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.
One of the more interesting developments in the gold mining sector at the moment is the impending launch of an investor alliance called the Shareholders Gold Council (SGC) whose objectives focus on reversing the poor shareholder returns and underperformance that has been dogging the sector’s leading gold mining stocks for some time now.
This new ‘Council’, which will be activist in nature, has been spearheaded by well-known hedge fund Paulson & Co, and was first pitched to fellow institutional investors and hedge funds during a Paulson & Co presentation at the Denver Gold Forum in September 2017.
For those unfamiliar with Paulson & Co, this is a hedge fund firm established by John Paulson in 1994. Paulson’s hedge fund firm rose to prominence in the late 2000s when it shorted subprime mortgages, and correctly bet on the collapse of the US housing market. Paulson & Co pursues event-driven strategies including merger arbitrage and corporate restructurings and runs a number of funds across equities and credit. Paulson also launched a specific gold fund in 2010 called the PFR Gold Fund which according to HedgeTracker had a “long-term strategy focus investing in mining companies and bullion-based derivatives“. This fund does not invest in physical gold, as was highlighted in the BullionStar article “Are the World’s Billionaire Investors Actually Buying Gold?“.
For those unfamiliar with the Denver Gold Forum, this is an annual three-day gathering of gold and silver mining companies, major institutional and hedge fund investors which invest in the sector, and Wall Street analysts covering the sector. In fact, the Forum’s organizers claim that the event represents nearly 90% of the world’s publicly traded gold and silver companies.
Reuters has also reported that major league institutional players such as Vanguard, State Street, Blackrock and Van Eck have also expressed interest in the SGC alliance.
High Cost Base, Destruction of Value
While hedge funds regularly attempt to turn around individual companies, the mobilization of a broad-based shareholder grouping focused on revitalizing an entire sector is still quite unusual, even for Wall Street. It is therefore instructive to examine what motivated Paulson & Co to roll out this idea and pitch the alliance to an entire institutional investment community. Although media coverage has been quite sketchy and exact details of the coalition remain unclear, the Denver presentation given by Paulson & Co’s natural resource specialist, Marcelo Kim provides some clarity, and is therefore worth reviewing.
According to Kim’s presentation ‘Gold Equities: Myths, Dreams and Reality‘, given to the Denver Gold Forum on 26 September 2017, the bottom line is that major gold mining stocks have been severely under-performing both the gold price and the broader equity indices for some time now.
This stock underperformance, thinks Paulson & Co, is due to poor investment decisions by said gold mining companies, destruction of enterprise value / low return on capital, and massive writedowns on ill-judged acquisitions, all in an environment of gigantic pay and compensation packages to gold mining company CEOs, clubby and cronie appointments to the companies boards of directors, and low stock ownership (but high options ownership) by these same company executives and board members. According to Paulson’s Kim, “CEOs and Boards get rich while shareholders lose money“.
Even more worryingly, total shareholder returns from 13 large publicly listed gold companies over the January 2010 to September 2017 period was an average negative 65%. However between 2010 and 2016, CEO pay in these same 13 leading gold mining companies was a combined US$ 550 million.
These 13 companies were Eldorado, Newcrest, Newmont, Gold Fields, Barrick, GoldCorp, Yamana, Kinross, AlgloGold, Agnico, Polymetal, Randgold, and Iamgold. All of these companies are members of the World Gold Council except for South African miners Gold Fields and Randgold and the Russian miner Polymetal. Notably, Randgold and Polymetal bucked the trend with relatively healthy shareholder return since 2010 of 35% and 20%, respectively, as well as the highest return on capital (RoC).
Additionally, over the 2010 – 2017 period, the gold mining industry had, according to Paulson and Co “written off $85 billion due to overpaying for acquisitions and massive cost overruns on mine builds“. Gold mining shareholders, said Kim, have no one to blame but themselves, as they had little engagement with company boards, chose not to engage in shareholder activism, but all the while continued to rubber stamp CEO pay, board appointments and mergers and acquisitions. Gold mining shareholders were in short, “like sheep being led to slaughter”.
Paulson’s Call to Action
The solution, according to Paulson & Co, is shareholder representation on company boards, investor rights agreements with company boards, company accountability to shareholders, the sacking of poor performing CEOs and board members, and the alignment of CEO compensation with share price performance. As all of these tactics are typical activist hedge fund tactics, it’s not really surprising that Paulson, as an activist hedge fund firm, would make these suggestions.
However, it is in the modus operandus and implementation of the scheme that there is arguably a more radical departure, since this is where the Shareholders Gold Council (SGC) comes in, with Paulson calling for a Council comprising a broad base of major (institutional) gold mining equity holders to come together and make recommendations on board appointments, CEO pay, company takeovers, as well as to make recommendations on annual general meeting (AGM) and extraordinary general meeting (EGM) voting decisions.
But still, is this really a new departure? In one way it is not, because there are perfectly good proxy advisory firms, such as Institutional Shareholder Services(ISS) and Glass, Lewis and Co which between them provide the same type of corporate governance and proxy voting research that Paulson’s Shareholders Gold Council is envisioning, and that are specialists in doing so for every major listed company in the world including every major exchange listed gold mining company.
Paulson and Co’s presentation even mentioned ISS, saying that the new Council would be ‘similar to ISS‘. According to Reuters’ June article, the Paulson led Council “will begin by releasing research reports on the gold mining sector… betting that shining spotlight on the space will result in greater accountability“. But is this just more of the same?
From a coverage standpoint, there are already countless sell-side (Wall Street) research reports covering all of the world’s leading gold mining companies that are published by a host of investment banks, in addition to umpteen buy-side research reports on the gold mining sector published by countless investment institutions and hedge funds, as well as the aforementioned governance and proxy voting research reports published by ISS and Glass Lewis.
If this new Shareholders Gold Council succeeds in gaining board level representation and in influencing investment and acquisition policy, and CEO compensation and board appointments, then this may in some way make a difference to future shareholder returns in the sector. But at this stage its impossible to say what type of influence, if any, such a Shareholders Gold Council would generate.
The Elephant in the Room
There is one topic, however, that an investor led Shareholders Gold Council could research, analyse and investigate, but for some mysterious reason has chosen not to. This is an issue that goes to the heart of a gold mining company’s operations and the performance of its share price. We are talking here about the actual gold price, how that gold price is discovered and established in today’s gold markets, whether that gold price is manipulated by bullion bank traders, and whether that gold price is subject to central bank interventions that attempt to control and stabilize it.
Simply put, the price that gold mining companies receive for their gold mining output is the most important driver of gold mining share price performance, and not the company’s cost base. We are assuming here that gold mining companies do not hedge their sales. Just look at how gold mining company stocks perform in an environment of a strongly rising or strongly falling gold price. The stock prices move up or down strongly since they are highly leveraged to corresponding gold price changes.
Take for example a simple model of a gold mining company. Its total revenue will depend on how much gold it extracts, processes and sells, and at what price it sells this gold. That’s the top line. The bottom line will be the profits remaining after subtracting total costs incurred by the mining company, which to some extent are fixed. These costs include operating costs (mining costs, processing costs, and corporate, general and administrative costs) and capital expenditure etc. Beyond this, impairments and writedowns on investments will also create an extra hit, as well as merger and acquisition costs.
As the gold price is most often quoted and understood in a price per ounce, the gold mining sector and the investment analysts which cover this sector like to calculate corresponding cost per ounce metrics, including operating costs per ounce of gold produced, total cash costs per ounce, and more recently an All-In Sustaining Cost (AISC) per ounce.
Total cash cost is a historic metric that was devised by the now defunct Gold Institute. It can be viewed as a standard metric for production cost in the gold mining sector. Cash costs would include all costs associated with producing the gold, such as direct production costs, smelting, refining, transport, and administration costs of a mine.
All-In Sustaining Cost (AISC) is a metric introduced by the World Gold Council in June 2013 which aims to try to reflect costs beyond cash costs. AISC includes cash costs but then adds other costs such as general administrative expenses (head office costs) and costs associated with maintaining and replenishing a mining company’s operations, i.e. for sustaining production. It thus includes capital expenditure and exploration costs.
So what Paulson & Co’s Shareholders Gold Council is planning, in addition to publishing research reports, is to try to have an impact on cost reduction, such as reducing CEO and board compensation, as well as to prevent gold miners making costly mistakes on acquiring overvalued mines which they will then have to take writedowns on in the future. This may all be very logical and make a difference in some way, but what the Shareholders Gold Council is not planning to do is to analyse and research anything about the gold price, which is, as was just stated above, the most important determinant of shareholder return and price performance in the gold sector.
Resources & Firepower, but Don’t mention the Gold Price
The Shareholders Gold Council, which on paper will have immense research resources and firepower and influence, will not it seems devote any time or resources to questioning anything to do with the gold price and will just take it a a given. This to me is a completely lost opportunity given that there is ample material for analysis in this area, some of which would surprise institutional and hedge fund investors in the gold space if they bothered to look. Much of this material has been documented on this website and elsewhere, such as by GATA.
The entire structure of the world’s largest and most influential contemporary gold markets has little to do with physical gold. The gold price is predominantly established and discovered in two markets, the London Gold Market and the COMEX gold futures market which between them trade very little physical gold but do trade vast quantities of synthetic gold and gold derivatives. See ‘What sets the Gold Price – Is it the Paper Market or Physical Market?‘.
The vast majority of ‘gold’ trading in the London Gold Market is of unallocated gold which is merely a claim against a bullion bank, and is a form of synthetic or paper gold in as much of a way as the gold futures derivatives that trade on COMEX are. See ‘Bullion Banking Mechanics‘ and an accompanying infographic for details. All gold demand that flows into unallocated paper gold by definition does not flow into physical gold demand, a gold miner’s bread and butter. So unallocated gold syphons off real physical gold demand into a paper substitute and suppresses real demand for physical gold.
There is no trade reporting in the London Gold Market, and the London Bullion Market Association (LBMA) whose remit it is to release it has continually stalled on publishing any trade reporting. This reinforces the opacity of the one of the main gold markets which is responsible for gold price discovery. Nor is there any transparency about where major gold-backed ETFs such as GLD, that store their gold in the London gold vaults, actually source this gold from, some of which is borrowed from central banks.
Nor it there any reporting of any activity in the London gold lending market or of outstanding central bank gold loans or gold deposits. Central bank gold loans are therefore another suppressing influence on the gold price.
This is also ample evidence that the Bank for International Settlements has continually taken a keen interest in the ‘free market’ price of gold and has at times discussed at the highest levels (i.e. the governors of major central bank) how to control the gold price. See ‘New Gold Pool at the BIS Basle, Switzerland’ Part 1 and Part 2.
The COMEX gold futures market is in effect a casino which has a huge influence on gold price discovery but where little physical gold ever changes hands. Some major bullion banks have also been fined recently for manipulating the gold price. These are the same bullion banks which ran the London Gold Fixings and which now run the LBMA Gold Price auctions, auctions whose prices the gold mining companies take to sell their gold output at.
Generally speaking, gold mining executives don’t want to touch any subject related to the gold price, nor does its representative body the World Gold Council. Now it seems, the institutionally backed Shareholders Gold Council likewise does not want to broach the ‘gold price’ subject.
Which is a shame, for by not examining the issue, and by not using some of their research resources to analyse and investigate and to ‘write reports‘ on the ample evidence of structural inefficiencies and interventionalist forces that hold back the gold price, Paulson’s Shareholders Gold Council, in the same way as the gold mining shareholders which they criticize, will remain “like sheep being led to slaughter”.
On 29 January 2018, the Commodity Futures Trading Commission (CFTC) Division of Enforcement together with the Criminal Division of the US Department of Justice and the FBI announced criminal and civil enforcement actions against 3 global investment banks and 5 traders for involvement in trade spoofing in precious metals futures contracts on the US-based Commodity Exchange (COMEX). COMEX is by far the largest and most active futures exchange in the world for trading precious metals futures including gold futures contracts and silver futures contracts.
The CFTC is bringing the charges under what it calls “commodities fraud and spoofing schemes“. Spoofing of orders is illegal under the US Commodity Exchange Act. The 3 banks in question are Deutsche Bank, UBS, and HSBC. As part of the CFTC’s prosecution, Deutsche Bank is being fined US$ 30 million, UBS US$ 15 million, and HSBC US$ 1.6 million.
The CFTC’s Order against the banks maintains that from at least February 2008 to at least September 2014, Deutsche Bank traders were involved in a scheme to manipulate precious metals futures prices by spoofing orders for those futures contracts, and also by extension that this spoofing triggered customer stop-loss orders.
Similarly, the CFTC Order says that UBS traders on the UBS precious metals spot trading desk were involved in spoofing orders in gold futures and silver futures contracts from January 2008 to at least December 2013, and likewise triggering customer stop-loss orders.
In the case of HSBC, the CFTC says that HSBC, through its New York office, spoofed orders in gold futures and other precious metals. However, the CFTC Order does not specify the period under which HSBC is accused of engaging in such spoofing. This may be because, according to the CFTC, HSBC cooperated during the CFTC’s investigation and offered to settle. But overall, the spoofing by one or more of the named banks was said to have run from January 2008 to at least September 2014.
As part of the process, the CFTC also announced civil enforcement actions against precious metals traders Andre Flotron formerly of UBS, and James Vorley and Cedric Chanu formerly of Deutsche Bank for what the CFTC describes as “spoofing and engaging in a manipulative and deceptive scheme in the precious metals futures market“.
According to the Department of Justice (DoJ) press release on the matter, Vorley (a UK citizen) and Chanu (a French citizen) are being charged in a criminal complaint in the Northern District of Illinois court with “conspiracy, wire fraud, commodities fraud, and spoofing offenses in connection with executing a scheme to defraud involving both solo and coordinated spoofing on the COMEX“. During that time, Vorley was based in London with Deutsche bank and Chanu was based in London and Singapore with Deutsche Bank.
Flotron is charged in an indictment in the District of Connecticut for “conspiracy to commit spoofing, wire fraud, and commodities fraud” during the time when he worked at UBS as a precious metals trader on the UBS trading desks in Zürich, Switzerland, and Stamford, Connecticut USA.
The DoJ statement also names Edward Bases and John Pacilio, and says that Bases and Pacilio are charged in a criminal complaint with “commodities fraud in connection with an alleged scheme to engage in both solo and coordinated spoofing on the COMEX“. Bases was at Deutsche Bank until June 2010 at which point he moved to a unit of Merrill Lynch. Pacilio worked for a unit of Merrill Lynch during 2010 and 2011 when some of his trade spoofing is alleged to have taken place.
Note that according to the DoJ “a complaint, information, or indictment is merely an allegation, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law“.
For an excellent explanation of some of the spoofing activities that these traders are accused of have engaged in, please see the recent article ‘US Gold & Silver Futures Markets: “Easy” Targets‘ by specialist researcher Allan Flynn posted on the BullionStar website and on his own ‘COMEX We have a Problem’ website here.
Spot, Fixes and Futures in the Gold and Silver Markets
While gold and silver futures trading is one side of the wholesale precious metals markets, it is not the full picture, because as well as COMEX, the over-the-counter (OTC) London Gold and Silver Markets are key gold and silver trading venues for these same investment banks, as well as key components of gold and silver price determination. And central to the London Gold Market and London Silver Market are the daily fixing auctions for gold and silver.
The investment bank precious metals traders who trade gold and silver in the wholesale market do so not just through exchange traded futures contracts or OTC contracts, but both. And they constantly trade across the London and COMEX ‘venues’ at the same time. In both gold and silver, predominant price discovery for the international gold price and for the international silver price occurs in the London OTC Market and on COMEX.
Price movements in one location, for example on COMEX futures, get instantly reflected in the London OTC spot quotes, and vice versa. Therefore price quotes in the London market, including opening prices and round prices for the London daily Fixings can be influenced by moving the futures prices. For example, if there is collusion among traders to push the futures prices lower so as to benefit other traders who have positions based on Fixing levels, this can be done by the trader from one bank pushing the futures price lower, while a trader at a second bank benefits from this movement in terms of his exposure to the Fixing price which has also moved lower. Such price movements are documented in the ‘Final Notice’ that the UK Financial Conduct Authority (FCA) levied against Barclays Bank and one of its precious metals traders in May 2014 (See below for details).
As highlighted below, the majority of the banks mentioned in the CFTC fines were also central to these gold and silver fixings, and astoundingly one of the traders mentioned above and subject to the CFTC and DoJ actions, James Vorley, was even a director of both of the private companies that oversaw the London Gold and Silver Fixings.
With the CFTC / DoJ fines, complaints and indictments against the banks and their traders for manipulating gold and silver futures prices now in the public arena, the question of manipulation of the London Gold and Silver fixing auctions now comes back in focus, and the question now needs to be asked – where are the regulators in investigating (and perhaps prosecuting) banks and traders for gold and silver fixings manipulation?
Because even a superficial look at the banks and traders, the trading desks and their operations, the trader chat room transcripts, and the connections between the futures and fixings at the time of the fixings should give even the most dullard regulators and prosecutors pause for thought.
Deutsche Bank and HSBC – New York Futures and London Fixings
As a reminder, the London Silver Fixings were a daily auction of (paper) silver at midday in London that operated up until August 2014 when they were replaced by the LBMA Silver Price auction. The London Gold Fixings were a twice daily auction of (paper) gold at 10:30 am and 3:00 pm in London that operated up until March 2015 when they were replaced by the LBMA Gold Price auction.
The London Silver Fixings were administered by a private company called London Silver Market Fixing Ltd (LSMFL) whose three members were Deutsche Bank, HSBC and the Bank of Nova Scotia. Deutsche Bank, HSBC and Bank of Nova Scotia were also the only 3 entities allowed to take directly participate in the silver fixings, and each had become a member of the silver fixings by acquiring one of the 3 traditional companies that had run the fixings – ScotiaBank acquired Mocatta in 1997, Deutsche acquired the old Sharps Pixley in 1993, and HSBC had acquired Samuel Montagu and rebranded as HSBC during its 1990s reorganisation.
The London Gold Fixings were administered by a private company called London Gold Market Fixing Ltd (LSMFL) which had 5 members, namely Deutsche Bank, HSBC, Bank of Nova Scotia, Barclays, and Societe Generale (SocGen). Only these 5 banks were allowed to directly participate in the gold fixings. These 5 banks were also the only banks in the gold fixings from 2004 all the way to 2014.
So from “January 2008 to at least September 2014“, the period stipulated by the CFTC that covers manipulation of gold and silver futures, the same banks, i.e. Deutsche Bank and HSBC, were at all times active members of the daily gold and silver fixings in London.
Even more amazingly, James Vorley, the Deutsche Bank trader who is the subject of the CFTC / DoJ accusation of “conspiracy, wire fraud, commodities fraud, and spoofing offenses” on COMEX was a Director of both London Silver Market Fixing Ltd and London Gold Market Fixing Ltd from September 2009 until May 2014, which is all the way through the period of ‘at least February 2008 to at least September 2014’, when Deutsche Bank precious metals traders were involved in a scheme to manipulate precious metals futures prices by spoofing orders for those futures contracts. You couldn’t make this up!
Vorley, along with Deutsche’s Kevin Rodgers resigned from the London Gold and Silver Market fixing companies in May 2014, when Deutsche Bank dropped out of the daily gold and silver fixing auctions. Matthew Keen of Deutsche Bank had previously resigned as a director of the gold and silver fixing companies in January 2014 when he left the bank and was replaced by Rodgers who was Global Head of Foreign Exchange at Deutsche Bank at that time. But curiously, Rodgers also left Deutsche at the end of April 2014.
There is plenty written elsewhere on how the LBMA maintained its stranglehold over the London gold and Silver reference price benchmarks when the old tarnished fixings were no longer viable and the bullion banks running those fixings had to quickly pretend to distance themselves from the fixing while at the same time maintaining total control over the new versions of the auctions. But in summary, in August 2014, when the new LBMA Silver Price auction was launched by the LBMA with just 3 bank members, HSBC and Bank of Nova Scotia continued as 2 of these members. When the LBMA Gold Price auction was launched in March 2015, the existing incumbents of the old Gold Fixings namely Barclays, HSBC, Bank of Nova Scotia and SocGen, rejoined the new auction along with its new members, UBS and Goldman Sachs.
Barclays Mini-Puke: Gaming the Gold Fixing
In May 2014, the UK Financial Conduct Authority (FCA) fined Barclays Bank £26 million for systems and controls failings and conflicts of interests in relation to the London Gold Fixing auctions of which it was one of the 5 bullion bank participants. According to the FCA, these failings persisted from 2004 (when Barclays joined the fixings) until 2013. The year 2004 was also when the gold and silver fixings stopped being conducted in a room in Rothschilds offices and began to be conducted remotely.
As part of the May 2014 fines of Barclays, the FCA also fined Daniel Plunkett, one of the Barclays London-based precious metals traders, £95,000. While the fine for Plunkett was specifically to penalise his placement and cancellation of orders which were intended to manipulate prices within the rounds of the fixing, the commentary supplied by the FCA on the case is interesting in that it shows how gold futures price movements external to the fixings also very much influenced the fixing round prices during the auction that the FCA penalised Plunkett for.
At the start of the 28 June 2012 Gold Fixing at 3:00 p.m., the Chairman proposed an opening price of USD1,562.00. However, the proposed price quickly dropped to USD1,556.00, following a drop in the price of August COMEX Gold Futures (which was caused by significant selling in the August COMEX Gold Futures market, independent of Barclays and Mr Plunkett).
You can see here the interactions and influences that the COMEX gold futures prices movements had on the opening price that the Gold Fixing Chairman proposed to the begin the auction with. And now that we know there was collusion between the various precious metals traders across the bullion banks, it is not difficult to accept that the traders from one bank could be moving the futures lower to not only help themselves but as a favour to precious metals traders at other cartel banks that were also involved in the collusion schemes.
Banging the Fixes – Chat Room Transcripts from Class Action Suits
But there is also direct evidence of trader collusion to manipulate prices in the London gold and silver fixings in the form of trader chat room transcripts. This is not speculation, it is fact. Facts that have been documented in class action proceedings in the New York courts brought by plaintiffs against the bank member of the London Gold and Silver Market Fixing companies.
Again we turn to Allan Flynn, who was probably first to call attention to the manipulation of the silver market by these same banks with his extensive and succinct coverage of the evidence from the New York class action suits in his 8 December 2016 article ‘How to Trigger a Silver Avalanche by a Pebble: “Smash(ed) it Good”‘ posted on the BullionStar website and on Allan’s website here, and in his follow-up article from 14 December 2016 titled “When Gold Pops 1430 We Whack It“, posted on his website and on the ZeroHedge website here.
In the silver class action suit against Deutsche Bank, HSBC, the Bank of Nova Scotia, and UBS, Deutsche agreed in April 2016 to settle with the plaintiffs and to produce“instant messages, and other electronic communications” as part of the settlement. See BullionStar article ‘Deutsche Bank agrees to settle with Plaintiffs in London Silver Fixing litigation‘for full details of the April 2016 announcement.
Attorneys for the plaintiffs subsequently, as Allan Flynn documented “submitted samples of dozens of chat room messages between UBS and Deutsche Bank“, indicating “many efforts to artificially suppress gold prices, and to manipulate gold prices at the time of the Fixing.”
“One chat see’s a Deutsche Bank trader confirming with a UBS trader his trading had indeed influenced the Gold Fix: ‘u just said u sold on fix.‘ The UBS traded replied ‘yeah,’ ‘we smashed it good.‘
Another transcript example contained the following exchange:
“During a trading day which had been less successful the Deutsche Bank trader assured his opposite trader from Bank of Nova Scotia that ‘at least the fix will be fun . . . make it all back there!!!!!!‘”
So here we have precious metals traders actually colluding to artificially move the price levels on the fixings.
Technology Facilitated the Manipulation of the Fixes since 2004
In June 2015, I wrote an article on the BullionStar website titled “The pre-2015 London Gold Fixings – More technologically advanced than reported” in which I set out substantial evidence that the former Gold Fixings up until March 2015 were not some archaic dial-in telephone based auction using paper and pencils to set the price as the mainstream financial media choose to believe, but that the auctions since 2004 in both gold and silver employed sophisticated web-based technology apps, trading software, messaging apps and chat apps, all of which could also facilitate collusion and price manipulation across multiple trading desks in ‘rival’ banks.
When Rothschild pulled out of the Gold Fixings in 2004, Barclays took Rothschild’s place and the fixings moved to a remote model where traders from each of the 5 members banks of the Gold Fixing coordinated remotely instead of meeting twice a day face to face. At the same time, the fixing members introduced this new communication technology to assist their twice daily fixes.
In November 2014, the Swiss financial regulator FINMA announced that an investigation of UBS had found manipulation and attempted manipulation of by UBS Zurich employees of forex and precious metals benchmarks. At the time, Mark Branson, FINMA’s CEO said that “we have [also] seen clear attempts to manipulate fixes in the precious metals markets.”
