Tag Archives: London Gold Price

Lukewarm start for new London Gold Futures Contracts

The second half of 2016 saw announcements by three exchange providers for plans to compete in the London Gold Market through offerings of exchange-traded London gold futures contracts.

First off the mark was the London Metal Exchange (LME) in conjunction with the World Gold Council with a planned platform called LMEprecious. There were rumblings of this initiative in the London financial media from as early as January 2015,  but concrete details for the actual platform were only announced on 9 August 2016. See LME press release “World Gold Council, LME and key market participants to launch LMEprecious.” The LME plans to call its gold futures contract LME Gold. There will also be an “LME Silver”. Each is a suite of contracts of varying lengths including a daily futures (spot settlement) contract. See also BullionStar blog “The Charade Continues – London Gold and Silver Markets set for even more paper trading” from August 2016 which took a first look at the LMEprecious suite.

Two months after the LME announcement, during the annual conference of the London Bullion Market Association (LBMA), Intercontinental Exchange (ICE) announced on 17 October that it too planned the launch of a gold futures contract in the London market. See Bullion Desk’s “ICE to launch gold futures in 2017, competition in gold market grows” as well as the ICE press release. The ICE contract is named “Gold Daily Futures” and resides on the ICE Futures US platform. It too is a daily futures contract.

Not to be outdone, the CME Group then followed suit on 1 November 2016 and it too announced plans for a “London Spot Gold Futures contract” as well as a “London Spot Silver futures contract”. See CME press release “CME Group Announces New Precious Metals Spot Spread” from 1 November 2016, and “CME to launch London spot gold, silver futures for spot spread” from the Bullion Desk, 1 November 2016. The CME contract was to trade on COMEX (Globex and Clearport) as a daily futures contract, and was devised so as to offer traders a spot spread between COMEX and London OTC Spot gold.

As of August 2016, the LME’s target launch date was said to be “the first half of 2017”. ICE was more specific with a target launch of February 2017 (subject to regulatory review). In it’s announcement, CME went for an even earlier planned launch date of 9 January 2017 (subject to regulatory approval).

cme ice lme

Two Launches – No Volume

Why the update? Over the 2 weeks, there have been a number of developments surrounding these 3 contracts. The CME and ICE gold futures contracts have both been launched, and additionally, LME has provided more clarity around the launch date of its offering.

Surprisingly, while there was plenty of financial media coverage of these 3 gold futures contracts when their plans were initially publicised from August – November 2016, there has been little to no financial media coverage of the contracts now that 2 of the 3 have been launched.

On 25 January, I took a look at the CME website to see what the status of the CME gold futures contract might be. Strangely, the contract itself was defined on the CME website (with a code of GSP) but it had no trading volume. From the website, it was not clear when the contract actually launched, but it looked to be sometime during the last week of January.

On 25 January, I also sent a short email to CME asking:

“Has the London Spot Gold contract started trading yet?

http://www.cmegroup.com/trading/metals/precious/london-spot-gold.html 

It doesn’t look like it has, even though the contract is defined on your website. Could CME confirm when it will start trading?”

Next day on 26 January, I received this response from the CME:

“Thank you for reaching out to the CME Group with your query.  The London Spot Gold and Silver products are available to trade but at this time no trades have been made in the listed contract months.”

Fast forward to end-of-day 7 February. From the CME website, I still cannot see that there have been any trades in this gold futures since it was launched. The volumes are all zero. The same applies to the London Spot Silver futures contract (code SSP).

Next up the ICE gold futures contract (AUD). Upon checking the ICE website under section “Products”,  the new ICE Gold Daily Futures contract has been defined, and the description states “The Daily Gold Futures contract will begin trading on trade date Monday, January 30, 2017“.

Turning to the ICE reporting section of the website for futures products, and selecting the end of day ICE Futures US report page, and then selecting the reports for AUD, there are 6 daily reports available for download, namely, from 30 and 31 January, and 1, 2, 3 and 6 February. Again, looking at each of these reports, there are varying prices specified in the reports but there are no trading volumes. All of the volumes are zero.

