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

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

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

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

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

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

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

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

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

The New Vault Data – Gold and Silver

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

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

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

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

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

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

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

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

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

Previous Vault Estimates for Gold and Silver

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

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

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

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

Previous Vault Estimates Silver

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Large Bars but also Small Bars and Gold Coins

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

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

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

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

Unit for Delivery of Loco London Gold

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

For silver, the same guide states that:

“Unit for Delivery of Loco London Silver

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

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

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

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

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

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

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

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

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

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

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

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

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

LBMA numbers – Obscured Rolled-up numbers

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

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

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

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

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

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

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

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

The London Float

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

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

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

In its press release, the LBMA states that:

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

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

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

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

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

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

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

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

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

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

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

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

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

LBMA total gold vaulted: 7449 tonnes

Bank of England gold vaulted: 5081 tonnes

Gold in commercial LBMA vaults: 2368 tonnes

Gold in ETFs: 1510 tonnes

Gold in commercial vaults not in ETFs: 858 tonnes

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

i.e. 7449 – 5081 = 2368 – 1510 = 858

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

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

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

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

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

Investment – more than ETFs

ETFs

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

Other holdings

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

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

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

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

UBS and LBMA

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

A Chink of Light into London’s Gold Vaults?

On 5 February, the Financial Times of London (FT) featured a story revealing that the London Bullion Market Association (LBMA) plans to begin publishing data on the amount of real physical gold actually stored in the London precious metals vaulting network. The article titled “London gold traders to open vaults in transparency push” can be read here (accessible via FT subscription or via free monthly FT read limit).

This new LBMA ‘monthly vault data’ will, according to the FT’s sources, be published on a three-month lagged basis, and will:

show gold bars held by the BoE, the gold clearing banks, and those [vaults] operated by the security companies such as Brink’s, which are also members of the LBMA.”

The shadowy source quoted in the FT article is attributed to “a person involved in setting up the programme”, but at the same time, although “the move [to publish the data] is being led by the LBMA“, the same LBMA ”declined to comment” for the FT story. This then has all the hallmarks of a typical authorised leak to the media so as to prepare the wider market for the data release.

On 16 February, the World Gold Council in its “Gold Investor, February 2017″ publication featured a focus box on the same gold vault topic in its “In the News” section on page 4, where it states:

“Enhanced transparency from the Bank of England

The Bank of England is, for the first time, publishing monthly data revealing the amount of gold it holds on behalf of other central banks.

 As a leading custodian of gold, with one of the largest vaults in the world, the Bank of England’s decision is highly significant. Not only will it enhance the transparency of the Bank’s own gold operations; it will also support the drive towards greater transparency across the gold market.

The data reveals the total weight of gold held within the Bank of England’s vaults and includes five years of historical data.”

The Proposed Data

Based on these two announcements, it therefore looks like the gold vault data release will be a combined effort between the LBMA and the Bank of England, the blood brothers of the London Gold Market, with the Bank of England data being a subset of the overall LBMA data. While neither of the above pieces mention a release date for the first set of data, I understand that it will be this quarter, i.e. sometime before the end of March. On a 3 month lagged basis, the first lot of data would therefore probably cover month-end December 2016, because that would be a logical place to start the current dataset, rather than, for example, November 2016.

While the Bank of England data looks set to cover a 5 year historical period, there is no indication (from the FT article) that the wider LBMA vault data will do likewise. From the sparse information in the FT article, the LBMA data will “show gold bars held“. Does it mean number of gold bars, or combined weight of gold bars? What exactly it means, we will have to wait and see.

The Bank of England data will capture “total weight of gold held“. Notice that in the above World Gold Council piece it also states that the data will cover the amount of gold that the Bank of England “holds on behalf of other central banks.” There is no mention of the amount of gold that the Bank of England holds on behalf of commercial bullion banks.

Overall, this doesn’t exactly sound like it is “enhancing the transparency of the Bank’s own gold operations” as the World Gold Council puts it. Far from it. Enhancing the transparency of the Bank of England’s gold operations would require something along the lines of the following:

  • Identities of all central banks and official sector institutions (ECB / IMF / BIS / World Bank) holding active gold accounts at the Bank of England. Active gold accounts meaning non-zero balances
  • Identities of all commercial / bullion banks holding active gold accounts at the Bank of England
  • A percentage breakdown between the central bank gold held in the Bank of England vaults and the bullion bank gold held in the Bank of England vaults
  • An indicator for each gold account as to whether it is a set-aside earmarked custody account or whether it is a fine troy ounce balance account
  • Information for each central bank and official sector institution as to whether any of “its” gold is lent, swapped or repo’d
  • Information for the bullion bank gold accounts as to whether the gold recorded in those accounts is borrowed, sourced from swaps, sourced from repos, or otherwise held as collateral for loans
  • Information on the gold accounts of the 5 LPMCL clearing banks showing how much gold each of these institutions holds each month and whether the Bank of England supplies physical gold clearing balances to these banks
  • Information on when and how often the London-based gold-backed ETFs store gold at the Bank of England, not just using the Bank of England as sub-custodian, but also storage in their own names, i.e. does HSBC store gold in its own name at the Bank of England which is used to supply gold to the SPDR Gold Trust
  • Information on whether and how often the Bank of England intervenes into the London Gold Market and the LBMA Gold Price auctions so as to supply gold in price smoothing and price stabilisation operations in the way that the Bank of England’s Terry Smeeton seems to have been intervening into the London Gold Market in the 1980s
  • Information on the BIS gold holding and gold transactions settlements accounts at the Bank of England and the client sub-account  details and central bank identities for these accounts
  • Information on gold location swaps between gold account holders at the Bank of England and gold accounts at the Federal Reserve Bank of New York, the Banque de France, and the Swiss National Bank, and BIS accounts in those locations
  • Gold for oil swaps and oil for gold swaps

Anything less is just not cricket and does not constitute transparency.

And its important to remember that any publication of gold vault data by the LBMA and Bank of England is not being done because the LBMA suddenly felt guilty, or suddenly had an epiphany on the road to Damascus, but, as the FT correctly points out:

“the LBMA, whose members include HSBC and JPMorgan, hopes to head off the challenge and persuade regulators that banks trading bullion should not have to face more onerous funding requirements.”

Bank of England

The Current Data

As a reminder, there is currently no official direct data published on the quantity of real physical gold bars held within the London gold vaulting system. This vaulting system comprises the vaults of eight vault operators (see below for list).

Once a year in its annual report, the Bank of England provides a Sterling (GBP) value of gold held by its gold custody customers, while the LBMA website states a relatively static total figure of “approximately 6,500 tonnes of gold held in London vaults” that it claims are in the vaults in its network. But beyond these figures, there is currently no official visibility into the quantity of London Good Delivery gold bars held in the London vaults. There are, various ways of estimating London gold vault data using the Bank of England annual figure and the LBMA figure together with Exchange Traded Fund gold holdings and central bank divulged gold holdings at the Bank of England.

These approaches have been documented in BullionStar articles “Central bank gold at the Bank of England” and “How many Good Delivery gold bars are in all the London Vaults?….including the Bank of England vaults“, both from September 2015, and more recently “Tracking the gold held in London: An update on ETF and BoE holdings” from September 2016.

The September 2015 estimates calculated that there were 6,256 tonnes of gold in total in the London vaults, with 5,134 tonnes at the Bank of England (as of end February 2015), and 1,122 tonnes in London “not at the Bank of England“, all of which was accounted for by gold-backed ETFs which store their gold in London. These calculations implied that there was nearly zero gold stored in London outside the Bank of England that was not accounted for by ETF holdings.