According to FINMA, it found that chat groups between traders at multiple banks were central to how the manipulation was coordinated:
“In the improper business conduct in foreign exchange and precious metals trading, electronic communication platforms played a key role. The abusive practices were evidenced in the information exchanged between traders in chat groups. FINMA examined thousands of suspicious chat group conversations between traders at multiple banks.“
The introduction of new technology and chat apps from 2004 is also highly correlated with academic research findings showing “a decade of manipulation” of the gold fixing from 2004 until 2013. As highlighted in the Bloomberg article “Gold Fix Study Shows Signs of Decade of Bank Manipulation“
“Abrantes-Metz and Metz screened intraday trading in the spot gold market from 2001 to 2013 for sudden, unexplained moves that may indicate illegal behavior. From 2004, they observed frequent spikes in spot gold prices during the afternoon call. The moves weren’t replicated during the morning call and hadn’t happened before 2004, they found.
Large price moves during the afternoon call were also overwhelmingly in the same direction: down.
On days when the authors identified large price moves during the fix, they were downwards at least two-thirds of the time in six different years between 2004and 2013. In 2010, large moves during the fix were negative 92 percent of the time, the authors found.
There’s no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards, Abrantes-Metz said in a telephone interview this week.”
Well, there is an obvious explanation. The downward price movements identified by Abrantes-Metz and Metz started in 2004 because that’s when the London gold fixings went to a remote model and technology including chat apps was introduced. The suspicious price movements were more prevalent in the London afternoon because that was also the New York morning where COMEX gold futures were more active and where New York based traders could force the futures down causing a corresponding drop in the opening prices and round prices in the fixing auctions.
Prosecuting banks and traders for price manipulation on COMEX futures while ignoring the far larger London market and its gold and silver fixings looks like a job half done. Trading desks and their traders are agnostic to trading venues and with interlinked markets, the COMEX and the London Fixings are two sides of the same coin.
With blatant evidence that the same banks and traders were involved in both markets, and with actual chat room transcripts now confirming that precious metals traders across multiple banks were colluding in fixing price manipulation, then why are their no active regulatory investigations of trader manipulation of the London Gold and Silver Fixings?
Is it because of lack of jurisdictional authority or are the regulators and criminal enforcement agencies such as the FCA, DoJ, FINMA and the German BAFIN too terrified of opening a can of worms into the huge liabilities that would arise from proving a decade long criminal manipulation of the London Gold and Silver price benchmarks and that were used throughout the world the value of everything from ISDA contracts to institutional precious metals products, to ETFs.
This article is now transcribed below, here on the BullionStar website.
Central bank gold price suppression is a well-documented fact. Central banks have a long and colorful history of manipulating the gold price. This manipulation has taken many shapes and forms over the years. It also shouldn’t be surprising that central banks intervene in the gold market given that they also intervene in all other financial markets. It would be naive to think that the gold market should be any different.
n fact, gold is a special case. Gold to central bankers is like the sun to vampires. They are terrified of it, yet in some ways they are in awe of it. Terrified since gold is an inflation barometer and an indicator of the relative strength of fiat currencies. The gold price influences interest rates and bond prices. But central bankers (who know their job) are also in awe of gold since they respect and understand gold’s value and power within the international monetary system and the importance of gold as a reserve asset.
So central banks are keenly aware of gold, they hold large quantities of it in their vaults as a store of value and as financial insurance, but they are also permanently on guard against allowing a fully free market for gold in which they would not have at least some form of influence over price direction and market sentiment.
The Central Bankers’ Central Bank
The Bank for International Settlements (BIS) crops up frequently in gold price manipulation as the central coordination venue and the guiding hand behind a lot of the gold price suppression plans. This is true in all decades from the 1960s right the way through to the 2000s. If you want to know about central bank gold price manipulation, the BIS is a good place to start. Unfortunately the BIS is a law onto itself and does not answer to anyone, except its central banks members.
In the 1960s, central bank manipulation of the gold price was conducted in the public domain, predominantly through the London Gold Pool. This was in the era of a fixed official gold price of $35 an ounce. Here the US Treasury and a consortium of central banks from Western Europe explicitly kept the gold price near $35 an ounce, coordinating their operation from the Bank for International Settlements (BIS) in Basel, Switzerland, while using the Bank of England in London as a transaction agent. This price manipulation broke down in March 1968 when the US Treasury ran out of good delivery gold, which triggered the move to a “free market” gold price.
Central banks continued to suppress gold prices in the 1970s both through efforts to demonetize gold and also dump physical gold into the market to dampen price action. These sales were unilateral e.g. US Treasury gold sales in 1975 and over 1978-1979, and also coordinated (and orchestrated by the US) e.g. IMF gold sales across 1976-1980.
Gold Pool 2.0 – Force it Down Quick and Hard
Collusion to manipulate the price also went underground, for example in late 1979 and early 1980 when the gold price was rocketing higher, the same central banks from the London Gold Pool again met at the opaque BIS in Switzerland at the behest of the US Treasury and Federal Reserve in an attempt to launch a new and secretive Gold Pool to reign in the gold price. This was essentially a revival of the old gold pool, or Gold Pool 2.0.
These meetings, which are not very well known about, were of the G10 central bank governors, i.e. at the highest levels of world finance. All of the discussions are documented in black and white in the Bank of England archives and can be read on the BullionStar website.
The wording in these discussions is very revealing and show the contempt which central bankers feel about a freely functioning gold market.
Phrases used in these meetings include:
“there is a need to break the psychology of the market” and “no question of any permanent stabilisation of the gold price, merely at a critical time holding it within a target area” and “to stabilise the price within a moving band” and “it would be easy and nice for central banks to force the price down hard and quickly“.
And these meetings of top central bankers were in early 1980, 11 years after the London Gold Pool and 8 years after the US Treasury reneged on its commitment in August 1971 to convert foreign holdings of US dollars into gold.
Whether this new BIS gold pool was rolled out in the 1980s is open to debate, but it was discussed across the board for months by the Governors at the BIS, and may have been introduced in a form which would provide physical gold to the oil producers (gold for oil trades) without putting a rocket under the gold price. Their main worry was to allow the Middle Eastern oil producers to acquire some gold for oil without pushing the gold price up.
The Bank of England was also involved in the 1980s in influencing prices in the London Gold Fix auctions, in what an ex Bank of England staffer described euphemistically as ‘helping the fixes’. And the Bank of England has even at times used terminology in the 1980s such as “smoothing operations” and “stabilisation operations” when referring to coordinated central bank efforts to control the gold price.
Paper Gold Ponzi
Probably two of the most influential changes on the gold market in the modern era are structural changes to the gold market which channel gold demand away from physical gold and into paper gold. These two changes were the introduction of unallocated accounts and fractionally backed gold holdings in the London Gold market from the 1980s onwards, and the introduction of gold futures trading in the US in January 1975.
In unallocated gold trading in the London OTC market, gold trades are cash-settled and there is rarely any physical delivery of gold. The trading positions are merely claims against bullion banks who don’t hold anywhere near the amount of gold to back up the claims. Unallocated bullion is therefore just a synthetic paper gold position that provides exposure to the gold price but doesn’t drive demand for physical gold.
When gold futures were launched in the US in January 1975, the primary reason for their introduction, according to a US State Department cable at the time, was to create an alternative to the physical market that would syphon off demand for gold, creating trading that would dwarf the physical market, and which would also ramp up volatility which in turn would deter investors from investing in physical gold. Gold futures are also fractionally backed and overwhelmingly cash-settled, and their trading volumes are astronomical multiples of actual delivery volumes.
Central banks as regulators of financial markets are therefore ultimately responsible for allowing the emergence of fractional reserve gold trading in London and New York. This trading undermines the demand for physical gold and allows the world gold price to be formed in these synthetic gold trading venues. Price discovery is not happening in physical gold markets. Its is happening in the London OTC (unallocated) and COMEX derivative markets. So this is also a form of gold price manipulation since the central banks know how these markets function, but they do nothing to crack down on what are essentially gold ponzi schemes.
Imagine, for example, that central banks were as tough on paper gold as they seem to be now on crypto currency markets. Now imagine if central banks outlawed fractional gold trading or scare-mongered about it in the same way that they do about crypto currencies? What would happen is that the gold market participants would panic and unwind their paper positions, precipitating a disconnect between paper gold and physical gold markets. So by being lenient on the fractional structure of trading in the gold markets, central banks and their regulators are implicitly encouraging activities that have a dampening effect on the gold price.
Gold Lending – A Riddle wrapped in a Mystery inside an Enigma
The gold lending market, mostly centred in London, is another area in which central banks have the ability to cap the gold price. Here central banks transfer their physical gold holdings to bullion banks and this physical gold then enters the market. These transactions can either be in the form of gold loans or gold swaps. This extra supply of gold through the loans and swaps disturbs the existing supply demand balance, and so has a depressing effect on the gold price.
The gold lending market is totally opaque and secretive with no obligatory or voluntary reporting by either central bank lenders or bullion bank borrowers. The Bank of England has a major role in the gold lending market as the gold used in lending is almost all sourced from the central bank custody holding in the Bank of England’s vaults.
There is therefore zero informational efficiency in gold lending, and that’s the way the central banks like it. furthermore, freedom of information requests about gold lending are almost always shot down by central banks, even sometimes on ‘national security’ grounds.
Many central banks have lent out their gold long ago, and just hold a ‘gold receivable’ on their balance sheet, which is a claim against a bullion bank or bullion banks. These bullion banks roll over the liability to the central bank for years on end and the original gold is long gone. Since central bank gold is never independently audited, there is no independent confirmation of any of the gold that any central banks claim they have.
Gold receivables are another fiction that allows central banks to fly under the radar in the gold lending market, and central banks go to great lengths to make sure the market does not know the size and existence of outstanding gold lending and swapped gold positions.
In Febuary 1999, the BIS was again the nexus for secretive discussions about the gold market when a number of the large powerful central banks basically ordered the IMF to drop an accounting change that would have split out gold and gold receivables into two separate line items on central bank balance sheets and accounting statements. These discussions are documented in the IMF document which is available to see here.
This accounting change would have shone a light on to the scale of central bank gold lending around the world, information which would have moved gold prices far higher.
Gold Loans and Gold Swaps – Highly Market Sensitive
However, a group of the large central banks in Europe comprising the Bank of England, the Bundesbank, the Bank de France and the European Central Bank (ECB) applied pressure to torpedo this plan as they said that “information on gold loans and swaps was highly market sensitive” and that the IMF should “not require the separate disclosure of such information but should instead treat all monetary gold assets including gold on loan or subject to swap agreements, as a single data item.”
Central banks also at times sell large quantities of gold, such as the Swiss gold sales in the early the 2000s, and the Bank of England gold sales in the late 1990s.While the details of such gold sales are always shrouded in secrecy, and the motivations may be varied, such as bullion bank bailouts or redistribution of holdings to other central banks, the impact of these gold sales announcements usually has a negative impact on the gold price. So gold sales announcements are another tactic that central banks use to at times keep the pressure on the price.
There are many examples of central bankers discussing interventions in the gold market. In July 1998, former Federal Reserve chairman Alan Greenspan testified before the US Congress saying that “central banks stand ready to lease gold in increasing quantities should the price rise.”
In June 2005, William R. White of the BIS in Switzerland, said that one of the aims of central bank cooperation was to “joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.”
In 2008, the BIS at its headquarters in Switzerland even stated in a presentation to central bankers that one of the services it offers is interventions in the gold market.
In 2011, one of the gold traders from the BIS even stated on his LinkedIn profile that one of his responsibilities was managing the liquidity for interventions. After this was published, he quickly changed his LinkedIn profile.
The COMEX gold futures market and the London OTC gold market have a joint monopoly on setting the international gold price. This is because these two markets generate the largest ‘gold’ trading volumes and have the highest ‘liquidity’. However, this price setting dominance is despite either of these two markets actually trading physical gold bars. Both markets merely trade different forms of derivatives of gold bars.
Overall, the COMEX (which is owned by the CME Group) is even more dominant that the London market in setting the international price of gold. This is a feat which financial academics ascribe to COMEX being a centralized electronic platform offering low transaction costs, ease of leverage, and “the ability to avoid dealing with the underlying asset” (i.e. COMEX allows its participants to avoid dealing with gold bars). Because of these traits, say the academics, COMEX has a ‘disproportionately large role in [gold] price discovery”.
Over 95% of COMEX gold futures trading is now conducted on CME’s electronic trading platform Globex, with most of the remainder done on CME’s electronic Clearport, where futures trades executed in the OTC market can be settled by CME. Next to nothing in gold futures is traded any more via pit-based open outcry.
The existence of gold price manipulation in the London and COMEX gold markets is well documented, it is hard to refute, and it has presented itself in many forms over the recent past. Examples include:
Bullion bank gold traders in the late 2000s colluding in chat rooms to manipulate the gold price as documented in current consolidated class action law suits going through New York courts
Barclays Bank manipulating the London Gold Fixing price in 2012 so as to prevent triggering option related pay-outs to Barclays clients
Recent CFTC (US Commodities regulator) prosecutions of futures traders on the CME for ‘spoofing’ gold futures orders
Flash crashes in gold futures prices which have no underlying explanation to, or connection to, events and developments in any physical gold markets
This last point, ‘flash crashes’ in gold futures prices, is particularly relevant for COMEX. Many readers will recall reading about one or more of these COMEX gold futures price ‘flash crashes‘ during which large quantities of gold futures are shorted in a concentrated interval of time (e.g. within 10 or 20 seconds) which causes the gold price to completely collapse in free fall fashion over that very short period of time.
For example, on 26 June this year, the COMEX gold price free fell by nearly 1.5% within a 15 second interval, amid a huge spike in trading volume to more than 18,000 August gold futures (56 tonnes of gold) during the 1-minute period around the crash event.
On January 6, 2014, the COMEX gold price fell by over $30 in a few seconds, from $1245 to $1215 on huge volume, forcing the CME to introduce a temporary trading halt.
On April 12, 2013, aggressive selling of gold futures contracts representing over 13.4 million ounces (more than 400 tonnes of gold) hit COMEX gold futures in two waves during the London morning trading session sending the gold futures price down by more than 5%. The following Monday, April 15, 2013 the COMEX gold price rapidly fell by another 10%.
Whether these flash crashes are the result of trading errors, futures market illiquidity, computerized trading patterns or deliberately engineered moves is open to debate. Engineered price takedowns, where an entity initiates an order with the intention of moving the futures gold price in a downward direction, are distinctly possible.
However, concentrated gold futures shorting over tiny time intervals doesn’t have to be in the form of one large trade or a series of relatively large trades. All a shorting tactic of this type has to do is to either trigger the price to move down through certain thresholds which then triggers stop-loss orders, or to trigger and induce trading reactions from trading algorithms that monitor gold futures prices. Once sentiment is damaged through rapid downward price movements, the result can affect gold futures trading sentiment for the rest of the day and indeed over subsequent days.
But beyond the possible or probable individual acts of price manipulation on the COMEX, it is important to realize that the very structure and mechanics of the COMEX create a system in which gold futures trades can be executed in large volumes in a virtual vacuum which has no connection to the physical gold bullion market, no connection to gold bar and gold coin wholesalers and retailers, and which doesn’t even have any connection to the vaulted gold residing within the COMEX approved vaulting facilities (aka COMEX warehouses aka COMEX vaults).
These underlying mechanics of COMEX, which are discussed below, allow the generation of massive gold futures trading volumes and open interest, huge leverage and large non-spot month position limits, a high concentration of speculative trading by a small number of banks, and a lack of transparency into the gold ‘delivery’ process. And at the foundation of the system, there are very small physical gold holdings in the COMEX approved vaults.
COMEX gold futures contracts are derivatives on gold. Importantly, a COMEX gold futures contract comes into existence any time two parties agree to create that contract. This means that COMEX gold futures contracts can continue to be created as long for as there are interested buyers (longs) and sellers (shorts) willing to bring these gold futures contracts into existence.
Therefore, there is no hard upper bound or supply limit on the amount of gold futures contracts that can be created on COMEX. This is very similar to the unit of trading of gold in the London market, i.e. unallocated gold, which is also a derivative that can be created in unlimited quantities. In both cases there is no direct connection to real physical allocated and segregated gold bars.
Technically, the value of any futures contract is derived from the value of its underlying asset, and in this case the underlying asset, nominally anyway, is physical gold. But perversely in the global gold market, the value of the gold futures is not being derived from the value of the underlying asset (physical gold). Instead, the value of the world’s physical gold is now being consistently and continually derived via this out-of-control and unhinged gold futures trading.
Contractually, COMEX 100 ounce gold futures contracts (COMEX code GC) are futures contracts that offer a physically deliverable option, i.e. to deliver/receive 100 ounces of minimum 995 fine gold (in either 100-ounce gold bars or 1 kilo gold bars format) on a specific future date.
However, the vast majority of COMEX 100 ounce gold futures are never delivered, they are offset (closed out) and cash-settled, or else they are rolled over. Only a tiny fraction of these gold futures contracts are ever ‘delivered’. Again, this is similar to unallocated gold in the London market, which is a cash-settled gold derivative.
COMEX is also a speculative market, where leverage (due to the use of trading margin) is used to create outsized trading volumes, and where initial position limits for individual traders are far larger than the quantity of underlying gold being stored in the COMEX approved vaults.
These factors combine to create what is in effect a Las Vegas type casino. This casino encourages vast speculative trading of futures which will never be delivered, and vast shorting (selling) claims on large quantities of gold which a) the shorter does not possess, b) are not even stored in the COMEX system, and c) are many multiples of annual gold supply). Conversely, the buyers are going long on claims on gold which will a) will never be delivered and b) which nearly none of the trading counterparties even wants to have delivered. The players in this casino have no interest in secure gold storage or allocated gold bars or bar brands or bar serial numbers. After all, as the academics put it, the COMEX provides “the ability to avoid dealing with the underlying asset”.
Even when COMEX gold futures for used for hedging purposes, much of this hedging is by bullion bank traders so as to hedge unallocated London gold using COMEX futures, i.e. hedging cash-settled paper bets with cash-settled paper bets. And both sets of instruments structurally have nothing to do with the real physical gold market.
Even back in December 1974, when COMEX gold futures were about to be launched (and which coincided with a lifting of the ban on US private ownership of gold), a group of major gold dealers in London including 3 of the 5 primary London gold dealers, i.e. Samuel Montagu & Co, Mocatta & Goldsmid, and Sharps Pixley & Co, told the US State department that they believed that this new gold COMEX futures market would dwarf the physical gold market i.e. “would be of significant proportion, and physical trading would be miniscule by comparison“.
These dealers expected that “large volume futures dealing would create …. a highly volatile market” whose “volatile price movements would diminish the initial demand for physical gold” that the US Government feared from the lifting of the gold ownership ban.
In hindsight, it was perceptive and prophetic that these major participants of the then fully allocated gold market in London in 1974 saw that the introduction of gold futures would create what we are seeing now, i.e. huge trading volumes, high price volatility, and a market (COMEX) which has an adverse effect on pricing in the physical gold market.
Trading Volume Metrics
Two revealing trading metrics for COMEX gold futures are trading volumes and the “Open Interest” on gold futures contracts. “Open Interest” simply means the number of gold futures contracts that are outstanding at any given time that have not been closed or delivered.
For 2016, COMEX gold futures trading generated a trading volume of 57.5 million contracts, representing 178,850 tonnes of gold. This is nearly as much gold as has ever been mined in the history of the world, i.e. which is estimated to be 190,000 tonnes. This COMEX trading volume in 2016 was also a whopping 37% higher than in 2015. In 2016, while 57.5 million gold futures contracts traded, only 71,380 COMEX gold contracts were ‘delivered’. This means that only 0.12% of COMEX gold contracts that traded in 2016 were ‘delivered’.
Delivered in this context means that the delivery option on the contract was exercised and a warrant representing 100 oz of gold on that contract changed hands, i.e. title documents to gold were shunted around a COMEX/vault recording system, mostly between bank holders. Delivered does not mean gold was withdrawn from a COMEX approved vault and delivered to an external location. The concept of gold vault withdrawal numbers, which is a bread and butter metric for the physical Shanghai Gold Exchange (SGE), is totally alien to the COMEX and its trading participants.
For the first six months of 2017, trading volumes in the main COMEX gold futures contract (GC) reached 32.7 million contracts, representing 101,710 tonnes of gold. This was 12% up on the same period in 2016. When annualized, this suggests than in 2017, COMEX is on course to trade more than 200,000 tonnes of gold, which will be more than all the gold ever mined throughout history.
In the first half of 2017, only 12,320 gold futures contracts (representing 38 tonnes) were delivered on COMEX. This means that from January to June 2017, only 0.037% of the COMEX gold contracts traded in that six month period were ‘delivered’, or just 1 in every 2650 contracts traded.
Beyond the trends and snapshots that trading volumes provide, COMEX Open Interest shows how much real physical gold would be needed if all longs who hold gold futures contracts decided to exercise every contract into the 100 ounces of physical gold that each contract supposedly allows for.
For example, currently there are 480,000 GC gold futures contracts outstanding on the COMEX, each of which represents 100 ounces of gold. This means that buyers of the contracts are long 480,000 contracts, and sellers of those same contracts are short 480,000 contracts. With each contract worth 100 ounces of gold, this is an open interest of 48 million ounces (1500 tonnes) of gold, which is about half a year’s global gold mining output.
Currently 46% of this open interest is in the front-month August 2017 contract (nearly 750 tonnes), with another 40% in the December 2017 contract. Together the August and December contracts represent over 85% of the current open interest. During 2017, open interest has fluctuated roughly between 400,000 and 500,000 contracts at any given time.
Registered Gold Inventory and Eligible
However, there are only currently 22 tonnes of ‘Registered gold’ in the COMEX approved vaults in New York, which is equivalent to about 700,000 ounces. What this means is that there are only 22 tonnes of gold currently in the vaults that the vault operators previously attached warrants to as part of the COMEX futures delivery process. This 22 tonnes of gold, if it was held in Good Delivery gold bar format, would only occupy one small corner of one of the COMEX’s 8 approved gold vaults when stacked 6 pallets high across 3 stacks, and another 4 pallets in an additional stack. That’s how small the COMEX registered gold inventories are.
The amount of Registered gold backing COMEX futures gold trading is also at a 1-year low. For example, in August 2016 there were 75 tonnes of Registered gold in the COMEX vaults. Now there’s only 30% of that amount.
There is also no independent auditing of the gold that the COMEX reports on its registered and eligible gold inventory reports. So there is no way of knowing if the COMEX report is accurate. For example, HSBC claims to have 165 tonnes of eligible gold and a measly 1.5 tonnes of registered gold stored at its COMEX approved vault. This vault is located in the lower levels of 1 West 39th Street in Manhattan (the old Republic National Bank of New York vault). However, I heard from a former New York Fed senior executive that HSBC don’t keep a lot of gold in this Manhattan vault since they moved a lot of it to Delaware after 9/11 for security reasons. If this is true, then the question becomes, on the COMEX report, does the total for HSBC represent the amount they have in the midtown Manhattan location, or the total in midtown and Delaware (assuming they have gold stored in Delaware).
COMEX approved vaults also report another category of gold known as ‘Eligible’ gold. This ‘Eligible’ gold is unrelated to COMEX gold futures trading and could be owned by anyone, for example owned by mints, refineries, jewellery companies, investment funds, banks or individuals, who would just happen to be storing this gold in the New York vaults that the COMEX also uses, such as the Brinks vaults.
In other words, this ‘eligible’ gold is merely innocent bystander gold that just happens to be stored in the COMEX approved vaults in the form of 100-ounce gold bars or 1 kilo gold bars. At the moment, there are 243 tonnes of this eligible gold in the vaults. But this gold is not involved in COMEX gold futures trading. Some of this gold is probably owned by banks that engage in COMEX gold futures trading because there are sometimes movements of gold from the eligible category to the registered category, but still, as long as it’s in the eligible category, this gold does not have any COMEX related warrants attached to it.
With an Open Interest of 1500 tonnes of gold on COMEX, and with registered gold in the New York vaults totalling only 22 tonnes, this means that there are currently 68 “Owners per Ounce” of registered gold. The holders of allocated gold bars stored in a secure vault, such as BullionStar’s secure vault in Singapore no not face this 68 owners per ounce problem, as each gold bar is owned by one person and one person only.
Since the beginning of 2017, this COMEX “owners per ounce of registered gold” metric has risen sharply, more than doubling from under 30 owners per ounce to the current ratio of 68 owners per ounce. This is because registered gold inventories have fallen sharply over this time.
Even adding into the equation all the eligible gold in the New York vaults, which is a calculation that doesn’t really mean much given the independent nature of eligible gold, there are still 5.7 “owners per ounce” of the combined COMEX “eligible and registered gold” total.
The physical gold foundations to the entire COMEX gold futures trading process are therefore very tiny in comparison to COMEX trading volumes and open interest. And all the while, gold futures trading volumes continue to rise, owners per registered ounce of gold continues to rise, and the amount of physical gold backing these contracts on COMEX continues to shrink.
