Tag Archives: Ruth Crowell

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.

How many Silver Bars are in the LBMA Vaults in London?

Sometime in the coming days, the London Bullion Market Association (LBMA) plans to begin publishing gold and silver vault holding totals covering the network of commercial precious vault operators in London that fall under its remit. This follows an announcement made by the LBMA on 8 May.

There are seven commercial vault operators (custodians) in the LBMA custodian vault network namely, HSBC, JP Morgan, Brinks, Malca Amit, ICBC Standard Bank, Loomis (formerly Viamat), and G4S. Note that ICBC Standard Bank has a vault which is operated by Brinks on behalf of ICBC Standard. It is also quite possible that some of the HSBC vaults, such as the famous GLD gold vault, are located within Brinks facilities.

Adding in the Bank of England gold vaults under the Bank of England’s head office in the City of London, the LBMA vaulting network comprises eight sets of vaults. However, the Bank of England vaults do not store silver, or at least there is no evidence that the Bank of England stores silver. However, the other 7 vault operators can and do store silver, or at least most of them do. It’s unclear whether the G4S vault stores anything on behalf of anyone, but that’s a different story.

The forthcoming LBMA vault data will represent actual physical gold and silver holdings, i.e. real tangible precious metals, as opposed to the intangible and gargantuan paper gold and paper silver trading volumes generated each day in the London precious metals markets.

The LBMA will report physical holdings data on an aggregated basis for each of gold and silver, i.e. one quantity number will be reported each month for vaulted gold, and one quantity number will be reported each month for vaulted silver. The LBMA data will be on a 3-month lagged basis. For example, if the LBMA begins reporting this data in early July (which it probably will), then the first set of data will refer to the end of March period.

The uncertainty as to when the LBMA will begin to publish its vault holdings data is purely because the LBMA has not provided a specific publication commencement date. At first, the LBMA announced that the reporting would begin “in the summer”. Subsequently, it announced that it’s vault reporting would begin in July.

As to whether the LBMA vault holdings numbers published each month will include or exclude the Bank of England gold vaults holdings is also unclear. At the end of April, the Bank of England went ahead and separately began to publish vault holdings numbers for its own gold vaults, also on a 3-month lagged basis. More information on this Bank of England initiative can be read in BullionStar blog “Bank of England releases new data on its gold vault holdings

Incidentally, the Bank of England has now updated its website (updated 30 June) with the gold holdings figure for its vaults as of the end of March, and is reporting total physical gold holdings of 163.36 million troy ounces, which equates to 5081 tonnes of gold.

When the LBMA begins to publish its numbers, it will be clear as to whether the LBMA gold number includes the Bank of England gold holdings or not, and this will probably even be specified in a footnote of the report. Excluding the Bank of England vaults (or at least the non-loaned gold in the Bank of England vaults which is not under the title of bullion banks), the remaining lion’s share of the LBMA’s gold holdings number comprises gold held by Exchange Traded Funds (ETFs) in London.

In early May, in the article “Summer of 17: LBMA Confirms Upcoming Publication of London Gold Vault Holdings”, I calculated that these gold-backed ETFs which store their gold in the LBMA vaults in London accounted for 1510 tonnes of gold. Specifically:

The HSBC vault in London holds gold on behalf of the SPDR Gold Trust (currently 853 tonnes) and ETF Securities (about 215 tonnes). The JP Morgan gold vault in London holds gold on behalf of ETFs run by iShares (about 210 tonnes in London), Deutsche Bank (95 tonnes), and Source (100 tonnes). An ABSA ETF holds about 36 tonnes of gold with Brinks in London. In total, these ETFs represent about 1510 tonnes of gold.

The approach used to calculate the gold stored by these ETFs in the London vaults can be seen in the article “Tracking the gold held in London: An update on ETF and BoE holdings”. To this 1510 tonnes gold figure we can add gold held on behalf of customers of BullionVault and GoldMoney – which is roughly 12 tonnes of gold between them (4.75 tonnes for GoldMoney, and 7.2 tonnes of gold for BullionVault).

When the LBMA publishes its first gold total for gold held in its vault network, it will also be clear as to whether the LBMA vaults hold any significant amount of physical gold above and beyond the gold allocated within the gold-backed ETFs. There may be some gold tonnage held on an allocated basis by the LBMA bullion banks as a ‘float’, and also some gold held in allocated form by various institutional investors such as hedge funds, but my hunch is that this residual gold will be at most a respectable fraction of the amount of gold stored on behalf of ETFs in London.

However, the silver holdings in the LBMA vault network are a different kettle of fish entirely, and in addition to ETF holdings (which are reported), there could be significant silver holdings in the London vaults which have gone unreported up until now (unreported silver in the form of what consultancy GFMS calls ‘Custodian Vault’ holdings).

Reported Silver

Although gold usually generates the most headlines, it’s important not to forget about silver, and the fact that this new LBMA reporting will also provide a monthly aggregated total for the amount of physical silver held in the LBMA vaulting network in London. The silver stored in these LBMA vaults is in the form of variable weight London Good Delivery silver bars.

The recommended weight range for a Good Delivery silver bar is between 900 troy ozs and 1100 troy ozs, however, these bars will often weigh in the region of about 1000 troy ounces each. The minimum purity of a London Good Delivery silver bars is 99.9% pure silver. For example, on the BullionStar website there is a Heraeus 0.999 silver bar weighing 947.75 troy ounces. This Heraeus silver bar is an example of a Good Delivery silver bar.

