have all the gold that they claim to have, much of which is supposedly stored at the NY Fed vault.
The main theme of the August 10 WSJ piece, as per the title, is whether the NY Fed actually stores all the gold in the vault that its claims to store, a theme which it introduced as follows:
“Eighty feet below the streets of lower Manhattan, a Federal Reserve vault protected by armed guards contains about 6,200 tons of gold.
The WSJ article intersperses a number of facts about this custody gold alongside various quotes, and while I cannot speak for anyone else quoted in the article, the quotes could probably best be described as being on the sceptical side of the NY Fed’s official claims.
Since I am quoted in the article, it seems appropriate to cover it here on the BullionStar website. The relevant section is as follows:
‘But “no one at all can be sure the gold is really there except Fed employees with access,” said Ronan Manly, a precious-metals analyst at gold dealer BullionStar in Singapore. If it is all there, he said, the central bank has “never in its history provided any proof.”
Mr. Manly is among gold aficionados who wonder if the bank is hiding something about what it’s hiding.’
Let me begin by explaining the basis of my quote.
The only reporting which the New York Fed engages in for the custody gold recorded as being held on behalf of its customers (central banks and official sector organizations) is a single number communicated each month (with a 1 month lag) on Federal Reserve table 3.13 – “Selected Foreign Official Assets Held at Federal Reserve Banks” and listed as “Earmarked Gold”.
As of the end of July 2017, the Fed reported that it was holding $7.84 billion of “Earmarked Gold” in foreign and international accounts. This amount is a valuation at the official US Treasury / Fed price of gold of US $42.22 per fine troy ounce, and which works out at approximately 5775 tonnes of gold.
The reason that this figure differs from the ~6200 tonnes number quoted by the Wall Street Journal is that it doesn’t include 416 tonnes of US treasury gold also claimed to be stored in the NY fed vaults. When the US Treasury claimed quantity is added, the figure comes to 6191 tonnes, hence the WSJ citation of circa 6200 tonnes.
NY Fed Gold – Opacity and Secrecy
Other than that, the Federal Reserve does not publicly communicate any other relevant information or details about the quantity of custody gold bars said to be stored in its vault, and furthermore, the Fed has never in its history publicly communicated any such relevant details or information.
So it is a fact that the Federal Reserve has “never in its history provided any proof” that all the gold it claims is there is really there, hence the quote is factual, and hence the connected quote that “no one at all can be sure the gold is really there except Fed employees with access” is a valid conclusion also.
The NY Fed has never provided any of the following:
– details of the names of the central banks and international financial institutions that it claims to hold gold on behalf of
– details of how much gold is held by each customer
– details of whether any of the gold stored in the vault is under lien, claim encumbrance or other title
– details of whether any of the custody gold is lent or swapped
– details of location swaps and / or purity swaps of gold bars between the NY Fed vaults and other central bank or commercial bank vaults around the world
– details of the fact that nearly all of the gold bars supposedly held in the NY Fed vault are a combination of old US Assay office gold bars and low grade coin bars made from melted coins
The NY fed has never allowed the conduct of any independent physical gold bar audits or published any results of its own audits. It has never published any gold bar weights lists (note one weight list for some US Treasury gold bars stored at the NY Fed vault made it into the public domain in 2011 as part of documentation that was submitted to a ‘Investigate the US Gold’ hearing in front of the US House of Representatives Committee on Financial Services. That weight list starts on page 132 of the pdf which can be accessed here.
Mainstream Media Cheerleaders and Detractors
The lack of transparency of the New York Fed as regards the custody gold that it stores for its central bank customers is therefore a valid point. The Wall Street Journal article of August 10 is merely highlighting this valid point. However, predictably this did not stop some mainstream US media critics from denouncing the WSJ article such as can be seen in the following tweet from a POLITICO ‘chief economic correspondent‘.