The Dominant Players
The latest Commitment of Traders (COT) report produced by the US Commodity Futures Trading Commission (CFTC), for 11 July, includes market concentration data for the percentage of contracts held by the largest holders. This COT report currently shows that “4 or Less Traders” are short 35% of the COMEX GC gold futures open interest, while “8 or Less Traders” are short a combined 51% of the open interest. Note that the “4 or Less Traders” are a subset of the “8 or Less Traders”.
The CFTC also publishes a Bank Participation Report (BPR) showing metrics for banks involved in gold futures trading. The latest BPR for 11 July shows that 5 US banks are short 78063 contracts (16.4% of the total open interest), and 29 non-US banks are short another 67,373 contracts (14.2% of open interest). In total, these 34 banks were short 145,000 contracts or 30% of the open interest. The same banks were long 40,688 contracts, so were net short 105,000 contracts.
Neither the COT report nor the BPR report reveal the identity of the ‘traders’ or the ‘banks’ that hold these concentrated large positions because the bank friendly CFTC choses not to do so, but even without their identities being revealed, it’s clear that a small number of entities are dominating trading of the COMEX gold futures contracts.
When is a Delivery not a Delivery?
The COMEX delivery report is known as the “Issues and Stops Report”. This report ostensibly shows the number of contracts that were ‘delivered’ on the COMEX each month, but in reality just shows a series of numbers representing the quantity of title warrants (to gold bars) that were shunted around each month between a small handful of players.
The COMEX does not publish any gold bar weight lists of registered or eligible gold inventories held in the COMEX approved vaults. It is therefore impossible to check to what extent the same gold bars or some of the same gold bars are moving back and forth between a few parties over time. On an annual basis, each COMEX approved vault must conduct a precious metal inventory audit on behalf of the COMEX and file this audit with the COMEX within 30 days of completing it. However again, the CME Group does not publish these inventory audits, which only adds to the existing opacity of the system. Is the registered gold in the COMEX vaults even specifically insured? Who knows, because the COMEX does not divulge such details.
Some of the bank institutions which are prominent on the COMEX gold delivery reports are also some of the same institutions which operate the COMEX approved vaults, e.g. HSBC, JP Morgan and Scotia, and these same names are undoubtedly some of the names underlying the CFTC’s Bank Participation Report given that they are always prominent on the COMEX delivery reports. By the way, these same banks essentially run the LBMA in London and run the unallocated gold clearing system, LPMCL, in the London Gold Market.
As regards, the COMEX’s assignment of delivery for gold futures contracts, this is also out of the hands of a contract holder looking for delivery. When a contract is presented for delivery, it is the Exchange (COMEX) which assigns the delivery to a specific warehouse. Not the contract holder. The contract holder (long) has no say in choosing which New York warehouse that contract will be assigned to, no choice of which bar brand he/she will receive, and no choice even of whether the assigned gold will be in the form of a 100 ounce bar of three 1 kilogram gold bars. But even to the long holder seeking delivery, delivery just means gaining an electronic warehouse warrant issued in the long holder’s name or broker’s name (title to the warrant).
To take real delivery of gold bars (withdrawing gold from one of the New York vaults) that would arise from a COMEX ‘delivery’ is a laborious and discouraging extra step. Armed with a copy of an electronic receipt, the procedure involves the receipt holder directly contacting the warehouse in question and telling them you want physical delivery. How they would react to such as phone call is not clear. My guess is that it would be like visiting the mailroom in a large company, the reaction being ‘Who are you? No one ever comes down here‘.
After navigating the withdrawal negotiations with the vault in question, the pickup and transport of the gold bars is then organized using one of the list of secure transport alternatives that approved warehouse will allow.
COMEX – Not Designed for Physical Bullion
The COMmodity EXchange (COMEX) is a derivatives exchange that is not designed for buying physical gold, storing or delivering that gold, or even selling physical gold. The COMEX primarily facilitates speculation and hedging, with the delivery option just existing as a little -used side option.
Flash crashes continue to occur but neither the CME nor the CFTC ever publishes explanations for the causes of these flash crashes.
It looks certain that in 2017, COMEX will again smash its gold futures trade gold futures representing more gold than has ever been mined in human history, i.e. more than 200,000 tonnes equivalent.
So far in 2017, only 1 in every 2650 gold futures contracts traded on the COMEX has resulted in delivery i.e. less than 0.038% of the contracts go to delivery. The rest, 99.962% of contracts are cash-settled and closed-out / rolled.
The open interest in COMEX gold futures is currently 1500 tonnes, yet there are only 22 tonnes of Registered gold in the COMEX vault inventories. This means that there are 68 owners per ounce of registered gold.
There is continually a high concentration of short futures positions held by a small number of banks on COMEX. The CFTC doesn’t name these banks. When contract deliveries occur on COMEX, it is not a delivery in the sense of a gold bar movement but is merely a transfer in title of a warrant attached to a bar.
Withdrawal of a gold bar or bars out of the COMEX vaulting network to be really delivered to another location is not straightforward.
With the London Gold Market trading unlimited quantities of unallocated gold which the bullion banks create out of thin air, and with COMEX trading gold futures which are also created out of thin air, the disconnect between the world of unlimited paper gold and the world of limited physical gold is becoming ever more stark.
On one side lies paper claims on gold which come into and out of existence through cash-settled market mechanisms. On the other is real physical gold that is segregated, allocated and unencumbered, with full title held by the gold holder. Paper gold ownership is fleeting, speculative and prone to counterparty and conversion risks. Real gold is tangible, has inherent value, has no counterparty risk, and can be securely stored.
When real gold is ‘delivered’ to a gold buyer, it actually is delivered to the buyer to wherever they want it delivered, unlike COMEX deliveries where an electronic warrant is merely updated. When real gold is held in a secure vault, such as BullionStar’s vault in Singapore, the gold is fully-insured and the gold holder has full audit and control.
Unlike the COMEX and the London OTC gold market, the traditional gold buying markets of Asia and the Middle East are markets know the real value of physical gold as a form of money and a form of saving. In the physical gold market, especially in Asia, gold buyers demand high purity gold (9999s purity) in convenient bar sizes such as 1 kilogram and 100 grams, and not the 100 ounce bar size traditionally made for COMEX delivery.
Physical gold buyers want gold bars from trusted and well-known sources, and also want choice and variety for example a cast bar from the German Heraeus refinery, or a highly designed minted bar from the Swiss refinery PAMP. Kilobars and 100 gram gold bars also have the lowest premiums of any bars on the retail market since many refineries compete to supply this segment and the demand is widespread and international. Most kilobars and 100 gram bars have their own unique serial numbers which facilitates tracking and auditing.
As COMEX pursues its record-breaking attempt in 2017 to trade gold futures representing more than 200,000 tonnes of gold, the disconnect between COMEX and the real world is becoming all too clear. COMEX flash crashes will continue as long as the CME and CFTC let them continue. And many people will continue to believe that these flash crashes were deliberately orchestrated. But at the heart of the contradiction between paper gold and real gold is not whether such and such a flash crash was deliberate. The heart of the contradiction is that the very structure of the COMEX system is so detached from the reality of physical gold market that it ideally suits deliberate flash crash attempts to rig the gold price.
BullionStar will be exhibiting at the FreedomFest event in Las Vegas, which this year runs from July 19 to 22 at the Paris resort in Las Vegas. For those attending FreedomFest please drop by our stand and say hello (Booth number 321) and to chat about precious metals. BullionStar CEO Torgny Persson will also be speaking at FreedomFest at 2:30pm on Friday July 21, on why today’s gold price is not reflecting what’s happening in the world and not reflecting what’s happening in the physical gold market.
This is Part 2 of a two-part series. The series focuses on collusive discussions and meetings that took place between the world’s most powerful central bankers in late 1979 and 1980 in an attempt to launch a central bank Gold Pool cartel to manipulate and control the free market price of gold. The meetings centered around the Bank for International Settlements (BIS) in Basle, Switzerland.
Part 2 takes up where Part 1 left off, and begins by looking at developments in the BIS Gold Pool discussions during January 1980, a month in which the US dollar gold price rocketed more than 60% during a three-week period to reach a then record of $850 per ounce. Part 2 then looks at how the discussions involving these central banks evolved over the remainder of 1980 and 1981 as key high level central bankers continued to call for intervention into the gold market.
Part 2 also looks at evidence that central bankers party to the discussions began advocating gold for oil exchanges between the West and the Saudis, exchanges which would provide real wealth (gold) to the Arabs in exchange for oil flowing to the West, while simultaneously keeping a lid on the gold price.
A series of meetings of the world’s most powerful central bank governors were held in late 1979 at the Bank for International Settlements (BIS) office of BIS Chairman and President Jelle Zijlstra in Basle, Switzerland. The objective of the meetings was discussion of a central bank consortium that would operate a collusive Gold Pool to manipulate the price of gold. Note that this was more than 11 years after the London Gold Pool had collapsed in March 1968.
At the IMF annual conference in Belgrade in early October 1979, the US monetary authority delegation in the form of Paul Volcker, William Miller, Tony Solomon, and Henry Wallich approached Fritz Leutwiler, Chairman of the Swiss National Bank, and discussed a proposal to launch a joint central bank gold selling operation.
During the discussions at the BIS and between the central bankers at various locations, Zijlstra, who was BIS President until the end of 1981, and Leutwiler, who became BIS President in January 1982, were both strongly in favour of launching a new joint central bank gold pool to manipulate the gold price.
The oil-producing cartel OPEC was at that time, “increasingly concerned that gold was outpacing oil”, but Al Quraishi, Governor of the Saudi Arabian Monetary Authority (SAMA) had made an assurance that the Saudi’s “would not rock the boat” and buy gold on the market if a new gold pool was activated. However, Al Quraishi and SAMA were still eager to “diversify” the reinvestment of the Saudi oil revenues into gold.
The Bank of England recorded market intelligence in October 1979 that the “USA was planning to sell 10 million ounces of gold in four separate unannounced operations” before the end of 1979 so as to “placate the Saudi Arabians.“
The Bank of England’s foreign exchange and gold specialist at that time, John Sangster, thought that there was“a need to break the psychologyof ‘the market can only go one way and that is up’.”
Sangster’s view was also that there was “no question of anypermanent stabilisation of the gold price, merelyat a critical time holding it within a target area”, an operation he called a “smoothing operation”.
A meeting to discuss a new collusive gold pool took place in the BIS office of Zijlstra on Monday 12 November 1979, whose invitees (in addition to Jelle Zijlstra) were Gordon Richardson, Governor of the Bank of England, Cecil de Strycker, Governor of the National Bank of Belgium, Fritz Leutwiler, Chairman of the Swiss National Bank, Bernard Clappier, Governor of the Banque de France, and Otmar Emminger, President of the Bundesbank.
A follow-on meeting about the collusive new gold pool took place in the BIS office of Zijlstra on Monday 10 December 1979, attended by Zjilstra, Kit McMahon of the Bank of England, Otmar Emminger, outgoing President of the Bundesbank, Karl Otto Pohl, incoming Bundesbank President, de la Geniere, the incoming Governor of the Banque de France, de Strycker, Governor of the Belgian central bank, Leutwiler, Chairman of the Swiss National Bank, and Rene Larre, BIS General Manager.
The December meeting, which was facilitated by BIS general manager Rene Larre, also revealed that “European central banks would intend to buy back in due course any gold they sold”, that the Gold Pool could be funded by buying gold first so as to create an inventory of physical gold to use for selling operations, and that in McMahon’s words “if the scheme were to be simply a BIS one, publicity would not necessarily, orperhaps desirably, arise”
Based on the detailed briefing of the content of that meeting at the BIS on 10 December, which was written by the Bank of England’s Kit McMahon for the benefit of the Bank of England Governor Gordon Richardson, the proposed new gold pool, among other things, would sell gold “only when gold was relatively strong and the dollar relatively weak and [buy] only in the reverse circumstances.”
In the 10 December 1979 meeting at the BIS, the Bundesbank was against the Gold Pool plan due to what Bundesbank President Otmar Emminger attributed to opposition from the BundesbankCentral Bank Council. However, the Bundesbank was thought, by the Bank of England’s Sangster, to be against the Gold Pool primarily as a tactical way to force the US Fed to address the underlying problems of a weak US dollar and high inflation.
The Banque de France, which had been in favour of the Gold Pool scheme prior to October 1979, also came out in the 10 December meeting as being against the scheme due to what Banque de France governor De la Geniere described as “great political dangers…of selling any French gold” indirectly through a Gold Pool. However, Sangster also thought the Banque de France was more likely to be tactically backing the Germans so as to put pressure on the Fed to first address inflationary problems.
As per Part 1, a number of internal documents from the Bank of England are cited below. These documents provide a unique road map on the evolution of the collusive discussions at the BIS and the thinking of the Bank of England executives involved in and supporting the discussions. Documents are rendered in blue text and italics, with bold, underlining, and a few cases of red text added where appropriate.
January 1980 BIS Gold Pool Meeting
Following the Gold Pool meeting at Zjilstra’s office in the BIS headquarters on 10 December 1979, the central bank governors next met at the BIS in Basle on 7 January 1980 during their monthly scheduled ‘Basle Weekend’. The afternoon London Gold Fix was set at $431 on 10 December 1979, but by 4 January 1980 it was already 36% higher at $588.
In preparation for the January meeting about the proposed Gold Pool, which took place on Monday 7 January 1980, John Sangster, the Bank of England’s foreign exchange and gold specialist, wrote the following briefing document titled “SECRET” to the attention of the Governor’s Private Secretary (G.P.S.) as well as to the attention of Bank of England Executive Director Kit McMahon. The Governor of the Bank of England at that time was Gordon Richardson.
To recap from Part 1, Christopher McMahon, known as ‘Kit’ McMahon, became Deputy Governor of the Bank of England on 1 March 1980, taking over that position from Jasper Hollom. Prior to becoming Deputy Governor, McMahon was an executive director at the Bank of England from 1970 to 1980. McMahon signed his internal Bank of England memos and correspondence with the initials ‘CWM’, short for Christopher William McMahon. McMahon left the Bank of England in 1986 to take up the role of Chief Executive and Deputy Chairman of Midland Bank. Midland Bank was taken over by HSBC in 1992. See profiles of McMahon here and here.
Gordon Richardson was Governor of the Bank of England for 10 years from 1973 to 1983. Before that, he was a non-executive director of the Bank of England between 1967 and 1973. Richard was chairman of J. Henry Schroder Wagg from 1962 to 1972, and chairman of Schroders from 1966 to 1973. After leaving the Bank of England, Richardson went on to be a director of Saudi International Bank in London. He also headed the influential Group of Thirty (G30) central bank lobbyist group, and was chairman of Morgan Stanley International.
John Sangster’s full name was John Laing Sangster, hence he signed his internal Bank of England memos and analysis with the initials ‘JLS’.
G10 plus Switzerland
Sangster’s secret memo to McMahon and Richardson was written on Friday 4 January 1980, a day on which the afternoon Gold Fix came in at $588 per ounce. The memo addressed developments in the gold price and discussed potential joint central bank intervention into the gold market. Hand written at the top are the words “The Governor has seen : copy in Basle Dossier JB 7/1“. JB is the Bank of England’s John Balfour who was also copied on the document, and who was a Bank of England alternate director at the BIS at that time.
The memo has 6 numbered paragraphs, paragraphs 5 and 6 of which are most interesting:
Copies to : Mr McMahon, Mr Balfour, Mr Byatt
5. Since the market has further extended itself, any central bank operation would now have greater chance of success. But it would have to be a co-operative effort preferable on a G.10 plus Switzerland basis. Obviously the contributors, with the possible exception of the USA, would go into the operation in the hope and intention of subsequently recapturing their gold. But I think the new “pool” must face the possibility that they might not recapture some or all of their gold – in which case they would have to envisage the operation as a general contribution to the struggle against inflation.
6. If a G.10 plus Switzerland operation were mounted on a pro rata basis, our share would be just under 3%. If the Italians (who sometimes talk as if the loss of one ounce of their gold would mean the end of the world) and the Swedes (very low gold holders) dropped out, our share would be about 3 1/4 %. If the Japanese declined on the excuse of a very low gold proportion, then I think we could do so too.
4th January 1980
The G10 that Sangster mentions refers to the Group of 10 highly industrialised nations which consisted of the USA, UK, France, West Germany, Netherlands, Belgium, Italy, Canada, Sweden, and Japan. The G10 as a grouping was formed in 1962 when these 10 countries participated in the IMF’s General Arrangements to Borrow (GAB) plan. Switzerland became associated with the GAB in 1964 but the name remained the G10. The G10 also participated in the Smithsonian Agreement in December 1971, with all other members agreeing to peg their currencies against the US dollar.
As readers will recall from Part 1, this list of 11 countries, as represented by their central banks, comprised the group of central banks that either advocated the gold market intervention meetings in late 1979 (the US), were present in the BIS Gold Pool meetings in November and December 1979 (Switzerland, West Germany, France, Netherlands, Belgium), or that were to be consulted after the December meeting. As per the December 1979 meeting:
“The meeting ended with Leutwiler saying he would approach the Canadians and Japanese to see how they felt about the idea while Zijlstra would talk to the Italians. All would then think further about it and revert in January.“
No mention of the Swedes, but, based on Sangster’s comment above, the Swedes were considered to be “very low gold holders“.
As per the 12 November 1979 Gold Pool meeting, there are no meeting minutes in the public domain for the 7 January 1980 Gold Pool meeting, with the BIS Archives office claiming it did not have such minutes. When asked about minutes from a 7 January 1980 meeting, the BIS Archives deflected the question and misdirected the answer, saying only that:
“The Gold Pool came to an end in 1968, so I take it that you are referring to meetings of the Gold and Foreign Exchange Committee. We do have some minutes for this meeting, but unfortunately not for the period which interests you.”
However, London Times correspondent Peter Norman, in Basle that day to cover the “Basle Weekend”, did write a report on the outcome of the BIS governors’ January meeting on gold. In his article titled “Bankers Rule Out Sale of Reserves to Hold Back Rush into Gold”, dated Monday 7 January 1980 (a day on which the gold price closed at $634), Norman wrote:
“Western central bank governors today ruled out any concerted sales of gold from reserves to quell the speculative rush of funds into the metal on the world’s bullion markets.
The idea, which has been suggested at various times in the past few months by Herr Fritz Leutwiler, the Swiss National Bank president, foundered when it became apparent that it would receive no support from the West German Federal Bank and the Bank of France.As these central banks have the second and third largest gold reserves in the Western world, their agreement was crucial to the launching of a concerted sale.”
“It appears that the gyrations of the gold markets were discussed at some length yesterday at the regular monthly meetings of central bankers here.”
“Behind the decision not to introduce a concerted programme of gold sales lies a hope that the speculative fever of the past few days will burn itself out and that the price will fall sharply of its own accord to administer a salutary shock to speculators.
There is also the sober consideration that nobody knows how much gold would need to be dumped on the market to achieve the desired result.“
Norman only refers to ‘sales of gold’ and not a Gold ‘Pool’ since knowledge of the Gold Pool discussions was not in the public domain at that time. The reference in the London Times’ January 1980 report to the West German and French central bankers still being against the launch of a gold intervention operation gels with the view attributed to the Bundesbank and Banque de France during the December 1979 BIS meeting.
The G5 Gold Meeting – Washington
However, this did not stop further discussions on gold market intervention, since exactly one week later on Monday 14 January in Washington DC, the deputy finance ministers of the G5 convened a secret meeting to also discuss a plan for joint central bank gold sales. In the 1970s, the G5 (Group of 5) referred to the world’s then five largest economies i.e. US, UK, Japan, West Germany and France.
This meeting was covered by a New York Times report, titled “Concerted Gold Sales Discussed” and filed in Washington DC on Wednesday 16 January 1980, a day on which the PM Gold Price closed at $760:
“The possibility of concerted sales of gold by central banks from the leading industrial nations was discussed at a secret meeting in Washingtonlast Mondayby deputy finance ministers from the United States, West Germany, France, Britain and Japan.
The United States Treasury, confirming reports of the meeting that have just leaked out, said discussions were not confined to gold, and that discussions covers a ‘ wide range’ of international monetary issues.
European sources reported that there was as yet no consensus on the gold sales, with France and Germany opposed and the United States, Britain and Japan in favour, but with varying degrees of enthusiasm.”
As per the London Times report on 7 January, the New York Times report of 16 January referred to sales of gold but not to the secretive Gold Pool discussions. The New York Times also recorded the West Germans and French as being non-cooperative about joint gold market intervention.
On Thursday 17 January 1980, the London Times, in an article titled “Gold at $755 after biggest jump ever” also commented on the secret Washington DC meeting, which it said was “chaired by Anthony Solomon, Under-Secretary of the United States Treasury for Monetary Affairs“, and that “apparently there was general agreement at the meeting that political factors were totally dominating the gold markets and that there was little point in any central bank selling gold.”
Sangster’s G5 Gold Briefs
The day after this Times report, on Friday 18 January, when the gold price closed in London at $835 per ounce, John Sangster at the Bank of England sent a confidential memorandum to Kit McMahon and to the attention of the Governor Gordon Richardson, commenting on the “G5 gold briefs“, i.e. the G5 gold discussions in Washington DC between the US, UK, France, West Germany and Japan. Sangster’s memo was as follows:
Copies to Mr. Kirbyshire, Mr. Byatt, Governors’ Private Secretary
Just a few glosses on the G5 gold briefs.
1. Whereas the earlier rise in the gold price had definitely been a factor in the dollar’s weakness, since early in the New Year the dollar has detached itself from gold.
2. But gold has been a factor in the rise in the price of other commodities. part of that rise is obviously due to the increase in international tension, but the meteoric rise in gold has almost certainly exacerbated it.
3. Now that international tension is the main factor in the gold market, any central bank action would probably be ineffective.
4. If tension eased substantially, however, central bank action need not then be unnecessary. With greater chance of success, it could be helpful in further cooling the inflationary environment.
5. I am suspicious of the thesis that any future gold pool must start with purchases. When the price starts to rise there will be too strong an inducement, and probably many would present arguments not to sell.
6. All of which seems to suggest that the only gold policy central banks could be said to have is – afraid to sell but hoping to buy in the next bear phase. Realistic perhaps, but not very satisfying.
18th January 1980 (Dictated by JLS and circulated in his absence)
The ‘international tension’ referred to in Sangster’s note above most likely refers to the Soviet invasion of Afghanistan in December 1979 and the Iranian hostage crisis that began in November 1979.
While John Sangster’s ‘glosses on the G5 gold briefs‘ memo from 18 January 1980 may have given the impression that gold market intervention was off the cards for the time being, no one told this to Fritz Leutwiler, chairman of the Swiss National Bank, because less than 2 weeks later, Leutwiler was again stirring for“central bank intervention in the gold market”.
According to Peter Norman in an article for the Times titled “Swiss call for banks to dampen gold price”, dated 31 January 1980 , a day on which the US dollar gold price closed at $653:
“Dr Fritz Leutwiler, president of the Swiss National Bank, has once again advocated central bank intervention in the gold market to curb wild price movements.
In today’s issue of Handelsblatt, the West German business daily, Dr Leutwiler was quoted as saying that central banks should exercise control over the gold price to dampen down inflationary expectations and prevent speculation on the gold market from spreading on to foreign exchange markets.”
“What has provoked Dr Leutwiler to raise the issue of central bank intervention in gold at this time remains a mystery. Neither he nor his spokesman were available for comment in Zurich today.“
“He has suggested central bank intervention in the gold market before, at the meeting of the International Monetary Fund in Belgrade last autumn and again to foreign journalists in Geneva last December. However, at the meeting of central bank governors in Basle last month [December 1979], the issue was quickly disposed of once it became apparent that neither the French nor West German central banks would support the idea.”
Note that after working for the London Times, Peter Norman subsequently moved to the Financial Times in 1988 and was the FT’s economic editor from 1992 to 1995, as well as later becoming the FT’s chief EU correspondent. Norman’s profile can be read here.
After gold in US dollars hit a peak of $850 in January 1980, the price came off but still ended January 1980 at over $700 per ounce. By the end of February 1980, the US dollar gold price was trading in the $640 range, and by March and April 1980 it was trading in the $500 range, as the Paul Volcker led US Fed’s interest rate hikes began to take effect. But by the end of June 1980, the gold price was again above $600 per ounce, and in late September 1980 gold was trading above $700 per ounce.
Exchange of Gold for Oil while the World Adjusts
In September 1980, the Bank of England Governors (the Governor and Deputy Governor) and senior executives again went on record addressing the gold price and possible coordinated central bank interventions into the gold market. The following detailed commentary document was written by the Bank of England’s John Sangster (JLS) on Wednesday 17th September 1980, a day on which the US dollar gold price closed at $673.
Although JLS addressed the September 1980 memorandum to “The Deputy Governor” and to “Anthony Loehnis”, it was also sent to the Governor, Gordon Richardson, because Richardson, along with McMahon and Loehnis, all replied to the memorandum by writing signed notes in pen on the actual circulated document, as was the convention at the time.
