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LBMA Gold Vault Data – How low is the London Gold Float?

The London Bullion Market Association (LBMA) has just released a first update on the quantity of physical gold and silver holdings stored in the ‘LBMA’ London vaulting network. The LBMA press release explaining the move, dated 31 July, can be read here.

This vaulting network, administered by the LBMA, comprises a set of precious metals vaults situated in London that are operated by the Bank of England and 7 commercial vault operators. For simplicity, this set of vaults can be called the LBMA London vaults. The 7 commercial vault operators are HSBC, Brinks, ICBC Standard Bank, Malca Amit, JP Morgan, Loomis and G4S. ICBC Standard outsources its vault management to Brinks. It’s possible that to some extent HSBC also outsources some of its vault management to Brinks.

Strangely, the LBMA’s initial reporting strangely only runs up to 31 March 2017, which is 4-months prior to the first publication date of 31 July. This is despite the fact that new LBMA vault holdings data is supposed to be published on a 3-month lagged basis, which would imply a latest report coverage date of 30 April.

At the end of April 2017, the Bank of England separately began publication of gold vault holdings for the gold bars that the Bank stores in custody within its own vaults. The Bank of England reporting is also on a 3-month lagged basis (and the Bank actually adheres to this reporting lag). See BullionStar article “Bank of England releases new data on its gold vault holdings”, dated 28 April 2017, for details of the Bank of England vault reporting initiative.

Currently, the Bank of England is therefore 1 month ahead of the LBMA vault data, i.e. on 31 July 2017, the Bank of England’s gold page was updated with Bank of England gold custody vault holdings as of 30 April 2017.

Ignoring the LBMA 3-month lagged vs 4-month lagged anomaly, the LBMA’s first vault reporting update, for vault data as of 31 March 2017, states that the 8 sets of vaults in question (which includes the Bank of England gold vaults) held a combined 7449 tonnes of gold and a combined 32078 tonnes of silver.

Also included in the first batch of LBMA data are comparable London vault holdings figures for gold and silver for each month-end date from July 2016 to February 2016 inclusive. Therefore, as of the 31 July 2017, there is now an LBMA dataset of 9 months of data, which will be augmented by one month each month going forward. Whether the LBMA will play catch-up and publish April 2017 month-end and May 2017 month-end figures simultaneously at the next reporting date of 31 August 2017 remains to be seen.

One of the Bank of England gold vaults
One of the Bank of England gold vaults

The New Vault Data – Gold and Silver

For 31 March 2017, the LBMA is reporting 7449 tonnes of gold stored across the 8 sets of vault locations. For the same date, the Bank of England reported 5081 tonnes of gold held in the Bank of England vaults. Therefore, as of 31 March 2017, there were 2368 tonnes of gold ‘not in the Bank of England vaults’ (or at least 2368 tonnes of gold not counted by the Bank of England data).

Of the gold not in the Bank of England vaults, about 1510 tonnes of this gold in London was held by gold-backed Exchange Traded Funds (ETFs), mainly with the custodians HSBC and JP Morgan. These ETFs include the SPDR Gold Trust and various ETFs from ETF Securities, Source, iShares, and Deutsche Bank etc. This 1510 tonnes figure is taken from an estimate calculated at the end of April 2017 using data from the GoldChartsRUs website. See BullionStar article “Summer of 17: LBMA Confirms Upcoming Publication of London Gold Vault Holdings” dated 9 May 2017 for details of this ETF calculation.

Subtracting this 1510 tonnes of ETF gold from the 2368 tonnes of gold stored outside the Bank of England vaults means that as of 31 March 2017, there were only about 858 tonnes of gold stored in the LBMA vaults outside of the Bank of England vaults that was not held by gold-backed ETF holdings. See Table 1 below.

The lowest gold holdings number reported by the LBMA within its 9 months of vault data is actually the first month, i.e. July 2016. At month-end July 2016, the LBMA report shows total vaulted gold of 7283 tonnes. There was therefore a net addition of 166 tonnes of gold to the LBMA vaults between August 2016 and the end of March 2017, with net additions over the August to October 2016 period, followed by net declines over the November 2016 to February 2017 period.

LBMA
Table 1: LBMA London Vaults and Bank of England Vaults – Gold holdings, July 2016 – March 2017

Turning to silver, as of 31 March 2017, the LBMA is reporting total vaulted silver of 32,078 tonnes held in London vaults. The vaulted silver data also shows a notable increase over the period from the end of July 2016 to the end of March 2017, with a net 2485 tonnes of silver added to the vaults.

Since the Bank of England vaults only store gold in custody on behalf of customers and do not store silver, there are no silver holdings at the Bank of England and therefore there is no specific Bank of England silver reporting. The LBMA silver data therefore refers purely to silver vaulted with operators such as Brinks, JP Morgan, Malca Amit, HSBC, and Loomis.

There are currently at least 12,000 tonnes of silver stored in London on behalf of silver-backed ETFs such as the iShares Silver Trust (SLV), various ETF Securities products, a SOURCE ETF and some Deutsche Bank ETFs. Subtracting these ETF holdings from the full 32,078 tonne figure being reported by the LBMA would suggest that there are an additional ~ 20,000 tonnes of non-ETF silver held in the London vaults.

LBMA
Table 2: LBMA London Vaults – Silver holdings, July 2016 – March 2017
How small is the London gold float?
How small is the London gold float?

Previous Vault Estimates for Gold and Silver

Prior to the new LBMA and Bank of England vault holdings data reports, the only way to work out how much gold and silver were in the London vaulting network was through estimation. Between 2015 and 2017, a number of these estimates were calculated for gold and published on the BullionStar website and the GoldChartsRUs website.

See BullionStar page “How many Good Delivery gold bars are in all the London Vaults?….including the Bank of England vaults” and GoldChartsRUs page “LBMA/BOE VAULTED GOLD, 2016 Update – The London Float”, and BullionStar page “Tracking the gold held in London: An update on ETF and BoE holdings”.

The “Tracking the gold held in London” article, published on 5 October 2016, took a LBMA statement of 6500 tonnes of gold being in London, the earliest reference to which was from 8 February 2016 Internet Archive page cache, and also took a Bank of England statement that the Bank held 4725 tonnes as of the end of February 2016 period, and then it factored in that the UK net imported more than 800 tonnes of non-monetary gold up to August 2016, and also that ETFs had added about 399 tonnes over the same period. It also calculated, using GoldChartsRUS ETF data, that the London-based gold-backed ETFs held about 1679 tonnes of gold as of the end of September 2016.

Therefore, as of the end of September 2016, there could have been at least 7300 tonnes of gold held across the LBMA and Bank of England vaults, i.e. 6500 tonnes + 800 tonnes = 7300 tonnes. As it turns out, this estimate was quite close to the actual quantity of gold held in the LBMA and Bank of England vaults at the end of September 2016, which the LBMA’s new reporting now confirms to have been 7590 tonnes. The estimate is a lower number because it was unclear as to which initial date the LBMA’s 6500 tonnes reference referred to (in early 2016 or before).

Previous Vault Estimates Silver

At the beginning of July 2017, an article on the BullionStar website titled “How many Silver Bars are in the LBMA Vaults in London?” estimated that there were about 12,000 tonnes of Good Delivery silver bars held across 4 LBMA vault operators in London on behalf of 11 silver-backed Exchange Traded Funds. These ETFs and the distribution of their silver bars across the 4 vault operators of Brinks, Malca Amit, JP Morgan and HSBC can be seen in the following table.

Silver
Table 3: ETF Silver held across LBMA commercial vaults in London, early July 2017 

The above article about the number of silver bars in the London vaults also drew on some data from precious metals consultancy Thomson Reuters GFMS, which each year publishes a table of identifiable above ground global silver supply in its World Silver Survey. One category of silver within the GFMS identifiable above ground silver inventories is called ‘Custodian Vaults’. This is distinct from silver holdings in ETFs and silver holdings in exchange inventories such as in COMEX approved vaults in New York. A simple way to view ‘Custodian Vaults’ silver holdings is as an opaque ‘unreported holdings’ category as opposed to the more the transparent ETF holdings and COMEX holdings categories.

For 2016, according to GFMS, this ‘Custodian Vaults’ silver amounted to 1571.2 million ounces (48,871 tonnes), of which 488.7 million ounces (15,200 tonnes), or 31% was represented by what GFMS calls the ‘Europe’ region. Unfortunately, GFMS do not break out the ‘Custodian Vaults’ numbers by individual country because they say that they receive the data on a confidential basis and cannot divulge the granularity. The early July article on BullionStar had speculated that:

“With 488.7 million ozs (15,201 tonnes) of silver held in Europe in ‘Custodian vaults’ that is not reported anywhere, at least some of this silver must be held in London, which is one of the world’s largest financial centers and the world’s highest trading volume silver market.”

“Apart from London, there would presumably also be significant physical silver holdings vaulted in Switzerland and to a lessor extent in countries such as Germany, the Netherlands and maybe Austria etc. So whats’s a suitable percentage for London? Given London’s extensive vaulting network and prominence as a hedge fund and institutional investment centre, a 40-50% share of the European ‘custodian vault’ silver holdings would not be unrealistic, with the other big percentage probably vaulted in Switzerland.

This would therefore put previously ‘Unreported’ silver holdings in the London vaults at between 6080 tonnes and 7600 tonnes (or an additional 182,000 to 230,000 Good Delivery Silver bars).

Adding this range of 6080 – 7600 tonnes to the 12,040 tonne figure that the 11 ETFs above hold, gives a total figure of 18,120 – 19,640 tonnes of silver stored in the LBMA vaults in London (545,000 – 585,000 Good Delivery silver bars).

But here’s the catch. With the LBMA now saying that as of the end of March 2017 there were 1.031 billion ounces of silver, or 32078 tonnes, stored in the LBMA vaulting network in London (and 31238 tonnes of silver in London as of end of December 2016), of which at least 12,000 tonnes is in silver-backed ETFs, then that still leaves about 20,000 tonnes of silver in the London vaults, which is higher than the silver total attributed to the entire ‘custodian vault’ category’ in Europe (as per the GFMS 2016 report).

Even the lowest quantity in the 9 months that the LBMA reports on, which is month-end July 2016, states that the LBMA vaults held 951,433,000 ounces (29,593 tonnes), which after excluding silver ETFs in London, is still higher than the total ‘Custodian Vault’ category that GFMS attributes to the European region in 2016.

These new LBMA vault figures are basically implying that all of the GFMS custodian vault figure for Europe (and some more) is all held in London and not anywhere else in Europe. But that could not be the case as there is also a lot of silver vaulted in Switzerland and other European countries such as Germany, to think of but a few.