Since silver has a lower value to weight ratio than gold and is bulkier to store, silver a) takes up more room and b) can be stored in secure warehouses rather than ultra-high secure vaults that are used to store gold. This is particularly true in expensive cities such as London where it is more economical to store silver in locations with lower commercial rental values.

In the LBMA vaulting network, London Good Delivery silver bars are stored 30 bars per pallet, i.e. a formation of 10 bars stacked 3 bars high. Since each bar weighs approximately 1000 oz, each pallet will weigh about 30,000 ozs, i.e. each pallet would weigh about 1 tonne.

Silver bars stored on pallets
‘1000 oz’ Silver Bars – 30 bars per pallet

At this stage, can we arrive at an estimate of the minimum amount of silver currently held in the LBMA London vaulting network? The answer is yes, for the simple reason that, in a similar manner to gold-backed ETFs, a substantial number of silver-backed ETFs also hold their silver in the vaults of London-based precious metals vaulting custodians, and these ETFs publicly report their silver bar holdings.

In addition, BullionVault and GoldMoney (which are not ETFs), both hold silver with one of the custodians in the LBMA vaulting network – Loomis. But I have included the BullionVault and GoldMoney silver totals below purely because even though they are non-ETF custodian vault holdings, both companies’ silver holdings are publicly reported on their websites.

However, there is probably also a lot more additional silver held in the London vaults above and beyond the silver bars allocated to ETFs and the known silver stored by GoldMoney and BullionVault. Some of this additional silver falls under what Thomson Reuters GFMS classify as ‘Custodian Vault‘ silver, which is silver that is basically in an ‘Unreported’ category but which Thomson Reuters GFMS seems to think it knows about through its own ‘proprietary surveys’ and ‘field research’. This ‘Custodian Vault’ silver probably accounts for a substantial amount of silver in the London vaults. However, it is difficult to know because GFMS does not provide granularity on its numbers beyond an overall ‘Europe’ number. But I have made some assumptions about this ‘Custodian Vault’ silver in London, which is discussed in a final section below.

Silver ETFs

For the silver-backed ETFs, the first step is to identify which silver ETFs hold silver bars in the LBMA vaults in London. Using the list of silver ETF providers specified on Nick Laird’s GoldChartsRUs website (subscription only), the platform providers and their ETFs which hold silver in the LBMA vaults in London are as follows:

  • iShares: 1 ETF
  • ETF Securities: 6 ETFs
  • SOURCE : 1 ETF
  • Deutsche Bank: 3 ETFs

Between them, these four providers offer 11 ETFs that hold some or all of their silver in LBMA London vaults. This silver is held with custodians JP Morgan and HSBC, and with sub-custodians, Brinks and Malca Amit. Note, that GoldMoney and BullionVault store silver in London with Loomis as custodian.

As publicly traded vehicles, most of these ETFs publish daily silver bar weight lists or holdings files and they also undergo twice yearly physical audits by independent auditors. These weight lists and audits documents are helpful in pinpointing who the custodians and sub-custodians are, which locations these silver ETF’s store their silver in, and how much silver (in silver bar form) is stored in each location.

iShares Silver Trust (SLV)

The iShares Silver Trust, ticker code SLV, is the world’s largest silver-backed ETF.  It’s probably best to think of SLV as the silver equivalent of the mammoth SPDR Gold Trust (GLD).

The custodian for SLV is JP Morgan Chase Bank (London Branch), and Brinks also acts as a sub-custodian for SLV. SLV holds silver in vaults across both London and New York. According to the SLV daily silver bar weight list, SLV’s silver bars are held in two Brinks vaults in London, one JP Morgan vault in London, and one JP Morgan vault in New York.

As of 29 June 2017, SLV reported that it was holding 348,841 Good Delivery silver bars containing a total of 339.89 million troy ounces of silver, or a colossal 10,572 tonnes of silver. The actual SLV bar list, which is uploaded to a JP Morgan website in pdf format using the same filename each day, can be seen here, but be warned that the file is about 5370 pages long, so there’s no real need to open it unless you are curious. A screenshot of the top of the first page is provided below

Silver bars held in the iShares Silver |Trust (SLV), JP Morgan London custodian Morgan
Silver bars held in the iShares Silver |Trust (SLV), JP Morgan London, SLV custodian. Source: SLV weight list, JP Morgan website – Click to Enlarge

The SLV weight list specifies that the SLV silver is held in a ‘Brinks London‘ vault, a ‘Brinks London C‘ vault, a ‘JPM London V‘ vault, and a ‘JPM New York‘ vault. Between them, 2 Brinks vaults in London hold 55% of SLV’s silver bars representing 5753 tonnes, or 54% of the silver held in SLV. Adding in the ‘JPM London V‘ vault means that 289,053 silver bars, weighing 8720 tonnes (or 82% of SLV’s entire silver holdings) are held in LBMA London vaults.

iShares Silver Trust (SLV) - Silver bars and Ounces by location
iShares Silver Trust (SLV) – Silver bars and Ounces by location – Click to Enlarge

The auditor for SLV is Inspectorate. Interestingly, the latest Inspectorate letter for SLV, for record date 10 February 2017, does not make a distinction between the 2 Brinks vaults in London and just reports that SLV’s silver is in:

“Three vaults located in and around London and New York:

- two vaults owned and operated by JP Morgan Chase Bank N.A. with 124,054 bars

- one vault owned and operated by Brinks, as a sub-custodian for JP Morgan Chase Bank N.A. with 220,066 bars

 This would suggest that Inspectorate does not see the need to distinguish between the “Brinks London” vault and the “Brinks London C” vault, presumably because both Brinks vaults are in the same building in the Brinks facility (which is beside Heathrow Airport).

