Tag Archives: good delivery

What’s Happening (or Not) at the LBMA: Some Updates

This article is in 3 parts and covers a) upcoming trade reporting in the London gold market which is being led by the London Bullion Market Association (LBMA), b) the recent publication by the LBMA of a Guide to the London OTC precious metals markets, and c) an update on monthly vault reporting which the LBMA and the Bank of England launched in 2017.

LBMA Trade Reporting

The lack of trade reporting in the London gold market is possibly one of the biggest ommissions in global financial markets, since the lack of gold trade data totally obscures knowledge of gold price discovery in a market that is predominantly a synthetic paper trading market, but which also plays hosts to the secretive world of central bank gold trading and central bank gold lending.

Trade reporting in the London gold market is also an initiative which the London Bullion Market Association (LBMA) has been promising to establish for more than 3 years, but which as yet has not produced one scrap of gold trade data, as the launch date and publication dates for this trade reporting have been continually pushed out.

In June 2014, in the wake of widespread trading misconduct, the UK Financial authorities launched the “Fair and Effective Markets Review” (FEMR) to improve confidence in the UK’s Fixed Income, Currency and Commodities (FICC) as well as to improve the fairness and efficiency of those markets.

The Review was conducted by the Treasury, the Bank of England and the UK Financial Conduct Authority (FCA) with the help of an independent Market Practitioner Panel drawn from the financial sector.

According to the FEMR, fair markets are those that have features such as market transparency and open access, while efficient markets are markets where trading and post-trade infrastructures provide sufficient liquidity and allow participants to discover and trade at competitive prices.

The FEMR recommendations were published in June 2015, which is now over two and a half years ago. One of the key recommendations of the FEMR report was to promote fairer market structures in FICC markets including improved transparency in over-the-counter markets. The Market Practitioner Panel also recommended that standardized physical markets such as the gold bullion trading market should have post-trade reporting so as to:

provide an understanding of liquidity, help to dispel some concerns over information abuse” and “work towards levelling the playing field.

During the review process, the FEMR authorities allowed interested parties to submit their views on the review, and in January 2015, the LBMA submitted a letter to FEMR (c/o the Bank of England) in which it stated that:

“The LBMA would also welcome further transparency through post trade reporting, providing the industry with data that at the moment does not exist for the bullion market.”

While this statement sounds innocuous enough, in a case of trying to steer the FEMR agenda while making it appear to be fully in agreement, the LBMA submission letter also made it clear that its members wanted the “precious metals market” to “report anonymised unique transactional data”.

In its submission, the LBMA further showed its true colours, i.e. that it primarily represents the powerful bullion banks and their central bank clients, as well as representing the interests of the Bank of England, when in a case of managing the expectations of the FEMR, the LBMA stated that “the role of the central banks in the bullion market may preclude ‘total’ transparency, at least at public level.” It also said that “transparency could be increased via post-trade anonymised statistical analysis of nominal volumes, provided by the clearing banks.”

The LBMA also cleverly retained control of the FEMR related agenda as it applied to the gold market when in April 2015 the LBMA launched its own “Strategic Review” of the London bullion market by commissioning the “independent” consultancy EY to undertake the actual strategic review and write a report.

Although the LBMA at the time gave lip-service to transparency and said that it would engage with the global bullion market in shaping this strategic review, the reality was otherwise and, for example, this author’s request for engagement were ignored by the LBMA. Furthermore, the actual EY report and its recommendations were never published and even the well-connected Financial Times in October 2015 said that it had only “seen” a “copy of the recommendations”.

One of the initiatives that supposedly grew out of this EY review was a Request for Information (RFI) by the LBMA to potential financial technology service providers in October 2015. This RFI was to “to assist the LBMA in delivering the EY recommendations from the Strategic Review.

What exactly the EY recommendations were is unclear, since the EY report was never published, but based on LBMA press releases, the goal of the review in terms of strategic objectives was said to be to enhance transparency, improve efficiency, and expand the use of technology in the gold and other precious metals markets.

The following month in November 2015, the LBMA announced that it had received 17 responses from 20 providers to its RFI queries, and that it had reappointed EY to help evaluate these responses.

Then on 4 February 2016 (i.e. exactly 2 years ago), the LBMA launched a Request for Proposals (RfP) process and asked a short-listed of 5 of the above 20 service providers to submit proposals to deliver a number of services to the London gold market including trade reporting, portfolio reconciliation and valuation curves, and also to build or provide infrastructure to support these services such as a submission interface, trade repository and data warehouse etc.

These services, including trade reporting, would, according to the LBMA press release, “be launched later in 2016”, and more specifically had a “target delivery date in the second half of 2016”.

Then a FEMR Implementation Report from July 2016 made note of the fact that the “LBMA had launched a specific ‘Request for Proposal’ focusing on trade reporting as a priority in response to the market commitment by LBMA members to enhance transparency.

But strangely, even though the LBMA said in February 2016 that it would launch trade reporting ‘later in 2016’, and even though the July 2016 FEMR noted that ‘trade reporting was a priority’, it was only on 12 October 2016 that the LBMA actually announced the winning entry in the RfP process.

This winning entry was awarded to a joint bid by financial technology service providers Autilla and Cinnober’s Boat Services Ltd. On the same day, the LBMA pushed out the launch date of trade reporting even further into the future and said that “in the first quarter of 2017, the LBMA together with Boat…will launch a trade reporting service”.

At the LBMA annual conference in Singapore on 17 October 2016, the LBMA CEO Ruth Crowell also said in her speech that:

“Now, what are these New Services? First and foremost, Phase One will focus on reporting and will launch in Q1 2017. This reporting covers all Loco London Spot, forward & option trading.”

“Reporting will not only make us more transparent and professional as a market….it will also demonstrate of the size and liquidity of the market for clients, investors and regulators.”

Also, at the same conference In October 2016, Jamie Khurshid, CEO of Boat Services Ltd  provided a timeline for the roll-out of the LBMA’s trade reporting, which included the following:

  • November 30 2016: Completion of design phase & engagement with member firm technology organisations
  • Q1 2017: Implement customization and configuration of solution
  • End Q1 2017: Complete on-boarding, certification & training
  • April 2017: Soft Launch to manage member flow exposure risk

Then in February 2017, in an article titled “Banks to Test London Gold-Trading Platform in Transparency Push”, Bloomberg addressed the LBMA’s trade reporting project and Boat’s reporting system LBMA-i and quoted LBMA CEO Ruth Crowell as saying that:

“LBMA-i will be ready to start collecting data in the second quarter” (2017)

“The data will then be vetted before being published later in the year” (2017)

However, in the May 2017 issue of the LBMA’s magazine, The Alchemist, the LBMA had already shifted the trade reporting dates even further out, with the LBMA CEO saying that:

Reporting will begin later this year in a phased approach and, following a period of quality checking the data, it is expected that it will be published in early 2018.

Then in the August 2017 issue of the LBMA’s Alchemist, LBMA Chainrman Paul Fisher stated that:

“Market Makers are expected to start reporting in the coming months, followed by other members later in 2017. After a period of quality checking, it is expected that the first data will published in early 2018.

At the LBMA’s next annual conference in October 2017 in Barcelona, there were a few additional references to trade reporting with the LBMA’s legal counsel saying that:

From September this year (2017), Market Makers and some full trading Members have started to report trade data into the LBMA-i. The LBMA-i is the reporting hub that is provided by Boat and Autilla.

the data is sufficiently anonymous without giving away the underlying client. The data will then be aggregated and published but not until Q1 2018. This is to provide the time to analyse the data and again work with the market to understand what we need to be publishing.

In this extremely long drawn out exercise by the LBMA, it must be clear by now that the LBMA and its trading members are engaging in this trade reporting project on their own terms, and with little regard for the spirit and recommendations of the Fair and Efficient Markets Review. There is also a trend of missed deadlines, broken promises, and a lack of explanation for the delays. Trade reporting data is being sent internally, analysed heavily, and filtered and scrubbed and sanitized. Nothing as yet has been published, and promised publication dates have been continually pushed out.

The LBMA doesn’t even try to hide this, saying in one of its conference presentations that the “decision to publicise anonymous, aggregate data sits with LBMA and Member firms” and that it requires “a minimum of 3 months to analyse data and agree parameters for public deferral”.

In all of this, gold investors of the world are getting the usual run around. The LBMA’s agenda for implementing trade reporting has far less to do with providing gold trade data to the investing public and the global gold market, and a lot more to do with influencing lobbying efforts with regulators and placating the woolly recommendations of soft touch regulators.

There isn’t even any clarity on what level of trade date will be made available to the public when and if it is finally released. The LBMA claims that the reporting by its trading members is mandatory and covers “all four metals” (gold, silver, platinum and palladium) in  “spot, forward, options, deposits, loans and swaps, whether Loco London, Loco Zurich or other locations.

If so, they should release all of this data, in granular format by category, showing for each metal, trade volumes by transaction type across spot, forward, options, deposits, loans and swaps. Transparency also calls for data that is useful for analysis, like the full suite of trade data that is reported by the world’s securities exchanges, where all trades would be reported, showing price, quantity, trade type (spot, option etc), transaction type (ETF, consignment etc), client counterparty types (central bank, broker, commercial bank, hedge fund, refinery, miner etc).

The LBMA’s reporting when published should also reveal the size of the physical gold market relative to the non-physical (paper) gold market. As the LBMA’s submission letter to FEMR in 2015 said:

Reporting in the physical market, which currently does not happen, will need to consider market pricing factors such as premiums, shipping/storage, taxes and duties.

So, yes, its possible that this information on the physical market can be reported. Technically there is nothing preventing this. But will it be reported? Likewise, will the trade data that is published reveal the magnitude of fractionally-backed unallocated gold trading that accounts for over 95% of daily London gold market turnover?

Another area critical for trade reporting report is central bank gold trades and central bank gold lending and gold swap related trades. Will central bank trades be reported as a grouping? Highly unlikely, as the LBMA already said that “the role of the central banks in the bullion market may preclude ‘total’ transparency, at least at public level.

But as I see it, almost none of the above will be reported by the LBMA, and the most we can expect per metal is a gross trade turnover figure rolled up by month, which is a figure that is practically useless in revealing anything about the real workings of trading in the London precious metals markets.

The LBMA Guide to the OTC Precious Metals Market

In early November 2017, the LBMA published an updated “Guide to the Global OTC Precious Metals Market”. The guide in pdf format can be opened here. The relevant LBMA press release is here. The guide is edited by Jonathan Spall, consultant to the LBMA, with input also from Aelred Connelly PR Officer to the LBMA.

On first reading, although well presented, it becomes apparent that this new Guide does not contain very much new information at all, with most of the information in the guide either already on the LBMA website, or taken from other LBMA publications and tweaked slightly. More recent developments such as London vault reporting or the LBMA Gold Price are included, but only the type of content that was already in the associated LBMA press releases.

If you didn’t know anything about the London gold market, this guide might provide some introductory detail, but other than that, it’s like a standard reference text which would be found in a reference library.

Unbelievably, this updated LBMA guide claims that it seeks to “make the moving parts of the market transparent”. However, in reality, it provides very little detail on transparency, so this claim rings hollow.

There is nothing revealed in the guide as to how the market really works, who the influential players are, and no data that would reveal the real state of the market, i.e. the fractional backing of unallocated accounts, the level of outstanding gold lending, the working of the gold vaults, how gold ETFs are allocated to and from what sources they are allocated from, how the Bank of England interacts with the commercial bullion banks and its client central banks, the trading volumes in the market and what transaction types they refer to etc.

This is a pity and a missed opportunity, since if it wanted to, the LBMA could have revealed how the moving parts of the market really work. But it is not surprising, since in its public and media interactions, the LBMA essentially acts as gatekeeper, regulating and filtering the information that it allows to be disclosed about the London gold market.

Structure of the Guide

Excluding the introduction and appendices, there are 22 sections in the guide. As well as gold and silver, the guide also covers the London Platinum and Palladium Market (LPPM), and the good delivery system for platinum and palladium.

TABLE OF CONTENTS

  • Editor’s Note
  • Introduction
  • London Bullion Market Association
  • London Platinum and Palladium Market
  • The Price
  • London Good Delivery – Gold and Silver
  • Good Delivery – Platinum and Palladium
  • London Precious Metals Clearing Limited
  • Precious Metal Accounts
  • Lending and Borrowing Metal
  • Options
  • Precious Metal Benchmarks
  • Bank of England
  • Futures Markets and Exchange
  • Traded Products
  • Physical Metal
  • Documentation
  • Market Regulation
  • Taxation
  • Conversion Table
  • Key Facts about Precious Metals
  • Clearing Statistics
  • Market Trade Statistics
  • Central Bank and Governmental
  • Ownership of Gold
  • Properties of Precious Metals
  • Frequently Asked Questions
  • Annexes
  • Disclaimer

Looking at the table of contents, the sections which would appear to be of particular interest and worth scrutinizing to see if they provide any new information are as follows:

Section 4: The Price

This section has short discussions of things like characteristics of the price (troy ounce, fineness etc), that are mostly taken from a page on the LBMA web site. Most importantly, this section does nothing to illuminate important questions about ‘price discovery’ or ‘where does the internationally quoted gold price come from?’.

There is nothing in this section about price discovery or that the prices on COMEX and the London OTC market create the international gold price. COMEX is mentioned elsewhere in the guide not in relation to price discovery.

You have to read between the lines to see how the guide addresses the issue of trading and price. It first says that it’s a wholesale market price [true]. It then mentions delivery location of London – i.e., ‘loco London’. All it says is as follows:

“The standard delivery location of gold and silver is London – Loco London. This is ultimately an account held with a clearing bank for precious metals and backed by metal held in a vault in London that forms part of the clearing system.”

However, this paragraph fails to mention that these are fractionally-backed unallocated positions, and that the position in the account with a clearing bank is a synthetic cash-settled gold derivative and really not backed by gold. The ‘backed by metal held in a vault in London’ is therefore misleading and disingenuous, since there is not necessarily any gold backing an ‘account held with a clearing bank’.