In the document, “Mr Loehnis” refers to Anthony Loehnis. At that time in 1980, Loehnis was an Associate Director of the Bank of England. In 1981, he became an executive director of the Bank responsible for overseas affairs. Loehnis had previous worked for the Bank of England Governor Richardson from 1977 to 1979, and Richardson had actually brought Loehnis into the Bank of England from J henry Schroder Wagg & Co, where Richardson had been chairman. Loehnis moved to SG Warburg in 1989. Loehnis’ full name was Anthony David Loehnis and hence he signed his internal Bank of England memos and correspondence with the initials ‘ADL’. See profile of Loehnis here.
17. 9. 80
MR LOEHNIS, THE DEPUTY GOVERNOR
Central Banks and Gold
1. Last year when there was some discussion of a possible revival of the central bank gold pool, sceptics outnumbered advocates. Subsequent events justified the sceptics, although international political events played more of a part than any can have foreseen. Nevertheless a general but unspecified wariness of political disasters may be a part of the general background to scepticism in this area. The sceptic may also now point to the gold price occasionally threatening $700 again even though international tension is significantly reduced.
2. Nevertheless the price of gold is telling us something, and I do not think that we can dismiss it as merely a symptom to be ignored while continuing to concentrate on fundamentals.
3. The world is in competition for a relatively few “inflation-proof” assets, of which gold is reckoned to be chief. Its supply has been sharply reduced over the past year and the bulk of its stock is largely and firmly held by the G10 (and Switzerland).
4. In these circumstances the competition for the reduced supply – much sharpened by OPEC appetite which was not markedly present in 1973/74 – is having a disproportionate effect on the price. I well realise that if this continues for long, gold may not be such a good hedge in the short-run thereafter.
5. But the damage to inflationary psychology will by then have been done; not only in the developed countries but with OPEC, where the escalating price of this, one of the few inflation-proof assetscould become an element in their price determination. Moreover, gold seems to exercise some influence on many “hard” commodities irrespective of fundamentals. The “symptoms” may therefore be having an independent effect on price levels.
6. It is not of course for us with our relatively low gold holding, compared with many of the G10 countries, to preach a new gold pool. We can question however whether it is helpful in the longer run for the G10 countries to continue to sit pat on all their gold (in just another manifestation of the perversity of the adjustment process) and complacently accept the effects of the rising price of gold.
7. If any operations were ever contemplated, it would have to be geared at some concept of the developing real price of gold and not attempt to hold any particular nominal level.It would almost certainly not be a “pool” with any significant potential for recovery of gold sold. Rather it would enable OPEC to acquire some modicum of the chief inflation-proof asset without an excessive rise in the price.The aim would be to prevent gold making its own particular contribution to inflation while the developed world was attempting to bring inflation down and so reduce gold’s own peculiar attraction.
8. This is not to advocate gold for oil directly; the price haggling would be too acrimonious. Market intermediation should allow the G10 to move with the price while attempting to control its pace as well as break off the experiment when possible or necessary. A positive policy for gold could be a sign of confidence on the broader issue of inflation. But I fear the general opinion will be that the risk of comparative failure is too high to warrant such action on gold.
The actual memorandum from John Sangster (JLS) to McMahon and Loehnis (and Richardson) can be seen here: Page 1 and Page 2. The links may take a little while to load first time. Since this is an extremely important document, it can also be viewed below:
There are a number of intriguing aspects to Sangster’s Bank of England document, namely that:
Gold was reckoned to be the chief “inflation-proof” asset
The bulk of the available gold stock was firmly held by the G10 (and Switzerland)
Gold demand by OPEC countries was impacting the gold price due to limited supply
The escalating price of gold was feared by Sangster to have the potential to affect OPEC’s price determination of oil
Sangster’s posed the question whether “in the longer run” the G10 countries should “sit pat on all their gold”
Sangster’s vision was for central bank operations to target the movements of the real price of gold in a moving fashion
Sangster’s did not necessarily envision a central bank Gold Pool in the traditional sense but a Pool that would “enable OPEC to acquire some modicum” of Gold “without an excessive rise in the price”. Modicum is a word which means a small quantity of something.
Sangster also wanted to “prevent gold making its own particular contribution to inflation” (i.e. to sabotage what gold does best – signal inflation) and hilariously, in typical central banker fashion, he referred to the interest in real money (gold) as a “peculiar attraction” that should be targeted.
There are 3 hand-written notes on the document. The first note at the top of page 1 in blue pen was written by Anthony Loehnis. The second note which starts at the top left of page 1 and continues at the bottom of page 1 in black pen was written by the Deputy Governor Kit McMahon. The 3rd note at the bottom of page 2 in black pen was written by the Governor Gordon Richardson.
Note from Anthony Loehnis:
“An interesting but difficult proposal. The case for rising gold prices as a locomotor rather than a manifestation of inflation would need to be made very persuasively. And I have difficulty with “the developing real price of gold”. It may nonetheless be an idea worth touring around in Basle and elsewhere, although I share the doubt in JLS’s final statement. AOL 19.9”
Note from Kit Mc Mahon:
“I have always been one of the sceptics in this area, & I am afraid I remain one.If the US would declare official convertibility buying and selling to CMIs without limit – at say $700, I believeit would be an enormously beneficial development for the international monetary system and especially for the US. But I see not the faintest chance that this will ever happen. In the absence of such a move I think it would be weak and dangerous for a group of central banks to try ad hoc to influence the price. CWM 24/9.”
Note from Gordon Richardson:
“It is surely impossible for any country to fix a gold price in present circumstance. What I am looking towards is some exchange of gold for oil while the world adjusts – although not very hopefully! G”
Again, there were some intriguing comments in the these hand-written notes.
Loehnis recommended sharing around Sangster’s proposals in Basel (BIS) and elsewhere.
McMahon advocated that the US Government declare official convertibility between the US dollar and gold at $700 per ounce. This was based on a calculation of US overseas dollar liabilities tallied in a separate document. A similar calculation today would put the US dollar gold price in the many thousands.
Richardson was ‘looking towards an exchange of gold for oil’ between the gold holders (Western central banks) and the gold producers (OPEC, the most important member of which was the Saudis).
In the Bank of England Archives, there do not seem to be any relevant files relating to Gold Pool discussions or gold market intervention after the year 1980. Likewise, BIS Archives claim not to have any material whatsoever about the 1979-1980 BIS Gold Pool discussions, despite the fact that there are numerous files in the Bank of England archives proving that these discussions took place. We therefore need to look at relevant material from other sources covering the period after 1980.
Zjilstra’s Per Jacobsson lecture – September 1981
Just over 1 year after John Sangster had written his document dated 17 September 1980 to Kit McMahon, Anthony Loehnis, and Gordon Richardson, in which he envisioned a scheme that would “enable OPEC to acquire some modicum” of gold “without an excessive rise in the price”, the BIS President Jelle Zijlstra was again proposing joint action to control the gold price.
On Sunday, 27 September 1981 in Washington DC, Zjilstra gave the main speech at the IMF’s annual “Per Jacobsson Lecture”. Zijlstra was chosen to give this speech to mark the fact that he was scheduled to retire at the end of 1981 from his role as President and Chairman of the BIS and as President of the Dutch central bank, De Nederlandsche Bank (DNB). Note that Fritz Leutwiler of the Swiss National Bank (SNB) became BIS President and Chairman from January 1982 onwards, while Wim Duisenberg became President of the Dutch central bank in January 1982.
In his “Per Jacobsson Lecture” which was titled “Central Banking with the Benefit of Hindsight”, and which was given while the gold price had last traded that week at $450 per ounce, Zijlstra candidly told his Washington DC audience of fellow central bankers that:
“I feel that it is necessary for us, within the Group of Ten and Switzerland, to consider ways to regulate the price of gold, admittedly within fairly broad limits,so as to create conditions permitting gold sales and purchases between central banksas an instrument for a more rational management and deployment of their reserves.
On the occasion of the annual meeting of the IMF in 1979 this was brought up, but regrettably, insufficient agreement could be reached to make even a modest start with regulating the gold price in the free market.
It is my firm conviction that relatively small-scale interventions, though not forestalling the subsequent explosion of the gold price, would at least have reduced it to more manageable proportions.
Now that the turbulent emotions seem to have quietened down, we would be wise to reflect anew and without prejudice on these subjects.”
These quite extraordinary statements from Zjilstra while still BIS President illustrate that the desire of the BIS head to intervene in the gold market had not dwindled between early 1980 and the end of 1981. In fact, Zjilstra seemed to be indicating that the lower volatility in the gold price towards the end of 1981 provided a perfect opportunity to revisit the discussions with more chance of success in controlling the gold price.
Zjilstra “regretted” that “insufficient agreement could be reached” by the G10 and Switzerland on considering “ways to regulate the price of gold” in late 1979
Zjilstra was also convinced that “relatively small-scale interventions” would have reduced the gold price moves in January 1980 “to more manageable proportions“
Zjilstra advocated revisiting the topic of gold market intervention (“reflecting anew and without prejudice on these subjects“) sensing that “the turbulent emotions seem to have quietened down”.
This view of Zjilstra’s resonates with John Sangster’s comment in his 18 January 1980 report about the G5 Gold Briefs in which Sangster said:
“If tension eased substantially, however, central bank action need not then be unnecessary. With greater chance of success, it could be helpful in further cooling the inflationary environment.”
Given that Fritz Leutwiler of the Swiss national Bank took over the reins as BIS President in January 1982, and given that Leutwiler was arguably the most prominent of all the BIS governors as an advocate of a new BIS Gold Pool (see above and Part 1), then it would not be surprising if, under Leutwiler’s stewardship, the BIS inner club of Governor’s recommenced discussions of a BIS Gold Pool during the 1982 – 1983 timeframe.
First, there is the Meeting on the Gold Pool – 1983
During that time, Gordon Richardson was still Bank of England Governor, Karl Otto Pohl was still Bundesbank President, Fritz Leutwiler was still Swiss National Bank Chairman, and Paul Volcker was still Chairman of the US Federal Reserve. So, is there any evidence of a Gold Pool mentioned during this timeframe?
Fascinatingly, there is:
“Over A bratwurst-and-beer lunch on the top floor of the Bundesbank, Karl Otto Pohl, its president and a ranking governor of the BIS, complained to me in 1983 about the repetitiousness of the meetings during the “Basel weekend.”“First, there is the meeting on the Gold Pool, then, after lunch, the same faces show up at the G-10, and the next day there is the board which excludes the U.S., Japan, and Canada, and the European Community meeting which excludes Sweden and Switzerland.”
Edward Jay Epstein, “The Money Club” – An Essay, HARPER’S November 1983
In 1983, investigative journalist Edward Jay Epstein was given privileged access to the Bank for International Settlements and some of its inner sanctum central bank governors while he was writing an article on the BIS (“The Money Club”) for US magazine Harper’s.
In his Money Club article, Epstein writes:
“Artfully concealed within the shell of an international bank, like a series of Chinese boxes one inside another, are the real groups and services the central bankers need-and pay to support.
The first box inside the bank is the board of directors, drawn from the eight European central banks (England, Switzerland, Germany, Italy, France, Belgium, Sweden, and the Netherlands), which meets on the Tuesday morning of each “Basel weekend.“
To deal with the world at large, there is another Chinese box called the Group of Ten, or simply the “G-10.” It actually has eleven full-time members, representing the eight European central banks, the U.S. Fed, the Bank of Canada, and the Bank of Japan. It also has one unofficial member: the governor of the Saudi Arabian Monetary Authority.
“This powerful group, which controls most of the transferable money in the world, meets for long sessions on the Monday afternoon of the “Basel weekend.”
[Karl Otto Pohl] concluded: “They are long and strenuous-and they are not where the real business gets done.” This occurs, as Pohl explained over our leisurely lunch, at still another level of the BIS: “a sort of inner club.“
Bundesbank President Karl Otto Pohl is clearly on record in 1983 as stating that “First, there is the meeting on the Gold Pool“ during the “Basle weekend“. But the only publically known gold pool was the London Gold Pool which operated from November 1961 to March 1968.
Epstein interviewed the Bundesbank’s President Karl Otto Pohl in 1983, more than 15 years after the London Gold Pool had collapsed. Pohl only joined the Bundesbank in 1977, and he would not, in 1983, have used the term ‘Gold Pool’ for a meeting that had not discussed a gold pool since 1968, i.e. 15 years earlier. So what does this term ‘Gold Pool’ refer to?
“What is the ‘gold pool’ cited by BIS board member and Bundesbank President Karl Otto Pohl in his interview with the financial journalist Edward Jay Epstein published in the November 1983 edition of Harper’s magazine?”
The BIS initially responded to Schall with a classic ‘deflection and avoid answering the question’ response. The BIS wrote:
“Many thanks for your phone call and e-mail enquiry…
A detailed history of the Gold Pool, which operated between 1961 and 1968, can be found in Toniolo, Gianni (2005), ‚Central Bank Cooperation at the Bank for International Settlements,‘ Cambridge: Cambridge University Press, pp. 375-81 and 410-23. This book should be available from most academic libraries covering finance and economics.”
“Thank you for your response. However, it seems that you have not answered my question as to the ‘gold pool‘ that Mr. Pohl cited in his interview with Edward Jay Epstein. That interview took place many years after the London Gold Pool disbanded and it must have been the BIS‘ own gold pool.
Therefore, once again: what is the ‘gold pool‘ that Mr. Pohl was talking about in 1983?”
The BIS then replied again as follows:
“After further in-house research the following can be said about references to the’‚Gold Pool’:
The ‘Gold Pool‘ Mr Pohl referred to in the 1983 interview is clearly a bit of a misnomer. The (London) ‘Gold Pool‘ as such – i.e. as a mechanism to intervene actively in the gold market by buying and selling gold on behalf of the central banks – operated only between 1961 and 1968.
Out of the regular meetings of central bank gold and foreign exchange experts organized at the BIS between 1961 and 1968 to discuss the operations of the London Gold Pool grew the so-called G10 Group of Gold and Foreign Exchange Experts, which continued their regular meetings at the BIS after the London Gold Pool had been abandoned. But for quite some time after 1968 this group was still being referred to by some as the ‘Gold Pool’, although it didn’t have the operational role the London Gold Pool had. This forum still exists today — it was re-named the Markets Committee in 1999.
Thus, it should be clear that after 1968 the mandate of this Gold and Foreign Exchange Committee was no longer to discuss and agree on direct interventions on the gold market,but simply to monitor and discuss developments on the financial markets generally. This is the ‘Gold Pool‘ Mr Pohl refers to in his 1983 interview.
Frankly, this BIS response is risible and fabricated since Karl Otto Pohl only joined the Bundesbank in 1977 and had no dealings whatsoever with the 1960s gold pool so would never have referred to a meeting which had nothing to do with a gold pool as “the meeting on the Gold Pool“.
As former Luxembourg prime minister Jean-Claude Juncker famously said: “When it becomes serious, you have to lie“. The BIS response to Schall is also as hollow and misleading as a similar response the BIS sent to me when I asked for BIS documents on the Gold Pool discussions which took place in Jelle Zjilstra’s office in November and December 1979, meetings which are proven to have taken place. As a reminder, the BIS told me:
“The Gold Pool came to an end in 1968, so I take it that you are referring to meetings of the Gold and Foreign Exchange Committee. We do have some minutes for this meeting, but unfortunately not for the period which interests you.”
Many Modicums of Gold for the Saudis
Therefore, what sort of Gold Pool would the early 1980s gold Pool have been? Bank of England Governor, Gordon Richardson, a member of the BIS inner club of governors, was calling for “some exchange of gold for oil while the world adjusts”.
Bank of England gold and foreign exchange specialist John Sangster recommended a pool that would not have significant potential for recovery of gold sold, but that “would enable OPEC to acquire some modicum” of gold “without an excessive rise in the price.” It would involve “market intermediation” which would “allow the G10 to move with the price while attempting to control its pace.”
OPEC was “increasingly concerned that gold is outpacing oil”, and while Al Quraishi, Governor of the Saudi Arabian Monetary Authority (SAMA) said that the Saudi’s “would not rock the boat” and buy gold on the open market if a new gold pool was selling, the Saudi’s still wanted to“diversify” into gold.
Incoming BIS President, Fritz Leutwiler “advocated central bank intervention in the gold market“. Outgoing BIS President Jelle Zjilstra wanted the G10 and Switzerland to “consider ways to regulate the price of gold, so as to create conditions permitting gold sales and purchases between central banks.“
Soviet – Kuwait Gold for Oil Deals
Gold for Oil sales were not just in the realm of theory even in 1979. They were fact. On 4 October 1979, the Governor’s office at the Bank of England wrote the following Secret briefing to the Bank of England Deputy Governor about Russian gold being exchange for Kuwaiti oil:
THE DEPUTY GOVERNOR
Sir George Bolton phoned and asked me to mention to you that he had heard the following story from Washington.
It was attributed to the State Department and has two strands.
The Russians have sold one hundred tons of gold to Kuwait against payment in oil.
The Russians have suggested to the Government (?Central Bank) of Kuwait that they should act as agents for the Russians in buying oil against gold.
4th October 1979
Handwritten 1 DAHB / JGH only. 2 back to JLS please. Handwritten “Mr McMahon, Mr Sangster, Mr Walker” “for what it may be worth”.
The day before this Secret memo was written, the New York Times reported from the IMF conference in Belgrade on 3 October 1979 in an article titled “Saudis Hint Oil Output May Drop – Dollar’s Eroding Value Cited at IMF Meeting” that:
“Saudi Arabia’s finance minister told a forum of international monetary officials and private bankers today that his country was considering new cutbacks in oil production because of the eroding value of the dollar.”
“It would be naive to pretend that a continuous erosion of our financial resources, through inflation and exchange depreciation, could not evoke reactions,” Sheik Abalkhail said.
“We have done this to maintain more orderly conditions in the oil market and to promote a higher level of sustained growth of the world economy. We are finding it increasingly difficult to continue our policies under prevailing instabilities in exchange markets, coupled with high levels of inflation in industrial countries.”
On 4 October1979, the New York Times again reported from the IMF conference in Belgrade in an article titled “Historical Linkage Cited For Gold and Oil Values” that:
“South Africa’s finance minister suggested today that there was a rough historical relationship between oil and gold prices.”
“Of the relationship between gold and oil, [Oren] Horwood declined to provide any explanation, saying ‘I simply note the fact’. The reaction of bankers here was that the relationship showed a constancy of real values against the background of gyrations in currencies.”
“Mr Horwood said that, as tracked over the last half-century, the price of gold per ounce was generally 15 times greater than the price of oil per barrel.”
Prior to the 1970s, the gold oil ratio was more static than the gold oil ratio since the 1970s for the simply fact that the gold price was fixed for a large period of time prior to the 1970s. However, the Gold to Oil ratio since 1970 has moved in a range of about 10 to 35, with a lengthy period during the 2000s when the ratio dipped below 10.
Conclusion – The BIS, Where Noone Can See
To me, the evidence suggests that a Gold Pool did evolve at the BIS in the early 1980s but that it has been extremely well hidden. If it did evolve, was its intent to control the gold price so that Saudi & Co could acquire gold on the open market without driving up the gold price, or was it a dual purpose operation of Western central banks to quell inflationary signals, while in the background transferring a portion of their substantial gold holdings to Saudi & Co in secretive BIS administered transactions? And did it fix the gold / oil ratio or attempt to target a range, while allowing the dollar price of gold and oil to seemingly fluctuate randomly? And where was the gold that was being provided to Saudi & Co coming from, central bank sales from the large western central bank gold holders?
The Bank of England’s Sangster said he did not want to“advocate gold for oil directly” but was advocating that OPEC “acquire some modicum” of gold “without an excessive rise in the price.” And Bank of England Governor Gordon Richardson was “looking towards some exchange of gold for oil while the world adjusts“. Remembering that given that the Governor of the Saudi Arabian Monetary Authority (SAMA) was an unofficial member of the G10 at the BIS, then it is not implausible that the Saudis got what they wanted i.e. a chance to acquire real money in the form of gold in return for continuing to supply oil to the advanced Western economies.
Anyone familiar with the writings of “Another” on the USAGold website which appeared starting in October 1997 will recognise that this is exactly what “Another” said happened at the BIS, i.e. that the BIS fixed the gold/oil ratio so as to allow the Saudis to acquire gold even as they were receiving US dollars in payment for their oil exports.
In other words, that one leg of the BIS transactions took the form of behind the scenes gold transfers that flowed to Saudi & Co as subsidised payments for oil, thereby allowing the Saudis to receive payment in the ultimate money of gold in addition to fiat US dollars, while the other leg of the transactions allowed oil to continue to flow to the West. And lastly, that these arrangements, by also targeting the gold price, kept gold at an artificially low level which prevented gold fulfilling its traditional role of inflationary baramoter.
Anyone who reads ‘Another’ will see intriguing sentences such as follows, which just so happen to resonate with what BIS discussions and Bank of England documents were alluding to:
It was once said that “gold and oil can never flow in the same direction”
The BIS, instead of taking [gold] outright, places it where it’s needed!
In effect the governments are selling gold in any form to “KEEP IT” being used as ‘REAL MONEY” in oil deals!
Make no mistake, the BIS knows gold in the many thousands.
Not all oil producers can take advantage of this deal as it is done “where noone can see”.
Westerners should not be too upset with the CBs actions, they are buying you time!
Oil went from $30++ to $19 + X amount of gold! Today it costs $19 + XXX amount of gold (which according to some ‘Another’ experts, is a reference to the gold for oil agreement of the 1980s being renewed in the earlier 1990s at more favourable terms to the Saudis after the invasion of Kuwait)
All of this is presented in highly stylised but cryptic and ‘vague’ detail by Another & Friend of Another (FOA) on the USAGold website for those interested in reading it. I would tend to agree with what “Another” says, especially after having seen all of the discussions that took place at the BIS from the late 1970s onwards. The only question I would have is if the gold for oil deals are true, then “why the secrecy?” Why not make it public, and let the world adjust?
In a bizarre series of events that have had limited coverage but which are sure to have far-reaching consequences for benchmark pricing in the precious metals markets, the LBMA Gold Price and LBMA Silver Price auctions both experienced embarrassing trading glitches over consecutive trading days on Monday 10 April and Tuesday 11 April. At the outset, its worth remembering that both of these London-based benchmarks are Regulated Benchmarks, regulated by the UK’s Financial Conduct Authority (FCA).
In both cases, the trading glitches had real impact on the benchmark prices being derived in the respective auctions, with the auction prices deviating noticeably from the respective spot prices during the auctions. It’s also worth remembering that the LBMA Gold Price and LBMA Silver Price reference prices that are ‘discovered’ each day in the daily auctions are used to value everything from gold-backed and silver-backed Exchange Traded Funds (ETFs) to precious metals interest rate swaps, and are also used widely as reference prices by thousands of precious metals market participants, such as wholesalers, refineries, and bullion retailers, to value their own bi-lateral transactions.
Although the gold and silver auctions are separately administered, they both suffer from limited direct participation due to the LBMA only authorising a handful of banks to directly take part. Only 7 banks are allowed to participate directly in the Silver auction while the gold auction is only currently open to 14 entities, all of which are banks. Limited participation can in theory cause a lack of trading liquidity. Added to the mix, a central clearing option was introduced to the LBMA Gold Price auction on Monday 10 April, a day before Tuesday’s gold auction screw-up. The introduction of this central clearing process change saw four of the direct participants suspended from the auction since they had not made the necessary system changes in time to process central clearing. This in itself could have caused a drop in liquidity within Tuesday’s gold auction as it reduced the number of possible participants.
Other theories have been put forward to explain the price divergences, such as the banks being unwilling to hedge or arbitrage auction trades due to the advent of more stringent regulatory changes to prevent price manipulation. While this may sound logical in theory, no one, as far as I know, has presented empirical trade evidence to back up this theory. There is also the possibility of deliberate price manipulation of the auction prices by a participant(s) or their clients, a scenario that needs to be addressed and either ruled out or confirmed.
ICE Benchmark Administration (IBA), the administrator of the LBMA Gold Price, also introduced a price calculation Algorithm into the gold auction in mid-March 2017, a change which should also be considered by those seeking to find a valid explanation for the gold auction price divergence where the opening price kept falling through multiple auctions rounds whilst the spot price remained far higher. Could the algorithm have screwed up on 11 April?
Whatever the explanations for the price divergences, these incidents again raise the question as to whether these particular precious metals auctions are fit for purpose, and why they were designed (and allowed to be designed) at the outset to explicitly block direct participation by nearly every precious metals trading entity on the planet except for a limited number of London-based bullion bank members of the LBMA.
LBMA Silver Price fiasco
First up, on Monday 10 April, buried at the end of a Reuters News precious metals market daily news wrap was a very brief snippet of news referring to an incident which dogged the LBMA Silver Price during Monday’s daily auction (an auction which starts at midday London time). According to Reuters:
“silver prices slipped after the LBMA silver price benchmark auction was paused for 17 minutes after a circuit breaker was triggered when the auction price moved outside of the spot range, the CME said in a statement.”