Even though the official custodian for SLV is JP Morgan Chase Bank N.A., London Branch (see original SLV Custodian Agreement filed April 2006 here), since it’s launch in 2006 SLV has at different times used quite a diverse group of sub-custodian vaults as well as at least 3 JP Morgan vaults. For example, over the 3 year period from early 2010 to early 2013, SLV stored silver in the following vaults:

  • Johnston Matthey, Royston
  • Brinks London
  • Brinks London A
  • Brinks London C
  • Viamat (now known as Loomis)
  •  JP Morgan London A
  • JP Morgan London V
  • JP Morgan New York

Royston is about 50 miles north of central London. The above list is taken from the following chart which is from the ScrewTape Files website.

SLV vaults used, April 2013 and prior. Source: Screwtape Files
SLV vaults: Feb 2010 – April 2013. Source: Screwtape Files – Click to Enlarge

Given that there are Brinks vaults in London named ‘Brinks London‘, ‘Brinks London A‘, and ‘Brinks London C‘, this would most likely imply that there is or was also a ‘Brinks London B‘ vault, which, for whatever reason, doesn’t show up in any ETF custodian documentation.

The naming convention of the JP Morgan vaults in London as ‘JPM London A‘ and ‘JPM London V‘ is also interesting. SLV silver started being taken out of the ‘JPM London A’ vault in February 2012, and this vault was depleted of 100 million ounces of SLV silver (~ 3100 tonnes) by October 2012 (blue line in above chart). At the same time, the SLV silver inventory in the ‘Brinks London’ vault ramped up by 100 million ounces of SLV silver also between February 2012 and October 2012.

JPM London A could be JP  Morgan’s original vault in the City of London. This would then make the JPM London V vault a separate location. My pet theory (pet rock theory) is that the V in the ‘JPM London V’ could refer to Viamat International, which is now known as Loomis. JP Morgan could have outsourced storage of silver to Viamat by ring-fencing some vault space. JP Morgan could then call this space a JP Morgan vault, even though it would be physically within a location managed by one of the security storage / transport providers.

I now think on balance that HSBC probably took the same approach with its gold vault and has it located in a Brinks facility, but that it calls it a HSBC vault. This could also mean that HSBC uses Brinks to store silver, while referring to it as HSBC storage. As to whether HSBC and JP Morgan store gold at the Bank of England while labelling it as a HSBC or JP Morgan storage area is another interesting question, but is beyond the scope of discussion here.

Note, there is also an iShares Silver Bullion Fund known as SVR which uses Scotia Mocatta as a custodian, which as of 29 June held 2,154 silver bars, however, SVR mostly holds its silver bars mostly in Toronto with Scotia, with a small number of silver bars stored with Scotia in New York. SVR therefore does not store any silver bars in London. See latest SVR weight list here.

ETF Securities – 6 ETFs

Keeping track of all the silver-backed ETFs offered by ETF Securities is challenging to say the least, but in the below discussion I’ve tried to devise a system which will make things at least a little clearer.

ETF Securities operates 6 ETFs which hold physical silver bars that are stored in the LBMA precious metals vaulting network in London. Of these 6 ETFS, 3 of them hold silver bars and nothing else. The other 3 ETFs are precious metals baskets which hold ‘physical’ gold, silver, platinum and palladium. Two of these ETFs are domiciled in the UK, 2 are domiciled in Australia, and the other 2 are domiciled in the US. In each of the UK, Australia and the US, ETF Securities offers 1 silver ETF and 1 precious metals basket ETF.

It’s most convenient to refer to the codes of these ETFs when discussing them. The 2 UK domiciled ETFs, with codes PHAG (silver) and PHPM (precious metals basket), are positioned under a company called ETFS Metal Securities Limited (MSL). The 2 ETFs domiciled in Australia, with codes PMAG (silver) and PMPM (precious metals basket), fall under a company called ETFS Metal Securities Australia Limited (MSAL). The final 2, which are US domiciled, are known as SILV (silver) and GLTR (precious metals basket).

ETFS Metal Securities Limited (MSL) – PHAG and PHPM

ETFS Physical Silver (PHAG) has a primary listing on the London Stock Exchange (LSE) and trades in USD. It’s NAV is also in USD. The custodian for PHAG is HSBC Bank Plc, with a listed vault location of London. Note: There is also another variant of PHAG called PHSP. It’s the same security as PHAG (same ISIN) but its trades in GBP (and its NAV is calculated in GBP). Its best to ignore PHSP as it’s literally the same fund.

ETFS Physical PM Basket (PHPM) is a precious metals Basket ETF that also holds gold, platinum, and palladium, in addition to silver. The custodian is HSBC Bank Plc with a vault location in London. There is also a GBP variant of PHPM called PHPP. Again, just ignore PHPP in this analysis.