In which the WSJ takes seriously the lunatics who think the NY Fed is lying about what's in its vaults. https://t.co/83LsDN4ApP
I would wager that this Ben White chap has never asked the New York Fed any serious questions about its custody gold, preferring instead to throw around tweets using accusatory language such as ‘lunatics’. But this sort of reaction is par for the course from elements of the cheerleading US mainstream media, who seem to feel an obligation to protect the Fed and the status quo of the incumbent central bank led financial system from any valid criticism.
However, I have asked the NY Fed serious questions about its custody gold.
– the number of central banks and official sector institutions that have gold in storage with the NY Fed in Manhattan.
– the identities of these central banks / official sector institutions that have gold in storage.
– could FRBNY CBIAS / Account Relations provide me with gold bar weight lists for the gold holdings that these central banks and official sector institutions hold with the NY Fed?
As the first query went unanswered, I then resubmitted the query a month later in mid-March. On neither occasion did the Fed respond or acknowledge the request. Realistically, I didn’t expect the NY Fed to answer, since they have track record of being aloof and unanswerable to anyone but their own stakeholders, however, the outcome of the emails has established that the NY Fed does not engage on this issue nor provide any transparency in this area to the public.
I had expected the WSJ article to be a lot longer and more in-depth than it actually was, and to obtain some publishable response from the NY Fed. The WSJ however says in the article that:
“The Fed declined to comment”
The lack of any quotation by the Fed within the WSJ article is a glaring omission, and actually proves the complete lack of cooperation by the Fed on the entire topic of gold bar storage. The WSJ article does say that it filed Freedom of Information (FOIA) Requests with the NY Fed, which again underscores that without FOIAs, the Fed wouldn’t voluntarily reveal anything.
What these Freedom of Information requests actually contained is not, however, even revealed by the WSJ, except hilariously in one passing reference to “a heavily redacted tour guide manual“. Hilarious in the sense that the NY Fed would even see fit to heavily redact a simple tour-guide manual. To quote the WSJ:
‘The Wall Street Journal filed Freedom-of-Information requests with the New York Fed. Among the Journal’s findings, from a heavily redacted tour-guide manual provided by the Fed: Tour guides are informed that “visitors are excitable” and should be asked to “please keep their voices down.”‘
Why doesn’t the Wall Street Journal do a full publication of all the NY Fed FOIA responses that it received and publish them on its website? This at least would be some sort of backup evidence to the published article.
There are a multitude of angles that the Wall Street Journal could cover if it wanted to do a proper investigation into the gold bars supposedly stored in the NY Fed vault below 33 Liberty on Manhattan Island.
Why did the German Bundesbank take multiple years to transfer back a small portion of the gold that it claimed to have held at the NY Fed vaults, with much of that gold having to be recast / remelted into new bars en route to Frankfurt in Germany. If the gold was allocated and segregated to the Bundesbank account at the NYFed, there would have been no reason for the multi-year transfer delays and no reason to need to melt down and recast any gold bars.
Why did low-grade coin bars start turning up in the NY Fed vaults from 1968 onwards? The only place they could have come from is Fort Knox in Kentucky. The fact that these low-grade coin bars had to be used suggests there was not enough high-grade gold bars (995 US assay office Good Delivery gold bars) to satisfy central bank customer requirements at the NY Fed vault at that times. Some of these coins bars were over time shifted out of the NY Fed vaults and refined into high-grade bars and sent to the Bank of England in London. How much coin bar gold is still in the NY Fed vault.
For the 3 largest claimed gold holders at the NY Fed, which are the Banca d’Italia, the Bundesbank and the International Monetary Fund, and which between supposedly hold at least 4000 tonnes of gold at the NY Fed, there is no way to validate the accuracy of any of these holdings, neither from IMF, Bundesbank or Banca d’Italia sources, nor from the NY Fed. These gold holdings have, on paper, not changed since the early 1970s, but thats over 40 years ago and there is no way to check the accuracy of these 3 holdings which make up the lions share of all the gold supposedly held at the NYFed.
Why is there a tunnel between the NY Fed level E basement gold vault to the Chase Manhattan Plaza level B5 basement gold vault across the street? i.e. Why is a central bank vault linked to a commercial vault run by a commercial bank (JP Morgan Chase)?