Therefore, as far as the CME and ICE websites show, both of these new gold futures contracts have been launched and are available to trade, but there hasn’t been a single trade in either of the contracts. Not a very good start to what was trumpeted and cheer-led as a new dawn for the London Gold Market by outlets such as Bloomberg with the article “Finance Titans Face Off Over $5 Trillion London Gold Market“.

LMEprecious – To Launch Monday 5 June 2017

Finally, possibly so as not to be forgotten while its rivals were launching their London gold futures offerings, the LME on Friday 3 February announced in a general LME and LME Clear update memo that the planned launch date of its LMEprecious platform is now going to be Monday 5 June, i.e. 4 months from now.

LME update header

LME footer

As a reminder, the LMEprecious contracts will be supported by a group of market maker investment banks, namely Goldman Sachs,Morgan Stanley, Société Générale, Natixis and ICBC Standard Bank.

It’s also important to remember that all 3 of these gold futures contract product sets are for the trading of unallocated gold, (i.e. claims on a bullion bank for gold, aka synthetic / fictional gold). All 3 contracts claim to be physically-settled but this is essentially a play on words, because in the world of the London Gold Market, physically-settled does not mean physically-settled in the way any normal person would define it. LBMA physically-settled just means passing unallocated balances around, a.k.a. pass the parcel. To wit:

ICE London gold futures settle via unallocated accounts:

“The contract will be settled through unallocated loco London gold vault accounts using LBMA Good Delivery Rules.”

CME London gold futures settle via unallocated accounts:

London Spot Gold futures contract will represent 100 troy ounces of unallocated gold

And for LMEprecious, settlement will be:

“Physical settlement one day following termination of trading. Seller transfers unallocated gold to [LME Clearing] LMEC account at any LPMCL member bank, and buyers receive unallocated gold from LMEC account at any LPMCL member bank.”

Conclusion

With neither the CME nor the ICE gold futures contracts registering any trades as of yet (according to their websites), it will be interesting to see how this drama pans out. Will they be dud contracts, like so many gold futures contracts before them that have gone to the gold futures contracts graveyard, or will they see a pick up in activity? All eyes will also be on the LME contract from 5 June onwards.

The lack of coverage of the new CME and ICE London gold futures contracts is also quite unusual. Have the London financial media already forgotten about them? According to Reuters it would seem so. On 22 January, Reuters published an article titled “LME’s pitch for share of gold market faces bumpy ride” which exclusively questioned whether the LME gold contract would be a success, while not even mentioning the CME and ICE contracts. Given that 22 January was right before the CME and ICE contracts were about to be launched, this is quite bizarre. Presumably Bloomberg will come to the rescue of its ‘financial titans’ heros, and will write glowing tributes about the new contracts, but this will be tricky given the zero trade volumes. We await with bated breath.

Guest Post: Hanging by a Thread – “Very skeptical” judge – former FBI/SEC official eyes London gold and silver fix lawsuits

Written by Allan Flynn, specialist researcher in aspects of gold and silver. 

Five months have lapsed without decision, since London gold and silver benchmark-rigging class action lawsuits received a cool response in a Manhattan court. Transcripts from April hearings show, in the absence of direct evidence, the claims dissected by a “very skeptical” judge, and criticized by defendants for lack of facts suggesting collusion, among other things.

Judge Valerie E. Caproni, former white-collar defense attorney, SEC Regional Director and controversial FBI General Counsel, presided over oral arguments for motions-to-dismiss totaling 9 hours on April 18 and 20.

Its “based entirely on statistics with no other,” the judge said, pouring cold water on plaintiff’s claims of bank collusion in gold benchmark rigging. Defense attorney scoffed as much at the silver hearing. “There is not a single fact… that shows an agreement between my client and the other alleged conspirators to fix the fix.”

Seven banks are being sued in separate gold and silver class action lawsuits currently before the US. District Court, Southern District of New York. The plaintiffs: gold and silver bullion traders, and traders of various associated financial instruments, allege banks conspired in secret closed meetings, to rig the London PM Gold Fix, and Silver Fix benchmarks during the period from 2001 to 2013.