ETFS Metal Securities Limited (MSL) officially reports all of its precious metals holdings in the same report (which it reports on each trading day). Since PHAG and PHPM are part of MSL, PHAG and PHPM silver bar holdings are reported together. According to the MSL weight list, as of 30 June 2017, MSL held 62,427 London Good delivery silver bars containing 60,280,155 troy ounces of silver (1875 tonnes). The individual ETFs within MSL also report their own holdings. However, there is a slight mismatch between dates on the individual fund pages and the date in the MSL spreadsheet with PHAG and PHPM reporting 29 June, while MSL has reported 30 June.

It’s not a big deal though. As of 29 June, PHAG held 58,777,148 troy ozs of silver (1828.2 tonnes) and PHPM held 1,480,037 troy ozs of silver (46 tonnes), which together is 60,257,185 troy ounces of silver (1874.25 tonnes), which is very close to the MSL reported number. Overall, PHAG holds 97.5% of the silver that is held in MSL, and PHPM only holds about 2.5% of the silver held in MSL.

Now, here’s the crux. While MSL uses HSBC Bank Plc in London as custodian for its silver, HSBC also uses Malca Amit London as sub-custodian, and the Malca Amit vault holds more than twice the amount of MSL silver (i.e. predominantly PHAG silver) than the HSBC vault. MSL’s reported silver holding are distributed as per the following table:

ETF Securities -
ETF Securities PHAG and PHPM - Silver bars and Ounces by location – Click to Enlarge

MSL holds 62,427 London Good Delivery silver bars in LBMA vaults in London, containing 60.28 million ounces of silver (1875 tonnes of silver). The Malca Amit vault stores 42,917 of these bars (1283 tonnes), and a HSBC vault stores another 19,510 silver bars (592 tonnes).

Inspectorate is also the independent auditor for the silver held by MSL. According to the latest Inspectorate audit letter, dated 3 March 2017 but referring to an end audit date of 31 December 2016, the silver in MSL was held in the vaults of HSBC Bank plc, London and at the vaults of Malca-Amit London.

ETFS Metal Secs. Australia Ltd (MSAL) – PMAG  & PMPM

ETFS Physical Silver (PMAG), domiciled in Australia, is an ETF which only holds silver, and holds this silver in London with custodian HSBC Bank plc at a vault location in London. Note: ETF Securities officially refers to PMAG as ETPMAG.

ETFS Physical PM basket (PMPM) is a precious metals Basket ETF that also holds gold, platinum, and palladium, in addition to silver. The custodian of PMPM is HSBC Bank plc with a vault location in London. Note: ETF Securities officially refers to PMPM as ETPMPM.

In a similar way to UK domiciled MSL, MSAL (the ETFS Australian company) reports on all of its precious metals holdings in one daily spreadsheet including the silver in PMAG and PMPM. As of 30 June 2017, MSAL held 2754 silver bars in a HSBC vault in London, containing 2,664,690 troy ounces of silver (82.88 tonnes of silver).

Of the 2,664,690 ounces of silver held by MSAL, over 98%, or 2617,229 ounces, is held by PMAG, with less than 2% held in PMPM (47,362 ounces). The actual figures are 98.22% vs 1.78%. This means that PMAG roughly holds 2705 silver bars, and PMPM holds 49 silver bars.

Inspectorate is, not surprisingly, also the independent auditor for MSAL’s metal holdings, and as per the latest audit letter for record date 31 December 2016, the silver bars audit location is stated as having been “HSBC Bank plc, London“.

ETF Securities US domiciled ETFs: SIVR and GLTR

The final two ETF Securities ETFs which hold silver bars are the ETFS Silver Trust (SIVR), and the ETFS Precious Metals Basket Trust (GLTR). HSBC bank plc is the custodian of SIVR and JP Morgan is the custodian of GLTR. However, GLTR also uses Brinks as a sub-custodian.

The latest silver bar weight list spreadsheet for the ETFS Silver Trust (SIVR), dated 29 June, which is titled “HSBC US Silver Bar List”, states that the SIVR Trust holds 21,437 silver bars containing 20,363,315 troy ozs of silver (633.4 tonnes of silver). There is no mention of SIVR holding any of its silver with a sub-custodian. The latest independent audit report for SIRV, by Inspectorate, for an audit reference date of 31 December 2016, states that the audit took place “at the vault of HSBC Bank plc, London (the “Custodian”)“, where Inspectorate found “20,108 London Good Delivery Silver Bars with a weight of 19,171,492.300 troy ounces.

The latest silver bar weight list for the ETFS Precious Metals Basket Trust (GLTR), also dated 29 June, and which is titled “JPM Precious Metals Basket Bar List“,  states that the GLTR Trust holds 5,670 silver bars containing 5,496,035 ozs of silver (~ 171 tonnes of silver).

However, while 85% of these bars (144.5 tones of silver) are stored in the ‘JP Morgan V‘ vault, 15% of the silver bars (26.5 tonnes of silver) are stored in a ‘Brinks 2‘ vault. So according to GLTR naming convention, as there is a ‘Brinks 2′ vault, presumably when it was first named, there was also a ‘Brinks 1′. ‘Brinks 2′ could possibly be referring to the same location as the ‘Brinks London A’ vault.

GLTR
ETF Securities (GLTR) -Silver bars and Ounces by location – Click to Enlarge

Inspectorate is also the independent auditor for the precious metals held by GLTR. In the latest Inspectorate audit letter for GLTR, with an audit reference date of 31 December 2016, Inspectorate states that its audit was only conducted “at the vault of J.P. Morgan Chase N.A, London (the “Custodian”)” where it counted “4,873 London Good Delivery Silver Bars“. This probably means that GLTR’s holdings of silver bars in the ‘Brinks 2′ vault are quite recent, i.e. they have been acquired since 31 December 2016.