Section 4 then ends with a baffling and confusing paragraph which looks deliberately designed to mislead with a title of “The Metal’ Not the Account”, which says:

“Clearly, gold, silver, platinum and palladium are all traded metals. It is an important distinction that it is not unallocated or allocated metal that is traded, but the metal itself.

The terms ‘allocated’ and ‘unallocated’ simply reflect the type of account over which the metal clears post trading of the underlying metal.”

This line, that “it is not unallocated or allocated metal that is traded, but the metal itself” looks like an attempt by the author to try to justify that all trading in the London market is trading of underlying metal. However, when an unallocated position is traded, it is just a claim on a bullion bank that is being traded. There is no specific metal. Its is just a liability to a bullion bank that is traded. And since these positions are fractionally-backed, it is not metal which is being traded. So, its mischievous to say that “the metal itself” is being traded. Perhaps the LBMA should be asked “Show me which underlying metal is being traded?

Section 7: London Precious Metals Clearing Ltd (LPMCL)

The LPMCL is one of the most important components of the London gold and silver markets since all trades that flow through these markets are cleared through LPMCL. But strangely, this section say very little about LPMCL and there is no discussion of the London precious metals clearing statistics or what they represent. This section merely says that LPMCL is a:

“daily clearing system of paper transfers whereby LBMA members offering clearing services utilise the unallocated precious metals accounts they maintain between each other” and that LPMCL lies at the heart of the Loco London (OTC) system”

This section could have actually provided real detail in LPMCL. But it didn’t. It just takes some text from the LPMCL website. The LPMCL subsection also has no explanation of the AURUM system and the fact that it its unallocated metal that is being cleared.

In fact, this entire LPMCL section is misleading because the section is titled “London Precious Metals Clearing Limited” and apart from a few introductory paragraphs about LMPCL, the rest of the section is devoted to physical gold vaulting, with sub-section headings such as” Vault Managers”, “Vault Operators Accreditation Scheme”,  “Weighing Gold”, “Weighing Silver”, “Traditional Weighing”, “Weighing Platinum and Palladium”, “Scales”.

But clearing of paper transfers (which LPMCL’s  AURUM processes) is not related to vaulting of physical metal. Allocating metal is distinct from the clearing of trades in AURUM. It’s a separate step. Notably, this section also doesn’t mention who the member banks of LPMCL are. They are HSBC, JP Morgan, Scotia, ICBC Standard, and UBS. Could it be trying to draw attention away from the names (the bullion banks) that actually run the LBMA?

Notably also, in the LPMCL website under Definitions, there is a definition for Paper Gold:

“A term used to describe gold contracts such as loco London deals and future contracts which do not necessarily involve the delivery of physical gold.”

Section 8: Precious Metal Accounts

This section begins with the strange, and misleading comment that “it’s the metal that’s being traded”:

“The Metal not the Account

Clearly, gold, silver, platinum and palladium are all traded metals. It is an important distinction that it is not unallocated or allocated metal that is traded, but the metal itself.

Given that the LPMCL website definition of unallocated metal is an “amount of that Precious Metal which we have a contractual obligation to transfer to you”, the “metal not the account” statement above makes little sense and is illogical.

Section 9: Lending and Borrowing

The first subsection of section 9 is titled “Deposits and Leases”, but there is no mention that bullion banks predominantly do the borrowing or that the central banks predominantly do the lending, nor of the level of outstanding loans from central banks to bullion banks.

In a subsection called “Lending Allocated Metal”, it mentions official central bank holdings of 33,399.2 tonnes in July 2017, but makes no attempt to comment on how much of this metal is lent out:

As of July 2017, it has been calculated by the World Gold Council (using data from the International Monetary Fund’s International Financial Statistics) that the world’s central banks hold 33,399.2 tonnes of gold. A listing appears in section 22.

But the question must be asked, why does the LBMA need to resort to quoting figures from the WGC which are in turn just figures reported to the IMF when the LBMA can get lending info from its member firms about gold lending activity, and from the Bank of England.

This subsection also states that central banks lends to commercial banks. But there is no mention of which central banks and commercial banks are involved, or the level of gold lending by central, or the length of deposits, or whether they roll over the loans and for how long.

Interestingly, the same subsection confirms that if a central bank lends out its allocated gold bars, it doesn’t get back the same bars. As the text says:

“Therefore, allocated metal becomes unallocated when it is lent but can be returned as allocated. Albeit, it will be returned with different bars and will likely be of a (slightly) different weight.

‘’…it’s not possible to lend allocated metal. Allocated metal is associated with specific bars in an account and, clearly, it is not possible to lend specific bars and expect to get the same ones back while receiving a return”

Section 12: Bank of England

There is nothing new in this section, and only vague references of how central banks in the London gold market lend and swap gold with bullion banks.

The Bank provides safe custody for the United Kingdom’s gold reserves (owned by Her Majesty’s Treasury) and for other central banks. This supports financial stability by providing central banks with access to the liquidity of the London gold market. It also provides gold accounts to certain commercial firms (including members of the LBMA) that facilitate access for central banks to the global OTC gold market.”

Section 14: Physical Market

This section is short and only addresses consignment stocks and inventory financing. Its quite telling that a Guide to the London OTC gold market only has one section (out of 22) about a ‘Physical gold market”.  In a real, specialized physical gold market (not London), this would takes many pages to cover. The intro to this section even tacitly admits that loco London trading has nothing to do with the physical gold market:

However, unlike Loco London trading, the physical market can require knowledge of a myriad of specific country requirements, the logistics and costs of moving precious metal around the world in various forms prior to fabrication, the manufacturing costs at the various refineries and sourcing refining/manufacturing capacity.”

Section 21: Market Trade Statistics

This section is as good as blank given that there are no gold market trade statistics. This page just gives some sketchy information about the delayed gold trade reporting project (see above).

Section 22: Central Bank and Government Ownership of Gold

For such a promising sounding section, based on the title, this section is a real letdown and has nothing in it except a short introduction followed by a replicated table of World Official Gold Holdings sourced from the World Gold Council.

 Limited Hangout

This new updated LBMA Guide is in some ways similar to a ‘Limited Hangout’ as the term is used in the intelligence community, i.e. revealing partial truth while keeping the main body of information hidden, and acting as gatekeeper to drip feed some information.

In other words, some information is ‘hung out’ while the main body of information is kept hidden. The public see the information that is offered and thinks “this is useful, this source is credible” but then the public inquires no further. The LBMA can point to the fact it is ‘transparent’ about the gold market, while actually not revealing anything at all important about the real workings of said market. The LBMA has drip fed some information to the public while actually acting as gatekeeper and preventing any critical information from reaching the market.

One of the characteristics of a limited hangout is that nothing new is really revealed about the subject matter being discussed. This is exactly what the LBMA guide is. All of the information contained in the guide is already on the LBMA website or else within LBMA press releases.

There is also a failure to discuss the most important areas of the London Gold Market including the fractional reserve nature of unallocated gold accounts, what the daily gigantic trade volumes in gold and silver are based on, how the London OTC gold market that trades huge quantities of synthetic gold positions continues to set the international gold price, the extent of gold lending in the London market and who are the lending central banks and who are the borrowing bullion banks, the real role of the Bank of England in the London market and the lending market, how the LMPCL clearers maintain gold accounts at the Bank of England.

This goes back to the theme of transparency and secrecy that I discussed in a presentation in Singapore October 2016 titled “The Gold Market – Where Transparency means Secrecy”, a transcript of which can be read here.

This also relates to the topic of market efficiency and availability of market data and information. Because, a market which is secretive and which is not transparent, such as the London Gold Market, cannot be efficient, because some market participants, namely bullion banks and central banks, have an informational advantage over other participants.

And remember that the London Gold Market creates the international gold price, so the transparency of this market is not just a theoretical issue, it has real world implications for everyone who owns and transacts in physical gold around the world.

Vault Holdings Reporting

Last year in 2017, both the Bank of England and the London Bullion Market Association (LBMA) for the first time began publishing monthly data showing the quantities of physical gold and silver held in the wholesale precious metals vaults in London.

The Bank of England data covers monthly gold holdings held by its central bank and commercial customers in the Bank of England’s gold vaults. Note that the bank of England does not store any silver. The LBMA publishes monthly data on both the gold and silver held in the vaults of the 8 commercial vault operators which comprise its vaulting network.

Both sets of data are published on a 3-month lagged basis. The Bank of England began to independently publish its monthly gold vault data at the end of the first quarter 2017, and the first month’s figures for the end of December 2016 revealed that the Bank’s gold vaults held 5102 tonnes of gold. See “Bank of England releases new data on its gold vault holdings” for more details. Prior to 2017, the Bank only published gold vault holdings data once a year in its annual report.

The LBMA began publishing its vault data at the end of July 2017. Prior to that the LBMA had never published any data addressing precious metals holdings in its London vaulting network.

When the LBMA published its first set of data at the end of July, it stated that as of 31 March 2017 there were 7449 tonnes of gold and 32078 tonnes of silver in the vaults of the 8 commercial vault operators that comprise its vaulting network. See  “LBMA Gold Vault Data – How low is the London Gold Float?” from 2 august 2017 for more details.

For some reason, the first set of LBMA was on a 4-month lagged basis, however, since then they have since caught up to reporting on a 3-month lagged basis.

Since it’s now 6 months since the LBMA first released its vault data, it’s timely to do a short update on the more recently published vault data from both the LBMA and the bank of England, starting from the end of March 2017.

At the end of March 2017, the Bank of England was storing 5081 tonnes of gold in the vaults under its headquarters building in London. As of September 2017 (the latest month published), the Bank of England was storing 5220 tonnes of gold. Therefore in that 6 month period, net gold holdings in the Bank of England’s vaults increased by 139 tonnes, or 2.73%. There were net additions of gold to the Bank’s vaults in 5 of those 6 months, but nothing really significant stands out. A net 43 tonnes were added in April, 33 tonnes in June, there was a net decline of 8 tonnes in July, and a net addition of 56 tonnes in September.

See chart below for a graphical representation of these Bank of England vault holdings changes.

Bank of England custodial gold holdings as of 30 September 2017. Source: www.GoldChartsRUs.com

Over the 6 month period from month-end March 2017 to month-end September 2017, the LBMA precious metals vaults saw a net inflow of 294 tonnes of gold, or a 3.95% increase. There were net additions over the same 5 months as the Bank of England witnessed. On an aggregate basis, total gold holdings rose from 7449 tonnes to 7743 tonnes with large net inflows of gold bars appearing in the LBMA vaults in April with 47 tonnes added, 45 tonnes added in June, 86 tonnes added in August, and September saw the highest inflow with 157 tonnes of gold added. Only July 2017 saw net outflows of 59 tonnes of gold bars.

See chart below for changes to these LBMA vault holdings totals.

LBMA vaults gold holdings as of 30 September 2017. Source: www.GoldChartsRUs.com

Adding the gold inflows of 294 tonnes in the LBMA vaults to the gold inflows of 139 tonnes in the Bank of England vaults, this means that over the 6 month period being discussed, the total amount of gold stored in all the London wholesale gold vaults increased by 433 tonnes, which is the equivalent of just under 35,000 Good Delivery gold bars, each weighing approximately 400 ounces. Gold-backed ETFs which store their gold in London only added about a net 40 tonnes of gold over the same period, so could only explain a small part of the total increase.

The LBMA vaults on an aggregated basis added 1794 tonnes of silver over the same 6 month period to the end of September 2017. Total silver holdings rose from 32078 tonnes to 33873 tonnes. This was a net increase of 5.6% in the total silver quantity held in the vaults. The largest net inflows were in April with 749 tonnes added, and June with 658 tonnes of silver added. Silver-backed ETFs which hold their silver in London actually saw net outflows over the 6 month period in question, so these movements do not explain the large 1794 tonnes of silver added to the London vaults over this time.

LBMA vaults silver holdings as of 30 September 2017. Source: www.GoldChartsRUs.com

 

How many Good Delivery gold bars are in all the London Vaults?….including the Bank of England vaults

Each year in June, the Bank of England publishes its annual report which quotes financial data up to the end of February (its financial year-end). The Bank’s annual report also states the amount of gold, valued at a market price in Pounds sterling, that it holds under custody for its customers, which comprise central banks, international financial institutions, and LBMA member banks.

The Bank of England as gold Custodian

In 2014, the Bank of England stated that, as at 28th February 2014, it held gold assets in custody worth £140 billion for its gold account customers, while in 2013, the corresponding figure was £210 billion. In June 2014, Koos Jansen of Bullionstar calculated that the Bank of England therefore held 5,485 tonnes of customer gold at the end of February 2014, and 6,240 tonnes of customer gold at the end of February 2013. This meant that between the two year end dates, end of February 2013 to end of February 2014, the amount of gold in custody at the Bank of England fell by 755 tonnes.

In his personal blog in June 2014, Bron Suchecki of the Perth Mint, also discussed the 2013 and 2014 Bank of England gold custody tonnage numbers, and derived the same 755 tonne drop between February 2013 and February 2014, and he also went back all the way to 2005 and calculated yearly figures for each February year-end from 2005 to 2014. (See table in Bron Suchecki’s blog).

Bank of England gold in custody down another 350 tonnes during 2014

Applying a similar exercise to the Bank of England 2015 Annual Report (large file), the report states (on page 34) that:

“As of 28 February 2015, total assets held by the Bank as custodian were £514 billion (28 February 2014: £594 billion), of which £130 billion (28 February 2014: £140 billion) were holdings of gold.” 

Since 28th February 2015 was a Saturday, the afternoon London Gold Fixing price in GBP on Friday 27th February 2015 was £787.545 per ounce.

£130 billion @ £787.545 per ounce = 5134.37 tonnes = ~ 410,720 Good Delivery bars

This means that between 28th February 2014 and 28th February 2015, the amount of gold stored in custody at the Bank of England fell by another 350 tonnes, from 5,485 tonnes in February 2014, to 5,134 tonnes on 28th February 2015.