Does, or has the JP Morgan / Chase in the past, facilitated the activation of NY Fed stored central bank gold into the commercial gold market via movements of gold bars from 33 Liberty to Chase Manhattan Plaza vaults?
Why is there no mention in the Wall Street Journal article of the NY Fed’s Auxiliary vault which was built in 1963 and its location, and which supposedly stores gold bars in a “wall of gold”. Was this not newsworthy?
Why did the 2004 version of the NY Fed gold vault brochure ‘The Key to the Gold Vault’ state that gold bars “belonging to some 60 foreign central banks and international monetary organizations” were stored at the NY Fed vault, and then the 2008 version of the same brochure had changed this statement to gold “belonging to some 36 foreign governments, central banks and official international organizations”.
Why the drop from 60 customers to 36 customers. I have heard from a very reliable senior ex-NY Fed executive that some central banks were unhappy to keep their gold in Manhattan in the aftermath of 9/11 and wanted it stored elsewhere. You wouldn’t blame then given what happened to the Scotia gold vaults under the WTC 4 on 9/11.
Why does the NY Fed decline to comment for a Wall Street Journal article? Surely this should ring alarm bells at the Wall Street Journal?
BullionStar recently teamed up with Real Vision TV, the unique video-on-demand finance and investment channel, to film a presentation for the Real Vision audience on some topical areas of the gold market.
The video presentation, which was filmed in London in June 2017, covers the fractional-reserve world of bullion bank trading in the London Gold Market, and also some concerns and risks of gold-backed Exchange Traded Funds. It then wraps up by discussing the benefits and attractions of physical gold ownership in light of the dangers and risks of today’s synthetic gold trading market.
Real Vision TV has kindly made this presentation available for viewing by BullionStar customers and readers, and the video presentation, which is 20 minutes long, can be viewed at the following link:
BullionStar would like to thank Real Vision TV for making this presentation possible and for facilitating the broadcasting of the presentation to the BullionStar audience.
Real Vision TV, founded by Raoul Pal and Grant Williams, is a subscription-based video on-demand channel featuring discussions, interviews, presentations and insights from many of the world’s top financial market minds and investment gurus.
Over the last number of years, one of the most interesting trends in the physical gold world is the ongoing conversion of large 400 ounce gold bars into smaller high purity 1 kilogram gold bars to meet the insatiable demand of Asian gold markets such as China and India.
This transformation of 400 ounce bars into 1 kilogram bars is an established fact and is irrefutable given the large amount of evidence which proves it is happening, as has been documented on the BullionStar website and elsewhere.
It is also something which causes plenty of excitement in the gold world as it underscores the huge movement of physical gold from West to East, and the continual depletion of gold inventories from locations such as the London Gold Market.
The general movement is one of 995 purity 400 ounce gold bars coming out of gold-backed ETFs, central bank gold holdings and other wholesale gold holdings, and these bars making their way to the Swiss refineries where they are transformed / smelted / recast into smaller 9999 high purity gold bars. The smaller gold bars are then exported from Switzerland to India, China, Hong Kong, and the Middle East.
At the same time as the wider gold market acknowledges and publicises this trend, the establishment gold world and bullion banks (as represented by the London Bullion Market Association) tend to downplay this conversion of 400 ounce gold bars into 1 kilogram bars, presumably because it directly highlights the continual drain of real physical gold out of the London vaults into China and India, gold which has little chance of ever coming back again.
For an example of significant downplaying of conversion of 400 ounce gold bars into kilogram gold bars, see BullionStar post from September 2015 titled “Moving the goalposts….The LBMA’s shifting stance on gold refinery production statistics” which documents how a mammoth 2000 tonnes of LBMA gold refinery output attributed to the year 2013, mysteriously disappeared from the LBMA’s publications in early August 2015, after the original figure of 6,601 tonnes had been highlighted on this website, with the original figure being replaced by a far lower 4600 tonnes.