The “Tracking the gold held in London” estimates from September 2016 used a figure of 6,500 tonnes of gold in total in the London vaults, and showed that there were 4,725 tonnes inside the Bank of England vaults, of which about 3,800 tonnes was known to be held by central banks (and probably a lot of the remainder was held by central banks also) and that there were 1,775 tonnes of gold outside the Bank of England. The article also calculated that there were 1,679 tonnes of gold in the gold backed ETFs that store their gold in London, so again, there was very little gold in the London vault network that was not accounted for by ETFs and central bank gold.

BoE-Gold

The Vaults of London

Overall, there are 8 vault operators for gold within the LBMA vaulting network. These 8 vault operators are as follows:

  • The Bank of England
  • HSBC Bank plc
  • JP Morgan Chase
  • ICBC Standard Bank Plc
  • Brink’s Limited
  • Malca-Amit Commodities Ltd
  • G4S Cash Solutions (UK) Limited
  • Loomis International (UK) Ltd

HSBC, JP Morgan and ICBC Standard are 3 of the London Gold Market’s clearing banks that form the private company London Precious Metals Clearing Limited (LPMCL). The other two member of LPMCL are Scotia Mocatta and UBS. Brink’s, Malca-Amit, G4S and Loomis are the aforementioned security companies. The LBMA website lists these operators, alongside their headquarters addresses.

Bizarrely, the FT article still parrots the LBMA’s spoon-fed line that the vaults are “in secret locations within the M25 orbital motorway”. But this is far from the truth. Many of the London vault locations are in the public domain as has been covered, for example, on this website, and the FT knows this:

JP Morgan: https://www.bullionstar.com/gold-university/jp-morgan-gold-vault-london

Malca-Amit https://www.bullionstar.com/gold-university/malca-amit-london-gold-vault

G4S: https://www.bullionstar.com/gold-university/g4s-london-gold-vault

And perhaps HSBC: https://www.bullionstar.com/gold-university/hsbc-gold-vault-london

G4S location https://www.bullionstar.com/blogs/ronan-manly/g4s-london-gold-vault-2-0-icbc-standard-bank-in-deutsche-bank-out

Malca-Amit location https://www.bullionstar.com/blogs/ronan-manly/gold-vaults-london-malca-amit

HSBC possible location https://www.bullionstar.com/blogs/ronan-manly/hsbcs-london-gold-vault

And obviously, the Bank of England vaults are where they always have been, under the Bank’s headquarters in the City of London: https://www.bullionstar.com/gold-university/bank-england-gold-vaults

It’s slightly disappointing that we spend time and effort informing the London financial media where some of the London gold vaults are, and then they continue to parrot the LBMA’s misleading “secret locations” line. I put this fake news down to a decision by the FT editors, who presumably have a stake in playing along with this charade so as not to rock the boat with the powerful investment banks that they are beholden to.

The FT also reminds us in its article that “last year a gold vault owned by Barclays, which can house $80bn of bullion, was bought by China’s ICBC Standard Bank.

This Barclays vault in London was built by and is operated by Brink’s, and presumably after being taken over by ICBC Standard, it is still operated by Brink’s. Logistically then, this ICBC Standard vault is most likely within the Brink’s complex, a location which is also in the public domain, and which even hosts an assay office as was previously mentioned here over a year ago. The Barclays vault (operated by Brink’s) is even mentioned in a Brink’s letter to the SEC in February 2014, which can also be seen here -> Brinks letter to SEC February 2014.

brinks1

brinks2
Brink’s letter to SEC, February 2014

Given the fact that there are eight sets of vaults in the London vault system (as overseen by various groups affiliated to the LBMA such as the LBMA Physical Committee, the LBMA Vault Managers Working Party,  the gold clearers (London Precious Metals Clearing Limited), and even the LBMA Good Delivery List referees and staff, then one would expect that whatever monthly vault data that the LBMA or its affiliates publishes in the near future, will break out the gold bar holdings and have a distinct line item in the list for each vault operator such as:

  • HSBC – w tonnes
  • JP Morgan – x tonnes
  • ICBC Standard – y tonnes
  • Brink’s – z tonnes

dsc_0102_800.jpg

Conclusion

At the LBMA conference in Singapore last October, there was talk that there were moves afoot for the Bank of England to begin publishing data on the custody gold it holds on a more regular basis. It was also mentioned that this data could be extended to include the commercial bank and security carrier vaults but that some of the interested parties were not in favour of the idea (perhaps the representative contingents of the powerful HSBC and JP Morgan). Whatever has happened in the meantime, it looks like some data will now be released in the near future covering all of the participating vaults. What this data will cover only time will tell, but more data than less is always welcome, and these data releases might also help show how near or how far we were with earlier estimates in trying to ascertain how much gold is in the London vaulting system that is not accounted for by ETF holding or central bank holdings.

Revealing the extent of the gold lending market in London is critical though, but this is sure to remain a well-kept secret, since the LBMA bullion banks and the Bank of England will surely not want the general market to have any clue as to which central banks don’t really have any gold while still claiming to have gold (the old gold and gold receivables trick), in other words, that there is serious double counting going on, and that some of the central bank gold has long gone out the door.

 

LPPM – The London Platinum and Palladium Market

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

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

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

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

pt

LPPM

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

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

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

Full LPPM member Tanaka of Japan describes LPPM as:

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

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

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

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

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

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

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

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

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

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

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

The founding members of LPPM in 1987 were:

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

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

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

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

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

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

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

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

lppm

London by name, but no London office

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

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

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

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

London Platinum and Palladium Fixing Company Limited (LPPFC)

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

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

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

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

southern

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

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

LPPFC hands the platinum and palladium fixings to LME

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

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

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

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

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

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

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

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

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

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

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

LME

LME Downplays Silver auction after being awarded Platinum / Palladium

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

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

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

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

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

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

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

14 May 2014 – LBMA launches consultation on London Silver Market

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

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

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

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

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

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

The LME’s Executive Summary of Silver Price solution

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

“We are the natural London home for silver”

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

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

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

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

LME amends Press Release and deletes reference to central clearing

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

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

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

The LME original press release included the following two paragraphs:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The LME Fixings

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

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

The are only 5 member participants of LMEBullion, namely:

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

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

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

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

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

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

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

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

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

Participation and Governance of the LME administered prices

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

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

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

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

LBMA merger with LPPM

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

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

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

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

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

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

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

Bloomberg summed up this October 2015 news as follows:

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

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

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

Shanghai Gold Benchmark Price – New Kid on the Block

Exactly 19 months to the day after the International Board of the Shanghai Gold Exchange (SGE) held its first full trading session on 19 September 2014, the Shanghai Gold Exchange launched the Shanghai Gold Benchmark Price auction on 19 April 2016. In China, the number 19 is very auspicious since it consists of lucky number 1, which means origin or beginning, and lucky number 9 meaning everlasting, eternity, or longevity.