SOURCE – Physical Silver P-ETC

A silver-backed ETF offered by the ETF provider ‘SOURCE’, which is named the Physical Silver P-ETC, holds its silver bars in a London vault of  custodian JP Morgan. The SOURCE ETF platform was originally established in 2008 as a joint venture between Goldman Sachs, Morgan Stanley, and Merrill Lynch.

The latest silver bar weight list for the Physical Silver P-ETC (dated 23 June) states that it holds 3,129,326 troy ounces of silver (97.34 tonnes of silver). The list does not state an exact bar count, but looking at the weight list, there are about 3,237 silver bars listed.

Inspectorate is also the independent auditor for the Physical silver P-ETC. The latest Inspectorate audit letter, conducted on 4 January 2017, states that at that time, this ETF held 2,048 silver bars containing 1,982,343 troy ounces of silver. This is interesting because about a week ago, this SOURCE Physical silver P-ETC held about 4 million ozs of silver. Now it holds 3.1 million ounces of silver, and at the start of the year it held under 2 million ounces of silver. So the quantity of silver held in this SOURCE silver ETF fluctuates quite dramatically.

Deutsche Bank ETFs

There are 3 ETCs listed on the Exchange Traded Commodity (ETC) section of the Deutsche Asset Management website which hold physical silver in London. These 3 ETCs are as follows:

  • db Physical Silver ETC
  • db Physical Silver ETC (EUR)
  • db Physical Silver Euro hedged ETC

The Factsheets for these 3 Deutsche ETCs all list the custodian as “Deutsche Bank”, but list the sub-custodian as “JP Morgan Chase Bank”. For example, the Factsheet for the db Physical Silver ETC states

“Custodian/Sub-custodian:       Deutsche Bank AG/JP Morgan Chase Bank N.A.”

Shockingly, there do not seem to be any recent independent audit documents for any of these Deutsche ETCs anywhere on the Deutsche Asset Management website. The latest ‘Inventory Audit’ document in the ‘Download Center’ of the website is dated November 2012. That audit document can be viewed here. The old audit document stated that on 25 September 2012, ‘DB ETC Plc’ held 13,314 silver bars containing 13,040,194.3 troy ounces of silver (405.6 tonnes of silver), and that the audit was conducted at ‘Custodian and Location‘ of ‘JP Morgan Chase Bank, N.A. London‘. I have scanned the entire website and there is no sign of any other audit documents or any silver bar weight list.

The initial metal entitlement for units issued in each of these 3 ETCs was 10 troy ounces per unit. The latest units issued figures from Deutsche (dated 22 June 2017) for these ETCs is as follows:

  • db Physical Silver ETC: 277, 500 units issued
  • db Physical Silver ETC (EUR): 533,000 units issued
  • db Physical Silver Euro hedged ETC: 878,000 units issued
  • Total units issued for silver-backed db ETCs = 1,688,500 units

This would mean that in total, these 3 ETCs would have had an initial metal entitlement of 16,885,000 troy ounces of silver. However, due to what looks like operational fees being offset against the metal in these ETCs (i.e. selling silver to pay fund expenses), the effective metal entitlement for each of the 3 ETCs is now stated on the Deutsche website as being less than 10 troy ounces.

For db Physical Silver ETC, the entitlement is 9.6841 ounces. For db Physical Silver ETC, the entitlement is 9.6930 ounces and for db Physical Silver Euro hedged ETC the metal entitlement is a very low 7.9893 ounces.

Therefore, the amount of silver backing these ETCs looks to be (277500 * 9.6841) + (533000 * 9.693) + (878000 * 7.9893) = 14,868,312 troy ounces = 462.5 tonnes. Since there is no bar count, an approximate bar count assuming each bar weighs 1000 oz would be 14,870 Good Delivery silver bars.

Since there are no audit reports and no silver bar weight list for these ETCs, it’s difficult to know if real allocated silver in the form of London Good Delivery silver bars is backing these Deutsche Bank db ETCs, let alone trying to figure how many silver bars are in a JP Morgan vault in London backing these Deutsche products. We can therefore use 462.5 tonne for Deutche but with a caveat that there is no current silver bar weight lists or independent audit documents.

Total ETF Silver held in London LBMA Vaults

Adding up the silver held in the 11 ETFs profiled above yields the following table. In total, the 11 ETFs hold approximately 12,041 tonnes of silver (387.2 million troy ounces) across 4 vault operators. Brinks vaults hold 48% of the total, and JP Morgan vaults hold another 30%. HSBC and Malca Amit hold about 11% each of the remainder.

ETF Silver Holdings -  Tonnes, Held in London Vaults

ETF Silver Holdings – Tonnes, for Silver stored in London LBMA Vaults

In terms of London Good Delivery silver bars, these 11 ETFs hold approximately 400,000 of these silver bars. Since the 3 Deutsche ETFs (ETCs) don’t have an available bar list, I converted the assumed troy ounce holdings to bar totals by assuming each bar held weighs 1000 ozs. Brinks stores over 191,000 of these Good delivery silver bars. That equates to nearly 6,400 pallets with 30 silver bars per pallet. If the pallets were stacked 6 high, and arranged in a square, that would be an area 32 pallets long by about 33 pallets wide. In addition, Brinks may also store silver on behalf of HSBC, or even on behalf of JP Morgan. Who knows?