While gold refineries in countries other than Switzerland may be involved in these 400 ounce to 1 kilogram gold bar transformations, the Swiss refineries are the big players in this area, as they say so themselves. The names in question are Valcambi, PAMP, Argor Heraeus and Metalor. For a full understanding of the extent to which these large Swiss gold refineries process 400 ounce gold bars into kilobars and the importance that they attribute to this specific category of refinery activity, please see BullionStar blog from November 2015 titled “From Good Delivery bars to Kilobars – The Swiss Refineries, the GFMS data, and the LBMA“.
But if you thought the massive conversion of large gold bars into kilogram bars that occurred in years such as 2013 and 2014 was an anomaly or a one-off, then think again. Because it also happened in 2015, and in a very big way.
LBMA Update – 2015 Gold Refinery Statistics
In early May 2017, the London Bullion Market Association published a revised version of its 4 page ‘LBMA Overview Brochure’, the most notable update of which was that it revealed refinery production statistics for 2015 for the gold and silver refineries around the globe that are on the LBMA’s Good Delivery List.
A table in the updated brochure states that in 2015, the “total refined gold production by the refiners on the List was estimated to be 5,034 tonnes”. The corresponding figure for gold in 2014 was 4921 tonnes.
At some point each year, the LBMA will invariable release such refinery statistics, however, the lag in publication is inexplicably long, for example, 2015 data only gets released in May 2017. Why 2016 data is not released in 2017 remains a mystery. This length of lag would not happen in any other industry. Leaving aside this mystery, the 2015 statistics are interesting and worth analysing for a whole lot of reasons, which are discussed below.
This year the LBMA update – of the 2015 data – was a very low-key affair indeed and did not even, in the LBMA’s eyes, merit a press release. This differs to May 2016, when the LBMA published 2014 gold and silver refinery statistics and at least accompanied the announcement with a press release which it titled “4,921 tonnes of gold production in 2014 – LBMA GD refiners”.
The LBMA’s May 2016 press release stated that 2014 refinery gold production by the refiners on the LBMA’s Gold Good Delivery List for gold totalled 4921 tonnes, and importantly, it attributed the excess over ‘world mine production of 4,394 tonnes‘ to be due to “recycling of material by LBMA GD refiners converting large 400 oz bars into kilobars“.
This reference to ‘world mine production of 4,394 tonnes‘, which was itself attributed to Thomson Reuters GFMS, is incorrect, and the LBMA should have said that “world mine production + scrap recycling + net hedging supply” was 4394 tonnes, as is clear in the Thomson Reuters GFMS table from which the figure of 4394 tonnes was taken. This table is as follows:
The ‘net hedging supply’ category can be ignored as it is not relevant for gold-laden material arriving into gold refineries for processing. What the LBMA should have said in its 2016 press release is that in 2014, the gold refineries on its list (which generate 85% – 95% of world gold refinery output) produced 4921 tonnes of gold, which was in excess of combined gold mining production and scrap recycling i.e. in excess of 3131 + 1158 = 4289 tonnes. This excess was due to “recycling of material by LBMA GD refiners converting large 400 oz bars into kilobars”.
Given that the LBMA gold refiners only represent 85% – 90% of world gold refinery output, and not 100%, the mine and scrap material that they process is only 85% – 90% of global mine production and scrap production. Therefore, the GFMS figures should be scaled back to represent this 85% to 90% range.
It is however not realistic to expect that bullion banks which supply large 400 ounce gold bars to gold refineries for conversion into smaller gold bars would use non-LBMA accredited gold refineries to do so, since a) bullion banks are all members of the LBMA, and b) the London bullion banks use Swiss gold refineries which are all on the LBMA good delivery list. They would therefore not use a more obscure non-LBMA gold refinery, such as one of the smaller Indian gold refineries, to convert large wholesale / central bank gold bars into smaller gold bars.