Now only 500,000 bars in the entire London vaults system

On page 19 of a London Bullion Market Association (LBMA) presentation on 15th June 2015 in Texas, given by LBMA CEO Ruth Crowell to the International Precious Metals Institute (IPMI), it stated that:

There are ~500,000 bars in the London vaults, worth a total of ~US$237 billion

Page 19 of LBMA presentation from 15th June 2015
Page 19 of LBMA presentation from 15th June 2015

 

500,000 bars ~= 6,250 tonnes

On 15th June 2015, the morning LBMA Gold Price was set at $1178.25, which would make $237 billion worth of gold equal to 201.145 million ounces, which is 6,256 tonnes.

So, there are now only about 6,250 tonnes of gold in the London vaults, including the gold in the Bank of England vaults.

 

From 9,000 tonnes to 7,500 tonnes to 6250 tonnes

The LBMA stated earlier this year on a vaulting page on its website that:

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

Based on this metric, that comes out as (7500 * 0.75) or 5,625 tonnes of gold bars in the Bank of England vaults, and 1,875 tonnes of gold bar in other London vaults.

An earlier version of the same LBMA vaulting page with a website imprint from April 2014 stated that:

In total there is approximately 9,000 tonnes of gold held in London vaults, of which about two-thirds is stored in the Bank of England.”

So that earlier reference would have been (9000 * 0.66) or 6,000 tonnes in the Bank of England and 3,000 tonnes in the other vaults. To summarise:

Earliest quotation

  • 9,000 tonnes in all London  vaults = 720,000 bars
  • 6,000 tonnes in Bank of England (BoE) = about 482,000 bars
  • 3,000 tonnes in  London ex BoE vaults = 238,000 bars

Second quotation

  • 7,500 tonnes in all London vaults  = ~600,000 bars   => lost 120,000 bars (1500 tonnes)
  • 5,625 tonnes in Bank of England = ~ 450,000 bars  => lost 32,000 bars (375tonnes)
  • 1,875 tonnes in Ldn ex BoE  vaults = ~150,000 bars  => lost 88,000 bars (1125tonnes)

Third quotation: June 2015

  • There are ~500,000 bars in the London vaults, worth a total of ~US$237 billion

 

The London vaults refer to at least the LBMA London vaults, and may include other non-LBMA gold vaults in London, depending on how the LBMA collected these figures from the vault operators. Apart from the Bank of England gold vaults, the LBMA ‘London’ vaults, are the vaults of JP Morgan and HSBC Bank in the City of London, the vaults of Brinks, Malca Amit and Via Mat (Loomis) out near Heathrow, and the vault of G4S in Park Royal, and not to forget the Barclays vault which is run by Brinks.

In the cases of the 9,000 tonnes and 7,500 tonnes quotations, the tonnage figures and the fractions are probably rounded to an extent for simplicity, so are ballpark figures, but a comparison between the two earlier quotations indicates that the Bank of England lost 375 tonnes, and the rest of the London vaults lost 1,125 tonnes. In total that’s 1,500 tonnes less gold in London between the time the first figure was complied and the time the updated (second) figure was published.

Factoring in the “There are ~500,000 bars in the London vaults, worth a total of ~US$237 billion  quotation, which equates to 6,250 tonnes, this means that another 1,250 tonnes of gold (approximately 100,000 Good Delivery bars) has now gone from the London gold vaults compared to when there was 7,500 tonnes of gold in the London vaults, as quoted on the vaulting page of the LBMA’s web site as recently as earlier this year.

A total of 6,250 tonnes is also 2,750 tonnes (about 220,000 Good Delivery bars) less than the 9,000 tonnes quoted on the LBMA web site in April 2014, which may have referred to a period earlier than  2014.

All of the gold in the Bank of England would be London Good Delivery bars (i.e. variable weight bars each weighing about 400 oz or 12.5kgs), and most, if not all, of the gold in the other London vaults would also be London Good Delivery bars, because importantly, all the gold held by the ETFs in London, primarily the SPDR Gold Trust at the HSBC vault in London, is required by the ETF prospectuses to be in the form of London Good Delivery gold bars.

In fact, Stewart Murray, the then CEO of the LBMA stated at a presentation held in Paris in November 2011 that the gold in the London vaults was “Virtually all in the form of Good Delivery bars”, although by August 2015, a very recent presentation (slow file to load) by current LBMA CEO Ruth Crowell in Goa India, stated that, in the London gold market, “Almost all gold is held in the form of Good Delivery bars“.

Symantics maybe between ‘virtually‘ and ‘almost all‘, but there are probably some kilobars held in the London gold vaults now that might not have been as common in 2011. Note that the LBMA and the Shanghai Gold Exchange recently executed a mutual recognition agreement for a 9999 gold kilobar standard, so each body now recognises the kg bars manufactured by all of the gold refiners that each body has accredited.

The LBMA has also recently made reference to a potential 995 gold kilobar standard which it has referred to as a ‘draft for discussion and possible endorsement”. See the Goa presentation from Ruth Crowell, above.

BoE Gold and forklift

What time period did 9,000 tonnes refer to?

LBMA launched a new version of its website in approximately March 2014. It’s not clear what exact month this 9,000 tonnes of gold in the London vaults figure refers to, but a lot of the text on the new LBMA website in 2014 was already on the previous version of the website prior to the revamp, so the tonnages specified on the new website in April 2014 could have been on the previous version of the website before April 2014 and merely been copied across to the new website. However, there is a way to infer the latest date at which the 9,000 tonne figure could have been referring to.

At the Fifth LBMA Assaying & Refining Seminar, held in London between 10th and 12th March 2013, Luke Thorn from the Bank of England gave a talk about the “Bank of England’s role in the physical gold market”, in which he stated:

“At our premises at Threadneedle Street, London, we have approximately £200 billion worth of gold stored over 10 vaults.”

On 11th March 2013, the GBP price for an ounce of gold was £1059 (average of AM and PM fixes in Sterling). At £1059 per oz, $200 billion of gold is 188,857,412 ounces, or 5,874 tonnes, or about 469,940 Good Delivery bars.

Recalling the two totals discussed above at the Bank of England of 6,000 tonnes and 5,625 tonnes, this 5,874 tonnes figure is quite close to being halfway between 6000 and 5625 (i.e. 6000 + 5625 / 2 = 5812.5 tonnes). So its realistic to assume that Luke Thorn’s number lay somewhee in time between the two LBMA quotations, and that therefore, the 6,000 tonnes total at the Bank of England, and by extension the 9,000 tonne total in all London vaults, most likely referred to the state of the London gold market before 11 March 2013.

In other words, the 9,000 tonnes in the London vaults, and the 6,000 tonnes in the Bank of England, were referring to the amount of gold in the London vaults before the major drop in the gold price in April 2013 and June 2013, and before the huge 2013 withdrawals of gold from the gold ETFs which store their gold in London, and before most of the 755 tonnes of gold was withdrawn from the Bank of England (BoE) between 28th February 2013 and 28th February 2014.

 

 Only 90,000 Good Delivery bars outside BoE vaults – this includes all London ETF gold

If there are now only 500,000 Good Delivery bars in the London vaults, as LBMA CEO Ruth Crowell’s presentation of June 2015 states, then with 410,000 Good Delivery gold bars in the Bank of England vaults (5,134 tonnes from 28th February 2015), then there are only 90,000 Good Delivery gold bars in the other London gold vaults, which is 1,125 tonnes.

Not only that, but nearly all of this 1,125 tonnes in the other London vaults is gold belonging to the physical gold-backed ETFs which store their gold in London. The ETFs that store their gold bars in London are as follows:

(Note: PHAU and PHGP are the same ETF. They are just two ISINs of the same underlying ETF. PHAU is in USD, PHGP is in GBP. The same structure applies to the other ETF Securities ETF known as GBS. GBS and GBSS are the same ETF. GBS is the USD ISIN and GBSS is the GBP ISIN).

The SPDR Gold Trust (GLD) currently holds 682 tonnes of gold in the vault of HSBC in London. That leaves only 443 tonnes of gold from the 1,125 tonnes above that is not in the GLD.

The iShares Gold Trust (IAU) gold is held in 3 vaults in 3 countries, namely the JP Morgan vault in London, the JP Morgan vault in New York, and the Scotia vault in Toronto. On the surface, this is an unusual vaulting arrangement for IAU. This arrangement just arose due to the way the IAU prospectus was worded in 2004, and the way the original iShares Gold Trust custodian, Scotia Mocatta, stored the gold in London, New York and Canada. JP Morgan took over as custodian for IAU in the second half of 2010, and just maintained this 3 vaults in 3 countries arrangement for whatever reason. Some of the Authorised Participants of IAU include Barclays, Citibank, Credit Suisse, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, Scotia, and UBS.

In the JP Morgan vault in London, IAU currently holds 7,265 Good Delivery gold bars (2.907 million ounces), which is 90 tonnes. That leave only 353 tonnes in the London vaults, that is not at the Bank of England, not in the SPDR Gold Trust, and not in the iShares Gold Trust.

As of 3rd September 2015, the ETFS Physical Gold ETF (PHAU) held 3,271,164 troy oz of gold in London at HSBC’s vault. That’s 101.7 tonnes in PHAU, which leaves only 251 tonnes unaccounted for in the London vaults.

There is also another ETFS physical gold ETF called Gold Bullion Securities (GBS) which also holds its gold in the HSBC London vault. As of 3rd September 2015, GBS held 2,233,662 troy oz of gold. That’s 69 tonnes. Subtracting this 69 tonnes from the residual 251 tonnes above, leaves only 182 tonnes of unaccounted for gold in the London vaults.

Some of the Authorised Participants of the ETFS ETFs are Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Merrill Lynch, Morgan Stanley, Scotia, and UBS.

The ‘Source Physical Gold ETC (P-ETC)‘ also stores its allocated gold in the JP Morgan vault in London.  This gold is held for the trustee Deutsche Bank by the custodian JP Morgan Chase. The Authorised Participants for this Source ETC are Goldman Sachs, JP Morgan, Bank of America, Morgan Stanley, Nomura and Virtu Financial. According to a Source gold bar list dated 28th August 2015, the Source Physical gold ETC held 1.571 million fine ozs of gold in bars that weighed 1.574 million gross ozs, so that’s about 3,925 Good Delivery bars, which is about 49 tonnes.

Subtracting this 49 tonnes from the remaining 182 tonnes above, which are not held within the Bank of England, and which are not held by the other physically backed gold ETFs described above, leaves only 133 tonnes of unaccouted for gold in the London vaults.

Other companies store some of their customer gold in the London vaults, such as GoldMoney and BullionVault. Based on its daily update, BullionVault had 6709 kgs of gold, or 6.7 tonnes, stored in London, while GoldMoney, based on an audit from 1st December 2014, had 410 Good Delivery bars, or about 5.14 tonnes, stored in Via Mat’s (Loomis) London vault. Combined, that’s another ~14 tonnes of gold which can be substracted from the 133 tonnes above, leaving only 119 tonnes that is not  accounted for.

To put a figure such as 119 tonnes of gold into perspective, this is about the same amount as 1-2 weeks worth of gold withdrawals from the Shanghai Gold Exchange, or about 1 month’s worth of official gold imports into India.

Unallocated Musical Chairs, without any chairs

In a May 2011 presentation at the LBMA Bullion Market Forum in Shanghai, while discussing London gold vaults, former LBMA CEO Stewart Murray had a slide which read:

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

 

There are 2 interesting things about the above slide. If central banks ‘hold large amounts of allocated gold at the Bank of England”, which totalled 6,000 tonnes and then 5,625 tonnes, and more recently 5,134 tonnes, and if this is a proxy for an amount being ‘large’, then the 2nd statement with the quantum “very substantial amounts’ and especially the qualifier ‘very’, implies that the unallocated amounts represent larger amounts than the ‘allocated’ amounts, perhaps ‘very’ much larger amounts.

That 2nd statement is also a contradiction in terms. Unallocated gold is not necessarily held in vaults or held anywhere. Unallocated is just a claim against the bank that the investor holds an unallocated gold account with. There are no storage fees on an unallocated gold account in the London Gold Market precisely because one cannot charge a storage fee when there is not necessarily anything being stored.

So the ‘very substantial amounts‘ being held really means that investors have very substantial amounts of claims against the banks which offer the unallocated gold accounts, or in other words, the banks have very substantial liabilities in the form of unallocated gold obligations to the gold account holders. As to how much physical gold is on the balance sheets of the banks to cover these liabilities, if the figure of 500,000 bars in the entire set of London vaults is accurate, then there is hardly any gold in London to cover the unallocated gold accounts.

Bank of England

LBMA Member gold accounts at the Bank of England

A 2014 quarterly report of the Bank of England said that 72 central bank customers (including a smaller number of official sector financial organisations) held gold accounts with the Bank of England. That reference is on page 134 of the report, however, a small subset of the report, including page 134 can be viewed here (and is not a large file to download).

Then, in a slide from a presentation by then LBMA CEO Stewart Murray in London in 2011, one of the Powerpoint pages (page 15 of the pdf) stated that:

The Bank of England acts as gold custodian for about 100 customers, including central banks and international financial institutions, LBMA members and the UK government.”

If central bank customers with gold accounts, whose numbers would not change that much from 2011 to 2014,  represented ~72 gold accounts, that would mean that up to 28 LBMA members could have gold accounts at the Bank of England.

Is that number of LBMA member bullion banks a feasible number for maintaining a gold account at the Bank of England? Yes it is, primarily because of the gold lending market, but also due to the way the London gold clearing market works.