Number of ETF held Good Delivery Silver Bars stored in London LBAM vaults
Number of ETF held Good Delivery Silver Bars stored in London LBMA vaults

BullionVault

According to the latest numbers on the BullionVault website (Daily Audit), BullionVault has 349,939.57 kgs of silver stored in London. That equates to 11,250,557 troy ozs of silver, or 350 tonnes of silver. This silver is stored in the form of London Good Delivery Silver Bars. According to the BullionVault website, BullionVault use Loomis as a custodian for storing silver bars in London:

“The London (UK) vault is run on our behalf by Loomis International

Those with a BullionVault login can go in and view BullionVault’s latest silver bar weight list which has been generated by Loomis, but BullionVault don’t allow this list to be published externally. Suffice to say, the latest list, dated 11 May, lists 11,544 silver bars which are stored across nearly 400 pallets.

GoldMoney

The GoldMoney website has a real-time audit page which currently states that GoldMoney has 202,057.614 kgs of silver. That equates to 6,496,153 troy ozs of silver, or 202 tonnes of silver stored in London. This silver is also stored with Loomis. At least some of this silver and probably a lot of it is in the form of London Good Delivery silver bars. Without being able to log in to the site properly, it’s not possible to see a bar list.

So between them, BullionVault and GoldMoney have 550 tonnes of silver stored in Loomis vaults in London. My guess is that Loomis (formerly Viamat) store precious metals in a warehouse in Shepperton Business Park, Govett Avenue, Shepperton, a warehouse which is in the corner of the business park, beside the railway track.

Adding this 550 tonnes of silver to the 12040 tonnes of silver held by the 11 ETFs above gives a figure of 12,590 tonnes. Let’s call it 12,600 tonnes. This is then the lower bound on the amount of physical silver in the LBMA vaults in London.

Thomson Reuters GFMS – “Custodian Vault” silver

On its ‘Silver Supply’ web page, the Silver Institute website has an interesting data table titled “Identifiable Above-Ground Silver Bullion Stocks” which lists 5 categories of above-ground silver stocks, namely ‘Custodian vaults’, ‘ETPs’, ‘Exchanges’, ‘Government’, and ‘Industry’.

What’s notable and striking about this table is that the ‘Custodian Vaults‘ category for 2016 amounts to a very large 1571.2 million troy ounces of silver (50,440 tonnes), and also the fact that this ‘Custodian vaults’ category is distinct from silver held in ‘Exchanges’ (such as COMEX and TOCOM) and ETPs / ETFs (such as the ETF products discussed above). The ‘Custodian Vaults’ category also does not include ‘Government’ stockpiles or ‘Industry’ inventories. The actual table and the data in the table are sourced from the Thomson Reuters GFMS “World Silver Survey” 2017 edition. As you will see below, this ‘Custodian Category’ refers to holdings of silver which are not reported, but which are stored in custodian vaults, including in the London vaults. This category therefore needs to be examined in the context of the LBMA’s imminent reporting of silver holdings in the LBMA London vaulting system.

GFMS World Silver Survey - Identifiable silver stocks
Above-ground Identifiable Silver Stocks –  Source: GFMS World Silver Survey 2016. Click to Enlarge

You can also see from the above table that this 2016 Custodian Vaults figure of 1571.2 million ozs (50,440 tonnes) grew from a 2008 total of 615.6 million ozs (19,148 tonnes), so in eight years has risen more than 250%.

On pages 37-38 of this GFMS World Silver Survey 2017 (pdf – large file), GFMS makes some very interesting assertions. GFMS starts by defining what it calls Identifiable silver bullion stocks. It states:

‘Identifiable bullion stocks can be split into two categories: unreported GFMS stock estimates that are based on confidential surveys and field research;  [and secondly] stocks that are reported.

Unreported stocks include the lion’s share of our government category and our custodian vault category.”

Reported inventories are predominantly held in ETPs..but also include some of the government and industry stockpiles.”

However, in the accompanying commentary to the above table, GFMS classifies all ETP, Exchange and Industry holdings as “Reported“, and all Custodian Vaults and Government holdings as “Unreported“. Therefore, it is useful to regroup the 2016 figures from the above table into a Reported category and an Unreported category, as the GFMS commentary then makes more sense. A regrouped table of the 2016 data is as follows, and illustrates that ‘Custodian Vault’ holdings of silver (none of which are reported) account for a whopping 61% of all above ground silver:

Identifiable Above_ground silver stocks grouped by Reported and Unreported
Identifiable Above-ground silver stockpiles, 2016  – grouped by Reported and Unreported categories

A GFMS bar chart in the 2017 World Silver Survey also underscores the dominant position of these (unreported) ‘Custodian Vault’ holdings:

Above
Identifiable above-ground Silver grouped into 5 categories, 2007 – 2016. Largest % is ‘Custodian Vaults’. Source: GFMS World Silver Survey 2017

GFMS goes on to say that in 2016 “Reported stocks were 36% of identifiable stocks“. Conversely, we can see that ‘Unreported’ silver stocks (Custodian Vaults and Government) were 64% of identifiable stocks.

GFMS says that for 2016 “71% of reported stocks were ETPs“, the rest being Exchange and Industry classifications. Exchanges refers to silver held in warehouses of COMEX (NY), TOCOM (Japan) and the SGE and SHFE (China). COMEX is currently reporting 209 million ouzs of silver in its approved warehouses in New York, of which 172 million ozs in Eligible and 37 million ozs is in the Registered category.