Therefore, what the LBMA press release in May 2016 should really have said is as follows:
“In 2014, the gold refineries on the LBMA Good Delivery List (which generate 85% – 95% of world gold refinery output) produced 4921 tonnes of gold. This was in excess of the 85% – 90% of combined gold mining production and scrap gold recycling that these refineries are known to process. The LBMA refineries’ 4921 tonnes of refinery output in 2014 in excess of their mine and scrap processing of 3646 – 3860 tonnes (85% and 90% of combined mine and scrap supply) was due to recycling of material by LBMA GD refiners converting large 400 oz bars into kilobars.”
Such a statement would then put conversion of large 400 ounce gold bars into kilogram gold bars by LBMA gold refineries in 2014 at between 1060 and 1275 tonnes of gold (4921 – 3860, and 4921 – 3646). It would also mean that large 400 ounce gold bars from existing above-ground stockpiles were topping up ‘normal’ physical gold supply (gold mining output and scrap recycling) by between 25% and 30% during 2014.
These 2014 refinery figures have previously been covered in a BullionStar posting in June 2016. See BullionStar blog “An update on LBMA Refinery Statistics and GFMS”. The important take-away point here is that in 2014 the gold refineries on the LBMA good delivery list generated refined gold output in a distinct category attributed to recycling of material by LBMA good delivery refiners converting large 400 oz bars into kilobars.
Fast forwarding now to the 2015 LBMA figures and the 2015 Thomson Reuters GFMS figures, and repeating the above calculations:
For 2015, the LBMA states that the gold refineries on its list had total refined gold output of 5034 tonnes. In 2015, according to Thomson Reuters GFMS, gold mining production was 3158 tonnes, while scrap gold supply was 1173 tonnes, i.e. a combined mine and scrap gold supply of 4331 tonnes.
Since the gold refineries on the LBMA Good Delivery List for gold represent 85% to 90% of ‘world production’, which by LBMA logic is GFMS gold mining production and GFMS scrap recycling, then, these refineries would have processed between 3681 tonnes and 3898 tonnes (85% – 95%) of mine production and scrap supply during 2015.
This then implies that during 2015, these LBMA gold refineries also processed between 1136 tonnes and 1353 tonnes of gold due to converting large 400 oz bars into kilobars.
If the LBMA had have written a press release in May 2017 to coincide with updating its table of the output of LBMA Good Delivery refineries, it should have read something like the following:
“In 2015, the gold refineries on the LBMA Good Delivery List (which generate 85% – 95% of world gold refinery output) produced 5034 tonnes of gold. This was in excess of the 85% – 90% of combined gold mining production and scrap gold recycling that these refineries are known to process. The LBMA refineries’ 5034 tonnes of refinery output in 2015 in excess of their mine and scrap processing of 3681 – 3898 tonnes (85% and 90% of combined mine and scrap supply) was due to recycling of material by LBMA GD refiners converting large 400 oz bars into kilobars, which was in the range of 1136 to 1353 tonnes.”
Where would these huge quantities of 400 ounce gold bars have come from that were melted down during 2015, predominantly or even exclusively by the Swiss gold refineries? Because 1136 to 1353 tonnes of large wholesale market gold bars is a lot of gold. The most likely source of this gold is from the London Gold Market. Beyond that, gold which was already stored in Switzerland is also a possible pool from which to draw from.
2015 UK to Switzerland Gold Exports
During 2015, Switzerland imported 1853 tonnes of non-monetary gold, and exported 1861 tonnes of non-monetary gold. By far the largest source of Swiss gold imports during 2015 was ‘the UK’, which in this case really means the London Gold Market. Non-monetary gold is just gold which is not monetary (central bank) gold. Non-monetary gold shows up on trade statistics. Monetary gold does not show up on trade statistics since central banks get an exemption from revealing physical movements of monetary gold across national borders.
During 2015, Switzerland imported 644.5 tonnes of non-monetary gold from the UK (London). You can see from the below graph that no other source country came anywhere close to supplying non-monetary gold to Switzerland in 2015, with the next largest source countries each only sending less than 70 tonnes of gold to Switzerland. And London does not have any gold mines nor any major scrap gold collection facilities.