Bolivia’s gold and the Bullion Banks

Just as an example, the Central Bank of Bolivia’s gold that it lent to bullion banks in 1997 and that has never been returned to the Central Bank of Bolivia, has gone through the hands of at least 28 bullion banks between 1997 and the present day. These entities, some of which have merged with each other (*), and a few of which imploded, include Swiss Bank Corp*, Republic National Bank of New York*, Midland Bank (Montagu)*, Credit Suisse, SocGen, Natixis, BNP Paribas, Standard Chartered, ANZ, Scotia Mocatta, Barclays, Morgan Stanley, HSBC, Macquarie, Deutsche, Dresdner*, Bayerische Landesbank, Westdeutsche Landesbank*, JP Morgan*, Commerzbank*, Citibank, Rabobank, Morgan Guaranty* and Bayerische Vereinsbank. The IBRD (World Bank) even took on to its books the borrowed gold positions of the bullion banks during the financial crisis in 2009 because it had a higher credit rating than the investment banks after the Lehman crisis.

The lent gold of Central American banks during the 2000s, such as the gold of Guatemala, El Salvador, Honduras and Nicaragua,  had been on the books of additional banks Mitsui & Co, J Aron (Goldman), Mitsubishi, AIG, and N.M. Rothschild. Bullion banks ebb and flow as to their involvement in the gold market, and some merge and go bust or get forceably rescued and shoved together, but a lot of other banks are also LBMA members that are not in the aforementioned names, such as RBC, ICBC Standard Bank, Toronto Dominion Bank, Merrill Lynch and Zurcher Kantonalbank, not to mention the other Chinese and Russian bank members of the LBMA. So overall, it is quite conceivable that 28 LBMA member bullion banks each have a gold account at the Bank of England.

How much gold did the London-based gold ETFs lose in 2013

The year 2013 was a year of huge gold outflows from the gold backed ETFs. Of the ETFs based in London, or more correctly, the ETFs with gold stored in London, the gold outflows were as follows:

The SPDR Gold Trust had an outflow of 561 tonnes of gold in 2013. It started 2013 holding 1,349 tonnes of gold, and ended 2013 with 798 tonnes. At the end of March 2013, GLD held 1,221 tonnes, at the end of Q2 it held less than 1000 tonnes (passing through the 1000 tonne barrier on 18th June 2013. By the end of Q3 2013 (actually on 2nd October 2013) GLD held 900 tonnes. Then by the end of 2013 its gold holdings dipped below 800 tonnes. During 2014, GLD lost another 80 tonnes, taking it to 709 tonnes at December month-end 2014.

In Q2 2013, GLD was hammered. Its gold holdings went from 1,221 tonnes to 1078.5 tonnes in April, a loss of 143 tonnes, then down to 1,013.5 tonnes at the end of May, another 62 tonnes loss, and by the end of June it held 969.5 tonnes, a June loss of 43.5 tonnes. Overall in Q1 2013, GLD lost 128 tonnes, then 249 tonnes in Q2 (and 379 tonnes in H1), then 100 tonnes in Q3, and another 100 tonnes in Q4 2013 (200 tonnes in H2). The near rounded 100 tonne withdrawals from GLD in both Q3 and Q4 2013 are uncanny. As if someone said “let’s take another 100 tonnes out of GLD this quarter”.

The iShares Gold Trust (IAU) lost approximately 60 tonnes of gold in 2013. Assuming the mix of IAU gold holdings in 2013 across London, New York, and Toronto was the same as it is now (i.e with 56% of the gold in London, 41% in New York, and 3% in Toronto, then IAU would have lost about 34 tonnes from London. More of the IAU gold probably flowed out of the JP Morgan’s London vault in 2013 than the other IAU storage locations, because London is the world’s main gold market for Good Delivery bars, and furthermore, that is where the gold.

ETF Securities’ PHAU lost 52 tonnes in 2013. ETS Securities GBS ETF lost 42 tonnes. The ‘Source’ Gold ETF lost 31 tonnes.

The above shows that (561 + 34 + 52 + 42 + 31) = 720 tonnes of gold was withdrawn from London gold vaults in 2013 via ETF gold redemptions.  About 880 tonnes of gold in total was withdrawn from gold backed ETFs in 2013 but some of this was from ETF’s based in Switzerland and elsewhere.

Remember that the only entities which can usually redeem gold from gold backed ETFs are the Authorised Participants (APs), which in nearly all cases are the same banks as act as custodians or sub-custodians for those ETFs, and these are also the same banks that either have vaults in London or that have vaulting facilities in London, and these banks are also in a lot of cases members of the private gold clearing company London Precious Metals Clearing Limited (LPMCL) and lastly, these banks all hold gold accounts at the Bank of England.

Can ETF gold, such as GLD gold, be held in the Bank of England vaults?

Recalling that the amount of gold withdrawn from the Bank of England between 28th February 2013 and 28th February 2014 was 755 tonnes, can any of the gold that was withdrawn from the ETFs in 2013 have been the same gold that was in these the Bank of England withdrawals in 2013?

The answer is that technically, it can’t be the same gold because the ETFs are supposed to store their gold at the vault premises of the specified custodian. ETF gold can be stored at a vault of a sub-custodian, but has to be physically transferred to the vault of the custodian using “commercially reasonable efforts”.

According to the latest SPDR Gold Trust 10-K annual filing (and the 2013 version):

“Custody of the gold bullion deposited with and held by the Trust is provided by the Custodian at its London, England vaults. The Custodian will hold all of the Trust’s gold in its own vault premises except when the gold has been allocated in the vault of a subcustodian, and in such cases the Custodian has agreed that it will use commercially reasonable efforts promptly to transport the gold from the subcustodian’s vault to the Custodian’s vault, at the Custodian’s cost and risk.”

The subcustodians that the SPDR Gold Trust currently uses (and that it used during 2013) are “the Bank of England, The Bank of Nova Scotia-ScotiaMocatta, Barclays Bank PLC, Deutsche Bank AG, JPMorgan Chase Bank and UBS AG.”

These banks, along with HSBC,  but excluding Deutsche Bank, are the 5 members of London Precious Metals Clearing Limited (LPMCL). (Although the GLD Sponsor might want to think about deleting Deutsche Bank from the list).

Shockingly, the GLD Prospectus also says that:

“In accordance with LBMA practices and customs, the Custodian does not have written custody agreements with the subcustodians it selects.”

The GLD prospectus goes on to explain that LBMA custodians are obliged to provide gold holder entities with details (including locational details) of the gold that they or their subcustodians hold on behalf of a relevant entity gold holder that enquires,  but this is just based on “LBMA practices and customs”. It also states:

” Under English law, unless otherwise provided in any applicable custody agreement, a custodian generally is liable to its customer for failing to take reasonable care of the customer’s gold and for failing to release the customer’s gold upon demand.”

Coming from a background of equity and bond portfolio management, I find the fact that there are no custody agreements with the GLD gold subcustodians very odd. Custodians of financial assets such as Citibank, PNC, Northern Trust, and State Street, would all insist on having custody agreements with each other when appointing sub-custodians. To organise it in any other way is crazy.

This is something that GLD institutional and hedge fund investors should enquire about with World Gold Trust Services (the SPDR Gold Trust Sponsor) when performing their next set of due diligence exercises on the GLD, just to make sure they understand how the sub-custodian arrangements work. It does look like the gold in the LBMA system is acting like one big happy pool of gold..like the 1960s London Gold Pool.

All of the GLD annual and quarterly filings for 2013 and every year state, in the ‘Results of Operations” section, that “As of [Date], Subcustodians held nil ounces of gold in their vaults on behalf of the Trust.” For example:

“As at September 30, 2013, subcustodians held nil ounces of gold in their vaults on behalf of the Trust.”

The same is true for December 31, June 30, 2013, and March 31, 2013. The annual full gold bar audit undertaken on the SPDR Gold Trust would also suggest that no GLD gold is stored at sub-custodians, including the Bank of England. For example in the full 2013 GLD gold bar audit (click the exact link here -> //www.spdrgoldshares.com/media/GLD/file/Inspectorate_Certificate_Aug30_2013.pdf), it states that the location of the audit was the “London Vaults of HSBC Bank USA National Association“:

“We performed a full count of 77,709 bars of gold, based upon the gold inventory as at 28th June 2013, between 8th July and 29th August 2013 at the Custodian’s premises”

The bars were described as “77,709 London Good Delivery, large Gold Bars”.  There is also a separate partial audit on the GLD gold bars each year. The earlier partial audit of GLD in March 2013 stated that there was a random audit of the “105,840 London Good Delivery, large Gold Bars” held by the GLD “based upon the gold inventory as at 22nd February 2013, between the 4th March and 15th March“. This audit was also specified as occurring at the “London Vaults of HSBC Bank USA National Association”.

Although I don’t think the HSBC London vault was big enough to store all the GLD gold during 2013 when it held up to 1353 tonnes, as well as storing the ETFS Securities gold and other HSBC customer gold , the GLD audits and SEC filings seem to indicate that all the GLD gold was at the HSBC London vault.

Incidentally, the ETF Securities gold ETFs which also use HSBC as custodian, specify a list of subcustodians that includes the commercial security companies Brinks, Malca Amit and Via Mat (Loomis) in addition to the LPMCL members:

“The Bank of England, The Bank of Nova Scotia (ScotiaMocatta), Deutsche Bank AG, JPMorgan Chase Bank, N.A., UBS AG, Barclays Bank PLC, Brink’s Global Services Inc., ViaMat International and Malca-Amit Commodities Ltd.”

 As the Perth Mint’s Bron Suchecki pointed out in his personal blog in June 2014, central banks were net buyers of gold during 2013, not net sellers, so it appears that it was LBMA member banks with gold accounts at the Bank of England that were withdrawing gold bars from the Bank of England during 2013. Even the gold repatriated by the Central Bank of Venezuela in late 2011 and early 2012 appears to have been flown to Caracas from France and not from the Bank of England.

swiss

From March 2006 until February 2011, the amount of gold stored in custody at the Bank of England’s gold vaults rose by 2,065 tonnes (See Bron Suchecki’s table at the previous link). It then dipped by 68 tonnes from March 2011 to February 2012 before rising by another 722 tonnes from March 2012 to February 2013. That was a net 2,719 tonnes increase from March 2006 to February 2013. What percentage of this increase in custody gold holdings at the Bank of England was delivered by central bank customers and what percentage was delivered by LBMA bullion bank customers is unclear.

Then, as mentioned above, 755 tonnes of gold was withdrawn from the Bank of England between March 2013 and February 2014, and 355 tonnes withdrawn from March 2014 to February 2015.

If the ~720 tonnes of gold withdrawn from the gold backed London-based ETFs is not the same gold as was withdrawn from the Bank of England, then this means that (720 tonnes  + 755 tonnes) = 1475 tonnes of London Good Delivery bars came out of the London market in 2013.

Which is very interesting, because the UK exported approximately 1,400 tonnes of gold to Switzerland during 2013 (Eurostat – HS Code 7108.1200 “Unwrought Gold” – Source www.sharelynx.com).

Reuters also highlighted these 2013 exports in February 2014 when it quoted research from investment bank Macquarie from Eurostat:

“Australian bank Macquarie, citing trade data from EU statistics agency Eurostat, said the UK exported 1,739 tonnes of gold in 2013, with the vast majority sent to Switzerland.”

There is a possibility, as Bron Suchecki mentioned, that some of the Authorised Participants (APs) of the gold ETFs, which have gold accounts at the Bank of England, redeemed ETF shares for gold held at the London vaults of JP Morgan and HSBC, and that HSBC or JP Morgan transferred gold from their own accounts at the Bank of England to the gold accounts of the APs at the Bank of England, who then withdrew it.

But with over 1,400 tonnes of gold withdrawn from the London gold market in 2013 (since 1400 tonnes of gold was transported from the UK to Switzerland), this suggests that the gold that went to Switzerland in 2013 was in the form of Good Delivery bars from both the London based gold ETFs vaults (HSBC and JP Morgan), and from the Bank of England vaults.

As I will highlight in a forthcoming article (which will follow on from the recent “Moving the goalposts….The LBMA’s shifting stance on gold refinery production statistics“, a lot of this London gold exported to Switzerland from the UK in 2013 was sent to the large Swiss gold refineries to be transformed into very pure (9999 fine) smaller bars for the Asian market.

If the calculations above are correct about the 500,000 Good Delivery bars in the London vaults whittling down to about 130 tonnes of gold that’s not accounted for by ETFs and other known gold holders, and that’s not accounted for by the Bank of England vault holdings, then there is surely very little available and unencumbered gold right now in the London Gold Market.

This would explain however the following very recent information from the Financial Times on 2nd September 2015 when it said:

“The cost of borrowing physical gold in London has risen sharply in recent weeks. That has been driven by dealers needing gold to deliver to refineries in Switzerland before it is melted down and sent to places such as India, according to market participants.”

“‘[The rise] does indicate that there is physical tightness in the market for gold for immediate delivery’, said John Butler, analyst at Mitsubishi.”

And it begs the question, why do the dealers need to borrow, and who are they borrowing from. And if the gold is being borrowed and sent to Swiss refineries, and then shipped onward to India (and China), then when will the gold lenders get their gold back?

 

Moving the goalposts….The LBMA’s shifting stance on gold refinery production statistics

On Friday 31st July 2015, I released an article discussing the sale of Swiss gold refiner Valcambi to Indian jewellery company Rajesh Exports. In my report, in a section about Valcambi’s annual gold refining capacity, I made passing reference to 2013 gold refining production statistics that had been published by the London Bullion Market Association (LBMA) on 1st May 2015. These same gold refinery production statistics had also been quoted by the LBMA as recently as July 2015 in the news section of Issue 78 of its ‘Alchemist’ magazine, (published on 21st July 2015, just a week before my article).

The reference in my article to 2013 LBMA gold refiner production statistics discussed the unprecedented 6,601 tonnes of gold that was refined in 2013 by gold refineries on the LBMA’s Good Delivery List. My reference to this 6,601 tonnes on 31st July, including a short table of LBMA data, was as follows:

“Rajesh Exports just revealed in its press release that over the last 3 years, Valcambi has refined an annual average of 945 tonnes of gold and 325 tonnes of silver (2835 tonnes of gold and 975 tonnes of silver over 3 years). Presumably the last 3 years that Rajesh mentions refers to the last 3 calendar years of 2012-2014.