What exactly the CME meant is unclear because whatever statement Reuters was referring to has not been released on the CME Group website or elsewhere, and Reuters did not write a separate news article about the incident.
To recap, the LBMA Silver Price is administered by Thomson Reuters on a calculation platform run by the CME Group, and operated on a contract basis on behalf of the London Bullion Market Association (LBMA). However, there is nothing anywhere on the CME’s LBMA Silver Price web page, or on the Thomson Reuters LBMA Silver Price web page, or on the LBMA website, in the form of a statement, comment or otherwise, referring to this ‘circuit breaker’ that persisted for ’17 minutes’ in the LBMA Silver Price auctionduring which time the ‘auction price moved outside of the spot range‘
On its calculation platform, CME makes use of a pricing algorithm to automatically calculate a price for each round of the LBMA Silver Price auction (excluding the first auction round). From page 8 of its LBMA Silver Price Methodology Guide:
“3.7 Starting Price
The initial auction price value is determined by the auction platform operator by comparing multiple Market Data sources prior to the auction opening to form a consensus price based on the individual sources of Market Data. The auction platform operator enters the initial auction price before the first round of the auction begins….”
“3.4 End of Round Comparison
If the difference between the total buy and sell quantity is greater than the tolerance value, the auction platform determines that the auction is not balanced, automatically cancels orders entered in the auction round by all participants, calculates a new price, and starts a new round with the new price.”
There is also a manual price override facility which can be invoked if needed:
3.8 Manual Price Override
In exceptional circumstances, CME Benchmark Europe Ltd can overrule the automated new price of the next auction round in cases when more significant or finer changes are required. When doing so, the auction platform operator will refer to a composition of live Market Data sources while the auction is in progress.”
As to why the “auction platform operator” did not invoke these manual override powers and seek market data sources during the time in which the silver auction was ‘stuck’ for 17 minutes is unclear. A 17 minute pause would presumably be, in the CME’s words, ‘exceptional circumstances’.
Unfortunately, neither the CME website, the Thomson Reuters website, or the LBMA website provides intra-round pricing data for the LBMA Silver Price, so anyone who doesn’t have a subscription to the live data of the auction is well and truly left in the dark as to what actually happened on Monday 10 April. Unlike the LBMA Gold Price auction which at least provides an ‘Auction Transparency Report’ for each auction (see below), the LBMA Silver Price auction is sorely lacking in any public transparency whatsoever.
But what is clear from the Reuters information snippet is that the LBMA Silver Price auction on Monday 10 April suffered a serious trading glitch, that saw the prices that were being formed in the auction deviate from where the silver spot price was trading during that time. This price deviation suggests a lack of trading liquidity in the auction and/or an inability of the participants to hedge their trades in other trading venues. As to whether the final LBMA Silver Price that was derived and published as the daily benchmark price on 10 March was outside the spot range (and above or below spot) is not mentioned in the Reuters report.
The complete opacity about this incident is concerning but not really surprising since nearly everything in the London precious metals markets is shrouded in secrecy, and corporate communication in this area is truly abysmal.
Recalling that Thomson Reuters and CME announced in early March that they are abruptly pulling out of the contract for administrating and calculating the LBMA Silver Price, this latest fiasco is unwelcome news for the LBMA – CME – Thomson Reuters triumvirate, and raises further questions for the FCA as to whether this Silver auction and benchmark should even be allowed to continue in its present or similar form.
LBMA Gold Price fiasco
Turning to the London gold auction, on the afternoon of Tuesday 11 April, the LBMA Gold Price auction (which starts at 3:00pm London time) experienced what can only be described as a shocking and serious trading fiasco which has real world consequences for all trading entities that use the LBMA Gold Price Benchmark reference price (and there are many that do so). As a reminder, ICE benchmark Administration (IBA) administers the daily LBMA Gold Price auctions on behalf of the LBMA.
“London’s gold price benchmark fixed some $12 below the spot price on Tuesday afternoon as the auction appeared to become locked in a downward spiral. From an initial $1,265.75, close to the spot price at the time, the auction price ratcheted steadily lower before fixing at $1,252.90 in the ninth round. From the fifth round to the eighth the bid and offer volumes remained frozen, unable to match.“
“This came a day after ICE introduced clearing for the LBMA Gold Price auction”
Reuters concludes its article by noting that the ICE clearing was introduced:“before several participating banks had the necessary systems in place.”
“As a result, China Construction Bank, Societe Generale, Standard Chartered and UBS are yet to confirm a date for their participation in the cleared auction.. ICE declined to comment. The LBMA, which owns the intellectual property rights to the auction, was not immediately available to comment.”
This forced reduction in the number of participants in the auction seems to be relevant to the issue and therefore requires further scrutiny.
ICE Central Clearing – Foisted on the LBMA Gold Price auction?
In mid-October 2016 during the LBMA precious metals conference in Singapore, ICE Benchmark Administration announced that it would introduce central clearing into the London Gold Price by utilizing a series of daily futures contracts which it planned to launch in February 2017. The introduction of central clearing into the auction was initially planned for March 2017.
“IBA gave a central clearing update to the Committee, notifying them that the cleared instrument would be launched in January 2017 and the auction trades could be routed there from March 2017. The Committee were informed that IBA had spoken to every bank and every bank wanted to move. Discussion moved to the technical implications for this new model and IBA’s primary wish to keep running a healthy auction.”
“From March 2017, subject to regulatory review, centrally cleared settlement will be available for transactions which originate from IBA’s gold auction underlying the LBMA Gold Price.
This will give firms the choice of settling their trades bilaterally against each counterparty (as they currently do), or submitting their trades to clearing and settling versus the clearing house. This mechanism removes the requirement for firms to have bilateral credit lines in place with all of the other Direct Participants in the auction.
Central clearing opens the auction to a broader cross-section of the market. It also facilitates greater volume in the auction.“
By the end of March 2017, the above statement had been altered from March 2017 to “Q2 2017” with ICE pushing back the launch date for the introduction of central clearing:
“From Q2 2017, subject to regulatory review, centrally cleared settlement will be available for transactions which originate from IBAs gold auction underlying the LBMA Gold Price….”
Reuters again covered these ICE clearing delays in a series of articles during March, highlighting the fact that 4 of the 13 banks that are direct participants in the LBMA Gold Price auction were not ready for the introduction of central clearing due to delays in making unspecified changes to their internal IT systems that would allow such central clearing processing. So anybody who had been reading these Reuters articles would have been aware that there were risks on the horizon in terms of some of the LBMA Gold Price auction participants being slow in being ready for the changes.
“U.S.-based exchange operator ICE has already pushed back the launch of its service by several weeks to allow the banks and brokers who participate in the auction to adapt their IT systems, four sources with direct knowledge of the matter told Reuters.”
“Sources at many participant banks said that they were unhappy with the speed at which ICE was seeking to introduce clearing, which require investment in IT processes and back office systems and raise complex compliance issues.”
“However, at least four of the 14 banks and brokers who participate in the LBMA Gold Price auction will still not be ready to use the new system.
Banks that are not ready would be suspended from the auction until they have the necessary IT infrastructure in place or would have to participate through other players who could clear deals, according to the sources.
ICE’s readiness to provoke such disruption illustrates how much it wants to avoid further delays that could torpedo its ambitions to become the dominant exchange in London’s vast bullion market, market sources said”
“two sources told Reuters that ICE had again delayed and there was now no set start date.”
“Sources earlier told Reuters that Societe Generale, Standard Chartered, ICBC Standard Bank and China Construction Bank would not be ready to clear the LBMA auction in time for April 3.”
Again interestingly, ICE’s desire to promote its own gold futures contracts was seen as a primary driver for trying to rush through the introduction of central clearing for the gold auction, as doing so would add volume to ICE’s daily gold futures contracts:
“market sources say ICE plans to use clearing of the LBMA Gold Price auction, which it administers, to funnel business to its contracts and give it a head start over rivals.”
As a reminder, ICE and CME have both recently launched gold futures contracts connected to the London market, and the London Metal Exchange (LME) plans to launch its own suite of London gold futures contracts in early June.
Central clearing uses exchange for physical (EFP) transactions in the daily futures contracts which are then cleared at ICE Clear US. The futures have daily settlement each day between 3:00 pm and 3:05 pm London time. But how the whole process ties together is still quite puzzling. An email to the IBA CEO asking for details of how the futures are linked to the auction went unanswered.
So what was this downward spiral that the LBMA Gold Price auction experienced on the afternoon of Tuesday 11 April when it became, in the words of Reuters, locked in a downward spiral?
Let’s look at the ICE Auction Transparency Reports for the few days before and during the 11 April afternoon fiasco. These reports show the number of auction rounds, the number of participants,and the bid and offer volumes for each round as well as the price at the end of each round.
Fourteen entities are now authorized to be direct participants in the LBMA Gold Price auction, 13 of which are banks, the other being new participant INTL FCStone since early April. INTL FCStone is a financial services company that has a slant towards commodities. The 13 banks are:
Bank of China
Bank of Communications
China Construction Bank
Industrial and Commercial Bank of China (ICBC)
HSBC Bank USA
JPMorgan Chase Bank (London Branch)
The Bank of Nova Scotia – ScotiaMocatta
Unlike the old London Gold Fixing which had 5 member banks that were obliged to always turn up (and since 2004 dial in) for every auction, this LBMA Gold Price auction does not require all the authorized participants to dial-in. Most of the time, far fewer than the full contingent turn up. For example on Friday 7 April, 8 banks turned up at the morning auction while only 7 banks turned up at the afternoon auction (i.e only a 50% turnout). However, Friday 7 April is also relevant since that was the last day before ICE introduced central clearing to the gold auction.
Fast forwarding to the morning gold auction on Monday 10 April when ICE first introduced central clearing, you can see from the below auction report that only 5 banks participated. This is the same small number that took part in the former London Gold Fixing which was run by the infamous and scandal ridden London Gold Market Fixing Limited and which consisted of Deutsche Bank, Barclays, HSBC, Scotiabank and Société Générale.
The reason the turnouts after the introduction of central clearing are so low is that 4 of the direct participant banks have been excluded from the auction due to not being ready to implement central clearing – a fact predicted by Reuters News in March. This means that the usual number of between 7-10 banks participating in the auction has now been reduced by 4, as four banks cannot take part. As Reuters said on 21 March “Banks that are not ready would be suspended from the auction until they have the necessary IT infrastructure in place”.
The irony of this debacle is that the participating banks all already have bilateral credit limits with each other and so don’t need to do central clearing in the auction. Only new /future direct participants which do not have bilateral credit lines technically need to utilize the clearing solution.
Central clearing is supposed to make it easier for a far wider range and number of participants to take part. But if this entails enhancements to IT systems that some of the most sophisticated investment banks on the planet are struggling with, what hope is there for other precious metals trading entities to participate.
But some reason – probably to try to kickstart the trading volume in its daily gold futures contracts – ICE has made it mandatory for all existing direct participants (the bullion banks) to open clearing accounts and get their IT systems in shape to use clearing.
“Central clearing for the auction is enabled by effecting Exchange for Physical (“EFP”) transactions into the new physically settled, loco London gold daily futures contract which is traded on ICE Futures U.S. The EFPs establish positions in the futures contract which are cleared and can be physically delivered at ICE Clear U.S“
and Direct participants (DPs) “must establish a clearing account with an ICE Clear U.S. Clearing member” so as to be able to use this account to clear auction trades.
However, “DPs may still maintain credit lines to settle bilaterally against other DPs” and “DPs can elect, for each counterparty, to clear or settle their auction transactions bilaterally.” If this is so, then why the need to force these banks to open a clearing account and push through complex IT changes?
The ICE LBMA Gold Price web page now includes a double asterisk next to the names of the culprit banks that are not ready for central clearing. These banks are China Construction Bank, Société Générale, Standard Chartered, and UBS. the double asterisk states that “** Date of participating in the cleared auction to be determined.”
So now, more than 2 years after the LBMA Gold Price has been introduced, we are back to a situation where only 5 large bullion banks are participating in a daily gold price auction, an auction which has huge ramifications for the reference pricing of gold across myriad gold markets around the world.
Both of the auctions on 10 April finished within the first round, with buy volume and sell volume in balance, so there was no need for subsequent auction rounds.
Turning to the morning auction of Tuesday 11 April, only a measly 4 banks took part in the first round of the auction, and 5 participants took part in rounds 2 and 3. The bid and ask volumes were not that much out of balance, and the auction finished after 3 rounds.
Turning to the afternoon auction of 11 April, the price action commentary provided by Reuters was as follows:
“from an initial $1,265.75, close to the spot price at the time, the auction price ratcheted steadily lower before fixing at $1,252.90 in the ninth round. From the fifth round to the eighth the bid and offer volumes remained frozen, unable to match.“
Below you can see visually see what happened round by round from the first round price of $1,265.75 where there was zero bid volume and 125,217 ozs (nearly 4 tonnes) of ask volume, through the fifth to (actually) the ninth rounds where bid volume was an unchanging 92,873 ozs and ask volume was an unchanging 107,090 ozs, but still the price fell from $1,260.50 to fix in round 9 at $1,252.90, i,e, the price fell $7.60 in 2 minutes while the volumes didn’t budge. And most critically, the fixing price was $1252.90 while the spot price was trading at $1267 at that time.
“the benchmark ended up being set almost $15 dollars below where spot prices were trading at the time. The PM Gold Price showed a benchmark at $1,252.90 an ounce; however at the time, spot gold prices were trading around $1,267 an ounce, with prices heading towards a new five-month high.”
How could this happen? How could the auction price diverge so much from the spot price at that time and how could the auction go through round after round lowering the price while the bid and ask volumes did not change and while the spot price was actually far higher than any of the prices in the auction?
Kitco’s explanation, which is mostly based on the view of one person, Jeff Christian of the CPM Group, put the problem down to “poorly conceived regulations and a faulty price discovery mechanism“, i.e. a lack of liquidity due to banks being scared off by tightening regulations, and that this “sharp reduction in liquidity during the auction process” is causing “a large discrepancy in prices“. Christian also said that “because of regulations, banks and other financial institutions are backing away from becoming market makers.”
But this reasoning of backing away due to regulations is not backed up by the facts for the simple reason that banks have continued to join the LBMA Gold Price auction at a rapid rate over the last 2 years, i.e. there is a trend of ever more banks applying to be authorized to participate in the auction. For example, since the auction was launched on 20 March 2015 with 6 banks, 9 more banks have signed up JP Morgan, Morgan Stanley, Standard Chartered, Bank of China, ICBC, China Construction Bank, Bank of Communications, Toronto Dominion Bank, and INTL FCStone. Note that Barclays was one of the original six banks in the auction but dropped out after it downscaled its the precious metals business in London. There are also the same number of LBMA Market Makers now as there were two years ago, in both cases 13 LBMA Market Makers.
Kitco’s article also fails to mention the central clearing implementation fiasco brought about by ICE’s rush to channel activity into its gold futures contracts and Kitco even fails to realize that 4 banks were suspended from the auction due to this central clearing issue.
Another factor relevant to the screwed up afternoon auction on 11 April that should be considered is the fact that in mid-March 2017, ICE Benchmark Administration introduced a price algorithm into the LBMA Gold Price auction. This fact has been totally ignored by the financial media.
From a human Chairperson to an automated Algorithm
Up until mid March 2017, the LBMA Gold Price auction used a human ‘independent chairperson’ to choose the opening price in the auction and also the auction price in each subsequent round. The identities of these independent chairpersons have never been divulged by ICE nor the LBMA.
Critically, sometime during the 3rd week of March 2017, ICE Benchmark Administration (IBA) introduced a pricing algorithm into the LBMA Gold Price auction. This change in procedure (moving from an auction chairperson to an auction pricing algorithm) was not actively highlighted by either ICE or the LBMA but is clear from looking at Internet Archive imprints of the ICE LBMA Gold Price webpage.
“The auction process has an independent chairperson, appointed by IBA to determine the price for each round and ensure that the price responds appropriately to market conditions.”
See screenshot below for the same statement – taken from the same webpage:
Bullet point 1 of the Auction Process for the 9 March version of the webpage also refers to the chairperson as being responsible for setting the starting price and the price of each subsequent round “in line with current market conditions and the activity in the auction.”
But by 16 March, when the next imprint of the LBMA Gold Price page was made by the Internet Archive, the reference in the methodology section to an independent chairperson had been fully deleted, and bullet point 1 had been changed from mentioning a chairperson to discussing an algorithm, specifically changed to “IBA sets the starting price and the price for each round using an algorithm that takes into account current market conditions and the activity in the auction.”
See screenshot below for the same statement – taken from the same webpage:
So if there is an algorithm that is taking into account current market conditions in addition to activity in the auction, why did this algorithm not take the current spot prices into account over rounds 4 – 9 of the LBMA Gold Price auction on the afternoon of Tuesday 11 April?
Furthermore, for such a major change to the methodology and auction process in an auction whose benchmark price is widely used in the gold world, it’s very surprising that neither ICE, nor the LBMA, nor the London financial media mentioned this substantial algorithmic change.
In early December 2016, ICE published an LBMA GOLD PRICE Methodology Consultation in which one of the consultation’s proposed changes was “the introduction of an algorithm to determine the price for each auction round“.
The December 2016 document noted that:
“IBA’s auction process is currently that the auction chair sets the price for each Round in line with current market conditions and the activity in the auction”
“IBA currently has a panel of auction chairs who are independent of any firm associated with the auction, including Direct Participants. The chairs are externally sourced but work with IBA to deliver a robust process for determination of the LBMA Gold Price.
The chairs use their extensive market experience to set the round prices based on a pricing framework agreed with IBA. IBA chose to operate the auction using human chairs to make sure that the price could respond appropriately to market conditions from the outset.
IBA’s feedback from the market was that, at least in the early stages, the professional judgement of a human chairman was needed.“
“After operating the auction for more than a year, IBA started to develop an algorithm to set the auction’s starting price and subsequent round prices. IBA has now been testing and refining the algorithm over a number of months“
As per the proposal, the algorithm would replace the human chair, after which:
“Each auction will continue to be supervised by IBA’s analysts, and, if for any reason an auction did not progress as expected, IBA’s existing safeguards would be deployed to protect the integrity of the auction and the LBMA Gold Price benchmark“
These safeguards were stated as being three, namely:
– Pause the auction and restart, to give Participants an opportunity to contact clients or re-evaluate their positions
– Increase the imbalance threshold, if it appears that the auction will otherwise not finish
– Cancel an order, if it is compromising the integrity of the process and the relevant participant cannot be reached.
The proposals were pencilled in for implementation in Quarter 1, 2017.
Following the consultation, a “Methodology Consultation Feedback” document was published on the ICE Benchmark Administration website. One feedback respondent was concerned about who would be overseeing the daily auctions in the absence of a human chairperson, to which ICE answered:
“IBA can confirm that the auction will always be supervised by at least two IBA analysts. This approach is consistent with how we operate our other benchmarks.
Our aim is to put the auction on auto-pilot, not to make it driverless.
Unfortunately, from the wider gold market’s perspective, the LBMA Gold Price auction on the afternoon of Tuesday 11 April does indeed appear to have been ‘driverless‘ as it “did not progress as expected“, so it is now up to the LBMA and ICE to establish what the ‘IBA analysts’ were up to behind the driving wheel that day.
On its website, ICE states that the LBMA Gold Price methodology is “reviewed by the LBMA Gold Price Oversight Committee as documented in its Terms of Reference.” This Oversight Committee should also explain to the gold world what actually happened on the afternoon of 11 April.
Additionally, I find no explanation on ICE’s LBMA Gold Price webpage as to how exactly the automated algorithm works, what its logic rules are, how it was programmed etc.
The trading glitch with the LBMA Silver Price on Monday 10 April seems to have been completely missed by London’s financial media except for the brief reference by Reuters. The fact that there is no information on the CME, Thomson Reuters and LBMA websites about the issue should raise concern for users of this benchmark and for the UK’s regulator, the FCA. In an ideal world, there should be a full ‘outage’ report published on each of the 3 websites explaining what happened, but this will not happen in the shadowy and secretive London Silver Market.
Perhaps the auction price divergence in the LBMA Silver Price stems from a lack of liquidity brought on by the limited presence of auction participants, or due to the inability or unwillingness of participants to hedge or arbitrage their auction trades against the London OTC spot or other trading venues? The simple thing to do would be for CME, Thomson Reuters and the LBMA to explain themselves since this would minimize guesswork and to provide global silver market entities with clarity. Anything short of a full explanation by the parties concerned is irresponsible.
For the LBMA Gold Price auction, ICE Benchmark Administration needs to release a full ‘outage’ report and explanation on what exactly happened in the afternoon auction on 11 April and explain to the global gold market whether the introduction of central clearing was in any way responsible for the price divergence, and whether there are any conflicts of interest in trying to get banks to use its daily gold futures contracts. While they are at it, ICE should fully explain how the recent introduction of a pricing algorithm impacts the gold auction and whether this too had an impact on the auction price entering a downward spiral.
As the LBMA Silver Price and LBMA Gold Price are both Regulated Benchmarks, the FCA regulator needs to step up to the plate and for once show that it is on the side of the users of these benchmarks and not the powerful London banks.
Both of these auctions require full transparency and ease of direct participation by the full spectrum of the world’s gold and silver trading entities. Currently, they fall far short of these goals.
That article highlighted that the amount of gold stored in custody at the Bank of England (BoE) fell by 350 tonnes during the year to 28 February 2015, after also falling by 755 tonnes during the year to end of February 2014. Therefore, by 28 February 2015, there was, according to the BoE’s own statement, £140 billion or 5134.37 tonnes of gold in custody of the BoE, or in other words ~ 410,720 Good Delivery gold bars.
The article also reviewed snapshots of the total amount of gold stored in the London vaults at various recent points in time.
Firstly, a reference on the London Bullion Market Association (LBMA) web site for a date sometime before 2013 stated that there had been 9,000 tonnes of gold (i.e. 720,000 Good Delivery bars) stored in London with two-thirds of this amount, or 6,000 tonnes, stored in the Bank of England (about 482,000 bars), and 3,000 tonnes stored in London ex Bank of England vaults (238,000 bars). (Nick Laird of Sharelynx subsequently pointed out to me that the earliest reference to this 9,000 tonne figure was from a LBMA presentation from November 2011.)
Secondly, by early 2014, the LBMA web site stated that there were only 7,500 tonnes of gold in all London vaults, i.e. ~600,000 bars, and of this total, three-quarters or 5,625 tonnes were at in Bank of England, ~ 450,000 bars, and only one-quarter or 1,875 tonnes was stored at LBMA London gold vaults excluding the Bank of England’s gold vaults.
So, the entire London market including the Bank of England had lost 1,500 tonnes (120,000 bars) between 2011 and early 2014, with 375 tonnes less in the BoE and 1,125 tonnes less in the London market outside the BoE.
Finally, on 15 June 2015, the LBMA stated that “There are ~500,000 bars in the London vaults, worth a total of ~US$237 billion”. This ~ 500,000 bars equates to 6,256 tonnes. (On 15th June 2015, the morning LBMA Gold Price was set at $1178.25, which would make $237 billion worth of gold equal to 201.145 million ounces, which is 6,256 tonnes).
Therefore, another ~1,250 tonnes of gold (approximately 100,000 Good Delivery bars) departed from the London gold vaults compared to the early 2014 quotation of 7,500 tonnes of gold in the London vaults.
So overall, between the 9,000 tonnes quotation in 2011, and the 6,256 tonnes 2015 quotation, some 2,750 tonnes (~ 220,000 Good Delivery bars) disappeared from the London gold vaults. With 6,256 tonnes of gold stored in the entire London vault network in 2015, and with 5,134 tonnes of this at the Bank of England, that would leave 1,122 tonnes of gold in London outside the Bank of England vaults.
To reiterate, “the London gold vaults“, in addition to the Bank of England gold vaults, refer to the storage vaults of JP Morgan and HSBC Bank in the City of London, the vaults of Brinks, Malca Amit and Via Mat (Loomis) located near London Heathrow Airport, the vault of G4S in Park Royal, and the Barclays vault managed by Brinks.
Because the Bank of England reveals in its annual report each year the value of gold it has stored in custody for its customers (central banks, international official sector institutions, and LBMA member banks), then it is possible to compare 3 years of gold tonnage figures, namely the years 2011, 2014 and 2015, and then show within each year how much of this gold is stored at the Bank of England, and how much is stored in London but outside the Bank of England vaults.
Nick Laird of www.sharelynx.com / www.goldchartsrus.com has done exactly this in the following sets of fantastic charts which he has created to graphically capture the above London gold trends, and a lot more besides. These charts are just a subset of a suite of inter-related gold charts that Nick has created to address this critical subject in the London Gold Market.