This begs the question, does the GFMS Custodian vault number for Europe need to be updated to reflect the gap between the non-ETF holdings that LBMA claims are in the London vaults and what GFMS is reporting in a European ‘Custodian vaults’ category? If the LBMA reporting actually broke down the silver vaulting quantity number into Good Delivery silver bars and other categories, it might help solve this puzzle as it would give an indication of how much of this 32,000 tonnes of silver is in the form of bars that are accepted for settlement in the London Silver Market i.e. Good Delivery silver bars.

Could some of this 32,000 tonnes of silver be in the form of silver jewellery, and private holdings of silver antiques and even silver artifacts? On the surface the LBMA reporting appears to say not since it states that:

“jewellery and other private holdings held by retailers, individuals and smaller vaults not included in the London Clearing system are not included in the numbers”

But because this statement reads rather ambiguously, by implication another interpretation of the LBMA statement could be that:

“jewellery and other private holdings held by retailers and individuals in vaults that are part of the London Clearing system are included in the numbers”

The London Clearing system here refers to the vaults of the 7 commercial vault operators.

Until GFMS comes back with a possible clarification of its ‘Custodian Vault’ figure for Europe, then this contradiction between the LBMA data for silver and GFMS data for silver will persist.

The HSBC vault containing the GLD gold
The HSBC vault in London containing the GLD gold

Large Bars but also Small Bars and Gold Coins

According to the LBMA’s press release, while the LBMA vault holding data …represent the volume of Loco London gold and silver held in the London vaults offering custodian services“, surprisingly the new LBMA data includes “all physical forms of metal inclusive of large wholesale bars, coin, kilo bars and small bars.”

The inclusion of gold coins, smaller gold bars and gold kilobars in the LBMA vault data is bizarre because only large wholesale bars are accepted as Good Delivery in the London gold and silver markets, not gold coin, not smaller bars, and not gold kilobars. Even the LBMA website states that “the term Loco London refers to gold and silver bullion that is physically held in London. Only LBMA Good Delivery bars are acceptable for trading in the London market.

Furthermore, the entire physical London Gold Market and physical London Silver Market revolve around the LBMA Good Delivery lists. Spot, forward and options trades on the London OTC gold and silver market are only referenced to a unit of delivery of a Good Delivery bar, both for gold and for silver.

For example, in the LBMA’s “A Guide to the London Precious Metals Markets” it states that:

Unit for Delivery of Loco London Gold

This is the London Good Delivery gold bar. It must have a minimum fineness of 995.0 and a gold content of between 350 and 430 fine ounces…. . Bars are generally close to 400 ounces or 12.5 kilograms

For silver, the same guide states that:

“Unit for Delivery of Loco London Silver

This is the London Good Delivery silver bar. It must have a minimum fineness of 999 and a weight range between 750 and 1,100 ounces, although it is recommended that ideally bars should be produced within the range of 900 to 1,050 ounces. Bars generally weigh around 1,000 ounces.

Additionally, all the new London-based gold futures contracts launched by the LME, ICE and CME also reference, if only virtually, the unit for Delivery of loco London gold, i.e. the London Good Delivery gold bar. They do not reference smaller gold bars or gold coins.

In contrast to the LBMA , the COMEX exchange where the famous COMEX 100 ounce gold futures contract is traded only reports vault inventories of gold and silver where the bars satisfy that contract for delivery, i.e. the contract for delivery is one hundred (100) troy ounces of minimum fineness 995 gold of an approved brand in the form of either “one 100 troy ounce bar, or three 1 kilo bars”. COMEX do not report 400 oz gold bars or gold coins specifically because the contract has nothing to do with these products. Then why is the LBMA reporting on forms of gold that have nothing to do with the settlement norms of its OTC products in London?

Additionally, the LBMA website also states that “only bars produced by refiners on the [Good Delivery] Lists can be traded in the London market.“ All of this begs the question, why does the LBMA bother including smaller bars, kilogram bars and gold coins? These bars cannot be used in settlement or delivery for any standard London Gold Market transactions.

Perhaps these smaller gold bars and gold coins have been included in the statistics so as to boost the total reported figures or to make reverse engineering of the numbers more difficult? While the combined volumes of smaller bars and kilobars probably don’t add up to much in terms of tonnage, the combined gold coin holdings of central banks stored at the Bank of England could be material.

For example, the United Kingdom, through HM Treasury’s Exchange Equalisation Account (EEA), claims to hold 310.3 tonnes of gold in its reserves, all of which is held in custody at the Bank of England. The latest EEA accounts for 2016/2017, published 18 July 2017 state that “The gold bars and gold coin in the reserves were stored physically at the Bank’s premises.” See Page 43, Exchange Equalisation Accounts for details. Many more central banks, for historical reasons, also hold gold coins in their reserves. See Bullionstar article “Central Banks and Governments and their gold coin holdings” for some examples.

As another example, the Banque de France in Paris holds 2435 tonnes of gold of which 100 tonnes is in the form of gold coins, and 2,335 tonnes of gold bars. Even though these gold coins are held in Paris, this shows that central bank gold coin holdings could materially affect LBMA gold reporting that includes ‘gold coins‘ within the rolled up number. But such gold coins cannot be traded within the LBMA / LPMCL gold trading / gold clearing system and if present would overstate the number of Good delivery gold bars within the system.

The Bank of England gold page on its website also only refers to Good Delivery ‘gold bars’ and says nothing about gold coins, which underlines the special status to which the Bank of England assigns Good Delivery gold bars in the London Gold Market.  Specifically, the BoE gold page states that:

“..we provide gold storage on an allocated basis, meaning that the customer retains the title to specific gold bars in our vaults”

 “Values are given in thousands of fine troy ounces. Fine troy ounces denote only the pure gold content of a bar.

“We only accept bars which comply with London Bullion Market Association (LBMA) London Good Delivery (LGD) standards. LGD bars must meet a certain minimum fineness and weight. A typical gold bar weighs around 400 oz“

The Bank of England has now confirmed to me, however, that the gold holdings number that it reports on its website “is the total of all gold held at the Bank” and that this “includes coins that belong to the Exchange Equalisation Account (EEA) which are held by the Bank on behalf of Her Majesty’s Treasury (HMT)

This means that the total gold number being reported by both the Bank of England and the LBMA needs to be adjusted downward by some percentage so as to reflect the amount of real Good Delivery gold bars in the London vaults. What this downward adjustment should be is unclear, as neither the Bank of England nor the LBMA break out their figures by category of gold bars versus gold coins.

LBMA numbers – Obscured Rolled-up numbers

Another shortcoming in the LBMA’s vault reporting is that it does not break down the gold and silver holdings per individual vault. The LBMA will be only releasing 2 highly rolled-up numbers per month, one for gold and one for silver, for example, 7449 tones for gold and 32078 tonnes for silver in the latest month.

Contrast this to New York based COMEX and ICE gold futures daily reporting, which both do break down the gold holdings per New York vault. Realistically, the LBMA was never going to report gold or silver holdings per vault, as this would be a bridge too far towards real transparency, and would show how much or how little gold and silver is stored by each London vault operator / at each London vault location.

This does not, however, stop the LBMA from claiming transparency and in its 31 July press release it states that:

“According to the Fair and Effective Markets Review (see here for further details) 
‘…in markets where OTC trading remains the preferred model, authorities and market participants should continue to explore the scope for improving transparency, in ways that also enhance effectiveness.’

Real transparency, as opposed to lip-service transparency, would be supported by providing an individual breakdown of the number of Good Delivery gold and silver bars stored in each of the 8 sets of vaults at each month end. If they want to include gold coins, smaller gold bars, and gold kilo bars as extra categories, then this could also be itemised on a proper report. It would also only take any decent software developer about 1 day to write and create such a report.

There is also the issue of independently auditing these LBMA numbers. The issue is essentially that there is no independent auditing of these LBMA numbers nor will there be. So there is no second opinion as to whether the data is accurate or not.

The Bank of England gold vault reporting is also short of transparency as it does not provide a breakdown of how much of the reported gold is held by central banks, how much gold is held by bullion banks, how much of the central bank gold is out on loan with the bullion banks, and how much gold, if any, is held on behalf of ETFs at the Bank of  England as sub-custodian. Real transparency in this area would provide all of this information including how much gold the LPMCL bullion clearing banks HSBC, JP Morgan, UBS, Scotia Mocatta and ICBC Standard hold at the Bank of England vaults.

On the issue of ETF gold held at the Bank of England, it has been proven that at times the Bank of England has acted as a gold custodian for an ETF, for example, during the first quarter 2016, the SPDR Gold Trust held up to 29 tonnes of gold at the Bank of England, with the Bank of England acting in the capacity of sub-custodian to the SPDR Gold Trust. See BullionStar article  “SPDR Gold Trust gold bars at the Bank of England vaults” for details.

The London Float

The most important question with this new LBMA vault reporting is how much of the 7449 tonnes of gold stored in London as of the end of March 2017 is owned or controlled by bullion banks.

Or more specifically, what is the total level of LBMA bullion bank unallocated gold liabilities in the London market compared to the amount of real physical gold bars that they own or control. 

This ‘gold owned or controlled by the bullion banks’ metric can be referred to as the ‘London Float’. LBMA bullion banks can maintain their own holdings of gold bars which they buy in the market or import directly, and they can also borrow other people’s gold thereby controlling this gold also. Some of this gold can be in the LBMA commercial vaults. Some can also be in the Bank of England vaults.

In its press release, the LBMA states that:

“The physical holdings of precious metals held in the London vaults underpin the gross daily trading and net clearing in London.”

This is not exactly true. Only gold which is owned or controlled by the bullion banks can underpin gold trading in London. Allocated gold sitting in a vault that is owned by central banks, ETFs or investors and which does not have any other claim attached to it, does not underpin anything. It just sits there in a vault.

As regards gold bars stored in the LBMA vaults in London, these bars can either be owned by central banks at the Bank of England, owned by central banks at commercial vaults in London, owned by ETFs at the commercial vaults in London, owned or controlled by bullion banks, and owned by investors (either institutional investors, hedge funds, private individuals etc). On occasion, some ETF gold has at various times been at the Bank of England.

If central bank gold is held in allocated form and not lent out, then it is ‘off the market’ and can’t be ‘used’ by any other party such as a LBMA bullion bank. If central bank gold is lent out or swapped out to bullion banks, then it can be used or even sold by those  bullion banks. The LBMA uses the euphemism ‘liquidity’ to refer to this gold lending. For example, from the LBMA’s recent press release on the new vault reporting it says:

“In addition, the Bank of England also offers gold custodial services to central banks and certain commercial firms, that facilitate central bank access to the liquidity of the London gold market.”

ETF gold when it is held within an ETF cannot legally be used by other entities since it is owned by the ETF and allocated to the ETF. Institutionally owned gold or private owned gold when it is allocated is owned by the holder. It could in theory be lent to bullion banks also.