In another example of calculated Chinese planning, the SGE first announced plans to launch its own gold fixing auction on 11 March 2015. This was the week immediately prior to the launch of the LBMA Gold Price auction on 20 March 2015, an event which occurred without any Chinese banks being present in the initial participant list. This lack of Chinese banks as initial participants in the LBMA Gold Price auctions was despite the Chinese banks having made it clear in October 2014 that they wanted to be present in the London auction on launch day:

“It’s been very welcome to see that quite a few banks in China are very interested in taking part. They said they definitely wanted to be there on day one for gold” [Ruth Crowell, LBMA CEO, October 2014 interview with MetalBulletin quoted here]

Two Chinese banks eventually joined the LBMA Gold Price auction, Bank of China on 22 June 2015, and China Construction Bank on 30 October 2015, with Industrial and Commercial Bank of China(ICBC) tee’d up to join the LBMA Gold Price auction next month on 16 May 2016. However, sources in the gold market have indicated that the Chinese banks, and others, had difficulty establishing the necessary credit lines with the incumbent bullion banks that are a LBMA perquisite for being a direct participant in the LBMA auction. This need for bilateral credit lines between auction participants is not something that the Shanghai Gold Benchmark Price suffers from, since it is using a central clearing model, something that the LBMA have paid lip-service to but that has never materialised (nor will it if the LBMA has its way).

SGE bar

The Shanghai Gold Benchmark Price – Details

The Shanghai Gold Benchmark Price, which I’ll abbreviate to SGE Gold Fix, is a twice daily auction held on SGE business days at 10:15 am and 2:15 pm (Beijing Time). All time zones in China are officially the same time zone (and run on Beijing Time), with Shanghai Time equivalent to Beijing Time.

The SGE Gold Fix auctions use the exchange code SHAU, and run on the electronic SGE trading platform using a ‘centralised pricing trading’ auction model. The auction is for physically-delivered 1 kg lots of 99.99% purity gold or higher, quoted in RMB per gram, with a tick size of RMB 0.01. Delivery is in the form of 1kg standard gold ingots of fineness 999.9 or higher at SGE certified vaults. For the SGE Gold Fix, standard gold is either gold from an SGE approved refinery, or gold from a LBMA approved refinery. Settlement / Delivery is two days after trade date i.e. T + 2.

At this juncture it is important to emphasise that the Shanghai Gold Benchmark Price is a centrally cleared auction on the largest physical gold exchange in the world, that delivers real physical gold bars at any of the SGE’s 55 certified vaults. Shanghai Gold Exchange uses 55 certified vaults across 36 Chinese cities for gold storage. Unlike the LBMA Gold Price auction which just settles and clears its trades as unallocated gold that merely exists as a book-keeping entry in the database tables of the LPMCL’s AURUM system.

The objective of the SGE Gold Fix auction is to arrive at a ‘Benchmark Price’, which is a price at which supply and demand reach a balance, while allowing a certain imbalance (less than 400 kgs) to remain. The overall auction concept is therefore similar to the LBMA Gold Price auctions in London. However, there are many features unique to the Shanghai auction. The SGE Gold Fix involves a ‘Reference Price’ which is used as the auction’s initial opening price. This reference price is derived from prices entered into the trading system by two specific groups of auction members during a 5 minute pre-auction window period called the ‘Reference Price Submission Window’ which runs from 10:09 am – 10:14 am for the morning auction and from 2:09 pm – 2:14 pm for the afternoon auction.

These two sets of members are ‘Fixing Members’ and ‘Reference Price Members’. All of the Fixing members are financial institutions. The Reference Price members include gold mining companies and gold jewellery companies. The logic of obtaining opening reference prices from both fixing members and reference price members is that the SGE feels it will minimise price manipulation and price collusion since the reference prices submitted include a broader set of entities (i.e. include non-financial entities). This is a clever ‘checks and balances’ approach that is lacking in the LBMA Gold Price auction.

The Members

At launch, there are 12 Fixing Members and 6 Reference Price Members. The 12 Fixing Members are all banks, 10 of which are pure Chinese banks. These 10 Chinese banks are the Big 4 state-controlled banks in the Chinese Gold Market, namely Bank of China, China Construction Bank, Industrial and Commercial Bank of China (ICBC) and Agricultural Bank of China, followed by Bank of Communications, and also Industrial Bank, Ping An Bank, Bank of Shanghai, Shanghai Pudong Development Bank, and China Minsheng Bank.

The final Fixing members are local entities of 2 foreign banks, namely Standard Chartered Bank (China) and Australia and New Zealand Bank (China) (ANZ). Both Standard Chartered and ANZ hold gold import licenses into China, as does HSBC, however, there is no indication as of yet of HSBC becoming a Fixing Member. This is despite a report in January that China would penalise in some way a foreign bank with a gold import license if it did not join the SGE Gold Fix. Two of the 12 domestic bank holding gold import licenses, Everbright and China Merchants Bank, are also absent from the SGE Gold Fix member list. Perhaps in time, they, along with HSBC will sign up.

The 6 Reference Price members are Chow Tai Fook, one of Hong Kong’s largest jewellery companies and which also has a huge Chinese retail presence, China National Gold Group Corporation (China Gold), the largest of the Chinese gold mining companies, Shangdong Gold Group, another large Chinese gold miner, Shanghai Lao Feng Xiang, a large and well-known Chinese jewellery company, Bank of China (Hong Kong) Ltd, the RMB clearing bank in Hong Kong, and the SGE’s appointed settlement bank for the CGSE-SGE Gold Connect betwen the SGE and CGSE in the Hong Kong Gold Market, and MKS (Switzerland), the Swiss gold trading group that owns the PAMP gold refinery and also owns New York based MTB.

The above is just an initial list of participants that have joined so far. The SGE maintains that any qualified entity can join up in either the Fixing of Reference Price member categories. SGE stipulates that Fixing Member applicants are required to be financially-viable financial institutions that are either active on the SGE or active in the global gold market, while Reference Price applicants can meet one of a number of criteria such as “be a leading producer or consumer in the gold industry” or “be involved in the production, processing, trading, or investment of physical gold“.

SGE Benchmark

The Auction Mechanism

The Fixing members and Reference Price members submit initial reference prices. As to whether all members must submit a reference price is a moot point. Article 12.2 and 12.3 of the Rules for the Shanghai Gold Benchmark Price Trading state that the Fixing and Reference Price members “must provide market reference price at the designated time before the start of centralized pricing-trading“, however, the Shanghai Gold Benchmark Price White Paper (April 2016) describes a hierarchy of contingencies in deriving the reference price, two of which cover situations where less than 50% of members make a reference price submission.

The White Paper calculation methodology (algorithm) is as follows:

If > 50% of members submit a reference price, SGE calculates an arithmetic mean after disregarding the highest and lowest submitted price.

If < 50% of members submit a reference price, the SGE calculates an average (arithmetic mean) of all trades in the Au9999 spot gold contract that have been executed on the SGE during the timeframe for submitting reference prices.

If no trades were executed in the AU9999 during that time, the SGE takes the Shanghai Gold Reference Price from the previous trading session as the initial price. [this would be the previous afternoon benchmark price if applied to the morning pre-auction etc]

The Au9999 is the SGE busiest spot gold contractBased on this three-pronged approach, it would seem that the members are not all obliged to submit a reference price, otherwise the 50% threshold would never arise unless due to communication outages or similar. The only logical interpretation of the two documents is that if a member turns up to the auction (or logs in to the trading platform), then they are obliged to submit a reference price. If they don’t turn up, then there is no obligation. Notwithstanding this grey area, after the reference price is calculated the SGE then publishes the opening price.