If the motions to dismiss are allowed, the complaints will be thrown out. Plaintiffs on the other hand, are hoping to crack open the door to “discovery,” where they get to access confidential bank communications and records. Turning the tables earlier in April Deutsche Bank surprised by promising to provide such evidence ratting out its former fellow defendants. “No. I cannot consider it at all,” the judge said, stonewalling plaintiffs’ arguments mentioning the move. The German mega-bank settled claims a week prior to the hearing but is yet to hand over records.

Evidence

Alleged proof of downward price manipulation is revealed by averaged charts showing “Anomalous” price drops from 2001 to 2013 in the London Silver Fix and PM Gold Fix. In sympathy, even as the gold price quadrupled from around $300 to $1200 through the period, something counter-intuitive happened. Plaintiffs’ claim during London hours between the AM and PM fixes, the average price declined for each of the 13 years, bar one being flat in 2013. More pronounced effects were seen in silver.

“Those were compelling charts,” the judge responded to a presentation of evidence during the silver hearing. “I mean, seriously, they truly show that something happened.”

av-normalized-gold-prices
Image courtesy of Commodity Exchange, Inc., Gold Futures and Options Trading Litigation, Dkt No. 14-MD-2548 (VEC)

Defendants argue rather than collusion, the price drops show normal “parallel conduct.” Loads of precious metals producers all needing to sell, and a bunch of savvy bankers hoping to buy low. Plaintiffs say the banks have a near-perfect record betting on the fix outcome. Well of course, they trade on “the best information in the world about supply and demand,” the banks’ attorneys retorted.

Findings

Inclusion of a non-fixing bank UBS, in the lawsuit, is described by defendants as “unfair,” and just to “suck in” a Swiss regulator’s findings. If the Court is to be believed, the FINMA report may be all the cases have going for them. Of its 19 pages, the dominating subject is foreign exchange misconduct, with only a few lines about precious metals. Tip-toeing around the topic of collusion, the report describes a process of “cooperation” between UBS and others in precious metals trading. It says the bank shared sensitive client trade information such as “client names”, “stop loss orders,” and “flow information on large or imminent orders” with “third parties.”

Sharing of client trade information by banks, including UBS, in currency trading, the UK Financial Conduct Authority (FCA) reported in 2014, was for the purpose of collusion. Such communication enabled different banks to plan trading strategies, and “attempt to manipulate fix rates and trigger client “stop loss” orders (which are designed to limit the losses a client could face if exposed to adverse currency rate movements).”

Strong similarities exist between the methods and tools used by currency traders to rig benchmarks, and those used by precious metals traders. Referring to the detailed description of UBS offences including collusion in currency benchmarks, the FINMA report said, “the conduct and techniques inadmissible from a regulatory perspective, were also applied at least in part to PM spot trading.”

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Thurgood Marshall United States Courthouse, inset Judge Valerie E. Caproni

Hanging by a Thread

One “misconduct” the report emphasized in precious metals trading was UBS’ manipulation of the silver benchmark in the banks proprietary trading. “A substantial element of the conspicuous conduct in PM trading was the repeated front running (especially in the back book) of silver fix orders of one client.” According to the FCA, front running is a kind of insider trading.

“transaction for a “person’s own benefit, on the basis of and ahead of an order (including an order relating to a bid) which he is to carry out with or for another (in respect of which information concerning the order is inside information), which takes advantage of the anticipated impact of the order on the market or auction clearing price.”

Commenting on the brevity of plaintiffs’ evidence in silver, and the FINMA findings, Judge Caproni pointed out, “your hanging your hat pretty heavily on one line in that report.”

Attorney for defendants found the report favorably vague:

“Your Honor, I apologize. I must say he has made a misstatement three times. The FINMA settlement, Section 3.2.3 talks about UBS conduct with respect to silver. There’s not a not a word or hint about coordination with any other bank. It is between UBS and one of its customers or maybe more than one but no collusion.”

The judge responded, “We have the FINMA report. I knew that wasn’t exactly what it said.”

Confusion about the Swiss findings wasn’t helped by the events of the day. The conference call in German, reported FINMA boss Mark Branson alluding to perhaps more than the report dare, in, “clear attempts to manipulate precious metals benchmarks.” FINMA declined a request to supply a transcript or recording of the conference call, with a spokesperson responding, “We do not publish a transcript, and besides we have nothing to add to the report.”