Interesting, but on a side note, GFMS also states  in its 2017 silver report that as regards COMEX silver inventories:

“Eligible stocks reported by COMEX contain a portion that is allocated to ETPs”.

“At the end of 2016, the portion of COMEX Eligible stocks that was allocated to ETPs was around 16% of total COMEX eligible stocks.”

This will probably be an eye opener for those interested in COMEX silver warehouse stocks.

Addressing ‘Custodian Vault‘ stocks of silver, GFMS says that Europe’s share of Custodian Vault stocks was 488.7 million ozs (15,201 tonnes) in 2016 and accounted for 31% of total Custodian Vault stocks. Asian ‘Custodian Vault’ stocks of silver were just over 50% of the total with the remainder in North America (Canada and US).

Silver holdings in Custodian Vaults by Region

Silver holdings in Custodian Vaults by Region, 2007 -2016. Source – GFMS World Silver Survey 2017

But what do these ‘Custodian Vault’ stocks of silver refer to?

GFMS does not provide a detailed answer, but merely mentions a number of examples, which themselves vary by region. For Asia GFMS says “the bulk of these stocks are located in China, and reflects stocks held in vaults at banks“, and also ” other parts of Asia, such as Singapore, have been increasing in popularity for storage of bars and coins in recent years“, while in India “global bullion banks increasingly seeking this location as a strategic point for silver vaulting in case the need arises.” There are also silver “stocks in Japan”. From a BullionStar perspective, we certainly are aware that there is a lot of silver bullion in vault storage in Singapore, so the GFMS statement is accurate here.

In North America, GFMS attributes the “growth in silver custodian vaulted stocks not allocated to ETPs” to a “drop in coin sales in North America last year“. In the 2016 edition of the World Silver Survey, GFMS said that the growth in custodian vault holdings was partially due to “the reallocation by some North American investors from their ETP holdings” [into custodian holdings].

Turning to Europe, GFMS says that the growth in Custodian vault silver holdings “can be attributed to increased institutional investor interest“. Therefore, according to GFMS, institutional investors in Europe are buying silver and holding real physical silver in Custodian vaults.

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.

GFMS states:

“Custodian vault stock data excludes ETP Holdings, but it is important to note that most custodians of ETP silver stocks also store silver in vaults that are not allocated to ETPs. the same is true of futures exchange warehouses.” 

So how much of this 15,201 tonnes of ‘Custodian Vaults’ silver that is said to be in Europe is actually in London vaults? 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).

Note, BullionVault and GoldMoney silver is technically part of the ‘Custodian Vault’ figure, so can’t be counted twice.

ps: In its 2017 World Silver Survey, GFMS also stated that in 2016, ETPs (ETFs) held 664.8 million ounces of silver “with 75% of the total custodian vaulted stocks [that were] allocated to ETPs held in Europe and 24% in North America. Asia makes up the balance of less than 1%.“. This would mean that as of the date of the GFMS calculation for 2016, 498.6 million ounces of ETF silver was vaulted in Europe.

Above, I have accounted for 387.1 million ounces of silver that is currently stored in London on behalf of 11 ETFs. There are also 3 Swiss Silver ETFs which store their silver in Switzerland. These are ZKB (currently with 74.9 million ozs), Julius Baer (currently with 13.7 million ozs) and UBS (currently with 5.89 million ozs), giving a total of 94.49 million ozs of silver for these 3 Swiss based platforms. Therefore, between London vaults and vaults in Switzerland, there are currently 14 ETFs that together hold 481.6 million ounces of vaulted silver (14,980 tonnes of vaulted silver).

Conclusion

When the LBMA finally manages to publish its first report on the silver and gold stored in the LBMA vaults in London in the coming days, we will have a clearer picture of how much physical silver is actually in these mysterious and opaque vaults.

A lower bound based on ETF holdings and BullionVault and GoldMoney holdings would be about 12600 tonnes of silver. A higher bound that also reflects ‘Custodian Vault’ holdings could be in the region of 18120 – 19640 tonnes of silver. There would probably also be some LBMA bullion bank float, which may or may not be included in ‘Custodian Vault’ figures, that could push the silver total to over 20,000 tonnes or more.

The LBMA perennially claims that it wants to bring transparency to the London precious metals market. This has been a very hollow mantra for a long time now. However, while some of the LBMA members may want this transparency, others, possibly some of the powerful bullion banks or their clients, certainly don’t want transparency. Take a case in point. At the Asia Pacific Precious Metals Conference (APPMC) in Singapore in early June, the LBMA CEO in a speech to the conference talked about the difficulty of even getting a press release out about the upcoming publication of gold and silver vault holdings data. She said (fast forward to 8:37 in the below video):

It was actually a huge achievement just to get the press release out.”

For what is supposed to be a mature and efficient financial marketplace, this is a truly bizarre occurrence, and it must be pretty obvious that some of the vested interests in the London gold and silver markets needed to be dragged kicking and screaming over the finish line as regards being in any way open about how much gold and silver is actually in these LBMA London vaults.

But now, according to the LBMA CEO in the same part of her speech, even so-called “credible investors” (as opposed to uncredible investors?) also “find it a little odd that as a marketplace, there’s no data“, which may explain the vampires within the LBMA being dragged into the daylight.