Although the Bank of England is not a LBMA member, the Bank of England gold vaults are a critical part of the LBMA gold vaulting and gold clearing system, and LBMA bullion banks maintain gold accounts with the Bank of England which facilitate, among other things, gold lending and gold swaps transactions with central banks. Hence the above and below charts are titled “LBMA Vaulted Gold in London”.
My “How many Good Delivery gold bars are in all the London Vaults” article had also quantified that nearly all of this ~1,122 tonnes consists of gold from physical gold-backed ETFs which store their gold in the London vaults. (previously rounded up to 1,125 tonnes for ease of calculation).
I had included 5 gold ETFs in my previous analysis namely, SPDR Gold Trust (GLD), Shares Gold Trust (IAU), ETF Securities – ETFS Physical Gold ETF (PHAU & PHGP), ETF Securities – Gold Bullion Securities (GBS & GBSS), and Source Physical Gold ETC (P-ETC), and also some smaller holdings at BullionVault and GoldMoney. In total these ETFs and other holdings accounted for just over 1,000 tonnes of gold in the London market.
However, I had missed a few other gold ETFs which also store their gold in the London vaults. Nick Laird, whose Sharelynx website maintains up-to-date gold ETF data and gold holdings, took the initiative to fill in the missing ETF blanks and Nick re-calculated the more comprehensive ETF holdings figures for London, which worked out at an exact 1,116 tonnes of gold, astonishingly close to the implied figure represented by the 1,122 tonnes outside the Bank of England vaults.
The additional gold backed ETFs also included in Nick Laird’s wider catchment were Deutsche Bank db Physical Gold ETC and associated Deutsche ETFs, ABSA gold ETF (of South Africa), Merk Gold ETF, and some smaller holdings from Betashares and Standard Bank. The following chart from Sharelynx shows the full data for physically backed gold ETFs storing their gold in London:
We then discussed an approach, in conjunction with Koos Jansen and Bron Suchecki, to identify known central bank gold stored in the Bank of England vaults by tallying up this storage data on a country level basis. So, for example, assuming 5,134 tonnes of gold stored at the Bank of England in early 2015, the aim would be to try to account for as much of this gold as possible using central bank sources.
As mentioned in the ‘How many gold bars‘ article, the Bank of England stated in 2014 that 72 central banks (including a few official sector financial organisations) held gold accounts with the Bank. It is not known if any of these gold accounts are inactive or whether any of these accounts have zero gold holdings. The LBMA stated in 2011 that “The Bank of England acts as gold custodian for about 100 customers, including central banks and international financial institutions, LBMA members and the UK government”. Therefore there could also be more than 25 LBMA member commercial banks with gold accounts at the Bank of England.
Some of the Bank of England 5,134 tonne total would therefore be gold held in LBMA member bank gold accounts at the Bank of England, for which data is not public. Likewise, a lot of central banks do not reveal where their gold is stored, let alone how much is stored in specific vaults such as at the Bank of England and Federal Reserve Bank of New York.
However, many central banks have more recently begun to provide some information on where they say their official reserve gold is stored. Other central banks have always been to some extent transparent. Overall, a variety of sources, where possible, can be used to source locational data regarding central bank gold storage locations. There will continue to be gaps however, since some central banks remain non-cooperative, even when asked directly about where they stored their gold.
Tallying this type of central bank gold storage data will probably be a work in progress. However, there has to be a cut-off point for doing a first pass through the data, and this is a first pass. As a group, the European central banks have been especially forthcoming with gold storage data, compared to even 3-4 years ago (except for Spain). For other central banks, I looked in various places such as their financial accounts, and I contacted some of them by email with varying degrees of success. About half of the 72 central banks on the Bank of England’s list were identified, again, with varying degrees of accuracy.
The following fantastic chart by Nick Laird captures an overview of this Bank of England gold storage data. Essentially the chart shows that the banks listed hold, or have stated that they hold, the respective quantity listed, and in total the named banks could account for x tonnes gold stored at the bank of England. This is labelled ‘Known Gold‘. Given ‘Known Gold’, this leaves the residual as ‘Unknown Gold‘.
The remainder of this article explains the logic and the sources behind each country, and why that country appears on the list. When a central bank claims to have stored gold at the Bank of England, or the evidence suggests that, it does not necessarily mean that the gold in question is held in custody in a gold set aside account or that it is allocated in identifiable bars, or even that it is actually there. Many central banks engage in gold lending, or have done so in the last 15-20 years, and have at times, or permanently, transferred control of that gold to LBMA bullion banks.
Until all central banks come clean about what form their gold holdings are in, which will never happen, then the amount of central bank gold that’s encumbered by bullion banks or under claims, liens, loan agreements etc will not be apparent.
Germany holds 3,384 tonnes of gold, and 12.9%, or 438 tonnes are stored at the Bank of England. The Bundesbank’s ongoing repatriation of gold from New York and Paris does not alter the amount of Bundesbank gold held at the Bank of England.
“Most of Danmarks Nationalbank’s gold is stored at the Bank of England, where it has been since it was moved for safety reasons during the Cold War. In March 2014, Danmarks Nationalbank inspected its stock of gold in the Bank of England.”
Therefore, the assumption here is that 62.7 tonnes of Danish gold is stored at the Bank of England.
Note the Danmarks Nationalbank’s assertion that in order for gold to be lent it has to be moved to the London, since London is the centre of the gold lending market.
In 1999 “Almost 99 per cent, or 93 per cent of the Nationalbank’s total gold stock, had been lent.” The same 1999 Danish central bank article also said that:
I have underlined the above sentence since it’s of critical importance to understanding that in gold lending, central bank gold lent to LBMA bullion banks at the Bank of England does not necessarily move out of the Bank of England vaults. Lent gold may or may not move out the door, depending on what the borrower plans to do with the borrowed gold.
It also means that the total gold in custody figure that the Bank of England reveals each year (for example £140 billion in February 2015), consists of:
a) central bank gold stored at the Bank of England
b) bullion bank gold stored at the Bank of England
c) central bank gold that has been lent or swapped with bullion banks (gold deposits and gold swaps) and that has not been moved out of the Bank of England vaults. This category of gold is still in custody at the Bank of England. The central bank claims to still own it, the bullion bank has control over it, and the Bank of England still counts it as being in its custody.
The Netherlands holds 612.5 tonnes of gold, and 18%, or 110 tonnes are stored at the Bank of England.
Notice that the UK gold reserves includes holdings of gold coin, as well as gold bars.
Ireland hold 6 tonnes of gold in its official reserves, a small amount of which is in the form of gold coins, but nearly all of which is in the form of gold bars stored at the Bank of England.
Recently, I submitted a Freedom of information (FOI) request to the Central Bank of Ireland requesting information such as a weight list of Ireland’s gold stored at the Bank of England. After the FOI request was refused and the Central Bank of Ireland claimed there was no weight list, I appealed the refusal and was provided with a SWIFT ‘account statement’ from 2010 that the Bank of England had provided to the Central Bank of Ireland. See below:
This statement shows that as of 31 December 2010, the Central Bank of Ireland held 453 gold bars at the Bank of England with a total fine ounce content of 182,555.914 ounces, which equates to an average gold content of 402.993 fine ounces per bar. It also equates to 5.678 tonnes, which rounded up is 5.7 tonnes of gold stored at the Bank of England.
The fact that no weight list could be tracked down is highly suspicious, as is the fact that Ireland had in earlier years engaged in gold lending, so did not, at various times in the 2000s have all of its gold allocated in the Bank of England. How a central bank can claim to hold gold bars but at the same time cannot request a weight list of those same bars is illogical and suggests there is a lot more that the Central Bank of Ireland will not reveal.
Belgium holds 227 tonnes of gold, most of which is stored at the Bank of England with smaller amounts held with the Bank of Canada and with the Bank for International Settlements. Banque Nationale de Belgique (aka Nationale Bank van België (NBB)) does not publish an exact breakdown of the percentage stored at each location, however, in March 2013 in the Belgian Parliament, the deputy Prime Minister and Minister for Finance gave the following response in answer to a question about the Belgian gold reserves:
“Most of the gold reserves of the National Bank of Belgium (NBB) is indeed held with the Bank of England. A much smaller amount held with the Bank of Canada and the Bank for International Settlements. A very limited amount stored in the National Bank of Belgium.”
Furthermore, there were a series of reports in late 2014 and early 2015 that would suggest that Belgium stores 200 tonnes of its gold at the Bank of England. Firstly, in December 2014, VTM-nieuws in Belgium reported that the NBB governor Luc Coene had said that the NBB was investigating repatriating all of its gold. See Koos Jansen article here.
On 4 February 2015, Belgian newspaper Het Nieuwsblad said that Belgium would repatriate 200 tonnes of gold from the Bank of England, but the next day on 5 February 2015, another Belgian newspaper De Tijd reported that NBB Luc Coene denied the repatriation report, and quoted him as saying:
“There are other and more effective ways to verify if the gold in London is really ours. We have an audit committee that inspects the Belgian gold in the UK regularly”.
Therefore, the assumption here, backed up by evidence, is that Belgium stores 200 tonnes of gold at the Bank of England.
Australia holds approximately 80 tonnes of gold in its official reserves, with 1 tonne on loan, and 99.9% of gold holdings stored at the Bank of England. See 2014 annual report, page 33. According to a weight list of its gold held at the Bank of England, released via an FOIA request in 2014, Australia stores approximately 78.8 tonnes of gold at the Bank of England.
South Korea (Bank of Korea) holds 104.4 tonnes of gold, 100% of which, or 104.4 tonnes is stored at the Bank of England. The Bank confirmed this to me in an emailon 11 September 2015. See email here ->
International Monetary Fund
The IMF currently claims to hold 2,814 tonnes of gold after apparently selling 403.3 tonnes over 2009 and 2010 (222 tonnes in ‘off-market transactions and 181.3 tonnes in ‘on-market transactions’). Prior to 2009, IMF gold holdings had been 3,217 tonnes, and had been essentially static at this figure since 1980 [In 1999 IMF undertook some accounting related gold sale transactions which where merely sale and buyback bookkeeping transactions].
Although the IMF no longer provide a breakdown of how much of its gold is stored in each location where it stores gold, the amount of gold held by the IMF at the Bank of England can be calculated by retracing IMF transactions from a time when the IMF did provide such details. In January 1976, the IMF held 898 tonnes of gold at the Bank of England in London, 3,341 tonnes at the Federal Reserve Bank of New York, 389 tonnes at the Banque de France in Paris, and 144 tonnes at the Reserve Bank of India in Nagpur, India. Therefore, of the IMF’s total 4,772 tonnes holdings at that time, 70% was stored in New York, 19% in London, 8% in Paris and 3% in India. See here and here.
In the late 1970s, the IMF sold 50 million ounces of gold via two methods, namely, 25 million ounces by ‘public’ auctions, and 25 million ounces by distributions to member countries.
In the four-year period between mid-1976 and mid-1980, the IMF sold 25 million ounces of gold to the commercial sector via 45 auctions. Thirty five of these auctions delivered gold at the FRBNY, 7 of these auctions delivered gold at the Bank of England, and 3 of the auctions delivered gold at the Banque de France.
Of the 7 auctions that delivered the IMF’s gold at the Bank of England, these auctions in total delivered 3.74 million ounces [Dec-76: 780,000 ozs, Aug-77: 525,000 ozs, Nov-77: 525,000 ozs, May-78: 525,000 ozs, Oct-78: 470,000 ozs, Mar-79: 470,000, and Dec 79:444,000 ozs], which is 116 tonnes. See IMF annual report 1980.
The IMF also sold 25 million ozs of gold to its member countries within four tranches over the 3 year period from January 1977 to early 1980. These sales, which were also called gold ‘distributions’ or ‘restitutions’ and covered between 112 and 127 member countries across the tranches, were initially quite complicated in the way they were structured since they involved IMF rules around quotas which necessitated the gold being transferred to creditor countries of the IMF and then transferred to the purchasing countries. In the later sales in 1979 and 1980 countries could purchase directly from the IMF.
Countries could choose where to receive their purchased gold, i.e. London, New York, Paris or Nagpur, however, the US, UK, France and India, which had the largest IMF quotas and hence the largest gold distributions, all had to receive their gold at the respective IMF depository in their own country. I don’t have the distribution figures to hand at the moment for the 25 million ozs sold to countries, but about 18 countries took delivery from the Banque de France in Paris, with the rest choosing delivery from New York and London.
Therefore an assumption is needed on the amount of gold the IMF ‘distributed’ to member countries from its Bank of England holdings between 1977 and 1980. Of the 25 million ounces distributed, the US received 5.734 million ozs, the UK received 2.396 million ozs (75 tonnes), France received 1.284 million ozs, and India received 805,000 ozs. Subtracting all of these from 25 million ozs leaves 14.78 million ozs which was distributed to the other ~120 countries. Since the IMF held 70% of its holdings at the FRBNY in 1976, 19% at the Bank of England and 8% at the Banque de France, apportioning these three weights to the remaining 14.78 million ozs would result in 10.76 million ozs (332 tonnes) being sold from the FRBNY, 2.867 million ozs (89 tonnes) from the Bank of England and 1.24 million ozs (38.5 tonnes) from the Banque de France.
Adding this 89 tonnes to the 75 tonnes received by the UK would be 164 tonnes distributed from the Bank of England IMF gold holdings. Add to this the 116 tonnes of London stored IMF gold sold in the auctions equals 280 tonnes. Subtracting this 280 tonnes from the IMF’s London holdings of 898 tonnes in January 1976 leaves 618 tonnes.
In 2009 the IMF said that it had sold 200 tonnes of gold to India, 2 tonnes to Mauritius, 10 tonnes to Sri Lanka,and then 10 tonnes to Bangladesh in 2010. The Bangladesh figures reflect its 10 tonne purchase. However, at the moment, there has been no exact confirmation that the 200 tonnes that India bought is in London. It probably is in London, but leaving this amount under the IMF holdings instead of in India’s holdings makes no difference. Subtracting the Bangladesh sale of 10 tonnes, and rounding down slightly, there are 600 tonnes of IMF gold (excluding the 2009 India 200 tonnes sale) storedat the Bank of England.
The IMF sales of gold to Sri Lanka and Mauritius in 2009 of a combined total of 12 tonnes probably came out of the IMF’s London holdings also. The IMF’s sale of 181.3 tonnes of gold in 2010 via ‘on-market transactions’ may also have come out of the IMF’s London stored gold. These ‘on-market transactions” look to have used the BIS as pricing agent, and the IMF have gone to great lengths to hide the full details of these sales from public view. More about that in a future article.
The Reserve Bank of India holds 557.75 tonnes of gold. Of this total, a combined 265.49 tonnes are stored (outside India) at the Bank of England and with the Bank for International Settlements. In 2009 India purchased 200 tonnes of gold from the IMF via an ‘off-market transaction‘. A slide from this presentation sums up this information.
The questions then are, is the 200 tonne purchase from the IMF stored at the Bank of England, and how much of the earlier 65.49 tonnes is stored at the Bank of England.
A 2013 article in the Indian Business Standard which was reprinted from “Reserve Bank of India history series. Volume 4, 1981-1997, Part A”, explains that in 1991, the Reserve Bank of India entered 2 separate gold loan deals, one deal with UBS in Switzerland (which required 18.36 tonnes of RBI gold to be sent to Switzerland) and the other deal with the Bank of England and Bank of Japan (where 46.91 tonnes was required to be sent to the Bank of England). Together those 2 transactions equals 65.27 tonnes which is 0.222 tonnes short of the 65.49 total.
After the gold loan deals expired, it looks like 18.36 tonnes of Indian gold were left in Switzerland and transferred to safekeeping or deposit with the BIS, and 46.91 tonnes of Indian gold was left at the Bank of England.
Regarding India’s purchase of 200 tonnes of gold in 2009, the IMF only has gold 4 depositories, namely, the Bank of England, Federal Reserve Bank of New York, Banque de France, and the Reserve Bank of India in Nagpur, India. Given that the Indian gold stored abroad is “with the Bank of England and the Bank for International Settlements“, then for the 200 tonnes of IMF gold to end up being classified as ‘with’ the BIS, it would have to have either been transferred internally at one of the IMF depositories to aBIS account, or transferred via a location swap or a physical shipment to a BIS gold account at the vaults of the Swiss National Bank in Berne.
For now, the 200 tonnes of gold sold by the IMF to India in 2009 is reflected in the IMF holdings and not the India holdings. It does not make a difference to the calculations, since the 200 tonnes is still at the Bank of England.
Bulgaria has 40.1 tonnes of official gold reserves. The latest BNB annual report states that 513,000 ozs are in standard gold form, and 775,000 ozs are in gold deposits.
The Bank for International Settlements (BIS), headquartered in Basle, Switzerland does not have run any gold vaults of its own. However, the BIS is a big player in the global central bank gold market, and it offers its central bank clientele gold safekeeping (and settlement) services using central bank vaults in London, New York and Berne. These services are possible because the BIS maintains gold accounts at the Bank of England, the Federal Reserve Bank of New York, and the Swiss National Bank in Berne. BIS gold accounts can act like omnibus accounts in that many central banks can hold gold in sub-accounts under a BIS gold account at each of these institutions in London, New York and Berne.
Gold can then be transferred around locations using gold swaps where one of the counterparties to the gold swap is the BIS.
The BIS is involved with gold in 3 main categories.
a) the BIS holds gold in custody for customers, off of the BIS balance sheet
b) the BIS has its own gold holdings which are classified as its gold investment portfolio, and which are on its balance sheet
c) the BIS accepts gold deposits from central banks. These gold deposits appear as a liability on the BIS balance sheet. Then the BIS turns around and places these gold liabilities in the market under its own name. These placing are also in the form of gold deposits and gold loans with other institutions including commercial banks. These ‘assets’ are then classified on the BIS balance sheet as BIS’ “gold banking” assets.
a) In its latest annual report, as of the end of March 2015, the BIS stated that it holds 443 tonnes of gold under earmark for its central bank customers on a custody basis. This gold is not on the BIS balance sheet. i.e. it is ‘off-balance sheet’ gold held by the BIS.
b) The BIS also holds 108 tonnes of its own gold (on balance sheet within an investment portfolio). This BIS gold is either kept in custody or transferred to bullion banks as gold deposits. The BIS does not provide granular data in its annual report as to how much of its own gold is ever put into gold deposits.
c) As of 31 March 2015, the BIS had 510 tonnes of gold assets on its balance sheet. Of this total, 108 tonnes was the BIS’ own gold, leaving 403 tonnes as banking assets (i.e. customer gold . Of this same 510 tonnes total, 55 tonnes were classified as gold loans, so 457 tonnes were not gold loans. If all 55 tonnes of gold loans were from customer gold, this would leave 348 tonnes of customer backed gold banking assets. On the same date (31 March 2015), the BIS held 356 tonnes of gold deposits from customers (sight deposits and short-term deposits) on the liability side of its balance sheet which originate entirely from central banks depositing gold with the BIS in sight and term deposits.
The question then is how to reflect BIS gold storage holdings at the Bank of England. While most if not all gold deposit transactions between central banks/BIS and bullion banks take place in London, the data is not readily published.
It was therefore decided, in the spirit of being conservative, to make an assumption on the BIS gold, and only use BIS customer custody gold and BIS own gold as inputs, and because BIS has gold accounts with 3 vaults (London, NY and Berne), to then just divide by 3 and say that one-third of BIS own gold and one-third of BIS ‘central bank custody gold’ is in London This would be 183.66 tonnes, i.e. (108+443)/3.
Therefore, this model states that 183.66 tonnes of BIS gold is stored in the Bank of England. This is probably being very conservative, especially given that no on-balance gold deposited by BIS customers is reflected in this figure.
In September 2010, the IMF sold 10 tonnes of gold to Bangladesh Bank, bringing total gold holdings up from 3.5 tonnes to 13.5 tonnes. The fact that this gold is stored at the Bank of England shows that the IMF sold this gold from its holdings that were stored at the Bank of England. (Note, Bangladesh has recently added some small amounts of domestic confiscated gold to its reserves).
Mexico’s central bank, Banco de Mexico (Banxico) currently hold 122.1 tonnes of gold. At the end of 2012, Mexican official gold reserves totalled 4,034,802 ounces (125 tonnes), of which only 194,539 ounces (6 tonnes) was in Mexico, and 119 tonnes abroad.
With Banxico now holding 122 tonnes according to the World Gold Council, and not 125 tonnes, the assumption is that the 3 tonne reduction came from domestic holdings.
Poland holds 102.9 tonnes of gold in its reserves. Poland’s central bank (Narodowi Bank Polski (NBP)) published a guide to Poland’s gold in 2014 in which it confirmed that nearly all of its gold is at the Bank of England. See pages 86-90 of the guide.
“How much gold did Poland possess before 1998? Approximately 746,463 ounces, of which almost 721 thousand was invested in deposits in commercial banks. In turn, the gold kept in the country was mainly coins, gold bars and various types of gold “scrap” bought by NBP.” (page 86)
Before 1998, only 25,463 ozs of NBP gold was kept in Poland, and 721,000 ozs (22.43 tonnes) was deposited with bullion banks. Poland then bought 80 tonnes of gold in 1998, bringing its gold reserves up to nearly 103 tonnes. The purchase was done as follows:
“…we used the services of a bank which constantly carries out similar transactions. Next, we made a location swap and the whole of NBP’s foreign gold reserves were deposited onto our account in the Bank of England.” (page 88)
It is likely that the NBP is referring to the BIS as the bank which purchased the gold on behalf of Poland, and then transferred it from one of the BIS gold accounts at the Bank of England to the NBP gold account at the Bank of England.
So that is 102.9 tonnes stored at the Bank of England.
Note also that, the Polish central bank explains that “It can be assumed that the gold that has been placed on the market at any time is precisely the gold that is held by the central banks in London“. In other words, central banks that have places gold on deposit (lent it) have done so with gold that they have stored in the Bank of England. See the following screenshot:
Note 6.1 on page 136 of the 2013 NBP annual report states:
“Gold and gold receivables The item comprises gold stored at NBP and deposited in a foreign bank account. As at 31 December 2013, NBP held 3,308.9 thousand ounces of gold (102.9 tonnes).”
This statement about the “gold stored at NBP and deposited in a foreign bank account” has been in a few of the recent NBP annual reports. In April 2013, before the NBP had published the guide to its gold, I asked the NBP by email, based on the statement, to clarify if the gold held abroad is held in custody, for example at the Bank of England or FRBNY or held in time deposits with commercial banks?”
The NBP responded: “Narodowy Bank Polski does not make gold time deposits with commercial banks”.
This may be true if the NBP is using sight deposits, but the 2013 answer, like so many other central banks currently, avoided providing any real information to the question.
Given that nearly all NBP’s 102.9 tonnes of gold was in the Bank of England when the 80 tonnes purchase was made in 1998, the assumption here is that still is the case, and that for simplicity, 100 tonnes of Poland’s gold is at the Bank of England.
Romania has 103.7 tonnes of gold in its official reserves.
In percentage terms, as at 31 December 2014, 27% of Romania’s gold was in ‘standard form’ which presumably means Good Delivery Bars (400 oz bars), 14% in gold coins, and 59% in ‘Deposits’ abroad. (59% of 103.7 tonnes is 61.2 tonnes)
Note the gold deposits with Bank of Nova Scotia and Fortis Bank Bruxelles in 2005 and additionally with the same two banks and with Barclays and Morgan Stanley NY in 2004.
Since the percentage breakdownbetween Romania’s bullionbankdeposits (59%), standardbars (27%) and coins (14%) hasn’t varied much since 2005, and was at a similar mix over various years that I checked such as 2011 and 2014, the conclusion is that Romania has had more than 50% of its gold on constant deposit since at least 2004 (i.e. the original allocated gold is long gone).
The 2005 annual report also states that there were 61 tonnes of Romanian gold stored at the Bank of England. Since Romania had just under 105 tonnes of gold in 2005, this 61 tonnes was referring to the gold deposits, which central banks, as illustrated in numerous other examples, continue to count as their gold even though it has been lent to bullion banks.
Romania therefore had or has 61 tonnes of gold stored at the bank of England.
Note also the reference to central vault, which probably refers to a vault in Bucharest.
The Philippines hold 225 tonnes of gold in its official reserves. In November 2000, when the Bangko Sentral ng Pilipinas (BSP) held 225 tonnes of gold, it explained in a press release titled ‘Shipment of Gold Reserves‘ that it ended up storing 95% of its gold at the Bank of England due to the use of location swaps with a counterparty (probably the BIS) that took delivery of BSP gold, and transferred gold to the BSP account at the Bank of England.
Since 2000, the BSP gold reserves have risen, fallen, and risen again and now total 195 tonnes. Assuming the ‘95% of its gold’ storage arrangement is still in place, then the Philippines has 95% of 195 tonnes, or 185 tonnes stored at the Bank of England.
Greece claims to hold 112.6 tonnes of gold. In 2013, the Greek finance ministry on behalf of the Greek central bank stated that half of Greece’s gold reserves were ‘under custody’ of the Bank of Greece, and the other half was ‘under custody’ of the Federal Reserve Bank of New York (FRBNY), the Bank of England and (very vaguely) Switzerland. Who actually controls Greece’s gold reserves at this point in time is anybody’s guess.