A couple of things may help explain the regulators haziness, and thus the challenges for sensitive cases as these. Switzerland is a country long associated with gold and banking. In 1970 Zurich was home to the worlds largest gold market. Most of the worlds’ gold is imported to Switzerland for refining. Consider then this impressive feat: An official inquiry is conducted of Switzerland’s largest bank caught up in a scandal involving “precious metals.” Offenses were identified in its Zurich office. The agency reports “serious misconduct” in precious metals trading including sharing of secret client trade orders with “third parties.” The agency head rallies against manipulation of “precious metals benchmarks.” Action against 11 bank personnel, including industry bans of between one and five years, were brought against two managers and four traders for, “serious breaches of regulation in foreign exchange and precious metals trading.” But yet, the word “gold” is absent from the entire report and announcements.

Secondly, FINMA’s 2015 Annual Report describes the sanctions against four now-former UBS traders. It may concern some, that justice is left to financial market regulators when:

“Four further enhancement actions against UBS foreign exchange traders were discontinued in August 2015. Since there were indications that their behavior had contributed to serious breaches of regulatory provisions, FINMA issued reprimands without taking further action against these individuals.”

The Puzzle

If the cases proceed, US commodity futures markets may also come under scrutiny. The Court spotted a not-so-obvious paradox concerning allegations the banks suppress gold prices. “Why would they drive the price down when they are sitting on I don’t know how much bullion? They are driving down the price of their own asset,” Judge Caproni posed.

Plaintiffs claim the banks hold a majority of short gold and silver futures on the US-based Chicago Mercantile Futures Exchange, paper instruments tied to the value of London silver and gold, which increase in value as the bullion prices fall. The banks argue that it’s impossible to tell from mandatory government filings, which banks prosper during the declines, and to what extent. The judge agrees, and defendants are pleased. “I’m very skeptical they have a well-pleaded factual allegation of what the banks’…COMEX position is,” the judge said.

“Mr Feldberg: Then your Honor has said that much better than I ever could.”

Where direct evidence of collusion isn’t available, antitrust law allows the pleading of additional circumstantial evidence that lends plausibility to allegations. Other circumstantial evidence, or “plus-factors,“ listed by gold plaintiffs, namely problematic antitrust facts arising out of the very clubby arrangement of the fix meetings themselves, failed to impress particularly.

“The Court: But weren’t all of your plus factors just the natural – they are just a function of the fix?..I thought every plus factor you pointed to was just that’s the nature of the fix.”

Last Stand

The unconvinced magistrate was likely close to a decision, before four weeks back when the banks had one last throw at dismissal. The court in the silver case was asked to apply a recent ruling where warehouse aluminum price manipulation was deemed not to have impacted end users of aluminum. Any decision on this in silver will likely impact the gold case also.

The question of standing, or which plaintiff’s are close enough to the alleged activity to have suffered injury, was well discussed back in April. For example the Court put to defense: “I’m not saying the two guys at a swap meet from Ohio would be a particularly compelling class representative, but why wouldn’t they have standing?” Plaintiffs seemed to have convinced that the issue could be decided later, if it gets to that. Judge Caproni just wasn’t sure firstly if all the statistics, and facts complained were plausible enough to infer collusion, reminding frustrated gold plaintiffs where the balance lies.

“Unfortunately for you I’m the one who has to make the decision here.

Mr Brocket: Again, with the greatest respect, I am trying to resurrect this here but, look. Every fact alone doesn’t prove collusion.

The Court: I agree.”

inside-shot-of-thurgood-marshall-courthouse
A courtroom in the Thurgood Marshall Courthouse NYC

Decisions regarding motions to dismiss in the London gold and silver benchmark-rigging class actions against banks, initially expected around the end of August, could come any day sooner or later according to someone familiar with the cases.

 

The above article was first published at Allan Flynn’s website here.

Allan Flynn is a specialist researcher in aspects of gold and silver. He is currently investigating for future publication on the same topic and works in property and commercial architecture when he needs to eat. He holds shares in precious metals producers and banks.