Some of the LBMA bullion banks have gold accounts at the Bank of England. How many of these banks maintain gold holdings within the Bank of England vaults nobody will say, not the Bank of England nor the LBMA nor the bullion banks, but it at least extends to the 5 members of London Precious Metals Clearing Limited (LPMCL) which are HSBC, JP Morgan, Scotia Mocatta, ICBC Standard and UBS. Gold accounts for bullion banks undoubtedly also extend to additional bullion banks beyond the LPMCL members because many bullion banks have been involved in gold lending at the Bank of England for a long time, for example Standard Chartered, Barclays, Natixis, BNP Paribas, Deutsche Bank, and Goldman Sachs, and these banks would at some point have to take delivery of borrowed gold at the Bank of England.

Note, the gold brokers of the London Gold Market have for a long time, as least since the 1970s, been able to store some of their gold bars at the Bank of England vaults. These brokers were historically Samuel Montagu, Mocatta, the old Sharps Pixley, NM Rothschild and Johnson Matthey.

Since LBMA bullion banks can maintain gold accounts at the LBMA commercial vaults in London, and because some of these banks have gold accounts at the Bank of England also, then this London “gold float” can comprise gold bars at the commercial vaults and gold bars at the Bank of England vaults. It is however, quite difficult to say exactly what size this London bullion bank gold float is at any given time.

Whatever the actual number, its not very big in size because if you subtract central bank gold and ETF gold from the overall LBMA gold figure (of 7449 tonnes as of the end of March 2017) then whatever is left is not a very big quantity of gold bars, and at least some of this residual gold stored in the LBMA commercial vaults is owned by institutions, hedge funds, private individuals and platforms such as BullionVault.

In September 2015, a study of central bank gold held at the Bank of England calculated that about 3779 tonnes of Bank of England custody gold can be accounted for by central bank and monetary authority gold holdings. See “Central bank gold at the Bank of England” for details and GoldChartsRUs page “LBMA/BOE VAULTED GOLD, 2016 Update – The London Float”. Compared to the 4725 tonnes of gold held at the Bank of England at the end of February 2016, this would then mean that there were about 946 tonnes of gold at the Bank of England that was “unaccounted for by central banks”. This was about 20% of the total amount of gold held at the Bank of England at that time.

However, some of this 946 tonnes was probably central bank gold where the central bank owner had not publicly divulged that it held gold at the Bank of England. Many central banks around the world that were contacted as part of the research into the “central bank gold at the Bank of England calculation” either didn’t reply or replied that they could not confirm where their gold was stored. See BullionStar article “Central Banks’ secrecy and silence on gold storage arrangements” for more details.
After factoring in these unknown central bank gold holders at the Bank of England, the remaining residual would be bullion bank gold. It could therefore be assumed that a percentage of gold stored at Bank of England, somewhere less than 20% and probably also less than 10%, is owned by bullion banks. Since central bank gold holdings, on paper at least are relatively static, the monthly changes in gold holdings at the Bank of England therefore probably mainly reflect bullion bank gold movements rather than central bank gold movements.

If we look back now at the LBMA vault data for gold as of 31 March 2017, how much of this gold could be bullion banks (London float) gold.

LBMA total gold vaulted: 7449 tonnes

Bank of England gold vaulted: 5081 tonnes

Gold in commercial LBMA vaults: 2368 tonnes

Gold in ETFs: 1510 tonnes

Gold in commercial vaults not in ETFs: 858 tonnes

Gold in commercial vaults not in ETFs that is allocated to institutions & hedge funds = x

i.e. 7449 – 5081 = 2368 – 1510 = 858

Assume 10% of the gold at the Bank of England is bullion bank gold. Also assume bullion banks gold hold some gold in LBMA commercial vaults.

Therefore total bullion bank gold could be (0.1 * 5081) + (858 – x) = 508 + 858 – x = 1366 – x.

Since x has to be > 0, then the bullion bank London float is definitely less than 1300 tonnes and probably less than 1000 tonnes. The bullion banks might argue that they can borrow more gold from central banks, take gold out of the ETFs, and even import gold from refineries. All of these options are possible, but still, the London bullion bank float is not that large. And it is this number in tonnes of gold which should be compared to the enormous volumes of ‘paper gold’ trading that occur in the London Gold Market each and every trading day.

For example in June 2017, the LBMA clearing statistics state that 21 million ounces of gold was cleared each trading day in the London Gold Market. That’s 653 tonnes of gold cleared each day in London. With a 10 to 1 ratio of gold trading to gold clearing, that’s the equivalent of 6530 tonnes of gold traded each day in the London gold market, or 143,660 tonnes over the 22 trading days of June. Annualised, this is 1.632 million tonnes of gold traded per year (using 250 trading days per year).
And sitting at the bottom of this trading pyramid is probably less than 1000 tonnes of bullion bank gold underpinning the gigantic trading volumes and huge unallocated gold liabilities of the bullion banks. So you can see that the London gold trading system is a fractional-reserve system with tiny physical gold underpinnings.

In May 2011, during a presentation at the LBMA Bullion Market Forum in Shanghai China, on the topic of London gold vaults, former LBMA CEO Stewart Murray included a slide which stated that:

Investment – more than ETFs

ETFs

  • Gold Holdings have increased by ~1,800 tonnes in past 5 years, almost all held in London vaults
  • Many thousands of tonnes of ETF silver are held in London

Other holdings

  • Central banks hold large amounts of allocated gold at the Bank of England
  • Various investors hold very substantial amounts unallocated gold and silver in the London vaults

The last bullet point of the above slide is particularly interesting as it references “very substantial amounts’ of unallocated gold and silver. Discounting the fact for a moment that unallocated gold and silver is not necessarily held in vaults or held anywhere else, given that it’s just a claim against a bullion bank, the statement really means that investors have ‘very substantial amounts‘ of claims against the bullion banks offering the unallocated gold and silver accounts i.e. very substantial liabilities in the form of unallocated gold and silver obligations to the gold and silver unallocated account holders.

If a small percentage of these claim holders / investors decided to convert their claims into allocated gold and silver, especially allocated gold, then where are the bullion banks going to get the physical gold to give to these converting claim holders? Neither do the claim holders of unallocated positions have any way of knowing how accurate the LBMA vault reporting is, because there is no independent auditing of the positions or of the report.

LBMA Vault data collaboration
Joni Teves, UBS, and Ruth Crowell, LBMA CEO

UBS and LBMA

The last line of the LBMA press release about the new vault reporting states the following:

“A detailed explanatory commentary follows, prepared by Joni Teves, Precious Metals Strategist, UBS”

This line includes an embedded link to the Teves report within the press release. This opens a 7 page report written by Teves about the new vault reporting. By definition, given that this report is linked to in the press release, it means that Joni Teves of UBS had the LBMA vault reporting data before it was publicly released, otherwise how could UBS have written its summary.

In her report, Teves states that a UBS database estimates that there are “1,485 tonnes of gold worth about $60bn and about 13,759 tonnes of silver worth about $7.85bn are likely to be held in London to back ETF shares“.

These UBS numbers are fairly similar to the ETF estimates for gold (1510 tonnes) and silver (12040 tonnes) that we came up with here at BullionStar, and so to some extent corroborate our previous ETF estimates. Teves also implies that some of the gold in the Bank of England figure is not central bank gold but is commercial bank gold as she says:

 “let’s say for illustration’s sake that about 80% to 90% of BoE gold holdings are accounted for by the official sector.

The statement on face value implies that 10% – 20% of Bank of England gold is not central bank gold. But why the grey area phrase of “let’s say for illustration’s sake”. Shouldn’t the legendary Swiss Bank UBS be more scientific than this?

Teves also says assume “negligible amount (in commercial vaults) comprises official sector holdings“, and she concludes that “this suggests that over the past year, an average of about 2,945 to 3,450 tonnes ($119-$139 bn) of investment-related gold was held in London.

What she is doing here is taking the average of 9 months of gold holdings held in the LBMA commercial vaults (which is 2439 tonnes) and then adding 10% and 20% respectively of the 9 month average of gold held at the Bank of England (which is 506 and 1011 tonnes) to get the resulting range of between 2945 and 3451 tonnes.

Then she takes the ETF tonnes estimate (1485) away from her range to get a range of between 1460 and 1965 tonnes, as she states:

 … “Taking these ETF-related holdings into account would then leave roughly around 1,460 to 1,965 tonnes or about $59bn to $79bn worth of gold in unallocated and allocated accounts as available pool of liquidity for OTC trading activities

But what this assumption fails to take into account is that some of this 1,460 to 1,965 tonnes that is in allocated accounts is not available as a pool of liquidity, because it is held in allocated form by investors precisely so that the bullion banks cannot get their hands on it and trade with it. In other words, it is ring fenced. Either way, a model will always output what has been input into it. Change the 10% and 20% range assumptions about the amount of commercial bank gold in the Bank of England vaults and this materially alters the numbers that can be attributed to be an ‘available pool of liquidity for OTC trading activities’.

Additionally, the portion of this residual gold that is in ‘unallocated accounts’ is not owned by any investors, it is owned by the banks. The ‘unallocated accounts’ holders merely have claims on the bullion banks for metal that is backed by a fractional-reserve trading system.

In her commentary about the silver held in the London vaults, Teves does not comment at all about the huge gap between her ETF silver in London (which UBS states as 13,759 tonnes), and the full 32000 tonnes reported by the LBMA,and does not mention how this huge gap is larger than all the ‘Custodian Vault’ silver which Thomson Reuters GFMS attributes to the entire ‘Europe’ region.

Conclusion

The amount of gold in the London LBMA gold vaults (incl. Bank of England) that is not central bank gold, that is not ETF gold, and that is not institutional allocated gold is quite a low number. What this actual number is difficult to say because a) the LBMA will not produce a proper vault report that shows ownership of gold by category of holder, and b) neither will the Bank of England in its gold vault reporting provide a breakdown between the gold owned by central banks and the gold owned by bullion banks. So there is still no real transparency in this area. Just a faint chink of light into a dark cavern.

On the topic of London vaulted silver, there appears to be a lot more silver in the LBMA vaults than even GFMS thought there was. It will be interesting to see how GFMS and the LBMA will resolve their apparent contradiction on the amount of silver stored in the London LBMA vaults.

Bullion Banks line up in London to support LME’s Gold Futures

The London Metal Exchange (LME) and World Gold Council have just confirmed that their new suite of London-based exchange-traded gold and silver futures contracts will begin trading on Monday 10 July. These futures contracts are collectively known as LMEprecious.

The launch of trading comes exactly 11 months after this LMEprecious initiative was first official announced by the LME and World Gold Council on 9 August 2016. Anyone interested in the background to these LMEprecious contracts can read previous BullionStar articles “The Charade Continues – London Gold and Silver Markets set for even more paper trading” and “Lukewarm start for new London Gold Futures Contracts”.