Some readers will recall that ICE Benchmark Administration (IBA) uses a ‘human’ chairperson to come up with the opening price in the LBMA Gold Price auction using a number of price sources that ICE Benchmark Administration will not divulge. Nor will ICE Benchmark Administration divulge the identities of the panel of chairpersons that it employs to chair the daily LBMA Gold Price auctions. Frankly, this is a disgrace and a scandal, and shows that the Chinese auction methodology is far more transparent that its London counterpart. My hunch is that there are names involved as chairpersons in the current LBMA Gold Price auction that were also involved in the former London Gold Market Fixing Limited company which operated the London Gold Fixing auctions. Otherwise, why keep the identities a secret. No mainstream financial journalists in London will touch this particular story, although they are all aware of it. See BullionStar blog “Six months on ICE – The LBMA Gold Price” for further details about the lack of transparency in the administration of the LBMA Gold Price auction.

Once the opening price of the Shanghai Gold Benchmark Price is established using the calculated reference price, the auction begins, and participants and their clients submit their buy or sell orders and transaction volumes etc. The auction consists of a first round and possible subsequent rounds if supply and demand don’t reach a balance. There are two distinct time periods in each round, a ‘market tendering‘ session and a ‘supplementary tendering‘ session. The market tendering part is just the normal part of the round where all participants and their clients submit orders. The supplementary tendering session in each round only applies to the Fixing members, and allows them to submit supplementary orders against the remaining imbalanced quantity so as to try to reduce the imbalance to less than 400 kgs and so speed up the auction, because if the imbalance is shrunk to under 400 kgs, there is no need for an additional round(s).

The first round  consists of  a 1 minute market tendering session + a supplementary tendering session of 10 seconds. If the price is not balanced after the first round, the SGE trading system will adjust the price upwards or downwards depending on buy and sell orders, and then a new round begins. Any and all subsequent rounds consist of 30 seconds duration of a market tendering session + 10 seconds of a supplementary tendering session.

Once the imbalance is less than 400 kgs, it is shared out among the Fixing members. The price is then said to be balanced and the SGE then publishes the benchmark price. The ‘Shanghai Gold Benchmark Price’ now has its own web page on the SGE website here, with daily price lookup, daily, monthly and annual charting (which will make sense when the auction has been running for a while), and Trading Rules, Contract Spec and Q & A (to be uploaded, but some of which are already detailed in the Rules and White Paper linked above).

SGE Surveillance Committee

The SGE has also created an Oversight Committee to monitor and oversee the auction’s functioning. This Committee currently comprises 11 representatives from 9 organisations. Although the names of the representatives have not yet been published, the names of their organisations have. The SGE will have 3 representatives, and the 8 other entities will each have 1 representative. The list is as follows

  1. SGE  3
  2. ICBC  1
  3. Bank of China  1
  4. Standard Chartered Bank (China)  1
  5. ANZ Bank (China)  1
  6. China Gold Coin Corporation  1
  7. Baird Mint  1
  8. China Gold Association  1
  9. World Gold Council  1

Of the list of 11, seven reps come from pure Chinese entities, with the remaining four from two foreign banks, the World Gold Council and ‘Baird Mint’. All represented entities have connections with the SGE except it seems Baird.

The Oversight Committee’s remit is to monitor trading, clearing, delivery, in terms with SGE rules, analyse trading behaviour, examine conflicts of interest etc.

Central Clearing

The SGE uses central clearing of the trades executed in the SGE Gold Fix auctions and so there is no credit risk between participants. Under central clearing, the exchange becomes the counterparty to all buyers and sellers. This also avoids the need for participants to maintain bilateral credit arrangements with each other, and so easily allows the number of auction participants to grow, even exponentially. The lack of central clearing in the LBMA Gold Price auction is a huge barrier to entry for non-bullion bank participants and has been kept as such by the LBMA, even though ICE offers central clearing and has been well able to implement a centrally cleared model from Day 1 in March 2015. See ICE Executive Summary which summarises the winning ICE bid for the LBMA Gold Price wherein ICE discusses “moving to a centrally cleared model“.

The Purpose of the Shanghai Gold Benchmark Price

The Shanghai Gold Benchmark Price is but one more step in the growth and deregulation of the Chinese gold industry, and the internationalisation and extended use of the RMB. Much of this scene was set back in 2000 at the China Gold Economic Forum. It’s also a natural step for a country that is the largest gold producer, gold consumer and gold importer on earth. The SGE Gold Fix also provides China with a real role in global gold price discovery and creates the first proper transparent RMB denominated gold price benchmark, calculated within a centralised trading auction setting on an exchange.

An RMB gold price benchmark aids risk management and hedging in the domestic gold sector, and can also now be used within Chinese gold-backed derivative products, a function which the SGE has explicitly mentioned. So expect financial products to appear that use the Shanghai Gold Benchmark Price as a reference or valuation price. In China, where gold is correctly recognised as the ultimate money, there is also the prestige of having an internationally known global gold price benchmark, that will, in SGE’s words “enhance China’s voice in the global gold pricing market”.

In its White Paper, the SGE states that “the relationship between Shanghai Gold and Loco London Gold is non-competitive”, and it lists a number of reasons why this, on paper, is so, such as the London auction is for the OTC trading of 400 oz bars of 99.5 purity quoted in USD, while the Shanghai auction is Exchange-based trading for 1 kg bars of 99.99 purity quoted in RMB. While this is true, these are only ‘contract spec’ differences, and having a PBoC controlled gold benchmark that is not in London and not under the control of LPMCL clearing banks and the Bank of England is a much bigger change than purely differing contract specs.

The Chinese play a long patient game and more often than not just go ahead and do things / make things instead of just talking about doing things. The SGE and the PBoC have now set up another part of the infrastructure that can in time play a critical role in the global gold market as the Renminbi begins to internationalise. Whenever the Chinese Government and PBoC move to allow gold to be officially exported, this will really boost the new kid on the block benchmark.

I would not think that the Chinese will want to make waves with this Shanghai benchmark in the near future that would explicitly jeopardise their relationships with the London Gold Market. The fact that the luminaries of the global gold world were at the SGE Gold Fix launch ceremony and the China Gold Market Summit Forum on 19 April, much like they were at the launch of the SGE International Board in September 2014, attests to the fact that large players such as the World Gold Council, LBMA, MKS, ANZ and Standard Chartered are very much in a cooperative relationship with the SGE, the China Gold Association and the large Chinese banks. As the Chinese Gold Market continues to evolve, my view is that the Shanghai Gold Price Benchmark will naturally move into the ascendancy, and that its physical gold price discovery influence will subtly begin to show up the London Gold Market’s trading weaknesses (i.e. small % of physical traded), or alternatively, the Chinese will at some stage call time-out when ready, and allow the Shanghai Gold Price Benchmark to really shift up a gear to generate physical gold prices that will disconnect from the COMEX and LBMA pass the parcel shenanigans.

G4S London Gold Vault 2.0 – ICBC Standard Bank in, Deutsche Bank out

On 8 January 2016, Reuters broke the news that ICBC Standard Bank has purchased the lease on Deutsche Bank’s gold vault in London, and that ICBC Standard intends to become a member of the clearing syndicate, London Precious Metals Clearing Limited (LPMCL):

“ICBC Standard Bank is buying the lease on Deutsche Bank’s London gold and silver vault, enlarging its footprint in the city’s bullion market..”

ICBC.. has also applied to become a clearing member of the London gold and silver over-the-counter business.

The vault became operational in June 2014 and has a capacity of 1,500 tonnes. It was built and is managed by British security services company G4S.

These moves by ICBC Standard Bank have now put both the G4S vault and LPMCL, (a private company), back in the spotlight.