Given that the Federal Reserve Bank of New York was listed by the Greek MinFin as a foreign gold storage location ahead of the Bank of England, the assumption here is that of the 50% of Greece’s gold held abroad, the FRBNY holds more of this portion than the Bank of England. And so the assumption is that the Bank of England holds 40% of the foreign half, i.e. 20% of the total of Greece’s gold, with the FRBNY holding 50% of the foreign half. Taking 112 tonnes of gold as Greece’s total gold holding, 40% of this is 22.4 tonnes stored at the Bank of England. (Note, Greek gold reserves keep increasing incrementally each month by small amounts. As I am not sure what these increases relates to, a recent rounded figure of 112 tonnes has been chosen).
The Banca d’Italia holds 2.451.8 tonnes of gold. Although in 2014, the Banca d’Italia released a document in which it confirmed that some of this gold is held at the Bank of England, there is no evidence to suggest that Italy’s gold in London amounts to more than a few tonnes left over from 1960s transactions.
Bank of England gold set-aside ledgers show that in 1969 there were less than 1000 ‘Good Delivery’ gold bars in the Banca d’Italia gold account at the Bank of England, weighing less than 400,000 ozs in total. This is equal to about 12 tonnes. Most of the Italian gold at the Bank of England was flown back to Rome (and Milan) in the 1960s.
Since there is no public documentation that Banca d’Italia has ever engaged in gold lending (as far as I am aware), then there would be no need for Italy to keep a lot of gold at the Bank of England. Nearly all of Italy’s foreign held gold (over 1,200 tonnes) looks to be in New York (assuming it hasn’t been swapped or used as loan collateral). Italy could have engaged in non-public gold transactions from the Bank of England using gold location swaps from the FRBNY, or from Rome, but there is no evidence of this.
So, this model assumes 12 tonnes of Italian gold is stored at the Bank of England.
Brazil hold 67.2 tonnes of gold reserves. In 2012, Banco Central do Brasil told me by email that all of its gold reserves were in the form of ‘fixed term gold deposits at commercial banks only’. Since the gold would be required to be stored at the Bank of England for these gold deposit transactions to take place, Brazil therefore holds 67.2 tonnes of gold at the Bank of England. See email below:
Banco Central del Ecuador conducted a 3 year gold swap with Goldman Sachs in June 2014 where it swapped 466,000 ozs for US dollar cash This swapped amount of gold has been factored into the World Gold Council data for Ecuador, and the Ecuadorian reserves dropped by 14.5 tonnes in Q2 2014. from 23.28 tonnes to 11.78 tonnes. This swapped amount of 14.5 tonnes is most probably stored at the Bank of England, since Goldman Sachs proposed a similar deal with Venezuela in 2014 where the gold was required to be at the Bank of England for the swap to be initiated.
Bolivia Central de Bolivia holds 42.5 tonnes of gold, all of which is permanently on deposit with bullion banks. The Bolivian Central Bank is very transparent in explaining where its gold is ‘invested’. Hence, it has (until recently) even provided in its financial accounts, the names of the bullion banks which happened to hold its ‘gold deposits’ and the amounts held by each bank.
A recent Banco Central de Bolivia report for 2014 is less revealing and only shows the country distribution of the gold deposits, with 39% in the UK and the rest in France. While this probably refers to the headquarters of the actual bullion banks in question, i.e. Natixis is French etc, it could mean the gold is being attributed to the Bank of England and the Banque de France, so, a conservative approach here is to attribute 39% of 42.5 tonnes to the Bank of England, i.e. 16.6 tonnes stored at the Bank of England.
Peru holds 34.7 tonnes of gold in its official reserves.
At the end of December 2013, Banco Central de Reserva del Peru held 552,191 ounces (17 tonnes) of gold coins which were stored in the Bank’s own vault, and 562,651 troy ounces of “good delivery” gold bars (17.5 tonnes) which were stored in banks abroad, of which 249,702 ounces were in custody and 312,949 ounces in the form of short-term interest bearing deposits. See 2013 annual report.
Since the gold bars are all ‘good delivery’ bars (which is not the case at the FRBNY), and since Peru has still recently been engaging in gold lending, then the evidence suggests that 17.5 tonnes of Peru’s gold is stored at the Bank of England.
Latvia hold 6.62 tonnes of gold in its official reserves after joining the Euro on 1 January 2014 and after transferring just over 1 tonne of gold to the European Central Bank (ECB). All of Latvia’s gold is stored at the Bank of England, therefore Latvia stores 6.62 tonnes of gold at the Bank of England.
Before this transfer of gold to the ECB, Latvia had 248,706 ozs of gold, and it transferred 35,322 ozs to ECB, leaving 213,384 ozs.
The ECB holds 504.8 tonnes of gold. This gold was transferred by the Euro members to the ECB at the launch of the Euro by 1 January 1999. All the ECB gold is de-centrally managed, meaning that it stays where it was when transferred and is still locally ‘managed’ by the bank which transferred that gold to the ECB. Some banks may have transferred gold stored at FRBNY in fulfillment of their requirement, some banks may have transferred gold at the BoE, and countries such as France and Italy may have transferred amounts which are still stored at Banque de France and Banca d’Italia etc. Some of the ECB gold, such as the smaller amount transferred by Latvia, is in the Bank of England. Other amounts of the ECB’s gold are most certainly also at the Bank of England in London.
It would be a separate project to track these transfers. The 1 tonne of Latvian gold transferred to the ECB at the start o 2014 was included in the figures here just as a placeholder, so as to acknowledge that ECB gold is at the Bank of England. Given that the Euro is a competing currency to the US Dollar, the ECB may have more gold than not stored in Europe and not at the Federal Reserve Bank of New York, since ECB gold would logically be safer not stored in the main Reserve Bank of a competing currency bloc.
In its 2014 annual report, the Bank of Iceland said that “The Bank resumed lending gold for investment purposes in June 2014“, and “The Bank loaned gold to foreign financial institutions during the year”.
The Bank of Iceland lent 99.7% of its gold during 2014 because this is the percentage of the gold reserves which are not payable on demand, but are payable in less than 3 months. See below screenshot.
For the purposes of this exercise, Iceland stores 2 tonnes of gold at the Bank of England.
Ghana’s central bank, the Bank of Ghana, holds 8.7 tonnes of gold in its official reserves (precisely 280,872.439 ozs). Of this total, 39.3%, or 3.42 tonnes is held at the Bank of England, with 27.5% at the Federal Reserve Bank of New York, and 29.5% with investment bank UBS. See 2014 annual report.
Interestingly, Ghana refers to its gold account at the Bank of England as a ‘gold set aside’ account, which is the correct name for a Bank of England gold custody account of allocated gold. Probably more interestingly is that most central banks do not use this ‘set aside’ term.
A number of central banks refuse to confirm the location of their gold reserves. I will document this in a future posting. Some of the large holders undoubtedly hold quite a lot of gold at the Bank of England, as do a number of smaller holders. Countries that could fit into this category include Spain, France, Colombia, Lithuania, Sri Lanka, Mauritius, Pakistan, Egypt, Slovenia, Macedonia, Malaysia, Thailand and South Africa. In fact any central bank which has engaged in gold lending is a candidate for having some of its gold stored at the Bank of England.
Spanish people take note. Spain refused to say where its 281.6 tonnes of gold is stored, and Banco de España has the dubious record of being Europe’s least transparent bank as regards gold reserves storage locations. Maybe a project for Spanish journalists.
Banque de France keeps 9% of its 2,435 tonnes of gold reserves abroad, and has in the past engaged in gold lending. So this 9%, or 219 tonnes, is probably stored at the Bank of England.
The ECB and BIS no doubt have more gold stored at the Bank of England than the figures currently reflect. This would also increase the ‘known gold’ total. Egypt is another country which has had a gold set aside account at the Bank of England so is in my view an obvious candidate for the list.
Adding to the known total is therefore a work in progress.
It’s now been 6 months since the LBMA Gold Price auction, the much touted replacement to the London Gold Fixings, was launched on an ICE Benchmark Administration (IBA) platform on Friday 20 March 2015.
For anyone not au fait with the gold price auction, the LBMA Gold Price is a twice daily auction that produces the world’s most widely used gold price benchmark, which is then used as a daily pricing source in gold markets and gold products across the globe.
The 6 month anniversary of the LBMA Gold Price’s launch thus provides an opportune time to revisit a few unresolved and little-noticed aspects of this recently launched auction a.k.a. global benchmark.
Manipulative Behaviour and the FCA
From 1 April 2015, the LBMA Gold Price also became a ‘Regulated Benchmark’ of the UK’s Financial Conduct Authority (FCA) along with 6 other systemically important pricing benchmarks, namely, the LBMA Silver Price, ISDAFix, ICE Brent, WM/Reuters fx, Sonia, and Ronia. These 7 benchmarks join the infamously manipulated LIBOR in now being ‘Regulated Benchmarks’.
Manipulating or attempting to manipulate prices in a Regulated Benchmark is now a criminal offence under the Financial Services Act 2012.
The specifics are set out in Chapter 8 of the FCA’s Market Conduct sourcebook (“MAR”), with the details on ‘identifying potentially manipulative behaviour’ covered in MAR 8.3.6 which says that a benchmark administrator must:
“identify breaches of its practice standards and conduct that may involve manipulation, or attempted manipulation, of the specified benchmark it administers and provide to the oversight committee of the specified benchmark timely updates of suspected breaches of practice standards and attempted manipulation“
“notify the FCA and provide all relevant information where it suspects that, in relation to the specified benchmark it administers, there has been:
(a) a material breach of the benchmark administrator’s practice standards
(b) conduct that may involve manipulation or attempted manipulation of the specified benchmark it administers; or
(c) collusion to manipulate or to attempt to manipulate the specified benchmark it administers.”
and furthermore that the arrangements and procedures referred to above:
“should include (but not be limited to):
(1) carrying out statistical analysis of benchmark submissions, using other relevant market data in order to identify irregularities in benchmark submissions; and
(2) an effective whistle-blowing procedure which allows any person on an anonymous basis to alert the benchmark administrator of conduct that may involve manipulation, or attempted manipulation, of the specified benchmark it administers.”
Section 91 of the UK Financial Services Act 2012 deems it a criminal offence to intentionally engage “in any course of conduct which creates a false or misleading impression as to the price or value of any investment” which creates “an impression may affect the setting of a relevant benchmark”.
Recent Manipulation of Auction Starting Price
All of these FCA rules and the criminalisation of price manipulation offences sound very good in principle.
“4. Findings since go-live: IBA shared with the Committee that:
• IBA, and some direct participants, had observed the price of futures spiking during the minutes immediately before the afternoon gold auction starts.
IBA are now de-emphasising use of the futures as a related market to consider when determining the starting price .”
The fact that IBA has deemed it necessary to follow this course of action (i.e. de-emphasise the use of futures as a starting price determinant), and the fact that some entity or entities have been pushing around futures prices as a means of influencing the LBMA Gold Price starting price suggests that nothing has changed in the gold market since the introduction of the new auction, and that the same players who were actively manipulating the gold price back in 2012 are still doing so, despite this becoming a criminal offence under UK law.
4.12. At the start of the 28 June 2012 Gold Fixing at 3:00 p.m., the Chairman proposed an opening price of USD1,562.00. However, the proposed price quickly dropped to USD1,556.00, following a drop in the price of August COMEX Gold Futures (which was caused by significant selling in the August COMEX Gold Futures market, independent of Barclays and Mr Plunkett).
“4.18. …before the price was fixed, there were a number of further changes in the levels of buying and selling in the 28 June 2012 Gold Fixing, which coincided with an increase in the price of August COMEX Gold Futures.
4.19. As a result of these changes, the level of buying at USD1,558.50 exceeded the level of selling (155 buying/45 selling), and the proposed price was likely to move higher. Given that the price of August COMEX Gold Futures was trading around USD1,560.00 at this time, if the Chairman did move the proposed price in the 28 June 2012 Gold Fixing higher, it was likely to be to a similar price level (which was higher than the Barrier).”
You can read the entire FCA account of the saga of the 28 June 2012 afternoon fixing here, and think about the consequences and meaning of the IBA move to de-emphasis futures prices and what it signals.
Publicly Available Procedures – Not!
Which brings us to the procedures for establishing the auction starting price and subsequent prices for each round of the auction. On 28 April 2015, the IBA LBMA Gold Price web page, under ‘Auction Process’, stated that:
“The chairperson sets the starting price and the price for each round based on publicly available procedures.“
I was interested in reading these publicly available procedures, and learning about the price sources and price hierarchies used within the set of price determinants, so on 28 April 2015, I emailed the IBA communication group and asked:
“I have a question on the LBMA Gold Price methodology.
On the IBA LBMA Gold Price web page (https://www.theice.com/iba/lbma-gold-price) under ‘Auction Process’, point 1 states that “The chairperson sets the starting price and the price for each round based on publicly available procedures“.
Can you direct me to where these ‘publicly available procedures’ are view-able?
Incredibly, IBA received my email that day, and then changed point 1 under ‘Auction Process’ by deleting the original reference to ‘publicly available procedures’ and by copying and pasting in the FAQ answer that I had referred to about ‘in line with current conditions and activity in the auction.”
IBA then responded to my email on the same day, 28 April, without answering the question. The IBA response was:
“Please note the updated text: ‘The chairperson sets the starting price and the price for each round in line with current market conditions and the activity in the auction’. Thank you for pointing this out.“
So, not only did IBA avoid explaining the ‘publicly available procedures‘, they also covered it up and had the cheek to thank me for pointing it out to them. You can see for yourself the reactionary and firefighting tactics used by IBA in perpetuating non-transparency.
Furthermore, the fact that the original web page said that the procedures were publicly available and then they pulled it suggests that at least someone with responsibility in IBA, maybe naively, originally had been of the view that the pricing procedures were to be publicly available.
I emailed IBA again and said:
“This FAQ answer (to the question “How are the prices set for each round of the auction?) doesn’t really explain anything at all.
My question though is, apart from this one line FAQ answer, are there no more in depth ‘publicly available procedures’ available that explain how the opening price is set, what the price sources used are, what pricing hierarchy is used to select an opening price etc..?”
I’ve looked on your web site and in the FAQs and can’t find them. The only brief reference to price determination in the FAQs is that the chairperson”sets the price in line with current market conditions and activity in the auction.”
To which IBA replied:
“This information is not available on our website. However, as you seem to have a few questions, would you be interested in me setting up an off the record briefing with IBA in the next few weeks?”
I did not take IBA up on that offer since I do not think that an off the record briefing is appropriate for something that should be in the public domain. It also highlights the extent to which the vast majority of the financial media are happy to use unidentified sources, off the record briefings, and quotes, and willingly act as the mouthpieces for entities that they are too scared of offending lest they will not get ‘access’ to write their next regurgitated press release for, nor get invited to that entity’s Christmas party.
“‘The names of those selected to oversee ICE’s new gold price benchmarking process will not be disclosed, Finbarr Hutcheson, president of ICE Benchmark Administration (IBA), said.
“We are keeping that anonymous – we don’t think that it’s meaningful to the marketplace to know who’s running that auction and, frankly, the more we kind of feed the story, there’s just going to be more speculation around that,” he said at a briefing at its offices here.
“There’s a legitimate desire to know but actually we don’t want this process to focus on any individual or names of people,” he added.
Not “meaningful to the marketplace to know who’s running the auction“? What sort of statement is that in a free market? If there is a legitimate desire to know, as Hutcheson concedes there is, then why hide the identities?
If anyone needs reminding, the predecessor to the LBMA Gold Price auction was a trading process which, on 23 May 2014, the UK Financial Conduct Authority (FCA) saw fit to fine Barclays £26 million “for failings surrounding the London Gold Fixing.” This was also the first and only precious metals trading process in the UK ever to receive a fine from the FCA.
I would suggest that given the history of a ‘proven to have been manipulated daily gold price auction’, whose successor on launch day primarily consisted of the 4 incumbent participants that comprised the previous Gold Fixings auction (including Barclays), then it certainly is meaningful to the marketplace to know who’s running the new auction.
“’We have a panel of chairpeople that we are going to use and we have internal expertise as well on that, but we are not disclosing the names of those chairmen,’ Hutcheson said. “It will rotate through the panel but we have a significant bench of available external expertise with back-up if you like.”
Hutcheson declined to name how many chairpeople are on the panel.
But if the oversight committee were to feel that it was appropriate for the names to be disclosed, this stance may change, he suggested.”
And why would the oversight committee feel it to be appropriate or not to divulge the names of the chairpersons of the most important gold pricing benchmark in the world?
The Changing of the Guard
Its interesting to see how ICE Benchmark Administration’s description of the chairpersons evolved over a short period after the LBMA Gold Price auction was launched on 20 March.
This was the initial version of the ICE IBA web site description of the Chairperson on 20 March (see screenshot 1 below also):
“The chairperson has extensive experience in the gold market, and is appointed by IBA, and therefore independent of the auction process.”
A week later, a revised, more lengthy version of the Chairperson description had appeared on the ICE IBA web site (see screenshot 2 below also):
“The Chair is appointed by IBA and is independent of any firm associated with the auction, including direct participants. The chair is externally sourced, but works with the IBA team to deliver a robust process for determination of the LBMA Gold Price.”
The Chair facilitates the determination of the LBMA Gold Price by providing his extensive market experience to assist in setting the price in each round of an IBA gold auction.”
By July, the second paragraph of the second version above had been changed to read:
“Both the initial and subsequent round prices are selected by the Chair using their extensive market experience and applied based on an agreed pricing framework.”
So, there is a panel of chairpeople, as Hutcheson told Bulliondesk, who are 4 ‘ex-bankers’ according to Reuters, and who have ‘extensive experience in the gold market’ according to the IBA web site. So these people were previously bankers (which means investment bank staff) who gained their experience of the gold market in investment banks, and who have extensive knowledge of how a gold auction works, and since they are working with London-based IBA on a London-based daily auction, the chairpersons are either London-based or live proximate to London. And finally, according to one of the web site versions above, it’s a ‘He’ or set of ‘Hes’ so we know they are male.
And yet these same people are said to be “independent of any firm associated with the auction, including direct participants.”
Given that there are now 11 direct participants in the LBMA Gold Price auction, namely, Barclays, Bank of China, Goldman Sachs, HSBC Bank USA, JPMorgan Chase Bank, Morgan Stanley, Societe Generale, Bank of Nova Scotia – ScotiaMocatta, Toronto-Dominion Bank, Standard Chartered and UBS, how could ex-bankers based in London with extensive experience of the gold market collectively be independent of all of these banks?
And that’s just the direct participants. What about all the firms associated with the auction, for example, indirect participants who route their auction orders via direct participants?
It would be interesting to hear what IBA and the LBMA define as ‘independent’. Is there any precedent on a definition of ‘independent’ for persons connected to a daily gold auction? Luckily, there is.
“appoint up to two independent qualified individuals to serve on the Committee. A person will be considered to be independent for the purposes of these Terms of Reference if he/she is not, and has not been at any time in the preceding year, an employee or consultant of any Member and does not otherwise have a personal interest in the fixing price or the Fixing Process.”
While this document was referring to a committee whose Members were the directors of the banks running the former auction, at least there is some semblance of a definition of the concept of ‘independent‘ when applied to a gold auction.
So using that yardstick, it would be interesting to measure up the ex-banker chairpersons in the current auction as to how long exactly have they and their handler have been ‘ex’ bankers. Less than a calendar year before 20 March 2015 (i.e. 01 January 2014) would not cut it under a “has not been at any time in the preceding year, an employee or consultant of any Member” test.
And it also begs the question, why is the automated algorithm alluded to by ICE not being used in this LBMA Gold Price auction instead of a human chairperson?
Chairperson description 1
Chairperson description 2
Chairperson description version 3
You will notice from the first description screenshot of the chairperson (above) that on 20 March 2015, ICE IBA stated that:
“Feedback from the market is that the price in the first round of the auction, as well as the prices for the following rounds, is of paramount importance.
As a result, BA has appointed a chairperson from Day 1. In due course, IBA will evaluate developing an algorithm in consultation with the market.“
Then notice that in the second version screenshot about the chairperson, there is no mention of any algorithm. It just vanished.
A slightly different version of the algorithm text appeared in the IBA gold price FAQ document published at launch time:
“Why are you using a Chairperson and not an algorithm for day one?
Feedback from the market is that the setting of the initial price of the first round of the auction, as well as prices for the following rounds, are important. As a result, it is appropriate to have a Chairperson on day one. In due course, IBA will consult on automating the auction process using an automated algorithm.”
A point of information at this juncture. When IBA and LBMA refer to ‘the Market’ they are referring exclusively to LBMA members of the wholesale gold market and not to any of the other hundreds of thousands of global gold market participants who rely on the LBMA Gold Price benchmark as a pricing source. In fact it seems that ‘the Market’ means whatever the LBMA Management Committee decide it means.
It is also worth pointing out that many of the LBMA’s claims on consulting ‘the Market’ are just empty rhetoric, and the consultations are purely for window dressing for decisions that they have already decided on, a case in point being the EY bullion market review commissioned by the LBMA earlier this year that was announced on 27 April and wrapped up by June 2015. This is not too dissimilar to the way FIFA operates, as one correspondent pointed out.
In the case of the above ‘feedback from the market’ about wanting a chairperson, this could very well mean the 4 members of London Gold Market Fixing Limited (LGMFL) who all transitioned from the old auction to the new auction as if nothing had changed. It appears that they did not want anything to change. The old London Gold Fixing with 4 members had a chairperson (most recently Simon Weeks from Scotia) who rotated annually through the directors of (LGMFL), i.e. from Barclays, Scotia Mocatta, HSBC and SocGen.
Finbarr Hutcheson had also referred to this price calculation ‘Algorithm’ on 19 March, the day before the LBMA Gold Price launch. To quote Bulliondesk again:
“The panel of the independent chairs will be responsible for overseeing the process although ICE has indicated that it will be looking to make the process electronic in future.“
The LBMA Silver Price Algorithm
The LBMA Silver Price auction has a separate administrator, Thomson Reuters and a separate platform provider, CME Group. Thomson Reuters has this to say about the opening price on page 8 of its LBMA Silver Price methodology guide:
3.7 Starting Price
The auction platform operator (CME Benchmark Europe Ltd) is responsible for operating the LBMA Silver Price auction, including entering the initial auction price.
The initial auction price value is determined by the auction platform operatorby comparing multiple Market Data sources prior to the auction opening to form a consensus price based on the individual sources of Market Data. The auction platform operator enters the initial auction price before the first round of the auction begins….
For intra-auction prices for each round, the methodology guide says that:
3.8 Manual Price Override
In exceptional circumstances, CME Benchmark Europe Ltd can overrule the automated new price of the next auction round in cases when more significant or finer changes are required. When doing so, the auction platform operator will refer to a composition of live Market Data sources while the auction is in progress.
In the LBMA Silver Price methodology, only the first round is manually input. Subsequent rounds are calculated automatically by the ‘platform’. See page 7 of the guide:
“3.4 End of Round Comparison
[bullet point 2] If the difference between the total buy and sell quantity is greater than the tolerance value, the auction platform determines that the auction is not balanced, automatically cancels orders entered in the auction round by all participants, calculates a new price, and starts a new round with the new price.”
So this is different to the LBMA Gold Price where:
“The chairperson sets the starting price and the price for each round in line with current market conditions and the activity in the auction.”
Six months after the fanfare launch on 20 March 2015, unanswered questions remain:
How robust is the LBMA Gold Price auction mechanism, when within 3 months of launch date, IBA have to tinker with the price sources used to determine the starting price, and de-emphasise one price source due to volatile and seemingly delibrately manipulative futures price movements?
Why does the LBMA Gold Price auction needs a human chairperson throughout the auction and the LBMA Silver Price does not?
What happened to the plans for introducing an algorithm into the auction?
Why have ICE gone to great lengths to prevent the public knowing the identities of the chairpersons?
Why did ICE backtrack on a reference to ‘publicly available procedures‘ that would have explained how the starting price and round prices are determined?
What’s going to happen when the initial six months of the chairpersons’ rotating duties run out on Monday 21 September, as Reuters alluded to back in March?
To that list some further questions could be added:
Where are the Chinese banks ICBC and China Construction, Bank which both expressed interest in becoming direct participants in the LBMA Gold Price auction, going to join?
Where are all the gold mining and gold refining entities that have expressed interest in being direct participants going to join, participants that the ICE auction platform can accommodate right now?
When will the LBMA Gold Price auction move to central clearing on an exchange distinct from LMPCL’s monopoly on clearing predominantly unallocated metal?
When will the prohibitive credit lines enforced by the LBMA be removed as as to allow other non-bank participants to directly participate in the auction without maintaining credit arrangements with the incumbent bullion banks?
These are just some of the questions which financial journalists cannot bring themselves to write about when covering this topic.