This 10 July 2017 launch is itself over a month behind schedule given that LMEprecious was supposed to be launched on 5 June but was delayed by the LME.

Underlying What?

As a reminder, these LMEprecious gold futures and silver futures contracts represent unallocated gold and silver and there is no direct connection in the contracts to physical gold or physical silver, since settlement is via unallocated gold and silver balance transfers across LME Clearing unallocated metal accounts at member banks of London Precious Metals Clearing Limited (LPMCL).

Still, this hasn’t stopped LME from using terminology in the contract specs that attempts to link them by association to real precious metal. For example, the gold contract spec says that the:

 “underlying material” is “Loco London Fine Gold held in London and complying with standards relating to good delivery and fineness acceptable to the Precious Metal Clearer of the Clearing House”.

This is similar to how an estate agent (realtor) would describe a house that’s located in a bad area, i.e. that it’s not too far from a good area.

The LME also fails to mention the fact that the LBMA/LPMCL unallocated account system is a fractionally-based paper gold and paper silver trading system, with trading volumes of unallocated gold and unallocated silver that are 100s of times higher than the available physical metal sitting in the London precious metals vaults. Ironically, these gold and silver futures are starting to trade in a month in which the LBMA has still not begun publishing the actual quantities of gold and silver in the LBMA vaults in London, despite promising to.

For both gold and silver, the LME futures contract suite will consist of a daily trade date (T) + 1 contract (T+1), known as TOM, and daily futures from a T + 2 (equivalent to Spot settlement) out to and including all trade dates to T + 25. Beyond this, there are approximately 36 monthly futures contracts covering each month out to 2 calendar years, and then each March, June, September and December out to 60 calendar months (12 more quarters out to 5 years).

All LMEprecious contracts will centrally clear on LME’s clearing platform LME Clear. The contracts can be traded on LME’s electronic trading platform LMESelect between 1am and 8pm London time, and can also be traded 24 hours a day ‘inter-office’ over the blower (voice-based trading). Apart from trading hours differences, the only other difference between LMESelect and phone is that of the daily contracts, only T+1 to T+3 can be traded via LMESelect, while T+1 to T +25 can be traded over the phone.

The LME also plans to roll out options products and calendar spread products based on these futures, but as to when these will appear is not clear.

bank

Banks, Banks and more Banks

The official line is that LMEprecious has been developed by a consortium of the LME, the World Gold Council and a group of investment consisting of Morgan Stanley, ICBC Standard, SocGen, Goldman Sachs and Natixis, as well as prop trading firm OSTC, but to what extent each of the 5 banks and OSTC has had input into the product development and trading rules of LMEprecious  is unclear.

On 3 August 2016, the World Gold Council established a UK registered company called ‘EOS Precious Metals Limited’ to house the arrangement between the Council and the aforementioned banks and OTSC. The first director of EOS was Robin Martin, managing director of market infrastructure at the World Gold Council, while the first registered address of EOS was actually the World Gold Council’s London office at 10 Old Bailey in the City of London.

A slew of other directors were then appointed to EOS Precious Metals Ltd on 9 November 2016, namely:

  • Aram Shishmanian, CEO of World Gold Council
  • Raj Kumar – ICBC Standard Bank (formerly of Deutsche Bank and formerly a director of London Precious Metals Clearing Limited (LPMCL)
  • Bradley Duncan – ICBC Standard Bank (resigned as director March 2017 and replaced by Richard England)
  • Francois Combes – SocGen (formerly a director of London Gold Market Fixing Limited)
  • Vinvent Domien – SocGen (formerly a director of London Gold Market Fixing Limited)
  • Matthew Alfieri – Goldman Sachs (resigned May 2017 and replaced by Donald Casturo)
  • David Besancon – Natixis
  • Bogdan Gogu – Morgan Stanley
  • Hanita Amin – Morgan Stanley
  • Jonathan Aucamp – Exec chairman of OSTC

Some of these directors, as you can see above, are very much connected to the existing and previous mechanisms of the London Gold Market, eg, LPMCL and the old London Gold Fixing.

But apart from ICBC Standard Bank, suspiciously absent from the list of banks cooperating with the LME and World Gold Council are the big guns of the LBMA and LPMCl members, i.e. HSBC, JP  Morgan, UBS, Scotia, all of which are big players in the London gold and silver markets and vaulting scenes in London, New York, and in UBS’s case Zurich. As they control LPMCL, perhaps there is no need for them to be involved in a gold and silvers futures sideshow.

Notably, also on 6 July, the LBMA held its Annual General Meeting in London at which the LMPCL member banks maintained their stranglehold on the LBMA Board:

  • Peter Drabwell of HSBC was re-elected to the Board
  • Sid Tipples, of JP Morgan  was re-elected to the Board
  • Raj Kumar of ICBC Standard (formerly of Deutsche Bank) was elected to the Board
  • Kumar replaces Steven Lowe of Scotia who had been on LBMA board Vice-Chairman

When EOS Precious Metals Ltd was established, it only had 1 A share and 1 B share, both held by WGC (UK) Limited. In the incorporation documents, A shares were defined as having voting rights, an ability to appoint a director and a board observer but no rights to dividends. B shares were defined as having no voting rights but with an entitlement to dividends.

On 26 October, a further 999 A shares and 699 B shares were allotted and said to be paid-up. In the in the allotment filing, these B shares are listed in various tranches i.e. 400 B shares, 100 B Shares, 100 B shares, and 99 B shares, with different total amounts paid for each of these tranches.

In total, there are now 1000 A shares and 700 B shares issued in EOS (with a nominal value of US$ 0.10 each), but there is nothing in the filings listing how many shares of each class are owned by each of the companies and banks that have director representation. Given that there are 6 trading entities as well as the World Gold Council, it could be that each of the 7 entities holds 100 B shares.

There are currently also 10 directors on the EOS board, 2 each from the World Gold Council, SocGen, ICBC Standard, and Morgan Stanley, and 1 each from Goldman Sachs and Natixis. Therefore, its possible that the 1000 A shares could be divided out in the same ratio, 200 for each of the World Gold Council, SocGen, ICBC Standard, and Morgan Stanley, and 100 shares each for Goldman and Natixis.

In a related development, on 23 February 2017 Reuters reported that the LME had agreed a 50-50 revenue sharing agreement with EOS precious Metals under which Morgan Stanley, ICBC Standard, SocGen, Goldman, Natixis and OSTC will attempt to generate trading certain volumes (liquidity) in the LMEprecious gold and silver contracts in return for 50% of the LME’s revenue on the products. The terms of this agreement are not public and it’s unclear if the performance of the banks and OSTC will be measured on customer flow or liquidity guarantees, or perhaps some type of credibility measurement of the contracts in the marketplace.

In early March, Reuters also reported that 3 additional banks and a broker had agreed to come on board with LMEprecious as clearing members, specifically, Commerzbank, Bank of China International, Macquarie Bank, and broker Marex Financial

Most recently, on 6 July, Reuters reported that of these 4 additional participants from the Commerzbank / Bank of China / Macquarie / Marex group, the LME has said that only Marex is ready to participate as a “general clearing member”.

Clearing Unallocated into LPMCL

This brings us to the different types of LME clearing members. Of the 6 participants which came on board to LMEprecious in 2016, 4 of these (SocGen, Goldman, Morgan Stanley and ICBC Standard) are General Clearing Members (GCMs) for LMEprecious. However, Natixis is only an Individual Clearing Member (ICM). Furthermore, OSTC is a Non-Clearing Member (NCM).  Marex, as mentioned above, is also a General Clearing Members (GCM). See list of GCMs, ICMs and NCMs for LMEprecious here.

According to LME Clear’s membership rules (Rule 3.1 Membership Categories and Application Process):

a “General Clearing Member” or “GCM”, which may clear Transactions or Contracts on its own behalf and in respect of Client Business

an “Individual Clearing Member” or “ICM”, which shall be permitted only to clear Transactions or Contracts on its own behalf

On 6 July, Reuters also reported that an algorithmic trading firm called XTX Markets which is based in Mayfair in London, will also start as a Non-Clearing Member (NCM) participant. Obviously, the Non-Clearing Member (NCM) don’t clear trades, instead they use  ‘Administrative clearers’ to do their clearing. XTX will use Marex, and OSTC will use SocGen.

As to why  Commerzbank, Bank of China International  and Macquarie Bank are still not ready to participate is unclear, but this seems odd given that they announced their intent to participate over 4 months ago.

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Unallocated account at LPMCL member needed to clear trades of LMEprecious

Meet the New Boss, Same as the Old Boss

In Summary:

– there are now 8 bullion banks, a prop trading firm, and a high speed algo firm lined up to help these LME gold and silver futures get out the gate

– these LMEprecious futures will be trading unallocated gold and unallocated silver.

– unallocated gold and unallocated silver is fractionally-backed paper gold and paper silver

– clearing members of LMEprecious require an unallocated precious metal account with an LPMCL member so as to transfer these unallocated gold and silver balances

– the 5 LMPCL banks offering these unallocated accounts are HSBC, JP  Morgan, UBS, Scotia and ICBC Standard

– the trading of these LMEprecious futures therefore comes full circle and does nothing to change the structure of the London Gold Market or the London Silver Market

– the World (Paper) Gold Council, which claims to promote gold on the behalf of the gold mining industry, is instead front and center in the promotion of more paper gold trading

With similar recently launched London gold futures from CME Group and ICE not having taken off, all eyes will be on these LMEprecious products to see if they can go where no London gold futures have gone before. Therefore, the LME monthly trading volumes page will be one to watch in future.

The Charade Continues – London Gold and Silver Markets set for even more paper trading

Today the London Metal Exchange (LME) and the World Gold Council (WGC) jointly announced (here and here) the launch next year of standardised gold and silver spot and futures contracts which will trade on the LME’s electronic platform LMESelect, will clear on the LME central clearing platform LME Clear, and that will be settled ‘loco London’. Together these new products will be known as LMEprecious’ and will launch in the first half of 2017.

However, although these contracts are described by the LME as delivery type Physical, settlement of trades on these contracts merely consists of unallocated gold or silver being transferred between LME Clear (LMEC) clearing accounts held at London Precious Metals Clearing Limited (LPMCL) member banks (i.e. paper trading via LPMCL’s AURUM clearing system).