The Background to the G4S Vault

On 20 March 2012, Deutsche Bank issued a press release announcing that it had contracted security company G4S to construct and manage a precious metals vault on Deutsche’s behalf in London. Critically, this was a substantial long-term partnership between Deutsche Bank and G4S, with G4S doing the actual work of building and then operating the precious metals vault. Deutsche stated at the time in March 2012 that the new vault would be for the exclusive use of Deutsche Bank clients, and that it would available for use by these clients during 2013:

“Deutsche Bank and G4S are pleased to announce that they are to join forces in establishing a new vault for the storage of precious metals in the UK.”

The new vault will be built and managed by G4S, the world’s leading international security solutions group, for the exclusive use of Deutsche Bank and its clients and will be an enhancement to Deutsche Bank’s already extensive metal trading and clearing capabilities. 

“‘It will position us well to quickly become a leading metals clearing and custody house,’ commented Raymond Key, Global Head of Metals Trading at Deutsche Bank. The vault, which will be constructed and run to industry-leading standards of security, will be available for clients in 2013.

Likewise, on 20 March 2012, G4S released its own press release in which it revealed that the contract with Deutsche Bank was a 10 year commercial deal and that discussions about building the vault had commenced in 2009:

“Working in partnership with Deutsche Bank, the business has secured a ten year commercial arrangement to establish a state of the art precious metals vault that will be built and managed by G4S, and will enable Deutsche Bank to extend and enhance their metal trading and clearing capabilities.

Discussions started with Deutsche Bank back in 2009 when increased economic volatility started to cause a rise in interest levels among investors for precious metals.”

“James Dinsdale, Managing Director, G4S Cash Solutions, said: ‘We’re delighted to have secured this partnership with Deutsche Bank….. This agreement represents a strategic move in the UK market place for G4S.”

Law firm Clyde & Co acted as advisor to G4S for the Deutsche vault project, and it too issued its own press release on 19 March 2012:

“Clyde & Co has advised global security and logistics company G4S in relation to a project for Deutsche Bank.

G4S will build and manage a gold bullion secure storage vault in the UK for Deutsche Bank.”

What none of the press releases mentioned was that the precious metal vault was being integrated into the basement of a new G4S operating centre in Park Royal, London.

Deutsche

As it turns out, Deutsche did not deliver on its self-publicised deadline for the new vault becoming available to its clients in 2013. However, on 9 June 2014, over 2 years after announcing the London vault project, a much reduced Deutsche Bank London precious metals business that had substantially stepped back from the London Gold Market, confirmed to Reuters that it had finally opened its new London precious metals vault. Note that Reuters is usually the first distribution channel that the London Gold Market PR machine contacts to get its stories out on to the newswires.

According to Reuters’ coverage of the June 2014 Deutsche opening announcement:

“Deutsche’s new vault has been built in partnership with logistics company G4S and is open to institutional investors, and commercial and central banks.”

The vault has a capacity of 1,500 tonnes, making it significantly bigger than a 200-tonne storage facility that the bank owns at the Singapore Freeport.

The period from late 2013 to early 2014 turned out to be a turbulent period for Deutsche Bank’s precious metals operations in London, during which time:

- German financial regulator BaFin began an investigation into the London Gold and Silver Fixings, of which Deutsche Bank was a fixing member (November 2013)

- Deutsche Bank announced that it would withdraw its participation in the London Gold and Silver Fixings and sell the Fixing seats (January 2014)

- Deutsche Bank ceased contributing to the GOFO benchmark and ceased being a LBMA market maker for precious metals forwards (February 2014)

- Deutsche Bank ‘failed to sell’ its gold and silver fixing seats (despite ICBC Standard Bank being interested), and Deutsche then merely resorted to withdrawing from the fixings (April/May 2014)

- Deutsche Bank’s Matthew Keen, who was a director of London Gold Market Fixing Limited (LGMFL), London Silver Market Fixing Limited (LSMFL), and  London Precious Metals Clearing Limited (LPMCL) resigned from Deutsche Bank, prompting the appointment of other Deutsche representatives to those company directorships (January 2014)

- Deutsche Bank’s representative on the London Bullion Market Association’s (LBMA) management committee, Ronan Donohoe, resigned from the LBMA management committee on 5 March 2014, only 7 months into a 2 year appointment (March 2014)

Given all the above retrenchments affecting its precious metals activities in London, it is slightly odd that Deutsche Bank still went ahead in June 2014 and announced the opening, at least in name, of its London precious metals vault collaboration with G4S. Perhaps it had a contractual obligation with G4S to do so.

But odder still is that less that 5 months after announcing the opening of the new vault, Deutsche Bank then stepped back even further by closing its physical precious metals trading operation in London in November 2014, and then announced in December 2014 that it would actually be interested in selling its London gold vault. This decision is beyond bizarre given the huge level of commitment that Deutsche Bank had made to the development of the vault for at least 4-5 years beginning in 2009.

As Reuters reported on 24 December 2014:

“Deutsche Bank is open to offers for its London-based gold vault following the closure of its physical precious metals business, three sources familiar with the matter said on Wednesday. ‘If the right offer came along, then the bank would sell the London vault,’ one source close to the situation said.

The German bank shut its physical precious metals trading arm last month as it further reduced its exposure to commodity markets.”

Deutsche declined to comment on the status of its vaulting operation.

 “…it could be difficult for Deutsche Bank to find buyers among its nearest peers. But sources familiar with the matter said a Chinese entity could come forward. ICBC is trying to build a presence in London and the sources said it was a likely candidate. ICBC declined to comment.”

The key question is did this Deutsche Bank vault in London, operated by G4S, ever do any precious metals business in the time between June 2014 and November 2014? If it did, then this activity could not have been substantial.

Deutsche Bank clients holding allocated gold and other precious metals with Deutsche in London would not have been impressed if they were told their holdings were being moved to the new vault in the summer of 2014, only to find out a few months later that Deutsche was looking to exit its involvement with the vault.

While the G4S / Deutsche vault sales process seemed to remain on hold for the entire year of 2015 with no announced activity from either Deutsche bank or ICBC, and no media scrutiny, Deutsche continued to exit the physical gold business in London amid a number of other significant developments. In August 2015, Deutsche departed from the London Precious Metals Clearing Limited (LPMCL) company, leaving HSBC, JP Morgan, Bank of Nova Scotia, Barclays, and UBS as the remaining 5 members of the London gold and silver clearing consortium.

On 20 August 2015, Reuters reported that:

“Deutsche Bank is to sever its last link with commodity trading by resigning as a clearing member of the London gold and silver over-the-counter business..” [LPMCL]

It’s a little known fact that London Precious Metals Clearing Limited (LPMCL) (company number 04195299) is a UK private limited company with the same registered address as the London Gold Market Fixing Limited and the London Silver Market Fixing Company Limited. This registered address is C/O Hackwood Secretaries Limited, One Silk Street, London EC2Y 8HQ.  Indeed, Hackwood Secretaries Limited is the Company Secretary for LPMCL. Hackwood Secretaries Limited is one of the companies Linklaters uses to offer its company sectretariat services. And Linklaters is one of the better known ‘magic circle’ global law firms that is headquartered in London.

While LPMCL has so far managed to steer clear of US class actions suits concerning precious metals manipulation accusations, its fellow Linklater registered gold and silver fixing companies, London Gold Market Fixing Limited and the London Silver Market Fixing Company Limited, both of which have had a lot of the same directors as LPMCL, have not been so lucky on the class action front, and both companies are now facing live consolidated class action suits in New York courts.