The London Bullion Market Association (LBMA) doesn’t reveal annual production data of its refinery members on an individual level, however, the LBMA recently published high level totals of the refined gold production of its accredited refiners (LBMA Good Delivery List) over the years 2006 to 2013. What was striking about the data was that total refined gold production of its refinery members reached 6,601 tonnes in 2013, which was 42% higher than total refined gold production in 2012, and also more than double global mine production of 3,016 tonnes of gold in 2013. See table below from LBMA publication:

Total annual refined gold and silver production by LBMA refiners 2006-2013 (tonnes)

Refinery output 2006-2013

So with Valcambi being the largest gold refinery in the world, it would be realistic to suggest that its annual average of 945 tonnes of refined gold output over the last 3 years probably hides the higher refined gold production that it too experienced in 2013 versus 2012.”

In the first quoted paragraph, above the table, I had hyperlinked the word ‘publication’ to a LBMA source document URL which pointed to a pdf document named ‘LBMA Brochure Final 20150501.pdf’.

The ‘LBMA Brochure Final 20150501.pdf’ file was a 4 page document titled “A guide to The London Bullion Market Association”, with the refinery production statistics appearing on page 3 under a page title “The LBMA Good Delivery List”. The file ‘LBMA Brochure Final 20120501.pdf’ was created on 2015-05-01 at 10:09:50 using the applications Adobe InDesign CS 5.5 (7.5) and Abode PDF Library 9.9.

In the refinery section of the LBMA Brochure Final 20120501.pdf’ document, the LBMA’s commentary first explained what the Good Delivery ‘List’ refers to, as well as listing the number of gold and silver refineries on the List, and then proceeded to comment on the ‘Total refined gold production of the refiners on the Listin 2013, which it stated was 6,601 tonnes. The LBMA commentary also highlighted that this 6,601 tonnes of refined gold production by the refiners on the List was ‘more than double‘ 2013 world mine production of 3,061 tonnes.

The ‘List’ specified 72 refineries which refined gold, and 83 refineries which refined silver. It also showed that 16 refineries which refined gold were in Europe, 43 in Asia, 11 in the Americas, and 1 each in Africa and Oceania. So the 6,601 tonnes of gold statistic for 2013 represented 72 refineries on the Good Delivery List which refined gold. And the LBMA made clear in its commentary that refiners on the Good Delivery List represent 85%-90% of world gold production:

original - GDL List

From Page 3 of 'LBMA Brochure Final 20120501.pdf'
From Page 3 of ‘LBMA Brochure Final 20120501.pdf’

As mentioned above, the LBMA also printed the same 2013 gold refining figure of 6,601 tonnes in Issue 78 of its magazine, ‘Alchemist’, which was published on 21st July 2015. Alchemist is published in both hard copy magazine format and on-line. In the ‘LBMA News’ section of Issue 78, viewable here and here(Alch78LBMANews), the LBMA Chief Executive, Ruth Crowell, provided a news update on the Association’s Physical Committee, stating:

Total refined gold production represented by the accredited refiners on the LBMA’s Good Delivery List was 6,601 tonnes in 2013, more than double mine production of 3,061 tonnes. For silver, refined production by listed refiners was 24,570 tonnes, marginally below the 25,494 tonnes of mine production in the same year.”

 [The full issue of Issue 78 of The Alchemist can be viewed here (large file)]

According to the LBMA, the ‘Physical Committee is made up of industry experts from the physical bullion market“, therefore this physical committee is well aware of the 6,601 tonnes of gold refinery production figure in 2013, not least because it’s printed in the committee’s news section in the latest edition of the Alchemist.

The explosion in gold refining activity in 2013, and the huge throughput of Good Delivery bars being transformed into smaller higher fineness bars for the Asian gold market was without doubt one of the biggest stories in the gold world during 2013. I had cited the 6,601 tonnes figure to help support a calculation about Valcambi refining capacity, and my reference wasn’t really central to the main topic of my Valcambi article. But it was a topic that I was planning to re-visit, and I tweeted about it on 4th June when I first read the LBMA report that contained the 6,601 tonnes data:

 

All of the above seems logical and easy to understand. It was therefore surprising to notice that on Wednesday 5th August 2015, three business days after my Valcambi articles was published, the LBMA substantially amended the gold refinery figures in the file ‘LBMA Brochure Final 20150501.pdf‘, and dramatically lowered the 2013 refined gold production figure from 6,601 tonnes to 4,600 tonnes, while substantially altering the wording and meaning of the paragraph commenting on the refined tonnage. The document content was amended and re-saved with the same file name LBMA Brochure Final 20150501.pdf‘, and left in the same web directory. So anyone viewing the LBMA document for the first time would not know that the gold refining figures in the report had been altered and substantially reduced. The file directory in question is here, and contains the altered report:

http://www.lbma.org.uk/assets/market/gdl/LBMA%20Brochure%20Final%2020150501.pdf

(The ‘%20’ instances are just space delimiters within the URL)

Luckily, the original version of ‘LBMA Brochure Final 20150501.pdf‘ from 1st May 2015 can be viewed here -> LBMA Brochure Final 20150501.

Let’s look at what was changed between the two versions. Here is the exact updated LBMA text and data table after the Wednesday 5th August changes, including the matrix displaying the number of gold and silver refineries on the ‘List’. The number of refineries remained unchanged. However, notice the 2013 gold refining figure became 4,600 tonnes:

GDL List in updated version - no change

Page 3 of the 5th August changed version of 'LBMA Brochure Final 20120501.pdf'
Page 3: changed version of ‘LBMA Brochure Final 20120501.pdf’ 5th Aug

If you compare the original and altered versions of this LBMA report, you will see substantial differences. Here is a description of the changes, which I have highlighted using italics, underline and bold in various places, and the LBMA’s text is indented:

a) For gold, the LBMA reduced the 2013 total refinery production figure from 6,601 tonnes to 4,600 tonnes, a reduction of 2,000 tonnes of gold. To put the sheer magnitude of 2,000 tonnes of gold into perspective, 2,000 tonnes of gold is nearly twice as much gold as the Swiss National Bank (SNB) officially reports that it holds. [The SNB claims to have 1,040 tonnes of gold].

The LBMA added that words ‘estimated to be‘ in front of the 4,600 tonnes figure, and the words ‘owing to recycling of scrap material‘ were added after the figure. The ‘more than double‘ reference to the 6,601 tonnes of gold being more than double world mine production, was deleted and replaced by the word ‘above‘. The words ‘source Thomson Reuters GFMS‘ were added in brackets at the end of the sentence. The wording of “total refined gold production by the refiners on the List was retained and not altered.

“Total refined gold production by the refiners on the List was estimated to be 4,600 tonnes in 2013, owing to recycling of scrap material, above world mine production of 3,061 tonnes (source Thomson Reuters GFMS).”

b) For silver, the 2013 total refinery production figure of 24,570 tonnes was increased to 29,984 tonnes, an increase of 5,500 tonnes. The words ‘estimated to be‘ were also added in front of the 29,984 tonnes figure. Unlike gold, no wording was added about recycling of scrap material. Since the LBMA upped the 2013 silver total so much, it was now far above mine production, so the previous words ‘marginally below‘ were replaced by the word ‘above‘.  Again, the words ‘source: Thomson Reuters GFMS‘ were added in brackets at the end of the sentence.

For silver[,] refined production by listed refiners in 2013 was estimated to be 29,984 tonnes, above the 25,981 tonnes of mine production in 2013 (source: Thomson Reuters GFMS).

c) The altered text still retained all of the references to the Good delivery refiner ‘List’, and still stated that the figures in the table were for ‘estimated annual refined gold and silver production by the refiners on the List’.

“The Gold refined by refiners on the List make up about 85-90% of world production. Total estimated annual refined gold and silver production by the refiners on the List are shown in the table below (tonnes).”

 d) The years 2006 and 2007 were removed entirely from the table in the changed version from 5th August, with the revised version only covering the years 2008 – 2013 and not 2006 – 2013 as per the original.

As the number of gold refiners in the ‘List’ above remained the same in this altered version as in the original version, there can be no doubt that this refers to the same group of gold refiners which had combined production output of 6,601 tonnes of gold in 2013 yet also, simultaneously (and impossibly) according to this altered version of the report, had a combined 4,600 tonnes of gold production output in 2013.

Total refined gold production of the refiners on the List

Question: How does the LBMA know that “Total refined gold production of the refiners on the List” was 6,601 tonnes in 2013?

Answer: Because the Good Delivery refiners provide annual refinery production figures to the LBMA. It’s as simple as that.

Every refiner on the LBMA’s Good Delivery list is required to provide production data to the LBMA on an annual basis. This information is required by the LBMA as part of its obligatory Pro-Active Monitoring (PAM) programme of Good Delivery refiners. The PAM programme is defined by the LBMA as follows:

“The PAM programme reviews the assaying competence of refiners on a three-yearly basis. In addition, it checks that they continue to meet the minimum requirements for refined production and tangible net worth on an annual basis.”

This production data was supplied to the LBMA on a three-yearly basis until 2011, but the rules were changed in 2011 to an annual basis. From ‘Alchemist’ issue 65, December 2011:

“Some important changes in the Rules have been agreed recently. The first is that refiners will have to provide data on their tangible net worth and production on an annual, rather than a three-yearly, basis.”

In the LBMA’s most recent Good Delivery Rules from March 2015, ‘Section 10 Pro-Active Monitoring’ states that:

All current Good Delivery refiners are also required to submit their production and audited financial data on an annual basis to the Executive. “

Annex A of the same document, clarifies the compliance date and states:

“With effect from 1st January, 2012, all current Good Delivery refiners are required to submit their refined production and audited financial data on an annual basis to the Executive.”

Additionally, refiners applying to be accepted on the LBMA’s Good Delivery list need to submit a three year operating history with three years of production figures as part of the application. Annex A (Application Form), addressing what to include with an application, states that required documents include:

  • Figures for the last three years’ annual production of refined * gold/silver in tonnes.
  • Estimate of next two years’ annual production of refined * gold/silver in tonnes.

The asterick (*) states that ‘refined’ refers to “metal which has gone through a refining process, such as electrolysis, Miller Process or Aqua Regia refining“. These processes would apply to Good Delivery bars that were being converted into 9999 fineness kilobars for the Asian gold market.

Therefore, the LBMA knows exactly, down to the exact tonne, the figure for “total refined gold production of the refiners on the List” in 2013.

In issue 74 of the LBMA’s ‘Alchemist’ published in June 2014, when the LBMA’s Physical Committee was providing a news update on ‘Pro-active Monitoring’, and reviewing the 2011 refinery production statistics which had just been finalised at that time, the Committee highlighted the following:

A number of issues arising from proactive monitoring of refiners on the list have also been discussed….Two very interesting numbers arising from this work are the figures for total refined production represented by the accredited refiners. Although it takes time to complete this data collection, the figures for 2011 are now complete. The total for gold is 4,695.8 tonnes and for silver is 28,395.5 tonnes, in both cases significantly above the respective world mine production of 2,838.1 tonnes and 23,545 tonnes.

It appeared that the writer of that paragraph thought that the two refining numbers were interesting enough to be comment worthy because the numbers were ‘significantly above‘ the world mine production figures.

The LBMA also administers a ‘Responsible Gold Audit Programme’ for gold refiners on its Good Delivery List. The audit seeks to determine whether a refiner complies with the LBMA’s ‘Responsible Gold Guidance’. The actual audits are carried out by independent auditors that have been approved by the LBMA, but the audit results are passed back to the LBMA. For example, in February 2014, the LBMA issued a press release announcing  that 4 refiners had successfully passed the audit. The announcement mentioned that:

the audit reviewed the refiners’ production over a 12 month period. The LBMA received a large volume of reports in late 2013, and will continue to report in the coming weeks as each batch is reviewed.”

Therefore, the audits are another way in which the LBMA keeps track of the refiners production, in addition to the reporting coming in from the Pro-active Monitoring programme. Either way, the LBMA knows the refinery production statistics of the Good Delivery refiners and does not need to get estimates from GFMS or any other body.

kilobars

Thomson Reuters GFMS

Given the above, then why the sudden need by the LBMA on 5th August 2015 to include a reference to  “source Thomson Reuters GFMS“? By including the reference to “owing to recycling of scrap material”, it is clear that the intention was to solely relate the 4,600 tonnes of gold quoted to just two sources, namely, gold mining and gold scrap recycling. Furthermore, why had the figure suddenly become an ‘estimate’ and who was responsible for the estimate? There is no need for estimates of refinery production when every refinery on the Good Delivery ‘Lists’ provides the exact real production figures to the LBMA.

Additionally, what was the reason for suddenly throwing a perfectly logical paragraph out the window which had referred to gold refinery production statistics for 2013 collected by the LBMA, and replace it with an estimate about gold mining and scrap recycling from a company, GFMS, which does not specialise in collecting gold refinery production statistics?

What is GFMS?

GFMS was a metals analysis consultancy firm, that was acquired by Thomson Reuters in August 2011. GFMS was formerly known as Gold Fields Mineral Services. The group within Thomson Reuters is now known as Thomson Reuters GFMS. GFMS gathers supply and demand figures for gold and other precious metals, and publishes an annual gold survey and related update reports.

GFMS’s supply data for gold mine production and gold scrap is not the same metric as gold refinery production output, and is not even close to being the same metric, especially in 2013 when there were huge amounts of Good Delivery gold bars re-smelted and re-cast into smaller gold bars in Switzerland and other places for onward shipment to Asia.

‘LBMA Overview Brochure.pdf’

The LBMA also makes reference to annual gold and silver refinery figures in another document on its website, in a file named ‘LBMA Overview Brochure.pdf‘. This document is located in a ‘presspack’ directory, presumably for use by the LBMA’s Fleet Street press contacts. This document has, in its various iterations, included a paragraph with identical phraseology  about refinery production statistics i.e. ‘Total refined gold production by the refiners on the List‘, and has also included a similar table of gold and silver production statistics of LBMA accredited refineries.