For example, the contract specs for the LME’s planned spot gold trading state that the LME’s proposed settlement procedure is one of:

“Physical settlement two days following termination of trading. Seller transfers unallocated gold to LMEC account at any LPMCL member bank, and buyers receive unallocated gold from LMEC account at any LPMCL member bank

The range of LME contracts for both gold and silver will consist of a trade date + 1 contract (T+1), aptly named TOM, as well as daily futures from T + 2 (equivalent to Spot settlement) out to and including all trade dates to T + 25. Beyond the daily futures, the suite of contracts also includes approximately 36 monthly futures contracts covering each month out to 2 calendar years, and then each March, June, September and December out to 60 calendar months. The LME / WGC press release also mentions plans for options and calendar spread products based on these futures.

precious

As well as trading electronically on LMESelect, these precious metals futures will also be tradeable via telephone market (inter-office market). Trading hours for the daily contract (TOM) will be 1am – 4pm London hours, while trading hours for all other contracts will be 1am – 8pm London hours, thereby also covering both Asian and US trading hours. Detailed contract specs for these gold and silver contracts are viewable on the LME website. The trading lot size for the LME gold contracts will be 100 ozs, which is significantly smaller than the conventional lot size of 5000 -10,000 ozs for gold trading in the London OTC market (and conventional OTC minimum of 1000 ozs of gold). The planned lot size for the LME’s silver contracts is 5000 ozs, again below the conventional lot size of 100,000 – 200,000 ozs for silver trading in the London OTC market (and conventional OTC minimum of 50,000 ozs of silver).

These LME contracts are being pitched as a real alternative to the incumbent over the counter system of gold and silver trading in London which is overseen by the London Bullion Market Association, an association whose most powerful members are the clearing and vaulting banks in London, namely HSBC, JP Morgan, Scotia, and to a lessor extent UBS and Barclays, but increasing ICBC Standard bank as well. But given that the LME’s clearing will sit on top of the LPMCL clearing system and use unallocated transfers, the chance of any real change to the incumbent London gold and silver market is non-existent. Nor will the trading of these LME products give any visibility into the amount of physical gold and silver that is held within the London Market, nor the coverage ratio between ‘unallocated account’ positions and real underlying physical metals.

Five Supporting Banks

This new LME / WGC initiative is being supported by 5 other investment banks and a trading entity called OSTC. These bank backers comprise US banks Goldman Sachs and Morgan Stanley, French banks Natixis and Société Générale, and Chinese controlled bank ICBC Standard Bank. According to a Reuters report about the launch, the World Gold Council had approached 30 firms about backing the launch, so with only 5 banks on board that’s a 16.6% take-up ratio of parties that were approached, and 83.4% who were not interested.

Earlier this year in January, Bloomberg said in a report said that the five interested banks were “ICBC Standard Bank Plc, Citigroup Inc., Morgan Stanley, Goldman Sachs Group Inc. and Societe Generale SA“, so somewhere along the line Citigroup looks to have taken itself off the list of interested parties, while Natixis came on board. The World Gold Council’s discussions about a proposed gold exchange and its discussions with ‘5 banks’ appear to have begun as early as the 4th quarter of 2014 and were flagged up by the Financial Times on 02 April 2015, when the FT stated that:

“The WGC has hired a number of consultants and spent the past six months pitching a business case for banks to consider the alternative trading infrastructure”

“The World Gold Council…and at least five banks are participating in initial discussions”

Notably, this was around the time that LME found out it had not secured the contracts to run either the LBMA Gold Price or LBMA Silver Price auctions. Note, that all 5 of the LME supporting banks, i.e. Goldman, ICBC Standard, Morgan Stanley, SocGen and Natixis, are members of the London Bullion Market Association (LBMA), with Goldman, Morgan Stanley, ICBC Standard and SocGen being LBMA market members, and Natixis being a full member of the LBMA. Goldman, Morgan Stanley, ICBC Standard and SocGen are also direct participants in the LBMA Gold Price auction operated by ICE Benchmark Administration. None of these 5 banks are direct participants in the LBMA Silver Price auction. Notably, none of these banks except for ICBC Standard is a member of the precious metals clearing group LPMCL. ICBC Standard Bank also recently acquired a precious metals vault in London from Barclays and also joined the LBMA’s Physical Committee (see BullionStar recent blog ‘Spotlight on LPMCL: London precious MEtals Clearing Limited‘ for details). Therefore, ICBC Standard seems to have a foot in both camps.

Unallocated Balances, Unsecured Creditors

Given the long build-up to this LME / World Gold Council announcement, and the fact that these LME spot and futures products were supposed to be a genuine alternative to the LBMA bank controlled OTC trading system, the continued use of unallocated settlement and the use of LPMCL accounts by these planned LME contracts underscores that the LME contract do not represent any real change in the London Gold and Silver Markets.

As a reminder, the resulting positions following transfers of unallocated gold and silver through the LME Clear accounts of LPMCL members essentially means the following, in the words of none other than the LBMA:

“Unallocated account basis. This is an account where the customer does not own specific bars, but has a general entitlement to an amount of metal. This is similar to the way that a bank account operates” 

Additional LBMA definitions of unallocated transactions are as follows:

settled by credits or debits to the account while the balance represents the indebtedness between the two parties.

“Credit balances on the account do not entitle the creditor to specific bars of gold or silver or plates or ingots of platinum or palladium but are backed by the general stock of the precious metal dealer with whom the account is held: the client in this scenario is an unsecured creditor.

Alternatively, a negative balance will represent the precious metal indebtedness of the client to the dealer in the case where the client has a precious metal overdraft facility.

Should the client wish to receive actual metal, this is done by “allocating” specific bars, plates or ingots or equivalent precious metal product, the metal content of which is then debited from the unallocated account”.

LME bows to LPMCL

However, it should come as no surprise that these LME spot and futures contracts haven’t taken a new departure away from the entrenched monopoly of the London gold and silver clearing and vaulting systems, for the LME specifically stated in quite a recent submission to the LBMA that it will never rock the boat on LPMCL’s AURUM platform. When the LME presented to the LBMA in October 2014 in a pitch to win the contract for the LBMA Gold Price auction (which it didn’t secure), the pitch said that a centrally cleared solution “would only be introduced with market support and respecting LPMCL settlement“. [See right-hand box in below slide]:

LME potential credit models

In the same pitch, the LME also stated that:

LME Clear fully respects existing loco London delivery mechanism and participants

[See bottom line in below slide]:

LME Pathway to cleared solution

Interestingly, following the announcement from the LME and the World Gold Council, the LBMA provided a very short statement that was quoted in the Financial Times, that said:

“The LBMA saw the announcement with interest and reconfirms it has no direct or indirect involvement in this project”.

While that may be true, what the LBMA statement didn’t concede is that 5 of its member banks, 4 of which are LBMA market makers, do have a direct involvement in the LME / World Gold Council project. Nor did the LBMA statement acknowledge that settlement of the planned LME gold and silver contracts will use the LPMCL infrastructure, nor that the LPMCL is now in specific scope of the LBMA’s remit.

Recall that in October 2015, the LBMA announced that:

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

With the LME contracts planning to use LPMCL, this ‘new dawn’ view of the LME / World Gold Council initiative is in my view mis-guided.

Even COMEX has more Transparency

Anyone familiar with the rudimentary vaulting and delivery procedures for gold and silver deliverable under the COMEX 100 oz gold and 5000 oz silver futures contracts will know that at least that system generates vault facility reports that specify how much eligible gold or silver is being stored in each of the designated New York vaults, the locations of the vaults, and also how much of the eligible gold or silver in storage has warehouse warrants against it (registered positions). The COMEX ‘system’ also generates data on gold and silver deliveries against contracts traded.

However, nothing in the above planned LME contract specs published so far gives any confidence that anyone will be the wiser as to how much gold or silver is in the London vaults backing up the trading of these spot and future contracts, how much gold or silver has been converted post-settlement to allocated positions in the vaults, nor how much gold or silver has been delivered as a consequence of trading in these spot and futures contract, nor importantly, where the actual participating vaults are.

This is because the LMPCL system is totally opaque and there is absolutely zero trade reporting by the LBMA or its member banks as to the volumes of gold and silver trading in the London market, and the volumes of physical metals held versus the volumes of ‘metal’ represented by unallocated account positions. Furthermore, the LBMA’s stated goal of introducing trade reporting looks as dead as a dodo, or at least as frozen as as a dodo on ice.

LBMA stall on Trade Reporting, LPMCL clear as Mud

On 9 October 2015, the LBMA announced that it had launched a Request for Information (RFI) asking financial and technology providers to submit help with formulating solutions to deficiencies which regulators thought the London bullion market such as the need for transparency, and issues such as liquidity that had supposedly been recommended as strategic objectives by consultant EY in its report to the LBMA, a report that incidentally has never been made publicly available. On 25 November 2015, the LBMA then announced that it had received 17 submissions to its RFI from 20 entities spanning “exchange groups, technology firms, brokers and data vendors”.

On 4 February 2016, the LBMA then issued a statement saying that it was launching a Request for Proposals (rRfP) and inviting 5 of these service providers (a short-list) to submit technical solutions that would address requirements such as an LBMA data warehouse and that would support the introduction of services such as trade reporting in the London bullion market. The RfP statement said that the winning service provider would be chosen in Q2 2016, with a planned implementation in H2 2016.

However, no progress was announced by the LBMA about the above RfP during Q2 2016, nor since then. The only coverage of this lack of newsflow came from the Bullion Desk in a 27 May article titled “Frustration Grows over London Gold Market Reform” in which it stated that the 5 solution providers on the short-list were “the LME, CME Group, the Intercontinental Exchange (ICE), Autilla/Cinnobar and Markit/ABS“, and that:

“the pace at which the LMBA is moving forward are causes for consternation in some quarters of the sector”

A quote within the Bullion Desk article seems to sum up the sentiment about the LBMA’s lack of progress in its project:

“It’s not going to happen any time soon. Look at how long it’s been going on already,” another market participant said. “Don’t hold your breath. It seems like we still have a long way to go.” 

What could the hold up be? Surely 17 submissions from 20 entities that were whittled down to a short-list of 5 very sophisticated groups should have given the LBMA plenty of choice for nominating a winning entry. Whatever else this lack of progress suggests, it demonstrates that increased transparency in London gold and silver market trading data is not going to happen anytime soon, if ever.

Furthermore, the opacity of the London clearing statistics that are generated out of the LPMCL clearing system need no introduction to most, but can be read about here.

Conclusion

According to the LBMA, ‘Loco London’ “refers to gold and silver bullion that is physically held in London“, however, given the secrecy which surrounding trading data in the London gold and silver markets, and the lack of publication by any bank about the proportion of unallocated client balances in gold or silver that it maintains versus the physical gold or silver holdings that it maintains, this ‘loco London‘ term appears to have been abused beyond any reasonable definition, and now predominantly refers to debit and credit entries in the virtual accounting systems of London based bullion banks. Nor, in my opinion, will the LME contracts change any of this. One would therefore be forgiven in thinking that the real underlying inventories of gold and silver in the London market and their associated inverted pyramid unallocated account positions are too ‘precious’ to divulge to the market. The Bank of England is undoubtedly licking its chops to the continued opacity of the market.