Some of the other exporters of gold to Switzerland during 2015 were France, Germany, Italy and UAE/Dubai (none of which are gold mining countries), and South Africa, Russia, Peru (which have gold mining). Some of the gold sent from France, Germany, Italy and UAE was obviously scrap. Some of the gold sent from South Africa, Russia and Peru was most likely gold mining ore or gold doré. But somewhere within these numbers, there was also most likely good delivery gold bars. For example, why would Russia or South Africa send gold mining ore or gold doré or scrap to Switzerland when they have their own perfectly good gold refineries with huge capacity.
Surprising perhaps, the largest gold-backed ETF, the SPDR Gold Trust (GLD) did not lose that much gold during 2015, with only a net 65 tonne gold loss. This is more so because the damage to GLD’s gold holdings had really been done in mostly in 2013 and to a lesser extent in 2014 when holdings had fallen from the 1350 tonne range down to the 700 tonne range. See chart.
Based on recently released data from the Bank of England, it can be seen that during 2015 the Bank of England gold vaults lost 13.5 million ounces of gold, with Bank of England total gold holdings dropping from 167.2 million ounces at the end of 2014 to 153.6 million ounces at the end of 2015. This is equivalent to a 421 tonne loss of gold from the Bank of England vaults during 2015. All gold held in the Bank of England is in the form of Good Delivery gold bars (i.e. the large 400 ounce gold bars.
Whether gold lost from the Bank of England vaults during 2015 was central bank gold or bullion bank (commercial bank) gold is unclear since the Bank of England does not provide a breakdown of figures. It’s possible that some of this gold that left the Bank of England during 2015 was converted from monetary gold to non-monetary gold, and then sent to Switzerland to be transformed into kilogram gold bars. This would then show up in the Swiss trade statistics. If extracted from the Bank of England vaults and left as monetary gold and then exported to Switzerland, it would not show up in Swiss trade statistics.
If 644 tonnes of non-monetary gold, as per the Swiss trade statistics, were sent from London to Switzerland during 2015, and another 421 tonnes of monetary gold from the Bank of England were also sent to Switzerland during 2015, this in total would be 1065 tonnes of gold. This quantum would begin to account for the range of 1136 to 1353 tonnes being converted from 400 oz gold bars into 1 kilogram gold bars that the 2015 LBMA gold refinery statistics imply. Add in another 100 – 200 tonnes of Good Delivery bars from sources such as Russia, South Africa and Dubai and this huge scale of 400 ounce bar conversion begins to look achievable. There could also be Good Delivery bars flowing out of Swiss central bank vaults directly, i.e. the Swiss National Bank (SNB) gold vaults in Berne, which would not show up on any inbound gold trade customs statistics.
Within a 3 year period, we can see roughly that the following quantities of large gold bars were melted down into kilogram bars and sent to Asia:
2013: about 2000 tonnes of gold
2014: between 1060 and 1275 tonnes of gold
2015: between 1136 to 1353 tonnes of gold
Overall, within the 2013 – 2015 period that is about 4200 – 4600 tonnes of gold being converted into kilogram and other smaller denomination high purity gold bars and sent to markets in China, India, Hong Kong and elsewhere in Asia. This is gold above and beyond mine supply and scrap supply. Where has all of this gold come from? Some of it is proven to be from gold-backed ETFs. Some is most probably also from central bank vaults, in which case the central banks do not have the gold that they claim to have. Which everybody know anyway, as much central bank gold has been lent out and is merely a fiction on the central bank balance sheets. But there may also be other stockpiles of Good Delivery gold bars which are also feeding this huge trend. Until the LBMA begins to publish its vault statistics, any grey area unreported gold vault inventories in London are still being kept in the dark.
If the trend of raiding ETFs and borrowing central bank gold to send to Switzerland to convert into kilogram bars for the Asian markets continues, then this is not and cannot be sustainable. The question is how long it can remain sustainable, in other words when will it become unsustainable?
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