Each member bank of LPMCL usually appoints two directors who are senior staff members of that investment bank. So with 6 investment banks within LPMCL, there are usually 11-12 LPMCL directors, give or take a few people who would invariably be moving bank at any given time.

Deutsche Bank’s two last-serving directors of LPMCL, Raj Kumar and David Mitchell-Innes, actually resigned from LPMCL on 9th February and 1st September 2015, respectively. The February 2015 LPMCL resignation by Kumar seems to have been precipitated by his internal move within Deutsche Bank for a short while to the role of Global COO for Commodities, but then significantly, Kumar left Deutsche Bank in July 2015 to take up a role in ICBC Standard Bank in September 2015 as a managing director in ICBC Standard’s  precious metals business, as Reuters reported on 17 September:

“London-based ICBC Standard Bank Plc named Raj Kumar head of its precious metals business development, effective immediately.

Kumar, who will be based in London, joins from Deutsche Bank AG, where he was managing director of precious metals business.”

 This Deutsche Bank – ICBC Standard Bank – LPMCL link in the form of Raj Kumar was undoubtedly useful to ICBC Standard in its move to take on Park Royal vault lease from Deutsche Bank, and could help facilitate ICBC Standard’s stance in an application to become a member of LPMCL.

However, the 20 August Reuters report also interestingly stated that Standard Chartered might be interested in becoming a LPMCL member:

“…there is one other bank, Standard Chartered, that could become a gold and silver clearing member in the next few months.”

Could this be a typo by Reuters when it meant to say Standard Bank? Possibly, but most likely not. Standard Chartered is an important bank in the London Gold Market in its role as a LBMA market maker in spot and options for gold and silver which it secured in February 2015. But Standard Bank is not to be confused with Standard Chartered bank. They are two entirely separate banking institutions, albeit with historical connections.

Standard Chartered is headquartered in London, and is well-known for its emerging markets focus, particularly in Asia and Africa. The ‘Standard’ in Standard Chartered in some ways does refer to the South African ‘Standard Bank’, since Standard Chartered was created in 1969 through the merger of Standard Bank of British South Africa and Chartered Bank of India, Australia and China. However in 1987, Standard Chartered sold its shareholding in Standard Bank.

In another LPMCL related link that could involve Standard Chartered, Martyn Whitehead, former director of LPMCL for Barclays, left Barclays in May 2015, and joined Standard Chartered in August 2015, as MD and head of Commodity Sales.

In April 2015, Reuters said of Whitehead’s pending departure from Barclays:

“Barclays’ global head of metals and mining sales Martyn Whitehead will leave the bank as part of its restructuring and exit from some parts of its commodities business, a source familiar with the situation told Reuters on Monday.

Whitehead was Barclays’ only representative listed with London Precious Metals Clearing Ltd. Barclays is one of the six banks that organise and co-ordinate bullion clearing and vaulting in London.”

Therefore, could two former directors of LPMCL, namely Raj Kumar and Martyn Whitehead, now be spearheading applications on the part of their respective new employers, ICBC Standard Bank and Standard Chartered, to both join the private club that is London Precious Metals Clearing Limited, and have access to the exorbitant privilege of being part of the London Gold Market’s private gold clearing consortium, and preferential treatment form the Bank of England gold and foreign exchange desk?

Standard ICBC

ICBC

China’s largest bank, Industrial and Commercial Bank of China (ICBC), has been eager to become a premier player in the London Gold Market for some time now. Although it became an Ordinary Member of the LBMA in 2012, ICBC had stated in 2012 its desire to become a LBMA Market Making Member. ICBC was also interested in buying Deutsche Bank’s seat in the old Gold Fixing in 2014, but strangely this sale never happened. See my BullionStar blog “Chinese Banks as direct participants in the new LBMA Gold and Silver Price auctions? Not so fast!” from March 2015 under section “ICBC and Standard Bank” for more details on this.

One key development for ICBC was crystalised in February 2015,  when ICBC finalised its acquisition of 60% of Standard Bank Plc (the UK arm of Standard Bank) from Standard Bank of South Africa, to create the entity now known as ICBC Standard Bank. See also the press release ICBC completes acquisition of 60% of Standard Bank Plc 20150129. The LBMA website nows list ICBC Standard Bank as an Ordinary Member of the LBMA in lieu of listings for both ICBC and Standard Bank.

ICBC also stated in June 2015 that it wanted to become a direct participant in the LBMA Gold Price auction, but again strangely this has not yet happened despite 2 other Chinese banks, namely Bank of China and China Construction Bank (CCB), eventually being authorised by the LBMA to join up to the LBMA Gold Price auction on 22 June 2015 and 30 October 2015, respectively.

Prior to the controlling interest purchase by ICBC, Standard Bank was no stranger to London Gold Market gold vaulting, and a 2009 report from Abu Dahbi’s “The National” on United Arab Emirates related bullion stated that gold had:

“moved to the vaults of Standard Bank of South Africa, located in the London offices of JPMorgan Chase at 60 Victoria Embankment, Blackfriars, London.”

The ‘vaults of Standard Bank‘ reference just refers to allocated or sub-leased space in the JP Morgan vault in London in the name of Standard Bank of South Africa.

Finally, ICBC also has a strategic interest in the London platinum group metals market through Standard Bank Plc’s existing participation in the London Platinum and Palladium Market especially through the daily platinum and palladium fix auctions, which are now administered by the LME on behalf of the LBMA.

 

The Park Royal VAULT

As first revealed by Zerohedge in December 2014, the London precious metal vault that was built by G4S on behalf of Deutsche Bank is located at in the Park Royal area of London at 291 Abbey Road, London NW10 7SA.

This Park Royal location was actually telegraphed by G4S itself as early as July 2013 when ‘G4S Cash Solutions’ advertised for “Precious Metals Vault Officers” for the new vault in a job advert on the careers section of its own website, which listed the job location as ‘Park Royal, West London‘. Not really a very security conscious approach for whats purports to be one of the world’s foremost security companies. The job adverts included the following:

Precious Metals Vault Officers

Location: Park Royal, West London

Number of Positions: 16

Closing Date: November 2, 2013

G4S Cash Solutions, in partnership with one of the world’s leading financial institutions, is launching a Precious Metal Vault in West London.  The vault which has been created with innovative, state of the art design and technology is at the leading edge of the global bullion storage industry.

We are now recruiting an exceptional team of Precious Metal Vault Officers who will operate and secure our vault in this exciting, new venture.”

  • “responsible for processing all inbound, outbound and stock management transactions and movements of Precious Metals”
  • “The operation and use of a Vault Management System together with specialist Precious Metals equipment”
  • “The conduct of receipting, weighing and stowing of Precious Metals including their physical movement in and around the Vault “

Other roles at the new vault were also advertised on the G4S website, such as  “Vault Manager – Precious Metals” which included information such as:

Vault Manager – Precious Metals

Location: Park Royal

Number of Positions: 1

Closing Date: November 2, 2013               

G4S is the largest secure solutions company in the world…Our Cash Management Solutions business has expertise in cash and valuables transportation, cash processing, ATM and cash centre outsourcing, secure storage and retrieval.”

“Responsible for the management, security and operations of the precious metals vault including security and traceability of all assets entering and leaving the vault.”