And its not just my opinion. This latest LME / World Gold Council / investment bank announcement has generated other skeptical reactions. The last word goes to Jim Rickards, who tweeted this in reaction to the latest LME / World Gold Council news:

LPPM – The London Platinum and Palladium Market

The platinum and palladium markets arguably receive more focus during the third week of May than at any other time of the year. This is due to a series of events hosted in London known as London Platinum Week. London Platinum Week, which also covers other platinum group metals such as palladium, is coordinated by the London Platinum and Palladium Market (LPPM) association and its members. This year, London Platinum Week runs from Monday 16 May until Friday 20 May.

The LPPM is intrinsically linked to London Platinum Week. Indeed, London Platinum Week is specifically held in the month of May because it commemorates the fact that the LPPM was founded in May, in 1987.

‘L-Phabet Soup’: LPPM, LPPFC, LBMA and LME

To coincide with London Platinum Week, this article looks at the relatively low-key organisation known as the London Platinum and Palladium Market (LPPM), and associated entities such as the London Platinum and Palladium Fixing Company (LPPFC), as well as the more recent platinum and palladium fixings, which are now administered by the London Metal Exchange (LME) on behalf of the London Bullion Market Association (LBMA). It is also timely to take a look at LPPM since it will most definitely cease to exist as a stand-alone entity later this year after it merges into the LBMA through a series of manoeuvres which have already been planned and scheduled, the first of which is a general meeting of the LBMA on 29 June.

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LPPM

LPPM is a trade association representing the interests of its members on the London platinum and palladium markets. LPPM operates the London/Zurich Good Delivery List for refiners of platinum and palladium, and also liaises with UK regulators and bodies such as HM Revenue and Customs.

Although it’s an association, the LPPM also describes itself conceptually as a members-only ‘Market’:

“The LPPM operates on an OTC basis…with trades being undertaken in troy ounces of platinum and palladium. Full membership of the Market is open to those companies in the UK currently engaged in trading in the metals [platinum and palladium] and offering services in the UK to the market, including market-making, clearing services, refining or manufacturing.”

Full LPPM member Tanaka of Japan describes LPPM as:

“an international self-management industry organization controlling Platinum and Palladium fair trade and appropriate products”.

Without stating the obvious, the London Platinum and Palladium Market (LPPM) is worth being familiar with because it oversees the London platinum group metals markets. More importantly, the LPPM members, especially its market making members, have a very influential input into daily price discovery in the global platinum and palladium markets, which in a real way impacts all users of and investors in platinum and palladium around the world. And given that LPPM appears to be run in a very informal clubby style with the same opacity and barriers to entry that surround the London Gold and Silver Markets, this should be concerning to platinum and palladium users and investors worldwide.

As an entity, LPPM is structured as an association, but unlike the London Bullion Market Association (LBMA), the LPPM is not a registered company. Both organisations are most usefully viewed as the public faces of the member entities, especially the banks, that operate in the precious metals markets. Currently, LPPM has 17 full members (10 of which are banks), 35 associate members and 52 affiliates.

The full members of LPPM that are banks are JP Morgan, HSBC, Goldman Sachs, UBS, Bank of Nova Scotia, ICBC Standard Bank, Credit Suisse, Deutsche Bank, Standard Chartered and Toronto-Dominion Bank. All of these 10 banks are market-making members of LPPM along with BASF Metals, which is also a full member. The remaining 6 full members of LPPM are precious metals refiners, namely, Johnson Matthey Plc of the UK, Tanaka Kikinzoku Kogyo of Japan, Germany’s Heraeus, and Metalor, PAMP and Valcambi of Switzerland. Tanaka only became a full member of LPPM in March 2015, where its full membership was voted on at the LPPM AGM. This illustrates that it is not a matter of merely applying for membership when attempting to become a full member of LPPM, the application has to be endorsed by the existing full members. Barclays and Mitsui & Co Precious Metals Inc were also still listed as full members of LPPM as recently as January 2016, but both have now been reclassified as associate members.
The associate members of LPPM also include a large number of banks such as Citibank, SocGen, Morgan Stanley, Merrill Lynch, Barclays, Commerzbank, Natixis, RBC and BNP Paribas as well as commodities trading companies, brokers and the trading arms of platinum and palladium producers.  LPPM therefore appears to be a private, members only trade organisation dominated by a small number of bullion banks, and in that regard is rather like the LBMA.

The London Bullion Market Association (LBMA) is a company incorporated on 14 December 1987 in England and Wales with Company Number 02205480, and it has a set of directors. As the LBMA’s Memorandum of Association states:

“The Company’s name is “The London Bullion Market Association”

The 1987 incorporation document of the London Bullion Market Association can be seen here, with its first registered office of ‘New Court, St Swithins Lane’, i.e. the headquarters of N.M Rothschild in London. The LBMA was founded by N.M. Rothschild & Sons Limited, J.Aron & Company (UK) Limited, Mocatta & Goldsmid Limited, Morgan Guaranty Trust Company of New York, Sharps Pixley Limited, and Rudolf Wolff & Company Limited.

LPPM was also established in 1987. Technically, LPPM was established so that the London platinum and palladium markets could be added to the UK’s Terminal Markets Order (TMO) exemption list so as to receive a zero rate of VAT from HM Revenue & Customs on sales of metal between LPPM members and non-members. LPPM was added to the VAT (Terminal Markets) Order by an amendment to the Order on 5 May 1987.

LPPM was established as an ‘Association’ via a ‘Deed of Establishment’. LPPM confirmed to me recently that it doesn’t have a Memorandum of Association nor Articles of Association, which seems odd given that its structured as an ‘Association’. According to a UK government website on legal forms for business:

“Unincorporated Associations are groups that agree, or ‘contract’, to come together for specific purpose. They normally have a constitution setting out the purpose for which the association has been set up, and the rules for the association and its members. They are typically governed by a management committee”.

LPPM therefore must have a deed of establishment and probably has a constitution, but where these documents are publicly filed, if at all, is anybody’s guess.

The founding members of LPPM in 1987 were:

  • Samuel Montagu
  • Ayrton Metals
  • Sharps Pixley Ltd
  • Mase Westpac
  • Johnson Matthey
  • Englehard Corp

All of these 6 founding members of LPPM are still full members of LPPM in one shape or another. Samuel Montagu through it being part of Midland Bank became part of HSBC, as did Mase Westpac which was bought by Republic National Bank of New York in 1993 which was then acquired by HSBC. Aryton Metals became part of Standard Bank in 1994. ICBC has recently acquired Standard Bank, and is now known as ICBC Standard Bank. BASF acquired Engelhard in 2006, hence the entity that was formerly known as Engelhard Metals is now known as BASF metals. The old Sharps Pixley business was bought by Deutsche Bank in 1993. Johnson Matthey still exists today as John Matthey.

It’s very revealing that these founding entities of LPPM represent 4 of the 5 current fixing members (HSBC, BASF, ICBC Standard and Johnson Matthey) in today’s platinum and palladium daily price auctions. These price auctions are widely used throughout the global platinum and palladium industry as valuation and contract benchmarks. The 5 member participants in the daily platinum and palladium price auctions in London, administered by the London Metal Exchange (LME) are:

  • BASF Metals Ltd
  • HSBC Bank USA NA
  • Johnson Matthey plc
  • ICBC Standard Bank plc
  • Goldman Sachs International

Note that 4 of the 5 platinum and palladium auction participants are founding members of LPPM. More on the daily platinum and palladium auctions below.

As of 2001, there were still only 9 full members of LPPM (7 of which were banks), namely:

  • J Aron & Company (UK)
  • Engelhard Metals Ltd
  • HSBC USA (London Branch)
  • Morgan Guaranty Trust Company of New York (London)
  • Johnson Matthey Plc
  • NM Rothschild & Sons Ltd
  • Standard Bank London Ltd
  • UBS AG
  • Credit Suisse First Boston (London Branch)

LPPM currently has a 9 person management committee, comprising a chairman from Johnson Matthey Plc, a vice chairman from ICBC Standard Bank,  and committee member representatives from HSBC, BASF Metals, SocGen, Toronto-Dominion Bank, Metalor, Heraeus and Anglo Platinum Marketing Ltd. Notably, 4 of the 9 members of the LPPM management committee, ie Johnson Matthey, HSBC, BASF Metals and ICBC Standard Bank, also represent 5 of the 6 founding members of LPPM and are also 4 of the 5 members participants in the daily London platinum and palladium price auctions.

lppm

London by name, but no London office

In addition to the fact that it’s a private association without any public filings, there are a number of organisational aspects about LPPM which indicate that it is run on a much more piecemeal style than the LBMA, with a setup more akin to a local golfing society than the global representative of the world’s biggest platinum and palladium trading hub.

Although ‘London’ is in the title of the ‘London Platinum and Palladium Market’, the LPPM doesn’t even have a permanent London address, but sometimes uses the rotating chairman’s company addresses in London for correspondence. The LPPM support staff and setup seems to be summed up as “anywhere but in the City of London”:

  • The LPPM’s Secretary and office address of LPPM is in Redbourn, Hertfordshire, 30 miles outside London.
  • The LPPM website address lppm.com is registered to Sharps Pixley at a Suffolk address, some 60 miles outside London. [The LPPM website also states that the site created by a web development company “for Sharps Pixley Ltd”]
  • The LPPM’s treasurer, who is also the administrative contact for London Precious Metals Clearing Ltd (see lpmcl.com) has his mail server registered at an address in Surrey, 22 miles from London. [The LPPM treasurer was also the administrative contact for the old Gold Fixing and Silver Fixing websites (www.goldfixing.com and  www.silverfixing.com)]
  •  The LPPM’s inter-organisational relations contact is a former Chair of LPPM, who at the time represented LPPM member Mitsui, but Mitsui exited the precious metals markets in London last year, although this former chair is still involved through this LPPM role, but at what address?

There are no published details or minutes of LPPM AGMs and very few press releases – ever. The only press releases that are retained on the LPPM website are here, with a few others traceable here and here.  All in all, quite a strange and secretive organisation that makes the LBMA look like the epitome of transparency.

London Platinum and Palladium Fixing Company Limited (LPPFC)

The London Platinum and Palladium Fixing Company Limited (LPPFC) is another low-key entity within the London platinum and palladium market, and not surprisingly it has very very close connections with LPPM. LPPFC is a private company made up of directors from HSBC, Goldman Sachs, ICBC Standard Bank and BASF Metals. As its name suggests, LPPFC was established for the purpose of operating the Platinum and Palladium price auctions. LPPFX was incorporated on 3 December 2004, and operated the platinum and palladium fixing auctions up until 1 December 2014, i.e. for 10 years exactly.