On Saturday 1st August, the version of this other file, the ‘LBMA Overview Brochure.pdf‘ document on the LBMA web site, had also been altered with some very strange temporary alterations inserted for 2013 gold and silver refinery production statistics. All of the annual refinery figures in the entire table had been blanked out of the table with the shorthand ‘n/a‘ substituted in each row. The text had also been changed, and 4,848 tonnes had been inserted as the gold refineries’ production figure for 2013, and 30,934 tonnes for silver, with the word ‘above‘ added before world mine production for both metals. The overwritten figures and text appeared in a  slightly scrawled text font (see below). GFMS was not mentioned in this file. The file, on 1st August, in its web directory (http://www.lbma.org.uk/assets/downloads/presspack/) rendered in a web browser as follows, when this image was recorded:

31st July 4848

 Why 4,848 tonnes?

So, where did this 4,848 tonnes figure for gold, and 30,934 tonnes for silver come from? These numbers are another entirely different set of figures for 2013, a third set if you will. To answer where these numbers came from, we need to turn to a presentation given by Stewart Murray, former LBMA CEO, at the LBMA’s Assaying and Refining Conference held in London between 8th – 10th March 2015. In a presentation titled ” The LBMA Good Delivery List, Recent and Future Changes“, on 9th March, Murray utilised slides which, on page 9 showed the following:

Murray slide 9 assaying and refining pres refinery prod stats

Notice, that for 2013, the figures are 4,848 tonnes for gold, and 30,934 tonnes for silver. This dataset also only goes from 2008 to 2013.

GFMS also makes another appearance in this slide, with a GFMS combined mine production and recycled scrap figure for 2013 being quoted as 4,302 tonnes for gold, and 31,460 tonnes for silver, respectively.

The next slide in that presentation, slide 10, even gives a regional breakdown of the 4,848 tonnes and 30,934 tonnes figures, attributing 1,790 tonnes of gold refining to Europe in 2013. Keep these figures in mind as we go through this maze of numbers.

Murray slide 10 regional refinery breakdown

Slide 6 of the same presentation showed a line graph of the Good Delivery gold refiners that were referred to in the production figures in slide 9. You can see that the numbers of refiners in each line as at 2014 equate to the numbers of gold refiners in the ‘List’ of the original ‘LBMA Brochure Final 20150501.pdf‘ file, i.e. 16 gold refiners in Europe, 43 in Asia, 11 in the Americas, 1 in Australia (which was Oceania in the List – the Perth Mint), and 1 in Africa (Rand Refinery). So again, there can be no doubt that they are the same refiners being referred to here that had a production output of 6,601 tonnes of gold in 2013, and at the same time 4,848 tonnes. So the same refiners have been at work in 3 parallel universes during 2013, or so it may seem.

GD gold refiners graph murray

By Wednesday 5th August, the ‘LBMA Overview Brochure.pdf‘ file had also been updated and re-saved, and contained the exact same commentary text and the exact same table of refinery production output figures as the altered ‘LBMA Brochure Final 20150501.pdf‘, i.e. the 4,848 tonnes figure was gone and was replaced by 4,600 tonnes, and the file was re-saved by the LBMA with the same file name, and left in the same file directory that it had been in, i.e.

 

Again, a first time viewer would not know by looking at the report that the gold and silver refinery production figures had been altered and the text edited.

What do the document properties of the re-saved ‘LBMA Brochure Final 20150501.pdf‘ and ‘LBMA Overview Brochure.pdf files, saved on Wednesday 5th August tell us?

LBMA Brochure Final 20150501.pdf‘ was saved at 15:49:48 on 5th August by author name Aelred Connelly. Then 29 seconds later at 15:50:17 on 5th august,  file LBMA Brochure Final 20150501.pdf‘ was also saved by author name Aelred Connelly. Aelred Connelly is the LBMA’s Public Relations Officer, ex Bank of England for more than 25 years, where he was a gold bullion analyst and a relationship manager for the Bank’s central bank and government customers.

brochure final 20150501 connelly 5th aug

overview brochure connelly 5th Aug

So, what is going on here?

Could it be that the LBMA’s original figure of 6,601 tonnes of refinery gold production in 2013 should not have been published for some reason, and needed to be quickly changed, for example, that the publication of this metric breached refiner confidentiality, or that it just made the GFMS supply numbers look way out of line with reality?

Previous LBMA documents discussing refined gold production

There are a number of other slightly older LBMA reports, brochures and other documents which discussed and recorded Good Delivery refinery annual production statistics. The interesting aspect of these other files, apart from the numbers, is that the syntax and wording is identical to the version from 1st May 2015 which I had quoted and which disappeared by 5th August. Furthermore, none of the older versions match (in style) the new versions that use ‘estimates’ and that refer to Thomson Reuters GFMS.

The previous syntax also seemed totally adequate for use by regulatory agencies such as the US SEC, and the UK Treasury’s Fair and Efficient Markets Review.

A file here refers to 2009 refinery figures. The same statistics were quoted in version created on 19th April 2012, for use in a LBMA meeting with the US Securities Exchange Commission (SEC) on 18th April 2012:

“Total refined gold production by the refiners on the List was more than 4,000 tonnes in 2009, well above world mine production of 2,611 tonnes. For silver, refined production by listed refiners of 22,800 tonnes was marginally greater than the 22,342 tonnes of mine production in the same year.”

Then there is another version that was saved as 23rd May 2014 but refers to 2011. It was also used in January 2015, in a letter from the LBMA to the Fair & Effective Markets Review, Bank of England:

“Total refined gold production by the refiners on the List was 4,695.8 tonnes in 2011, well above world mine production of 2,838.1. For silver, refined production by listed refiners of 28,395.5 tonnes was greater than the 23,545 tonnes of mine production in the same year.”

Another newer version  on 12th August 2015

There is also an even newer version of a file specifying “total refined gold production by the refiners on the List” now uploaded on the LBMA web site. This latest document, called “A guide to The London Bullion Market Association August 2015“,  is from 12th August 2015.

“Total refined gold production by the refiners on the List was estimated to be 4,579 tonnes in 2013, owing to recycling of scrap material, above world mine production of 3,061 tonnes (source: Thomson Reuters GFMS). For silver, refined production by listed refiners in 2013 was estimated to be 28,013 tonnes, above the 25,981 tonnes of mine production in 2013 (source: Thomson Reuters GFMS). The Gold refined by refiners on the List make up about 85-90% of world production. Total estimated annual refined gold and silver production by the refiners on the List are shown in the table below (tonnes).”

In this version, a refinery in China (Daye Nonferrous Metals Company) was accredited to the Good Delivery List for gold in June 2015, and so it was moved from the silver only category to the gold and silver category on the List. Why the 2013 gold production figure was then reduced again from 4600 tonnes to 4579 tonnes is unclear,  and even more mysterious is why the 2013 silver production figure became 28,103 tonnes,when in the two report versions from 5th August LBMA , the 2013 silver production total had been 29,984 tonnes. That’s a reduction of 1,871 tonnes of silver between 2 LBMA reports that were published a week apart.

Table: Comparisons – LBMA refinery production (1st May vs 5th August vs 9th March)

lbma data comparison table

It is not just 2013 where the refinery production statistics deviate significantly for both gold and silver. For gold, the altered figures were applied to 2012, 2011 and 2010 also. For 2009 and 2008, the revised data is actually higher for gold than the 1st May 2015 published version. The differences in 2010, 2011, and 2012, and indeed, 2008 and 2009 require explanations also.

For silver, the altered figure for 2013 is, as mentioned earlier, more than 5000 tonnes higher in the newer version. This article has focused on gold. I have not looked at the silver angle. Other people may wish to explore the silver angle.

The figures in the newer LBMA documents of 5th August are very close to the figures used by Stewart Murray in his 9th March presentation, except for 2013 in gold and silver, and in silver in 2012. There is still however, a 248 tonne difference between the 4,848 tonnes 2013 gold production figure quoted by Murray on 9th March, and the lower 2013 gold figure of 4,600 tonnes added into the LBMA documents on 5th March.

Conclusion

There are 2,300 tonnes of 2013 gold refining output in excess of combined mine production and scrap recycling being signalled within the  6,601 tonnes figure that was removed from the LBMA’s reports on 5th August 2015.

Could it be that this 6,601 tonne figure included refinery throughput for the huge number of London Good Delivery gold bars extracted from gold ETFs and LBMA and Bank of England vaults and converted into smaller gold bars in 2013, mainly using LBMA Good Delivery Swiss gold refineries? And that maybe this 6,601 tonne figure stood out as a statistical outlier for 2013 which no one wanted to talk about?

The objectives of HM Treasury’s Fair and Efficient Markets Review (FEMR) include transparency and openness. It would appear that altering already published gold refinery statistics, especially for 2013, seems not to be in the spirit of these FEMR objectives.

Part 2 of this analysis of the LBMA’s 2013 gold refinery statistics looks behind the 6,601 tonne number at the phenomenon of Good Delivery bars being processed through the Swiss gold refineries in 2013, the gold withdrawals from the London-based gold ETFs, and the huge shipments of gold from the UK to Switzerland in 2013. Part 2 also examines the 2013 withdrawal of gold from the Bank of England, and how GFMS and the World Gold Council tried to, or tried not to, explain the non-stop processing of Good Delivery gold bars into smaller finer kilobars during 2013.

Swiss Gold Refineries and the sale of Valcambi

The normally low-key Swiss gold refining market has been thrown into the spotlight with the announcement that private company Valcambi, the world’s largest gold refinery, is being acquired by Indian group Rajesh Exports Ltd (REL), the world’s largest gold jewellery manufacturer.

This acquisition is worth analysing for a number of reasons, namely will the Valcambi-Rajesh transaction impact marginal gold supply out of Switzerland and elsewhere, and how will the transaction, if at all, increase the likelihood of other large gold refineries becoming future acquisition targets?

Mesaric Mehta

Telegraphed Transaction

The announcement of the Valcambi acquisition should not come as a surprise because it was telegraphed in early July by the Economic Times of India. In its article, the Economic Times revealed that Rajesh Exports was in discussions to acquire a large stake in a Swiss gold refinery, and although the identity of the acquiree was not confirmed at that time, the Times said that Rajesh had “sounded out Valcambi…on a possible transaction”.

Since both Rajesh and majority Valcambi shareholder Newmont Mining declined to comment at the time (with Rajesh citing stock exchange rules), the Times and its industry sources were left to speculate that two of the other three large Swiss refineries, Argor-Heraeus or Metalor, might instead be targets, as opposed to Valcambi. Notably, the 4th large Swiss gold refinery, PAMP, was not mentioned in the Economic Times report.

The Times report would suggest that Rajesh Exports took the initiative in searching for a leading precious metals refinery to purchase. However, now that the acquisition has been announced, Rajesh Exports states that it was the Valcambi shareholders who initiated the search for a buyer. In its press release Rajesh states that:

the owners of Valcambi conducted a global search for divesting Valcambi, after an extensive search selected Rajesh Exports to acquire Valcambi.

That the search was prolonged was confirmed by India’s Business Standard, which also highlighted that Rajesh Exports was simultaneously on the look-out for a suitor:

Valcambi shareholders were looking for a buyer for quite some time. We (Rajesh) were also looking to deploy our cash at a safe place, which could generate a fair amount of business interest and help us grow. So, both of us came together and the transaction was concluded.”

But the transaction looks predominantly to have been a strategically planned sale of Valcambi by its holding company European Gold Refineries (i.e. its owners Newmont Mining and a private Swiss investor group), with what looks like input and advice from investment bank Credit Suisse.

A Quick Recap on Valcambi

Before discussing the Valcambi acquisition, its important to understand the Valcambi shareholding structure and the various parties involved with the refinery over its 54 year history.

Balerna based Valcambi was originally incorporated in the southern Swiss Canton of Ticino as Valori & Cambi SA on 15 May 1961, and changed name to Valcambi SA on 30 June 1967. The founders of the original Valori & Cambi, like its successor, seem to have wanted to maintain low profiles, because other than the fact that it was founded by ‘5 Swiss businessmen/entrepreneurs from Mendrisio”, there is little in the public record to identify who these 5 individuals were, since the online company register records don’t so back that far.

In 1967, Credit Suisse bought 50% of the Valcambi refinery, followed by the purchase of another 30% stake in 1968. The final 20% shareholding was purchased in 1980, giving Credit Suisse 100% control of Valcambi from 1980 up to December 2003. In that era, it was not unusual for a large Swiss bank to own a gold refinery, and the other 2 large Swiss banks of the day, UBS and SBC, also owned their own gold refineries (UBS owned Argor and SBC owned Metalor).

In December 2003, some of the same founders of Valcambi (from 1961) joined up with Newmont Mining and established a company called European Gold Refineries SA (EGR), which was 50% owned by Newmont and 50% owned by a group of Swiss investors (whose identities are not easily discernible). EGR then simultaneously bought 100% of Valcambi SA from Credit Suisse, and at the same time acquired a 66.65% shareholding in a company called Finorafa SA, which was a large gold distribution and financier business into the Italian jewellery market.

In their 2003 funding of EGR, Newmont and the Swiss private investor group each put up CHF 15 million in equal combinations of equity and debt.

In early July 2007, Mitsubishi International Corporation (MIC) of Japan bought a 6.55% shareholdings in EGR, with an option to buy a further 26.78% stake by 15 August 2007 (i.e. over 33% in total). Mitsubishi failed to take up its option in August 2007 to buy a larger shareholding in ERG, so this left Newmont and the Swiss investor group each with a shareholding of 46.725%, since their 50% stakes were each reduced by half of the Mitsubishi International Corporation of 6.55%, i.e. reduced by 3.275% each.

Newmont then bought another 15,960 shares in EGR from some of the private investors in April 2008, which increased its stake from 46.725 to 56.67%. This left the Swiss investor group and Mitsubishi holding a combined 43.33%. By this time ERG owned 100% of Finorafa SA as well as 100% of Valcambi, but Finorafa SA was by that time inactive.