  • “To work closely with internal management on the strategic global growth of our bullion projects; offering product, operational knowledge and LBMA expertise.”
  • “To train vault officers to ensure they are working within the LBMA / LPPM /  LPMCL guidelines…”  
  • A strong working knowledge of LBMA, LPPM and LPMCL codes of practice and proven experience of implementation of these codes
  •  ** Proven experience of working within a Precious Metal vault **
  • Proven experience of working within LBMA, LPPM and LPMCL codes of practice  (including weighing of bullion)”

 

…and a Weighmaster job role which included:

“Weighmaster

Location: Park Royal

Number of Positions: 1

Closing Date: December 31, 2015

 

  • Planning and implementing the conduct of receipting, weighing and stowing of precious metals including their physical movement in and around the vault
  • Planning for and implementing the conduct of picking, packing and shipping of precious metals including their physical movement in and around the vault

 

There were also similar job adverts on the G4S website for other positions at Park Royal including  “Precious Metals Shift Manager” (Positions: 4, closing date 31 October 2013), and “Secure Driver” (Positions:15, closing date 23 June 2014, “Deliver cash and valuables to various customers in a physically active role“).

Note that the closing date for the Secure Driver applicants was a few weeks after Deutsche Bank had announced on 6 June 2014 that it had opened the gold vault. So if the drivers hadn’t even been hired in June 2014 and probably not in July 2014 either, then there was nothing being moved in or out of the vault at that time, and there was most likely never any Deutsche Bank precious metals moved in or out of the G4S vault, which would also explain why, in December 2014, “Deutsche declined to comment on the status of its vaulting operation”, and would therefore make the vault an extremely bad and money losing investment decision for Deutsche Bank, as well as a bizarre business decision to commit substantially investment to the vault and then walk away from it 2 years later. 

From July to August 2013, G4S even tweeted about these Park Royal roles on its Twitter account and stated the locations of the jobs roles and locations, for example, for “Vault Manager – Precious Metals in Park Royal“.

Not only that, but G4S even advertised these precious metals vault positions to the world on Facebook, complete with the specification of the Park Royal location.

Park Royal

Where is Park Royal? Most people in London, if they know Park Royal at all, would recognise the name as a tube station (train station) and as an area of North West London. Park Royal is just off the North Circular Road, in an industrial area, frequently congested with traffic, just down the road from Hanger Lane roundabout, another often traffic gridlocked area. But as the crow flies, Park Royal is not too far from Heathrow Airport, or the M25 ring-road, or Central London.

As well as telegraphing the general Park Royal area where the new vault was to be built, G4S also went further and specified the exact address of the new operating centre in a planning application document available on the web, conveniently pinpointing the vault building location in this large industrial sprawl, chock full of industrial parks and warehouses:

OFFICE OF THE TRAFFIC COMMISSIONER (LONDON AND THE SOUTH EAST OF ENGLAND) APPLICATIONS AND DECISIONS       PUBLICATION DATE: 06 March 2014

Page 13 of document: Reference Number OK0229598 SI

G4S CASH SOLUTIONS (UK) LIMITED

Director(s): KEVIN O’CONNOR, Margaret Ann Ryan, Declan Hunt.

SUTTON PARK HOUSE, 15 CARSHALTON ROAD , SUTTON SM1 4LD

New operating centre: PARK ROYAL, 291 ABBEY ROAD LONDON NW10 7SA

New authorisation at this operating centre will be: 45 vehicle(s), 0 trailer(s)

In this case, the planning reference was referencing an increase in the number of vehicles allowed on the site. However, the more interesting planning applications are to be found not in the Office of the Traffic Commissioner, but in the website of Brent Council. These plans give a good overview of some of the details of the basement and vault that ICBC Standard Bank has just taken on the long-term lease for.

Park Royal tube

Planning applications for 291 Abbey Road NW10 7SA

The Park Royal area, including 291 Abbey Road NW10 7SA, is under the remit of Brent Council Borough of London. Brent Council planning applications are available on the Brent Council Planning web site. On the Brent Council web site, there are 5 planning application ‘Case Numbers’ for 219 Abbey Road NW10 7SA submitted since 2012. The sequential nature of there being 5 case numbers just means that after the initial application was made, various details of the application were amended, which necessitated the applicant making subsequent submissions to the Council requesting the changes. This allows the amended plans of the G4S development to be compared to the initial plans. Each of the 5 applications have multiple scanned documents uploaded and attached to the applications.

Case Number 12/2112:  This is the original planning application

Erection of new 2-storey storage facility (Use Class B8)”. Use Class B8 means Distribution or Storage. B8 building use is for storage or as a distribution centre. This application was submitted on 9 August 2012, and the application was granted on 9 November 2012.

Applicant: S Williams, G4S, Sutton House, 15 Carshalton Road, Sutton, Surrey, SM1 4LD

Architects: Pick Everard, Leicester

Pick Everard architectural practice describes itself on its website as “a leading independent, multi-professional consultancy practice working within the property, infrastructure and construction industry.

There are a number documents in the Case Number 12/2112 planning application, the most interesting of which is the initial floor plan diagram of the construction project: Project Park Royal – Document 120437 A 105 B Typical floor plans and sections.

Notice that on the diagram, there is a square-shaped basement specified on the floor plans, listed as ‘Basement Storage’, and this basement is specified as 1178 square metres. This 1178 sq mt space is approximately 34 metres * 34 metres. Furthermore, the ground floor level is listed as “Industrial Warehouse”, 1132 sq metres, with “Vehicle Loading Bays” at the rear, and the 2nd Floor level is listed as “Offices”.

On 20 September 2012,  the London Bullion Market Association (LBMA) published the following guidelines on the location of new precious metals vaults in London: Best Practice Guidelines Used by ‘Loco London’ Vaults – Opening a new vault for the storage of precious metals, in which it stated:

If you wish to store the higher value precious metals then you may find that insurers insist that your vaults are subterranean.

It appears that these guidelines were specifically written for Deutsche Bank and G4S to follow since they were the only parties submitting a planning application for a new precious metals vault in London at that time, and the dates fit exactly. Case Number 12/2112 also includes an initial site location plan Project Park Royal – Document 120437 A 001 J Site Location Plan showing an overview of the site, with car park at front, building in the middle with truck loading bays at the back of the buildings, and truck parking at the rear of the site.

Case number 12/3371: Some small extra details

Case 12/3371 is just an application containing extra details about construction materials etc and security gates, barriers etc. This application was submitted on 18 December 2012, and granted on 12 February 2013.

Case Number 12/3344: Some small extra details

Case 12/3344 just covers some extra details such as car park spaces at the front of the site, for 32 cars, 30 staff/visitor spaces, and 2 disabled spaces. That application was submitted on December 2012, and granted on 13 February 2013.

Case Number 13/0722: Some important revisions to the Project, including a reduction in the size of the Basement

Case Number 13/0722 is interesting in that it included a reduction in the size of the basement from 1178 sq metres in the original application, to 750 sq metres. This application was submitted on 25 March 2013, and granted on 22 April 2013.

The accompanying Delegated Report specified a “Non-material amendment application to: (a) reduce basement area, and other changes such as (e) alterations to fencing, (f) reduction in number of vehicle loading bay shutters from 6 to 5.

“It is proposed to reduce the size of the basement from 1178sqm (as approved) to 750sqm. This is below ground level and will not have a material impact.”