LPPFC is still an active company in the UK, despite it ceasing to run the daily platinum and palladium price auctions in London, and despite the LBMA legal counsel saying on one occasion in 2015 that LPPFC has been dissolved. According to the LBMA legal counsel:

The three fixing companies who had historically administered these prices are now dissolved and responsibility for the prices has transferred into the hands of independent administrators”

However LFFPC has not been dissolved, nor has the London Gold Market Fixing Company been dissolved, nor has the London Silver Market Fixing Company been dissolved. “The dissolution of a corporation is the termination of its existence as a legal entity.” LFFPC continues to exist as an active legal entity, company number 05304018. LPPFC made an annual return in January 2016. LFFPC even had a director appointed to it as recently as February 2016. The company secretary for LPPFC is Reed Smith Corporate Services of Broadgate Tower, 20 Primrose Street, in the City of London.

southern

The reason LFFPC has not been dissolved is that it is a currently one of the defendants in a consolidated class action suit taking place in the Southern District court in New York, where it is accused of platinum and palladium price manipulation along with the fixing members of LPPFC, namely Goldman Sachs Group Inc, HSBC Bank USA NA, ICBC Standard Bank PLC, and also UBS (not a fixing member of LPPFC). This class action was filed on 21 April 2015. In late 2015, the defendants tried to have the plaintiff’s motion dismissed but this was not upheld by the court. The class action suit against LPPFC and its member companies is in many ways similar to class action suits currently running against the London Gold Market Fixing Company and its members and the London Silver Market Fixing Company and its members, although the gold and silver class actions have received more publicity than the platinum / palladium suit.

The platinum / palladium class action case is “In re Platinum and Palladium Antitrust Litigation, No. 14-cv-9391” and is being heard by Judge Gregory D Woods. Plaintiffs are represented by Berger & Montague, and Labaton Sucharow. A few recent submissions by the plaintiffs lawyers to the court can be seen here (Berger Montague and Labaton Sucharow). Some of the defendant’s  submissions in late 2015 to dismiss the motion (which was unsuccessful) can be see here (LPPFC motion to dismissICBC motion to dismissBASF motion to dismissUBS motion to dismiss).

LPPFC hands the platinum and palladium fixings to LME

In the summer of 2014, during the period when the London Silver Fixing auctions were transitioning to a new platform via a high-profile competition that eventually resulted in the new LBMA Silver Price auction system being administered by Thomson Reuters (the award of which was announced on 11 July 2014), the LPPFC made a few stealthy moves to jettison its own operational role in the platinum and palladium fixings. These moves went mostly unreported and un-scrutinized in the financial media.

On Thursday 31 July 2014, LFFPC announced via a press release on the LPPM website that it would:

shortly commence an RFP [Request for Proposals] process with a view to appointing a third party to assume responsibility for the administration of the London Platinum and Palladium Fixing“.

The press release also stated that “The RFP process will be launched shortly. Expressions of interest in that process should be directed to enquiriesptpdfixing@lppm.com by no later than 6 August 2014.” Given that 6 August (a Wednesday) was 3-4 business days after the announcement that an RfP process was being launched, this is extremely short notice for intending applicants to signal their interest in such a process, especially since it was the August holiday season in the City of London and the London financial services and technology industries. It’s as if the LPPFC did not want any potential applicants to express interest in the RfP.

At that time, the LBMA was silent on its role in the RfP process for the platinum and palladium fixings.  On 31 July 2014, Bloomberg  wrote a story highlighting that the LBMA’s public relations officer, Aelred Connolly, declined to explain the LBMA’s role in the platinum/palladium RfP:

“Aelred Connelly, a spokesman for LBMA, declined to comment on the association’s role in the platinum and palladium request-for-proposal exercise.”

However, a LBMA to LPPFC connection is apparent in a move by the LPPFC on 4 August 2014 when it announced (on the Sharps Pixley website) the appointment of Jonathan Spall as the ‘independent chair’ of the platinum and palladium fixing calls, a role that was said to commence that day on 4 August 2014. Jonathan Spall (ex Barclays and ex London Gold Market Fixing Company) at that time was acting as a consultant for the LBMA in the Silver Price auction competition process. LPPFC also said in the same announcement that Mr Spall would be supporting the LPPFC Board’s “assessment of responses to the RFP process announced by LPPFC on 31 July.”

More notably, there was nothing reported by LPPFC nor by LPPM nor by the financial media about this RfP process, nor about what happened after ‘expressions of interest’ were received by 6 August, until an announcement was made by LPPFC on 16 October 2014 (11 weeks later), again announced on the LPPM web site, that:

“Following completion of the RFP process announced by The London Platinum and Palladium Fixing Company Limited (the LPPFCL) on 31 July 2014, the LPPFCL is pleased to confirm that the London Metal Exchange (LME) has been selected and has committed to become the new administrator of the London Platinum and Palladium Fixing”

Given that there is no evidence to suggest that there were any applicants to this process, not any short list,  nor any competition, it would appear that the contract was merely handed to the London Metal Exchange. I asked the LPPM recently to confirm how many applicant companies participated in the LPPFC RfP process that took place between August and October 2014, and of the applicant companies, could they confirm how many applicants were shortlisted and their identities? LPPM eventually responded that they did not carry out the RfP process and had passed my query on to the then chair of the fixing company [LPPFC] who would respond to me ASAP. When no response was received after a week of waiting, I asked the LPPM to confirm who my query had been passed on to. This question itself was not responded to by the LPPM. Hence, my conclusion is that neither the LPPM nor LPPFC wish to discuss the matter, and my conclusion is that there was no contested RfP process to run the replacement platinum and palladium fixings, and that the process was merely handed to the LME.

The reason why this is not surprising, apart from the secretive and stealthy operational culture of the LPPM / LPPFC, is that there is good reason to believe that the LME was being sweetened and placated with the platinum and palladium fixings administrator role after it failed to secure the administrator and operator role in the LBMA Silver Price competition in July 2014,  a role which was awarded to Thomson Reuters and the CME Group. I have heard from a number of people in the precious metals sector in London that the LME was not happy about the way in which the LBMA awarded the silver price auction contract.

LME

LME Downplays Silver auction after being awarded Platinum / Palladium

On 19 October 2014, the Wall Street Journal in an article titled “LME Wins Tender to Manage Platinum and Palladium Price Fixing”, said the following:

“Matthew Chamberlain, the LME’s head of business development, said the group had only been able to get ‘a bare bones’ pitch together in time for the deadline for proposals on the silver fix. For platinum and palladium, ‘we had time to get our technology in place,’ he said.”

Frankly, this ‘bar bones’ pitch statement by Chamberlain in bizarre and preposterous, in light of the fact that the LME is on record during the Silver auction competition in July 2014 as saying it had a full and complete solution that it claims was considered the best solution by much of the market. The reference to not having enough time is also bizarre and hard to fathom.

Proving that the Wall Street Journal reporters don’t seem to read their own previous articles on the same subject, the Wall Street Journal reported in a 29 May 2014 article titled “CME Group, LME Separately Work on Hosting a New Silver Fix” that the LME proposal was at that stage in late May 2014, more advanced that the ultimately winning CME proposal:

While the LME’s proposal is relatively advanced, CME Group is only in the early stages of considering a new silver fix, people with knowledge of the matter said.

“The LME went one further, saying it already has a proposal that will ‘provide best-practice regulatory compliance while maintaining the global position of the London market.’ The LME, which is owned by Hong Kong Exchanges and Clearing Ltd., said it would give more detail “at the appropriate time once the market consultation is complete.”

It can only be concluded that the LME was seriously downplaying the Silver Price competition in October 2014, since by that time it was satisfied in getting the platinum and palladium business. Consider the following timeline which shows that the LME had weeks and weeks in which to devise a solution for the Silver auction:

14 May 2014 – LBMA launches consultation on London Silver Market

16 May 2014 – LBMA launches online survey as part of market consultation on London Silver Market

23 May 2014 – LBMA issues update on the progress of its online survey

5 June 2014 – LBMA announces general survey results for its London Silver Price consultation

13 June 2014 – LBMA announces market seminar on the London Silver Price – seminar open to LBMA members and presenters – 10 applicants

19 June 2014 – LBMA provides details on 7 short-listed applicants, which includes the LME, that would present at the seminar

24 June – LBMA published executive summaries and/or slides from the 7 proposals that were presented at the seminar. Some presenters, such as LME only allowed an executive summary of their presentation to be published on the public version of the LBMA website

The LME’s Executive Summary of Silver Price solution

“Our silver auction is based on market best-practice with rigorous regulatory and compliance features, and will be ready for demonstration on our production systems by Friday 27 June.

“We are the natural London home for silver”

“We have reacted to strong market demand – from both physical and financial players – for the LME to deliver the London Silver Price, and our solution incorporates significant market feedback from across the silver community. Our dedicated team of precious metals experts is ready to support delivery of the solution, and ensure market continuity on 15 August 2014.”

On Wednesday 9 July, 2014, the LME announced that it had formed an alliance with financial technology company Autilla to provide a joint solution in the London Silver Price competition. The LME stated in a press release on that day that:

“’Throughout the LBMA’s process, the market has consistently indicated that Autilla’s technology and the LME’s compliance and price discovery systems are market-leading, and LME and Autilla have received numerous requests from the market to provide a joint solution,’ said Garry Jones, CEO of the LME.”

Two days later on 11 July 2014, the LBMA announced that CME / Thomson Reuters had secured the silver price auctions contract, news which must have caused much chargin and gnashing of teeth to LME and Autilla.

LME amends Press Release and deletes reference to central clearing

On Thursday 16 October 2014, the London Platinum & Palladium Fixing Company Ltd (LPPFC) awarded the contract to run the platinum and palladium price auction fixings to the London Metal Exchange (LME). LPPFC communciated this appointment in a press release which was published on the LPPM website (another example of the unhealthy inter-connectedness between the LPPM and LPPFC).

But the more interesting announcement that day came from the LME’s own web site where it issued a press release that was 7 paragraphs long, and also contained 2 ‘Notes to Editors’ bullet points.

The final two paragraphs of the LME’s press release that morning on 16 October 2014 explained the LME’s plan to use its LME Clear clearing service for platinum and palladium, so as to overcome the problem of bi-lateral credit risk between auction participants in the platinum and palladium auctions. This bilateral credit risk is huge barrier in the London Silver and Gold Price auctions as creates an obstacle for a wide-range of participants such as miners, refiner and mints to (on a practical level) taking part in the auctions. For background on the obstacle posed by not having central clearing, see for example “The LBMA Silver Price – Broken Promises on Wider Participation and Central Clearing“.

The LME original press release included the following two paragraphs:

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

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

I tweeted about this at 11:24 am London time that morning, with a link to LME press release, saying:

I also tweeted a second time at 11:29 am London time, saying:

Less than 3 hours later (somewhere between 13:34 and 14:21), the LME removed these 2 critical sentences from its press release and reissued an amended version of the press release on its website. The 13:34 and 14:21 time-stamps are based on Google cache which had made an imprint of the original press release at 16 Oct 2014 13:34:19 GMT and had found the amended press release at 16 Oct 2014 14:21:49 GMT.