The financial media has recently pitched the transition of the London daily gold fixings to an ICE Benchmark Administration (IBA) platform as a quantum leap from an antiquated Victorian-era process to a futuristic 21st century electronic auction.
“Four of the banks…had participated in the conference call used to determine the daily fixes, a system largely unchanged for nearly a century” and that“Gold is the last of the precious metals to make the switch to an electronic platform.”
The evidence suggests however, that in the last decade, the technology utilised in the daily gold fixings was far more advanced than the media commentaries imply, and that since 2004, the old gold fixing was not as technologically backward as is generally accepted.
Rothschild Departs, Barclays Joins – 2004
In April 2004, NM Rothschild announced that it was pulling out of commodity and gold trading, and also stepping down from chairing and participating in the twice daily London Gold Fixings. This left four banks as members of the fixing process, namely HSBC, Deutsche Bank, Scotia Mocatta, and SocGen.
According to Risk.net at the time, “the withdrawal of NM Rothschild from the market forced the London Gold Market Fixing company to introduce new fixing arrangements.”
From a practical standpoint, with NM Rothschild no longer part of the fixings after May 2004, the meetings could no longer use Rothschild’s offices in St Swithins Lane near the Bank of England. Another practical point was related to the location of the remaining participants’ offices.
Since Barclays Capital, who took over the fixing seat from Rothschild, was based in Canary Wharf (15-20 minutes train ride east of Bank), the five fixing members were not all located in walking distance of a central physical meeting place in the City of London. Scotia’s and Deutsche’s offices were in the City, but another gold fixing member, HSBC, had also fully moved to Canary Wharf circa 2003. Round trip travel from Canary Wharf to Bank twice a day, or vice versa, would have been prohibitive on all but a temporary basis.
Rothschild’s departure precipitated discussion of three changes to the Fixings process, specifically, 1) an annually rotating chairperson, 2) a conference call, and 3) a far less well-known, ‘web-based commentary’.
On 29th April 2004, Tim Wood of Mineweb.com wrote an article titled “London Gold Fixing Ritual to End”. The article explained the three changes and referred to the web-based commentary:
“As expected, the London Gold Fixing has announced that it will in future rotate the chairmanship of the arrangement and end a tradition of meeting in person to set bellwether gold prices twice a day.
Starting in May, each member bank will assume the chairmanship of the fixing for a one year period starting with ScotiaBank division ScotiaMocatta.
As of the same date, the Fixing will take place by telephone and the five member firms will no longer meet face-to-face as has previously been the case. As part of this change, it is intended that a web-based commentary of the Fixing will be introduced later this year“, the Fixing said in a statement.
The decision by N.M. Rothschild & Sons to quit the gold business leaves a vacancy at the Fixing. Ongoing members are Deutsche Bank, HSBC, and Société Generale.
Simon Weeks is the chairman-elect of the London Gold Fixing.”
[Coincidentally, Tim Wood, currently executive director of Denver Gold Group, has now ended up sitting on the new 2015 LBMA Gold Price Oversight Committee with Simon Weeks, nearly 11 years after the above article was written.]
On 5th May 2004, the twice daily Gold Fixings transitioned from physically attended meetings at Rothschild’s offices to remote conference calls with Scotia as the new chair.
“The London Bullion Market Association, which controls the price-setting process, plans to introduce a live Web-based commentary on the daily price-setting this year.”
‘Nothing was that much different apart from the fact that we didn’t walk down to St. Swithins Lane,’ said Simon Weeks, director of precious metals and foreign exchange at ScotiaMocatta, a unit of the Bank of Nova Scotia.”
(Note: The NY Times meant LGMFL, not LBMA, but they may have got confused because Simon Weeks was chairman of the LBMA at that time, as well as being chairman of the Gold Fixing company LGMFL).
“LGMF (London Gold Market Fixing) said it intends to introduce web-based commentary of the fixing later this year.”
Barclays then joined the fixings on 7th June 2004.
Bank of England refers to a Web-based application
The most authoritative confirmation of this “web-based feature commentary” comes from the May 2004 edition of the Bank of England Quarterly Bulletin which was kept in the gold fixings loop as per usual, and saw fit to review and report on the changes taking place in the Gold Fixing. See page 14 of pdf where it states:
“Since 5 May, a telephone conference call has replaced the twice-daily physical meetings. A web-based application to allow viewing of the fixing process is to be introduced later in 2004.“
Bank of England Quarterly Bulletin screenshot, May 2004:
Fast forward to 2014, and a publication titled “Financial Markets and the ACI Dealing Certificate 310-102“, by Philip J L Parker (ISBN 978-1-291-50352-4) also mentions this web-based commentary for the Fixing, stating:
“With effect from May 2004, the traditional face-to-face meetings (previously at the offices of NM Rothschild and Son), were replaced by a telephone fixing procedure. As part of this change, a web-based commentary of the Fixing has been introduced.“
So it appears that a liveweb-based commentary / web-based application has been used by the five members of the London Gold Fixing since 2004 that allowed the viewing of the fixing process, which would presumably mean viewing the orders entered by each participant and the intra-auction prices. However the existence of such as web-based application is never mentioned by the financial media, who persist in only ever mentioning a conference call, often in conjunction with the words ‘tradition’, ‘antiquated’ or ‘unchanging since 1919’ etc.
Pens and Paper?
It stands to reason that a live web-based application would be introduced and used during a conference call of the daily Gold Fixings. Given that the trader participants were located remotely from each other, it would be essential for the traders at each of the five firms to be able to see prices and current orders on their desktop screens during the fixings, and also essential for final order data to be captured in a trade capture system, then matched, and then sent downstream within trade, clearing and settlement processing systems.
As well as using phones, everything an investment bank trader or an inter-dealer broker does involves using one of their, often, six or more screens as input and output devices. They do not just use ‘bits of paper’ to record orders and trades and then pass these bits of paper to some junior person to run around the precious metals trading desk with. Trading screens are always used in conjunction with phones. Every order has to be captured and displayed, as well as calculated and processed in trade and settlement processing systems and downstream P&L and reporting systems.
We are talking here about order entry, trade execution, trade capture, trade processing, and trade clearing and settlement. We are also talking here about the most sophisticated investment banks on the planet, with the largest and most cutting edge technological and financial resources in any industry. We are talking about HSBC, ScotiaBank, Deutsche Bank, Barclays and Société Générale, not about two-bit bucket shops.
Until August 2014, the daily Silver Fixings comprised three of the same members as the daily Gold Fixings, namely HSBC, ScotiaMocatta and Deutsche. Given that both gold and silver trading would be run from the same precious metals trading desks in these banks, it seems reasonable to suggest that any technological order capture and display systems that were being used in the gold fixings, would also be used in the silver fixings.
It therefore makes the following claim from Harriet Hunnable of the CME Group hard to fathom when she commented last October on how the CME had taken the Silver Fixings out of the dark ages (CME ‘proud’ of silver fix system):
“In a very short time, we’ve taken a market that was doing this on pen and paper on the telephone to an electronic platform.”
I find this ‘pen and paper’ reference extremely hard to believe given the discussion of a web-based application in the Gold Fixings since 2004. Financial media commentaries at the time, in August 2014, also stuck to the dark ages script with CNBC headlining its coverage as “Victorian-era silver fix joins electronic age“.
Note that even ‘voice-brokered trades’ done by the large inter-dealer brokers such as ICAP and Tullet Prebon make use of screens as well as phones. Screens are intrinsic to all modern voice trading, as are messaging apps, and chat apps (although messaging and chat apps will probably be more highly regulated and subject to stricter compliance controls going forward).
It would be naive of anyone to think that daily Gold Fixings involving five distinct dealing rooms of five huge investment banks were not using various forms of order entry, trade capture, and various types of networked technology, to keep track of gold and silver fixing prices and orders and to visually display this updated data on traders’ screens and desktops during the daily fixing auctions.
Furthermore, the resulting net order data would have to be passed to other trade processing systems for downstream processing into London Precious Metals Clearing Ltd’s (LPMCL) metal clearing AURUM system, for netting and clearing and settlement, while the price and time-stamp data would need to be passed to price data vendors for distribution as well as to the LGMFL goldfixing.com web site.
Without a functional specification document, its hard to know what the original specification of a 2004 web-based commentary/web-based application used on the five trading floors would have entailed, and whether it would be originally designed and built in-house by one or a number of the technology departments of the five fixing member banks, or whether this type of project would have been outsourced. But trading floor technology is always changing and evolving and indeed, trading technology did change rapidly from 2004 to 2014.
Applications designed and used within investment banks do not stay static and they also have to be supported and maintained. Applications either evolve with the evolution of an investment bank’s technology environment or they are decommissioned and replaced. So it’s doubtful if a web-based app created in 2004-05 would still exist in its original version 1.0 form in 2014-15.
Examining the observable technology connected to the London Gold Market Fixing Company also brings up some interesting information. One window into the London Gold Market Fixing Ltd was its website www.goldfixing.com. The domain lookup for the www.goldfixing.com provides both registrant and technical support information.
The site was registered on 22nd December 1999 by Emilie Rivoire of NM Rothschild (email@example.com). This would make sense since NM Rothschild was the permanent chair of the daily gold fixings until 2004. The first version of the goldfixing.com website was created by a South African company called Catics Ltd in 2000.
“Rothschild, with approval from the other 4 members, approached us to design an elegant new web site. The site was created as a quick up-to-date historic guide about the London Goldfix. All interested parties can see how the price of gold gets fixed twice a day.”
The key requirements for the website included:
Provide a graphical view that would indicate the five members buying, holding or selling gold.
Build an interactive charting facility so that users can chart historic gold fixes.
Integrate site with Rothschild CMS (Content Management System).
When NM Rothschild departed from the Gold Fixings in 2004 and sold its fixing seat to Barclays, it appears that Rothschild also handed over the responsibility for the website to Barclays, who at some point employed Sapient in a technical capacity for the website. The domain lookup for the site most recently lists a technical support contact for the website of Sapient, with an address of Eden House, 8 Spital Square, London E1 6DU, and an email contact of firstname.lastname@example.org.
Eden House is the London office HQ of Sapient Global Markets. Sapient Global Markets is part of the Publicis.Sapient group, and provides various financial market consultancy and technological services to “capital and commodity market participants” including numerous financial exchanges and clearing houses. Publicis Groupe acquired Sapient in November 2014.
The ‘MSO Support’ in email@example.com refers to Managed Service Operations (MSO), which is an area within Sapient Nitro’s systems integration practice, which operates from various places including Gurgaon in India. This MSO support team was responsible for the www.goldfixing.com web site that was permanently switched off on the morning of 23rd March 2015.
That Sapient was responsible for the www.goldfixing.com web site is a fact because their indian team in Gurgaon confirmed to me early on the morning of 23rd March that the website had been shut down, as follows:
Furthermore, on their email to me, Sapient (Gurgaon) used the following two Sapient email addresses connected to the Gold Fixing and the goldfixing.com website:
A managed service operations team would generally be responsible for content management and delivery, as well as underlying web applications and servers etc.
Before the plug was pulled on the www.goldfixing.com website, fixing prices and associated trading data and gold bar quantities always appeared rapidly on the GoldFixing website straight after the 10.30am and 3.00pm fixings were completed, along with accompanying timestamps down to the exact second.
For example, on 23 October 2014, the morning gold fixing completed at 10:31:16. This information was rapidly updated on to the goldfixing website, as well as being sent out to all the major data vendors such as Bloomberg and Thomson Reuters:
Distribution of near real-time price data could not have been done without an electronic system that captured the fixing data, stored it in a database table, and fed it to a front-end website query.
Likewise, the historical price, bid-offer, bar total and date data which were viewable on the goldfixing website would also have needed to be stored in a database table and accessible via a website query. For example, see the last historical data of gold fixings from 18th and 19th March 2015 to be displayed on the old goldfixing website before it was switched off:
This fixing data that appeared on the goldfixing website has to have been supplied by other connected systems such as a fixings order capture and processing system. There cannot be website outputs within inputs, which by definition implies that there are also calculations performed as well as storage and retrieval. i.e. information systems and not ‘pencils’ and ‘bits of paper’ as some of the financial media seem to think the modern daily fixings made use of.
Managed Service Operations (MSO) offerings from companies such as Sapient, often include software/services that facilitate collaboration, and there are also lots of ready-made collaboration applications available on the market. For example, Microsoft Online Services is a server hosted enterprise software suite that can include Office Communications Online, Microsoft Office Live Meeting, and Sharepoint Online. Suffice to say, these products/services (which can be locally or cloud hosted) provide on-line real-time instant messaging and communications (Microsoft Communications Online), live conferencing with video and audio and messaging (Microsoft Live Meeting), or a collaboration platform (Microsoft Sharepoint Online). Citrix also offers a lot of products/solutions in this space such as GoToMeeting.
So some of the above types of software/services would fit the bill for providing precious metals traders’ workstations with web-based commentary, and messaging and communication apps that could be used in the daily fixings alongside phones. Outputs from some of the above could also be integrated into web site price data feeds through messaging middleware.
But there is another more important connection between the London Gold Market Fixing Company and Sapient Global Markets which points to another Sapient app being more than a web-based ‘commentary’.
The replacement Gold Fix – Request for Proposals
When the London Gold Market Fixing Limited (LGMFL) and the London Bullion Market Association (LBMA) launched a Request for Proposals (RfP) to administer the new LBMA Gold Price auction on 4th September 2014, Sapient Global Markets was one of the applicants to submit a proposal. This proposal was submitted in conjunction with Autilla Ltd. Previously, for the silver fixing replacement in mid 2014, Autilla initially submitted a standalone proposal, and then in the final week in early July, teamed up with the London Metal Exchange (LME) on a joint bid. Interestingly though, for the gold fixing proposal, Autilla joined up with Sapient in a joint bid on Day 1, so Autilla must have deemed a joint bid with Sapient as being advantageous.
Out of eight proposals received, the Autilla/Sapient proposal was among five proposals to get short-listed by the LBMA, and although they didn’t win the new contract, Autilla/Sapient did make a presentation of their proposal at the LBMA closed-door ‘market’ seminar on 24th October which saw presentations by the five short-listed parties. Note also that there was a third member of this Sapient/Autilla partnership called ‘Global Rate Set Service’, which was also referred to in the proposal as ‘Global Rate Set System’ and ‘GRSS’. This appears to be Global Rate Set Systems, a New Zealand based company.
In the Sapient/Autilla proposal summary, which takes the form of a 2-3 page letter to the LBMA dated 27th October, Page 2 describes a ‘current process‘ and also modifications for the new proposed process.
Reading Page 2 of the proposal, its clear that Sapient are intimately familiar with the ‘current process‘ and they only suggest ‘making changes’ to the current process where needed. Sapient state:
“Our solution is one that has a look and feel which is easily recognisable and known to those already familiar with the current process.”
Sapient’s reference to an ‘easily recognisable and known‘ ‘look and feel‘ of its proposed system suggests that ‘those already familiar with the current process‘ were familiar with a similar system.
‘Look and feel’ is a term that’s most commonly used in software development and nowadays rarely means anything outside the software industry. Just google ‘look and feel’ with or without the quotes to see what I mean. In software solutions, ‘look and feel’ will almost always mean “the appearance and function of a program’s user interface”, or “the design and formatting of a graphical user interface (GUI).”
Sapient is saying that those who were using the current process at that time in October 2014 (i.e. the traders of the remaining four fixing members ) would recognise and know an existing graphical user interface that they were familiar with when looking at Sapient’s proposed new graphical user interface.
Sapient states that it has ‘kept’ seven ‘main functions’ of the current process, and then goes on to list the functions that it has kept; these functions include participants logging in, participants entering indicative bar Buy, Sell and No Interest orders in bar amounts, a virtual Flag, matching within tolerance (50 bars), sharing out bars within tolerance, and fx rate pricing:
Sapient then lists the “new or modernised‘ ‘changes’ it is proposing ‘to achieve additional objectives of modernisation, transparency and regulatory cover‘. These new or modernised changes include house and client trades, intra-round price determination, real-time pricing commentary for full distribution, and a GUI messaging portal. Connecting in to the fixing via the messaging portal suggests that any previous messaging would have been done through standalone messaging/chat apps (like those used by interest rate and fx traders).
Interestingly, the Sapient proposal refers to automating some of the tasks that were done by the chairman of the Fixings which sounds like this entailed releasing the final fixing orders for matching, and then processing trade confirms etc.
In its proposal to the LBMA, Sapient therefore appears to be describing an existing electronic networked order capture and processing system that the gold fixing process was already using (up until Thursday 19th March 2015). It makes perfect sense then that Sapient had the contract to run the www.goldfixing.com website if it was also responsible for building, maintaining and supporting other parts of the recent gold fixing technical architecture.
Gold Fixing Document Retention Policy
That networked technology was used within the daily gold fixings prior to the transition to ICE’s WebICE is also supported by the requirements of the “Document Retention Policy” of the London Gold Market Fixing Company, dated 29 October 2014.
This Document Retention Policy, in section 2.3, states that the chairperson of the fixing process is responsible for keeping a record of the following data: member firms participating on each call, names of the individuals from each firm, opening price and sources of opening price, prices tried during the fixing, “bid and offer figures of each member firm at each price tried”, final fix price in dollars, euros and pounds, the time the price was fixed, euro and sterling exchange rates used to determine the fix price, and volume of transactions executed between participating member firms. That is a lot of data to have to record manually twice, each and every day, so again, this suggests that the chairman was not recording this information manually.
Note: As part of the application process to run the new gold fixing, all parties who submitted bids to the LBMA, including Autilla/Sapient, had to sign a non-disclosure agreement (NDA) with the LBMA, so it would be difficult to verify the technical details behind the Sapient/Autilla proposal, as they are most likely covered under the NDA and could not be revealed without the permission of the LBMA.
“The London gold fix, the benchmark used by miners, jewelers and central banks to value the metal, may have been manipulated for a decade by the banks setting it, researchers say.
Abrantes-Metz and Metz screened intraday trading in the spot gold market from 2001 to 2013 for sudden, unexplained moves that may indicate illegal behavior. From 2004, they observed frequent spikes in spot gold prices during the afternoon call. The moves weren’t replicated during the morning call and hadn’t happened before 2004, they found.
Large price moves during the afternoon call were also overwhelmingly in the same direction: down. On days when the authors identified large price moves during the fix, they were downwards at least two-thirds of the time in six different years between 2004and 2013. In 2010, large moves during the fix were negative 92 percent of the time, the authors found.
There’s no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards, Abrantes-Metz said in a telephone interview this week.“
Could the introduction of a trading desk web-based application into the fixings in 2004, which would have provided gold trading desks with extra eyes into the auction proceedings, have presented a means for facilitating a type of gold price manipulation which previously was not possible during the purely phone based meetings held at Rothschilds in St Swithins Lane?
The FCA, Barclays and Daniel Plunkett
On 23rd May 2014, the UK’s Financial Conduct Authority (FCA) announced that they were fining Daniel Plunkett, a former Barclays trader and director of its Precious Metals Desk, for manipulation of the gold price during the afternoon gold fix on 28 June 2012, and also fining Barclays for breaches of two Principles of the Authority’s Principles for Businesses between 7 June 2004 and 21 March 2013.
The FCA’s ‘Final Notice’ explaining the fining and prohibition of Daniel Plunkett, provided details of Plunkett’s trading into the gold fix on the afternoon of 28 June 2012. The ease and speed with which Plunkett, on two occasions, rapidly placed and then cancelled proprietary trades into the gold fixing during the fixing that afternoon, suggests that he was using an automated order entry system to place and cancels those trades, and also to unwind the second trade after the fixing completed.
Indeed, at that time in 2012, Barclays’ systems did not differentiate between a Gold Fixing trade executed by a Barclays trader and a gold spot market trade executed by that same trader. And since proprietary gold spot trades would be entered electronically, so too would Gold Fixing trades.
According to section 4.14 of the Final Notice document on Plunkett:
“At 3:06 p.m., shortly after the Chairman had increased the proposed price to USD1,558.50, Mr Plunkett, who had not placed any previous orders during the Gold Fixing, placed a large sell order of between 40,000 oz. (100 bars) and 60,000 oz. (150 bars), with Barclays’ representative on the Gold Fixing. This order was incorporated by Barclays’ representative into Barclays’ net position, which led to Barclays declaring itself to be a seller of 52,000 oz. (130 bars).”
“At 3:07 p.m.Mr Plunkett withdrew his entire sell order, which resulted in Barclays’ representative withdrawing Barclays’ position (selling 130 bars). This reduced the imbalance in the 28 June 2012 Gold Fixing from 190 bars to 60 bars (155 bars buying/215 bars selling)” Section 4.17
“At 3:09 p.m., Mr Plunkett again placed a large sell order, 60,000 oz. (150 bars), with Barclays’ representative, who, also taking into account changes in customers’ orders, declared Barclays’ net position in the 28 June 2012 Gold Fixing to be selling 40,000 oz. (100 bars).” Section 4.21
“Shortly after the conclusion of the 28 June 2012 Gold Fixing, Mr Plunkett repurchased 60,000 oz. (150 bars) of gold by executing an internal trade with Barclays’ Gold Spot Book. The purpose of executing this order was to unwind the 60,000 oz. (150 bars) position he had taken during the 28 June 2012 Gold Fixing.” Section 4.24
If an internal trade that Plunkett executed with the gold Spot Book could unwind an outstanding trade that he placed into the Gold Fixing, then the two trades, and the manner in which they were input would need to be similar, which, we will see below that they were.
Barclays – Gold Fixing trades were identical to Gold Spot trades
The FCA also issued a ‘Final Notice’ detailing the background to the financial penalty imposed on Barclays, for Barclays’ failure to , amongst other things, create systems on its precious metals desk “that allowed for adequate monitoring of traders’ activity in connection with the Gold Fixing”. The Barclays “Precious Metals Desk” was Barclays trading desk responsible for gold, silver, platinum, palladium and rhodium.
“The systems and reports did not formally record orders placed by traders in the Gold Fixing until 5 February 2013 and did not identify Gold Fixing transactions separately from general gold spot trades until 21 March 2013. As a result, Barclays was unable to adequately monitor what trades its traders were executing in the Gold Fixing or whether those traders may have been placing orders to affect inappropriately the price of gold in the Gold Fixing.” Section 2.3
“Barclays relied upon systems and reports that did not differentiate between Gold Fixing and gold spot market trades executed by its traders. (Barclays addressed this on 21 March 2013, when it updated its systems to specifically record Gold Fixing trades as such.) This meant that during the Relevant Period, Barclays could not adequately monitor its traders’ orders and trades executed in the Gold Fixing.” Section 4.36
So, section 2.3 and section 4.36 of this FCA Final Notice tells us that in 2012, gold fix trades executed by Barclays traders were seen as identical to gold spot trades executed by those same traders, and that both sets of trades used the same systems. Plunkett was not being monitored and was independently executing trades that were identical to gold spot trades, and these trades were flowing into Barclay’s net gold fixing position. This would have required an electronic trading platform. If Barclay’s house and customer gold fixing trades were on a technological platform in 2012, then the whole notion of the gold fixing orders with the other fixing participants also not being integrated into an electronic platform prior to 2015 is implausible.
The rapidity with which Plunkett engaged actively in the afternoon gold fixing on 28 June 2012 was also reiterated in the FCA’s Final Notice for Barclays:
“On 28 June 2012, a Barclays trader, Mr Daniel Plunkett, participated actively in the Gold Fixing” Section 2.6
“In particular, he placed a large sell order of between 40,000 oz. (100 bars) and 60,000 oz. (150 bars) with Barclays’ representative on the Gold Fixing, then withdrew it completely one minute later and subsequently placed another large sell order of between 40,000 oz. (100 bars) and 60,000 oz. (150 bars) two minutes after that.” Section 2.9
The move by Barclays on 21 March 2013 to finally differentiate between prop trader executed gold spot trades and prop trader executed gold fixing trades, also suggests that whatever the change was, it took an existing transaction type of gold spot trade and reflagged it as a gold fixing trade. These changes would have all been conducted on a pre-existing electronic platform (since the gold spot book was on an electronic platform), again undermining the notion of a purely pens and paper supported approach to the gold fixing using a system largely unchanged for nearly a century.
Interestingly, neither of the FCA Final Notices issued in connection with Barclays, Plunkett and the gold price, nor any other FCA comments on its investigation into precious metals manipulation in London, make any reference whatsoever to whether the FCA examined precious metals traders’ messaging app logs or other trader online communication dialogues. This is odd given that messaging apps were seen to have been widely used by all other traders in the recent LIBOR and FX price manipulation scandals. See here for some LIBOR examples and here for some FX examples of trader transcript manipulation chats.
Given that there appears to have been a web-based commentary in the gold fixings since 2004, as well as very sophisticated gold fixing order and price data capture in Barclays systems and in the most recent iteration of the Sapient supported goldfixing website, perhaps the financial media can take a look into this before claiming with certainly that the gold fixings only went on to an electronic platform during the 20th March 2015 transition to the ICE/IBA/LBMA Gold Price architecture.
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