Then in mid-November 2008, Mitsubishi had a change of mind and sold its 6.55% stake back to Newmont and the Swiss private investor group. These resold shares seem to have been split fairly equally between Newmont and the private investor group, bringing Newmont’s stake up to 60% By 2009, Finorafa, although owned by EGR, was in liquidation.

For the Valcambi transaction, Rajesh Exports has actually bought European Gold Refineries SA (EGR), which has full ownership of Valcambi SA. To purchase EGR, Rajesh established a Swiss company called Global Gold Refineries AG, which happens to be registered in the Canton of Lucerne (See company register here).

In turn, Global Gold Refineries AG is 95% owned by REL Singapore Pte Ltd, and 5% owned by Rajesh Exports Ltd India (and REL Singapore is fully owned by Rajesh Exports India). See here for the corporate structure of Valcambi and the holding companies. According to Rajesh, REL Singapore was set up primarily to execute international acquisitions and to source gold from mines.

Valcambi plant

Who were the Swiss Investor Group?

Note that since the acquisition of Valcambi by Rajesh Exports, there are now only 2 directors listed under the Valcambi Board of Directors, namely Valcambi CEO Michael Mesaric, who is staying on as CEO, and new chairman Federico Domenghini. Domenghini is also listed as the only director of the holding company Global Gold Refineries (see above). Interestingly, Michael Mesaric worked in senior roles at Credit Suisse between 1990 and 2002 before joining Valcambi, and is the first of our Credit Suisse connections.

The penultimate board of directors of Valcambi before the acquisition consisted of 6 individuals, 5 of who have now left the board. This penultimate list of directors can be seen here.

Although the full details of the Swiss investors behind Valcambi appear to be hard to find, some potentially relevant facts can be gleaned from the commercial register of the Canton of Ticino and also from the most recent pre-acquisition list of Valcambi board of directors. In addition, Rajesh mentioned one of the main private investors in its stock exchange press release (see below).

European Gold Refineries SA (EGR) was incorporated in Ticino in December 2003. Since 2003, the members of the board of EGR have been a selection of Newmont appointee directors, a selection of Mitsubishi appointees (for a short period), and a handful of other appointees. It is this third group of directors which may provide clues as to who the ‘Swiss private investors’ are, or at least who represents them.

Looking at EGR’s extract from the commercial register, in reverse date order, the most recent directors of EGR representing Newmont Mining (up until late July 2015) were Thomas Mahoney (chairman), Andrew Strelein, and David Farley. In addition, Carlo Camponovo, Luciano Martelli, and Michael Mesaric were listed as directors. Given that Mesaric is the CEO, this leaves Carlo Camponovo and Luciano Martelli as potential representatives of the Swiss investors, because logically, the Swiss private investors would need representatives on the board.

Going back further, ex-directors of Valcambi include Frank Hanagarne, Darren Morcombe, and Pierre Lassonde, all of Newmont, and Haydar Odok and Toshiro Sakai of Mitsubishi. After that we are left with 3 other directors, namely, Davide Camponovo, Emilio Camponovo, and Marco Cavuoto.

From the recent Valcambi board of directors profiles, Luciano Martelli works at Aurofin SA, and is also a director of Aurofin SA. Martelli has in the past also worked at Credit Suisse. Aurofin is a precious metals trading and financing company that was established in 1969 by Emilio Camponovo. Emilio Camponovo is still chairman of Aurofin.

Carlo Camponovo’s Valcambi profile states that he also worked at Credit Suisse from 1993 to 1997, and then worked at Finorafa SA, which is the second company that EGR owned from 2003 until it was liquidated in 2009. Marco Cavuoto was also a director of Finorafa until 2008.

The main reason for illustrating the above is to show the connections between Valcambi, Aurofin, Finorafa, and tangentially Credit Suisse, and also the Camponovo connections. Furthermore, it illustrates the low-key approach that Valcambi seems to have had in specifically naming its private shareholders.

The Valcambi web site even states that “In Switzerland and beyond: our firm deliberately keeps a low profile but has over the years become a key player in the precious metals refining industry” and to prove the point, the quotation is attributed to an unnamed ‘board member’!

Ironically, in the acquisition press release, Rajesh Exports dropped the low-key approach and provided some additional information about the Valcambi shareholders when it mentioned “Mr. Emilio Camponovo” as “the founder and current major share holder of Valcambi“. This suggests that the Camponovos were in the driving seat for the Valcambi sale alongside Newmont (and possibly Credit Suisse as navigator).

The Deal

Since Valcambi SA and European Gold Refineries SA are both private companies, there is little financial information available about either company. This has even stumped some of Newmont’s sell side analysts on Wall Street, who in their coverage of the sale admit that since Valcambi is a private company, they don’t have much visibility into Newmont’s disposal of Valcambi beyond knowing the net proceeds of the deal.

The Economic Times article on 1 July appears to have had very knowledgeable sources in India since it accurately foresaw that the deal was an all-cash deal for $400 million, 70% of which would be financed from Rajesh’s resources, and the other 30% from “overseas borrowings”.

This was highly prescient, since the announced acquisition turned out to be an all cash deal for $400 million, and Rajesh Exports confirmed at its press conference on 27 July that 30% – 35% of the consideration will be financed by long-term debt (provided by Credit Suisse, no less).

The Rajesh Exports press release states that over the last 3 years, Valcambi booked revenues of US$ 38 billion per annum, and earnings before interest, tax, depreciation and amortization (EBITDA) of US$ 33 million. These revenues look astronomical but they represent the annual average precious metals flows through the refinery being booked at market values (i.e. 945 tonnes of gold and 325 tonnes of silver per annum at market values).

Newmont (the 60% shareholder) will receive net proceeds from the sale of US$119 million. That could mean $200 million net proceeds to the entire shareholder base. Although its unclear as to exactly how much (in net proceeds) the private investor group received. Given that Rajesh is paying $400 million for Valcambi, Rajesh is also taking over or paying down some of the debt of EGR or Valcambi, or else Valcmabi has a quantum of cash on its balance sheet, or both.

Now that the deal has been announced, Newmont has pitched the sale of its stake as a disposal of a non-core asset which it claims will help pay down its debt and focus on its core business. So, being the largest shareholder of Valcambi, and actively wanting to dispose of non-core assets, this reinforces the view that Newmont was the primary driver of the entire ‘global search’ for a buyer of Valcambi.

As mentioned above, Credit Suisse has a long history of involvement with the Valcambi refinery, having fully owned Valcambi from 1980 to 2003. Credit Suisse’s involvement in the new deal also points to ongoing or rekindled relationship with the Swiss private shareholders and Newmont, since it sold the refinery to them in late 2003.

Until 2008, Newmont managed the Valcambi asset through its Merchant Banking group. This group, among other things, took care of “merger and acquisition analysis and negotiations”. Although Newmont’s Merchant Banking group was phased out in 2008, skilled corporate finance individuals at Newmont undoubtedly lent a hand to in the Valcambi disposal project.

Theoretically, Rajesh Exports could have just bought Newmont’s stake in Valcambi and become the new majority shareholder alongside the existing private investors. The fact that they didn’t go down this route could either mean that Rajesh wanted full corporate control, or that the investor group wanted to redeem its investment, or both.

Valcambi SA campus

Ramifications of the Valcambi Sale

The sale of the Valcambi refinery now raises questions as to whether its customer base and the mix of destinations for its gold exports from Switzerland will change, and what impact, if any, will the acquisition have on the ability of other countries to acquire Valcambi refined gold.

Rajesh Exports was an existing customer of Valcambi before the acquisition, and probably quite a large Valcambi customer.

In a 2011 presentation, Rajesh Exports stated that:

Top Suppliers include Australian Gold Refinery, ANZ Bank and Valcambi Refinery who constitute 90% of total supply of Raw gold to REL

So Valcambi was already an important supplied to Rajesh. Although Rajesh Exports only consumed about 170 tonnes of gold over its financial year 2014-2015, Rajesh Mehta, chairman of the group stated in his press release that:

The acquisition is also of national importance for India, as India is the largest consumer of gold in the world, it would be a step in the right direction by an Indian company to own a world-class asset like Valcambi. On a theoretical basis Valcambi is capable of supplying the entire gold requirement of India.

Gross gold imports (excluding smuggling) into India totals about 750-800 tonnes per annum at the moment. In its 2013 Sustainability Report  Valcambi states that its refinery has an annual capacity for gold refining of 1600 tonnes, and a total annual ‘precious metals’ refining capacity of 2000 tonnes. This is what Rajesh Mehta is referring to ‘in theory’ above.

Will Valcambi start supplying all of its output to India? Most probably no. Could this mean that Valcambi will start supplying more of its output to India? Probably yes. Even if it does though, Valcambi still has a lot of spare refinery capacity.

Rajesh Exports seems to have done the Valcambi acquisition for multiple reasons and not just to secure a source of refined gold supply. Rajesh claims that it wants to become a fully integrated major global gold player. (See above link to presentation where Rajesh even had a ‘Mission 2016’ plan to be a ‘fully integrated jewellery company’ by 2016).

Rajesh also had spare cash which it needed to invest in what it referred to as a safe place (i.e. “We were looking to deploy our cash in a safe place” – See Business Standard quote above). And Switzerland remains a universally known ‘safe place’ to deploy cash.

Rajesh already owns some gold mines, and a refinery, as well as gold manufacturing plants, wholesalers and a retailer network of jewellery showrooms which it plans to expand. The Valcambi acquisition allows Rajesh to move back along the gold supply chain. It also presumably will lead to cost savings on acquiring refinery output.

One of the less tangible benefits will be increased information flow about the gold market, both to Rajesh and to Valcambi. Another benefit to Rajesh will be refinery knowledge and skills transfer. Although headquartered in Bangalore in the state of Karnataka in the southwest of India, Rajesh Exports currently has a gold refinery in Uttarakhand in the north of India. This refinery has a gold output of 200 tonnes per annum. Rajesh plans to upgrade this refinery and turn it a subsidiary of Valcambi and then apply for LBMA gold and silver accreditation for  the refinery.

One of the main reasons why Valcambi (and its competitors PAMP and Argor-Hereaus)  set up in southern Switzerland near the Italian border was that Italy used to be the world’s largest jewellery manufacturer, consuming vast amounts of refined gold as is occurring in present day India. So in some ways, the acquisition of Valcambi by Rajesh Exports Ltd, as the world’s largest gold jewellery manufacturer, is just taking the supply chain logic a step further and going back to the traditional source of the Italian jewellery manufacturers (i.e. Ticino).

All of the above suggest that the acquisition will not end up diverting huge volumes of Valcambi output to India to such an extent that it would impact other customers’ reliance on Valcambi.

Additionally, Valcambi’s CEO, Michael Mesaric said of the deal that “the coming together of REL and Valcambi would ensure that Valcambi improves on it’s global share of gold business, by opening up new markets in India, Middle East and China.” Although Valcambi never broke down its gold exports by destination, about 80% of total Swiss gold exports in 2014 already went to Asia, with India, Hong Kong and China being the top 3 destinations. So what Mesaric is referring to appears to be more of the same, albeit even higher reliance on the existing top export markets.

Furthermore, Valcambi shareholders would not have agreed to the sale to Rajesh if it jeopardised its existing global customer base. Newmont has reiterated its support and will continue to use Valcambi “under the new ownership structure” since it has “long-term contracts with Valcambi for refining the gold produced” from a number of it mines.

In its 2013 sustainability report, Valcambi states that its clients are:

“some of the largest mining companies in the world, premium luxury watch manufacturers,the largest international banks, governments, central banks and scrap dealers”

The report also revealed that on a geographic basis,  Valcambi’s ‘business turnover’ was 33% in Europe, 36% in Europe (non EU), 15% in  North/South America, 9% in Africa, 4% in Asia, and 3% in Oceania.

Given that the gold exports trade statistics out of Switzerland do not align with the regions of this business turnover data, these figures (which would also include mining company and bullion bank business) must represent where Valcambi books its sales to and/or where the actual clients are based, rather than the ultimately destinations of the refined gold and silver output that are exported from Switzerland,. For example, a London-based bullion bank client of Valcambi that wanted gold refined in Balerna and sent to China would probably be accounted for by Valcambi as a European client, and the China destination of the gold would not get captured in the revenue records.

Valcambi’s refining capacity

Even if Rajesh Exports requires a higher share of the Valcambi refinery output, there is still plenty of spare refinery capacity in the Balerna facility.

Valcambi’s 2013 sustainability report also said that the refinery had an actual ‘product throughput’ of ‘3.8 tons bars and coins per day’ of gold and ‘1.8 tons bars and grain per day’ of silver. Assuming a 5 day week (250 day work year), that would be 950 tonnes of gold throughput and 450 tonnes of silver per annum.

Rajesh Exports just revealed in its press release that over the last 3 years, Valcambi has refined an annual average of 945 tonnes of gold and 325 tonnes of silver (2835 tonnes of gold and 975 tonnes of silver over 3 years). Presumably the last 3 years that Rajesh mentions refers to the last 3 calendar years of 2012-2014.

The London Bullion Market Association (LBMA) doesn’t reveal annual production data of its refinery members on an individual level, however, the LBMA recently published high level totals of the refined gold production of its accredited refiners (LBMA Good Delivery List) over the years 2006 to 2013. What was striking about the data was that total refined gold production of its refinery members reached 6,601 tonnes in 2013, which was 42% higher than total refined gold production in 2012, and also more than double global mine production of 3,016 tonnes of gold in 2013. See table below from LBMA publication:

Total annual refined gold and silver production by LBMA refiners 2006-2013 (tonnes)

Refinery output 2006-2013

So with Valcambi being the largest gold refinery in the world, it would be realistic to suggest that its annual average of 945 tonnes of refined gold output over the last 3 years probably hides the higher refined gold production that it too experienced in 2013 versus 2012. Unfortunately, there is no LBMA 2014 data. Doing a quick hypothetical calculation of Valcambi’s annual gold output over 2012-2014 where 2013 production was 42% higher than 2012, and 2012 production equaled 2014 production, then Valcambi would have refined 828 tonnes of gold in both 2012 and 2014, and a massive 1179 tonnes in 2013. This however would still be below the refinery’s gold output capacity of 1400 tonnes per annum.