Luckily, at least one financial news site, Finance Magnates, used the original press release, and reported as follows:

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

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

Therefore, between 1:34pm and 2:21pm, someone at the LME deleted the two sentences on clearing from the press release and the reference to LME Clear. LME Clear was launched on 22 September 2014. The LME press release now remains on its web site in its second incarnation. The most important question is why was this press release altered as soon as it was released, and who requested that it be altered. Was it too revealing to the incumbent parties that central clearing would blow apart current clearing status quo and make redundant the argument that widespread participation in the precious metals auctions is a difficult process? Because with central clearing of auction trades, direct participation in the platinum and palladium auctions for hundreds of platinum and palladium entities around the world would be a very simple process.

LME
Screenshot of original LME press release on 16 October 2014 – Platinum / Palladium

Very interestingly, there was also one other change to the 2nd version of the LME press release in the ‘Notes to editors’ section where it was amended as follows:

Original: “The go-live date of 1 December is dependent on the ongoing participation of the four participating members of the LPPFCL.”

Revised: “The pricing mechanism is dependent on market participation. The LME has worked with the LPPFCL to ensure that its solution can be adopted on 1 December by both existing LPPFCL members, and new participants.”

This looks like a re-edit that was designed to distract from the fact that the LME auction was merely the same 4 old fixers in a different disguise, or in other words, “meet the new boss same as the old boss”, or “same old wine, in a new bottle“. It’s highly comical that the exact same participants that were in the old platinum and palladium auctions now appear in the new platinum and palladium auction as the only participants, and the LPPM, LBMA, LPPFC and LME have the gall to keep a straight face when reporting this. In fact, it would be a complete joke, if it were not for the fact that the topic of global price discovery of platinum and palladium is critically important. And finally, neither of the LME executives that were interviewed by Reuters that same week of October 2014 , in an article about the platinum and palladium contract award titled “LME CEO plays Asia card as gold market decides on fix replacement”  even mentioned LME Clear to Reuters. Hmm, I wonder why?

The LME’s brochure about LMEBullion now states that “All transactions in platinum and palladium are Loco London and are settled on a bilateral basis“. Again, no mention of LME Clear or the central clearing capabilities of the LME.

The LME Fixings

On the day the LME platinum and palladium price auctions went live on 1 December 2014, it was announced by the LBMA that the auction / benchmark prices would be called the LBMA Platinum Price and the LBMA Palladium Price. This, according to the LBMA, was due to the LPPFC having asked the LBMA to take over the intellectual property for the two sets of daily prices before the new auctions were launched.  Trademarks for the LBMA Platinum PriceLBMA Palladium Price and also LBMA Platinum and Palladium Price  were registered by the LBMA on 28 November 2014, and a LBMA company called ‘Precious Metals Prices Limited’ was incorporated on 1 December 2014 to manage the intellectual property rights of the LBMA Platinum Price, the LBMA Palladium Price, the LBMA Silver Price and the LBMA Gold Price.

LBMA Platinum Price and LBMA Palladium Price auctions take place twice daily at 9:45am and 2pm London time. The platinum auction is schedule to run first, followed by the palladium auction. LME runs the daily auctions for platinum and palladium on an electronic auction system called LMEBullion.

The are only 5 member participants of LMEBullion, namely:

  • Goldman Sachs International
  • HSBC Bank USA NA
  • ICBC Standard Bank plc
  • BASF Metals Ltd
  • Johnson Matthey Plc

The 4 LPPFC members (Goldman, HSBC, ICBC Standard and BASF) were the only member of participants of LMEBullion when it was launched on 1st December 2014. Johnson Matthey Plc joined as a member participant of the auctions on 19 January 2015, a day on which the LME stated that:

“We believe that wider participation will maximise the effectiveness of the process, and we look forward to broadening participation further.”

However, since January 2015 however, no other member participants have joined. Why not? And why are there no industry participants directly participating in the auctions?

ETF Securities, which operates the ETFS Platinum Trust (PPLT) that uses the afternoon LBMA Platinum Price (the PM fix) as a valuation price source, states in an official filing dated 31 December 2015 that:

Formal participation in the LME PM Fix is limited to participating LPPM members, each of which is a bullion dealerTwelve LPPM members are currently participating in establishing the LME PM Fix (Barclays Bank PLC, BASF Metals Limited, Credit Suisse, Deutsche Bank AG, Goldman Sachs International, HSBC Bank USA NA, ICBC Standard Bank PLC, JP Morgan Chase Bank, Standard Chartered Bank, The Bank of Nova Scotia, ScotiaMocatta, The Toronto-Dominion Bank and UBS AG). Any other market participant wishing to participate in the trading on the LME PM Fix is required to do so through one of the participating LPPM members.”

Similar wording and the same list of 12 banks is also stated in the official filings of the ETFS Palladium Trust (PALL). Therefore, according to ETF Securities, participation in the LBMA Platinum and Palladium daily price discovery auctions is also a closed-shop in a similar way that participation in the LBMA Gold Price and LBMA Silver Price auctions is a closed-shop, with only a handful of dominant bullion banks being allowed to directly participate.

Since the beginning of 2016, Barclays has withdrawn from some activities in the precious metals markets in London. Excluding Barclays from the above list and excluding BASF Metals Ltd, then all of the other 10 banks that are allowed to participate are the only banks that are full members of the LPPM. Therefore, the rules of the auctions are de facto limiting ‘formal participation’ in the platinum and palladium auctions to LPPM bullion dealer full members (i.e. bank entity intermediaries), and by extension, excluding every other platinum and palladium market participant in the world of which there are thousands.  

Note that 7 other banks, namely, JP  Morgan, Scotia, Barclays, UBS, Deutsche Bank, Toronto Dominion Bank,and Credit Suisse, are ‘participating’ in the fixes in addition to the 5 member participants. Some readers will recognise that 4 of these additional banks, JP  Morgan, Scotia, Barclays, and UBS, are clearing members of the London precious metals markets along with HSBC and ICBC Standard through their membership of London Precious Metals Clearing Limited (LPMCL). The power of LPMCL banks in all four of the London precious metals markets, and their obsession with maintaining the clearing status quo, should not be underestimated, but it is a point which seems to have been ignored by the London financial media.

Participation and Governance of the LME administered prices

There does not appear to be any information on the LME website or associated uploaded documents that explains how interested participants can become participating members in the LBMA Platinum and LBMA Palladium auctions, or what the participation criteria is. These auctions therefore look like private clubs in the same vain of the LBMA Gold Price and LBMA Silver Price auctions, but even more closed and protected than their silver and gold counterparts.

The oversight committee for the platinum and palladium price auctions is even stranger. There is nothing independent about it. On the LME website, a document titled “Control Framework for LPP Prices“, paragraph 14, refers to an LPP Prices Oversight Committee for the Platinum and Palladium fixings, comprising 3 LME representatives, a possible 5 representatives (one each from the 5 member participants) and a potential LBMA observer:

“The Oversight Committee shall be composed of at least three senior individuals from the LME to serve as LME members on the Oversight Committee. These individuals will be appointed by the LME’s Executive Committee. Each member participant may also
nominate a qualified individual to act as a representative on the Oversight Committee. The London Bullion Market Association is entitled to nominate an observer to attend meetings of the Oversight Committee.”

However, the LME website shows that this Oversight Committee only consists of 3 representatives from the LME and no one else. It doesn’t even contain representatives from the member participants. Even if it did though, it’s still not independent, since there are no representatives from the wider global platinum / palladium sectors. Even the LBMA Gold Price and LBMA Silver Price administrators operate independent oversight committees, which while not perfect, are far more diverse than the LME Oversight Committee. See ICE Benchmark Administration (LBMA Gold Price) oversight committee and Thomson Reuters (LBMA Silver Price) oversight committee.

LBMA merger with LPPM

Apart from the fact that a lot of the same bullion banks and refiners have the strongest voices in both the LBMA and LPPM, the two bodies already collaborate on various initiatives, the most high-profile of which is the annual LBMA / LPPM precious metals conference. Up to a few years ago, this conference was described as “the LBMA Conference in association with the LPPM“, but is now billed as “the LBMA/LPPM Precious Metals Conference“, with LPPM having equal billing. The LBMA and LPPM have also on occasion jointed produced publications such as “A Guide to the London Precious Metals Markets“.

The LBMA’s roadmap for consolidating its power in the London precious metals markets has been well telegraphed since 2014. The fragmented nature of the 3 sets of precious metals fixings in London with 3 different platforms and 3 administrators is one aspect of the ‘Problem-Reaction-Solution’ agenda that has been played out by the LBMA and LPPM strategists since the 2nd half of 2014. An early inception of the idea of the LBMA and LPPM coming together was placed into the ‘Market’ in the October 2014 issue of the LBMA’s Alchemist magazine when LBMA consultant Jonathan Spall, in an article titled ‘No More Fixings‘  posed the question:

“Do we need an umbrella organisation with a strong voice to promote the interests of our rather small area of the global financial community?”

The ‘New World Order’ agenda was again pushed and crafted in the LBMA’s orchestrated ‘LBMA Strategic Review’ conducted by EY consultants,  a review which was not open to public consultation during the consultation phase, and the full findings of which have never been published. By June 2015, the LBMA CEO stated that the LBMA was planning to:

“Develop the precious metals market landscape to meet the current and future needs by implementing new services, new corporate structure and new governance

By October 2015 during the LBMA annual conference in Vienna, the LBMA CEO stated more specifically that:

A New Trade Association for all four metals will be formed which will hold the current assets of the market such as the Good Delivery List as well as develop new Financial Services to support market trading.”

Bloomberg summed up this October 2015 news as follows:

“The association [LBMA] is considering expanding its oversight to include platinum and palladium, rather than just gold and silver, Chief Executive Ruth Crowell said Monday at the conference, citing regulatory, political and competitive changes. Having all four metals under one group would make sense from a banking and vaulting perspective and LBMA members will be asked to vote on the change at the annual general meeting in June [2016], she said.”

The LBMA now plans to “update its legal structure and governance and a General Meeting has been called on June 29“. Note that this General Meeting is not the AGM. The implication here is that the proposals being tabled will be voted through by the members as the LBMA expressly wants them to be voted through. This General Meeting on 29 June has pushed back the scheduling of the LBMA Annual General Meeting to 27 September which will now “incorporate, into the constitution of the LBMA, the governance and legal structure changes agreed at the General Meeting in June.” So again, there is a presumption on the part of the LBMA that the proposed changes will go though. And there is no reason to doubt that these changes will not be implemented given that the entire plan has been in the works since at least mid 2014.

This whirlwind tour of the LPPM and associated entities will hopefully provide some pause for thought during London Platinum Week.