Applicant: Stacy Williams, G4S, Sutton House, 15 Carshalton Road, Sutton, Surrey, SM1 4LD

In the revised floor plan Project Park Royal – Document 120437 A 105 C Typical floor plans and sections, the basement, still listed as ‘Basement Storage’, has been remodelled as a rectangular space and reduced in size to 750 square metres from 1178 sq metres, i.e. a reduction of 428 square metres compared to the original submission. This new 750 sq metre size, as a rectangular area, is roughly 19 metres * 38 metres. See revised floor plans.  While a smaller basement does not necessarily mean a smaller vault, the basement size was more than likely reduced specifically because the vault size had been reduced.

If this was the case, then its possible that Deutsche Bank communicated to G4S that the vault size was to be reduced due to gold bullion exiting London for Asia (via Switzerland) in 2012 and especially during early 2013, and a fear that the previous planned size for the vault would be too big for the intended London bullion activity requirements.

The floor plan diagram specifying the reduced basement was actually created on 26 April 2013, which is coincidentally the week following the historic two-day gold price smash that occurred over Friday 13th and Monday 16th April 2013.  Said another way, the amended planning application which specified the basement size reduction was submitted 2 weeks before the historic gold price smash of 13-16 April 2013, and the application amendment to the floor plans was granted the week after the historic gold price smash of 13-16 April 2013.

When the Deutsche/G4S vault opened in June 2014, Reuters reported that the vault’s capacity was 1,500 tonnes of gold. It’s not clear if this capacity statistic was the capacity from a larger vault that would have been in the larger basement area, i.e. 1178 sq mtrs, which a source may have supplied to Reuters at an earlier time, or whether it referred to a smaller vault within the smaller and revised 750 sq mtr basement area. For if the vault can now hold 1,500 tonnes of gold within a smaller basement, the original basement, being 57% larger, may have been designed to hold in excess of 2,300 tonnes of gold.

It’s either a fortunate or unfortunate set of timings that Deutsche/G4S applied to reduce the size of one of the largest ever precious metals vaults in London within a few weeks of the gold price being critically injured by huge gold futures contract short trading over the 13-16 April 2013 period. It would be interesting to know who made the decision to reduce the area of the basement, and on what rationale this decision was based.

Again, as to how much precious metal, if any, Deutsche Bank ever processed or held in the Park Royal vault is debatable, since a) the vault was not operational until June 2014 and b) Deutsche Bank  was rapidly exiting the London Gold Market at that time. It therefore makes this LinkedIn profile of the person who actually performed the job of Precious Metals Manager at the vault all the more interesting,  a role which is stated to have lasted from December 2013 to May 2015, but a profile in which the references to physically related precious metal activities just refer to the job spec bullet points, and the achievements listed predominantly concern the vault and not the contents of the vault.

G4S spec

Likewise, the ‘Bullion Operations Manager‘ at the G4S vault, a vault which was exclusively for Deutsche’s clients, must have seen fallow periods in which no metal passed over the vault’s threshold with the LinkedIn profile predominantly listing job spec bullet points. However, interestingly, the profile refers to ‘Leasing with [a] major financial corporation to ensure compliance to contractual agreements‘, so there were, as would be the case, contractual agreements between Deutsche and G4S. On the Deutsche side, these contractual agreements  would raise the question of what penalties, if any, Deutsche Bank incurred in exiting contractual obligations with G4S, and whether Deutsche would have received a get-out exemption by delivering ICBC Standard Bank as the willing recipient of the vault lease.

G4S bullion

 

 Galliford Try

The planning applications submitted to Brent Council also include a “Method Statement & Logistics Plan” report written by the construction contractor Galliford Try for the project. On its website, Gallilford Try describes its Construction division as “a leading construction company, carrying out building and infrastructure works across the UK.

Galliford Try’s Method Statement & Logistics Plan report, which is useful as a comparison benchmark to the actual construction that was completed, reckoned that the construction would take 50 weeks to complete, which probably explains why the vault and building was only complete in mid-2014, given that the amended planning application was only granted by Brent Council on 22 April 2013. It still however does not help in explaining why Deutsche Bank initially thought in 2012 that the vault would be ready for its clients to use in 2013.

Crucially, page 4 of the Galliford Try report, in a section titled “Internal Finishes (weeks 27-50)“, sub-section “Basement (weeks 26 -40)“, confirms that “Once the ceiling grid works have been completed the steel / vault doors will be installed“, which proves beyond doubt that the vault is located in the basement of the G4S operating centre. There are also kitchen and toilet areas in the basement as per other London subterranean precious metals vaults.

On page 3, when discussing the basement excavation and basement concrete slab floor, it also states that  “Pockets will be formed in the floor for the fitting of the security doors etc“, and that “the lift pits…will be installed.”

GT1

From page 2:

GT2

From page 3:

GT3

From page 4:

GT4

The Park Royal site on which G4S built the operating centre and vault was first put on the market in November 2011 by Clay Street Property Consultants. The site occupies 1.89 acres and was sold (presumably to a G4S related company) in April 2012 for £4.5 million:

  • 291 Abbey Road & 2-4 Penny Road, Park Royal , London
  • Marketed in November 2011 the 1.89 acre site attracted a broad range of interest including institutional investors, property companies, developers and owner occupiers.
  • Securing 15 bids all at in excess of the asking price the site was sold in April 2012 to an owner occupier for £4,500,000 reflecting a price of £2.38m per acre.

A Google Earth image from July 2013  shows the site with the new development in full flight, and the construction of the basement in progress, and so allows a determination of whether the construction was following the last set of plans approved by Brent Council:

July 2013
Google Earth July 2013

 

Zooming in on the construction of the basement area from July 2013, the image shows the rectangular darker area where the vault was being positioned, and the lift-pits to the right of the image, one lift shaft at the front, and two towards the rear, which would be adjacent to the truck loading bays. This shape is very much in keeping with the basement size reduction to 750 square metres in the ultimate set of plans approved by Brent Council.

Basement Excavation - July 2013
Basement Excavation – July 2013

 

Finally, a Google Earth image from June 2015 shows an aerial view of the completed G4S development.

June 2015
Google Earth June 2015

 

Conclusion

The hasty exit of Deutsche Bank from the London Gold Market has never been adequately explained by the media. It remains an elephant in the room that the mainstream media does not seem to want to touch. The composition and operating mechanisms of the private LPMCL club is also another elephant in the room that mainstream media journalists have never adequately analysed and are unlikely to do so.

Now that ICBC Standard Bank has taken on the remaining term of the 10 year G4S lease that was vacated by Deutsche Bank, the key questions for ICBC are to what use will the state-controlled Chinese bank put this precious metals vault to, and whether the 5 incumbent LPMCL members will formally (along with the Bank of England informally) give the go-ahead to allow ICBC become a member of the private syndicate that is London Precious Metals Clearing Limited. The other outstanding question is whether Standard Chartered will also be involved in any extension of membership of LPMCL.

Another little appreciated fact is that during the pitches for the replacements to the Gold Fixing and Silver Fixing auctions, most of the exchanges and companies making the pitches, such as, CME, LME, ICE, all offered working solutions that included centralised on-exchange clearing of precious metals for the London Gold and Silver Markets. These solutions were even included in the various presentation materials of CME, ICE and LME, and made it into market presentations and press releases etc, however, the LBMA and its various associated accomplishes such as the LPMCL, pushed back completely on any part of solution that would have encroached on the existing LMPCL clearing mechanism.

The question of why LMPCL was so ‘precious’ that it needed protection from a transparent on-exchange clearing platform is also a question that mainstream financial journalists seem to have entirely missed. I will write a future blog post on LPMCL so as to shed some light on this thoroughly protected private syndicate of bullion bank clearers.