So, whichever way you look at it, on average, the Valcambi refinery is not yet running at full capacity for gold, it probably hasn’t ever reached full capacity (even in 2013), and it still has plenty of spare capacity. So even if Rajesh Exports ramps up gold flow from Valcambi to India, other export destinations such as China, South East Asia and the Middle East needn’t suffer as long as mining and bullion bank clients of the refinery can provide metal to make use of the reserve refining capacity.

The other Swiss Gold Refineries

Does the sale of Valcambi foreshadow the sale of any of the other large Swiss gold refineries or increase the likelihood of a similar transaction? I’d say no, but to answer these questions, you may find it helpful to look at the shareholder structure of Valcambi’s competitors in Switzerland, and then decide.

Apart from Valcambi, there are 3 other large gold refineries in Switzerland and 2 smaller refineries. Valcambi’s 3 big competitors are PAMP, Metalor and Argor-Heraeus.

The refineries owned by PAMP and Argor-Heraeus are also located in the south of the Canton of Ticino, literally within walking distance from Valcambi, in what’s known as the golden triangle of gold refineries in the southern tip of Switzerland. As mentioned above, these refineries were established in this area in order to be as near as possible to Milan and the Italian gold industry. Looking at the map below you will see the municipalities of Mendrisio (Argor-Heraeus), Balerna (Valcambi), and Castel San Pietro (PAMP). Balerna is only 4kms from Mendrisio, and 2kms from Castel San Pietro. Notice also the Swiss – Italian border at the bottom of the map south of Chiasso.

Along with Metalor, which is in Marin-Epagnier in the Canton of Neuchâtel in north-west Switzerland, these Big 4 refineries refine the bulk of Switzerland’s (and the world’s) gold. Valcambi, PAMP, Argor-Heraeus and Metalor are all Associates of the LBMA, and PAMP, Argor-Heraeus and Metalor are three of the five refiners on the LBMA’s refiner referee list which helps maintain the LBMA’s Good Delivery System for gold and silver.

Mendrisio 2

Two other smaller companies refine gold in Switzerland in addition to the Big 4. These two companies, also in the Canton of Neuchâtel and located quite close to Metalor, are PX Précinox in La Chaux-de-Fonds, and Cendres + Metaux in Biel. Together they arguably form another golden triangle of refineries, close to the Swiss gold watch industry and incidentally close to the headquarters of the Swiss National Bank in Bern (home of the SNB’s gold vaults and where the BIS’s also stores gold).

Neuchatel

The good delivery bars of Valcambi, PAMP, Argor-Heraeus, Metalor and PX Précinox are on the LBMA’s current Good Delivery list for gold, while the bars of Cendres + Metaux are on the LBMA’s former Good Delivery list for gold (transferred to the former list in April 2015).

Because PX Précinox and Cendres + Metaux are smaller than the Big 4, the analysis below only focuses on Metalor, PAMP and Argor Hereaus, all three of which are privately held Swiss companies.

Metalor

Metalor here refers to Metalor Technologies International SA. Currently the Metalor group is majority owned by French private equity company Astorg Partners SA (www.astorg-partners.com) headquartered in Paris. The remainder of the shares are owned by Swiss individuals and by Metalor management.

The Metalor group is not just a refinery group. It has two others divisions, Advanced Coatings (for electronics and jewellery) and Electrotechnics (silver conductivity electrical contacts used in electrical applications). The refinery division has 4 refineries worldwide, in Neuchatel Switzerland, in the US (North Attleboro, which is south of Boston and is the headquarters of the refining division), in Hong Kong, and in Singapore. The 2012 Metalor annual report states that the group’s refining capacity of fine gold was 650 tonnes per annum in the Swiss, US and Hong Kong refineries. The Singapore refinery was opened in 2013, and since this has a refinery capacity of 150 tonnes,  that boosts the total refinery capacity to about 800 tonnes per annum now.

Metalor is the oldest of the Swiss gold refineries and was under the ownership of Swiss Bank Corporation (SBC) from 1918 until 1998. In 1998 a group of Swiss private investors comprising Ernst Thomke, Martin Bisang, Rolf Soiron and Giorgio Behr acquired the majority of shares from UBS. UBS still retained a minority shareholding following this transaction. Thomke then became Metalor chairman until April 2004, after which Bisang was appointed chairman.

Metalor then raised additional capital from another group of Swiss private investors who operated through a British Virgin Islands company called ‘Partners Only’. Zurich business magazine Bilanz speculated as to the identities of these ‘Partners Only’ investors in an article published in 2005, and another published in 2009. These articles list a number of well-known Swiss investors connected to Roche.

In September 2009, Metalor announced that in July 2009, a majority of the private investor shareholders had sold their shareholdings to Astorg Partners SA in an equity funded transaction. The press releases stated that two of the largest investors would invest their proceeds back in with the Astorg transaction, and that Metalor’s management including Scott Morrison, the Metalor CEO, would also become long-term shareholders. One of these 2 ‘largest shareholders’ who stayed on was Martin Bisang (see above). (Metalor press release and Astorg Partners Press Release).

Swiss newspaper NZZ (Neue Zürcher Zeitung) confirmed in 2010 that Belgium headquartered private equity company Sofina had co-invested alongside Astorg Partners, and together they had acquired almost 60% of the shares, which left the remainder of the shares owned by Metalor management as well as Martin Bisang and Daniel Schlatter. Both Bisang and Schlatter are connected to Bellevue Group, a boutique bank in Zurich, owning 20% and 5% of Bellevue shares, respectively. Bellevue actually acted as co-lead financial advisor to Metalor in its sale to Astorg which lists the transaction as spanning 2008-2009. Astorg lists its Metalor investment as being part of its Astorg IV fund.

The board of Metalor now includes Joël Lacourte, Managing Partner of Astorg Partners, Sophie Pochard,  Jean-Hubert Vial,  and Benjamin Dierickx, all of Astorg Partners, Martin Bisang and Daniel Schlatter of Bellevue Holding AG, and Metalor CEO Scott Morrison. See Neuchâtel company register extract and Bloomberg.

Of the 2008-2009 sale, Martin Bisang has said previously that “it was extremely difficult to find a buyer” for Metalor. This in some ways was because the Lehman induced financial crisis of 2008/2009 impacted transactional values at that time. However, Astorg was looking for acquisition targets in Switzerland at  that time, which obviously helped the sale.

Metalor CEO in 2009 Philippe Royer, said that Astorg was a “long-term majority shareholder”. While this is true, private equity companies in most cases eventually want to crystalise their investments, and so its hard to put an exact time-frame on a PE company’s definition of ‘long term’. Maybe 10 years+. The same may be true of the remaining private investors including from Bellevue. A hostile acquirer looking to purchase just the Metalor refineries would have to take on board the other divisions and navigate the complexity of the company. In a similar way a friendly acquirer in the jewellery or investment gold sectors might be put off by the industrial divisions of the group.

Verdict: No change at Metalor in the medium-term.

 

Argor-Heraeus

The Argor-Hereaeus group, located a few minutes drive from Valcambi and PAMP in southern Ticino, has an “annual refining capacity of 450 tonnes for both gold and silver” according to a 2013 company report.

As well as refining, the group produces a range of bars and coins and high precision products for the watch and jewellery sectors.

The current shareholding structure of Argor-Heraeus is quite diverse and consists of parties from three contiguous central European countries, namely, German engineering conglomerate Heraeus, German bank Commerzbank, The Austrian Mint, as well as Argor-Heraeus management. The fragmented shareholder base evolved as follows:

The company, as Argor SA, was established in 1951. Swiss bank Union Bank of Switzerland (UBS) acquired an 80% stake in 1960, and full ownership in 1973. In 1986, Heraeus of Germany purchased a 25% stake from UBS and entered a joint venture with UBS. In 1999 UBS departed leaving Heraeus and the company management with 100% of the shares. Then in April 1999, Commerzbank took a 35% stake, which resulted in Heraeus having 35%, Commerzbank having 35% and Argor-Heraeus management having 30%.

In 2002, the Austrian Mint (owned by the Austrian central bank) acquired a 24.3% interest, which left then Heraeus with 26.5%, Commerzbank with 26.5% and management were said to have 22.7%.

According to the 2013 annual report of the Austrian Mint, it now claims to own 28.6% of the shares of Argor-Heraeus, with an equity value of CHF 122.4 million (and a profit share for 2013 of CHF 19.5 million). According to the 2014 Commerzbank annual report, Commerzbank now owns 31.2% of Argor Heraeus shares with an equity value of CHF 152.7 million (and a 2014 profit share of CHF 22.7 million). In its latest annual report, Heraeus does not reveal its holding in Argor-Heraeus, but if the Austrian Mint and Commerzbank won a combined 59.8%, then that leaves 40.2% for Heraeus and Argor-Heraeus management.

On the website, Heraeus is listed at the top of the shareholder list, so this may indicate that Heraeus has the largest shareholding, which would be above 31%. This would leave management with the remainder.

A complex and diverse shareholder base means a diverse board of directors, and from the Argor-Heraeus SA company registry filing, the board of directors includes, as expected, a cross-section of directors from Commerzbank, the Austrian Mint, and Heraeus, including Gerhard Starsich, CEO and board member of the Austrian Mint, Hans-Jürgen Deutsch of Heraeus Precious Metals, and David Burns, head of commodities at Commerzbank.

All three parties often refer to the strategic benefits of being a shareholder in the Argor-Heraeus refinery so, it seems that the existing formula, whatever it is, is working well.

For example, Commerzbank states that it has a “long-standing cooperation with the refinery Argor-Heraeus S.A. allows us to combine well-founded experience in physical metals with strong expertise in structuring“. Likewise, the Austrian Mint refers to using Argor-Heraeus as a source of refined metal supply, presumably on preferred terms. All parties also presumably get access to information flow about the Swiss gold refining industry and gold demand and supply trends in and out of Switzerland, which is helpful.

In its 2013 annual report, the Austrian Mint said that Argor-Heraeus achieved “large increases in sales and profits in comparison to the preceding year”, so the refinery appears to be a good investment for the various parties also.

It therefore doesn’t seem likely that any of the 3 external shareholders would need to, or want to, dispose of their shareholdings. An acquirer would have to navigate negotiations with a central bank (Austria), a large German bullion bank, and a large German conglomerate, in addition to the Argor-Heraeus management.

Verdict: No change in Argor-Heraeus ownership over the foreseeable future

 

PAMP (Produits Artistiques Métaux Précieux)

PAMP SA of Castel San Pietro in Ticino, a neighbour of Valcambi and Argor-Heraeus, operates two precious metals refineries, one in Ticino and the other as a joint venture with MMTC in Delhi in India. PAMP SA is fully owned by MKS (Switzerland) Finance SA of Geneva.

Together the two refineries have an annual capacity for  550+ tonnes of gold, and 1200+ tonnes of silver. According to its website, “PAMP handles over 400-metric-tonnes of gold per year”, therefore there is still spare capacity.

MKS, a private company founded in 1979, is actually headquartered in the Netherlands, and has 16 offices around the world. MKS could be described as a physical precious metals refining and distribution company, and also a precious metals trading and financing company. The main office is in Geneva. MKS also owns precious metals bar and coin wholesaler Manfra, Tordella & Brooke (MTB) in New York which will be familiar to some readers as an approved Comex depository for gold. MKS Finance SA is also an Associate of the LBMA.

According to its company registry filing in the Canton of Geneva, the board of MKS (Switzerland) SA includes chairman Marwan Shakarchi, vice-chairman Karma Shakarchi-Liess, Venkata Gopalakrishnan, Hans Isler, Jean-Pierre Roth, and Stanley Walter.

The PAMP SA company filing from Ticino can be seen here.

In India, the PAMP refinery, India’s largest gold and silver refinery, is a joint venture established in 2008 with MMTC, and is known as MMTC-PAMP. MMTC is a ‘Government of India Undertaking’ or Central Public Sector Enterprise (CPSE), and is a huge trading company and the biggest precious metals importer in India. A few of MMTC’s directors are Indian Government appointees and the company’s website even uses a government web site domain (http://mmtclimited.gov.in/).

According to its profile:

“MMTC is the largest importer of gold and silver in the Indian sub-continent, handling about 174 MT of gold and 1165 MT of silver during 2011-12. MMTC supplies gold on loan and outright basis to the exporter, bullion dealers and jewellery manufacturers on all India basis.”

MMTC also has its own nationwide retail jewellery showroom network. From an Indian prespective, it’s not surprising that Rajesh Exports would have steered clear of looking to acquire PAMP because of PAMP’s existing relationships with MMTC. Recall that PAMP was not mentioned by the sources quoted by the Economic Times of India as a potential Swiss refinery target, while Valcambi, Metalor and Argor-Heraeus were mentioned. MMTC-PAMP, is the only precious metals refiner in India currently on the LBMA’s good delivery list.

An acquisition of PAMP SA of Switzerland would probably have to  be a full acquisition of the entire MKS Finance group becasue PAMP and MKS are closely integrated across a lot of their respective functions. Since MKS seems to be thriving independently, its doubtful if they’d be interested in being taken over. Perhaps they’d be more open to collaboration. Negotiating with one owner as opposed to multiple owners  in an acquisition scenario would undoubtedly be easier though.

It’s still unclear though as to how the exact shareholdings of MKS and PAMP are structured. MKS states that it’s a family-owned business and that would mean either exclusive or majority ownership by the founding Shakarchi family. It probably has some management ownership also. But being a private company, its hard to determine if MKS has, or does not have, a set of external private investors.

Verdict: PAMP and MKS will probably remain independent but watch this space