Hopefully with the above analysis and the upcoming aggregated LBMA silver vaulting numbers, these “credible investors” (and the hundreds of millions of other silver investors around the world) will now be less in the dark about the amount of silver in the London LBMA vaulting network, and will now have better information with which to make investment decisions when buying silver and selling silver.

Summer of 17: LBMA Confirms Upcoming Publication of London Gold Vault Holdings

Just over a week ago I wrote an article highlighting that the Bank of England has begun publishing monthly data on the total quantity of gold bars held within the Bank of England vaults in London. See “Bank of England releases new data on its gold vault holdings”.

This new gold vault data was first released in early April 2017 and covers gold bar holdings at the Bank of England for every month-end for the last 6 years. Going forward, the Bank will publish updates to this dataset every month, on a 3-month lagged basis.

The move by the Bank of England to  publish this data was first reported by the Financial Times in February and was supposedly part of a broader gold vault reporting initiative which was to include vault holdings for all 7 of the London Bullion Market Association (LBMA) commercial precious vaults in London. These commercial vaults are run by HSBC, JP Morgan, Brinks (on behalf of itself and ICBC Standard), Malca Amit, Loomis and G4S. While the Bank of England had single-handedly gone ahead with its side of the reporting initiative, the precious metals vault holdings data from the LBMA was conspicuously absent when the Bank of England made its move. As I wrote in my article last week:

The London Bullion Market Association was also expected to publish gold vault holdings data for the commercial gold vaults in London, but as of now, this data has not been published, for reasons unknown.

While the Bank of England has now followed through with its promise to publish its gold vault holdings, the LBMA has still not published gold vault data for the commercial gold vault providers, i.e. its members HSBC, JP Morgan, ICBC Standard Bank, Brinks, Malca Amit, Loomis and G4S. Where is this data, why is there a delay, and why has it not yet been published?

However, as if by magic, the LBMA has now just issued a press release titled “LBMA to publish Precious Metal holdings in London vaults”. Coincidence, perhaps. But whatever the case, the LBMA development is timely, and the press release, which is actually a combined press release from the LBMA and one of its alter egos, London Precious Metals Clearing Limited (LPMCL), makes interesting reading, but unfortunately at the same time is still quite vague, and appears to suggest that some of the vault operators in question have been dragged kicking and screaming to the start line.

Summer of 2017

The statement from the LBMA reveals that:

from summer 2017 the LBMA will be publishing the gold and silver physical precious metals holdings of the London vaults, with the platinum and palladium holdings to be published at a later date”

The statement also clarifies that “the data only includes physical metal held within the London environs” and that it will cover “aggregate physical holdings”.

Given that the LBMA and Bank of England work very closely, its disappointing and bizarre that the LBMA didn’t coordinate the vault data release at the same time as the Bank of England, because, at the end of the day, this is just some simple holdings data we are talking about, and all the vaults concerned know precisely how much precious metal they are holding at any given moment.

As a reminder, the Bank of England was established by the LBMA in 1987, the Bank of England is an observer on the LBMA Management Committee, and the former head of the Bank of England Foreign exchange Division, Paul Fisher, is the recently appointed ‘independent‘ chairman of the LBMA Management ‘Board’ (formerly known as the LBMA Management Committee). See “Blood Brothers: The Bank of England and the London Bullion Market Association (LBMA)” for more details.

Representatives of the two large commercial vault operators in London, HSBC and JP Morgan, also sit on the LBMA Board. Additionally, representatives of the vault operators HSBC, JP Morgan, Brinks and ICBC Standard Bank also sit on the LBMA Physical Committee and all of the vault operators are represented on the LBMA’s Vault Managers Working Party.

The reference to ‘aggregate physical holdingsin the press release is also potentially disappointing as it seems to imply that the LBMA will not break out its vault reporting into how much gold and silver is held by each of the 7 individual vault operators in and around London, but might only publish one combined figure each month end.

A reporting format in which each vault/operator is listed alongside the quantity (tonnes or thousands of ounces) of gold and silver held by that vault operator would be ideal. For example, something along the lines of:

                                                   Gold (tonnes)                  Silver (tonnes)

  • HSBC                                      x                                                x
  • JP Morgan                             x                                                x
  • ICBC Standard                     x                                               x
  • Brinks                                    x                                                x
  • Malca Amit                           x                                                x
  • Loomis                                  x                                               x
  • G4S                                       x                                              x
  • Bank of England                x                                        no silver

Quantity per vault is the approach taken in the daily precious metals vault reports that COMEX releases on its approved vault facilities in and around New York, as per an example for gold here. HSBC, JP Morgan, Brinks and Malca Amit submit inventory levels to COMEX for that report. Likewise, HSBC, JP Morgan, Brinks and Loomis submit inventory levels in New York to ICE futures for its version of the gold futures inventory report.

Given that the individual vault operators based in New York report precious metals inventory to COMEX and ICE, is it too much to expect that many of the same vault operators cannot do likewise for their London vault facilities?

It remains to be seen which date ‘summer 2017” refers to. This seems like a bizarre non-committal cop out by the LBMA not to have announced a definitive date for beginning to report vault data. Summer 2017 could mean anything. Assuming they are talking about the northern hemisphere, summer could mean anywhere from May to August or beyond.

If the LBMA data is on a 3-month lagged basis in the same way that the Bank of England data is, the first tranche of LBMA vault data could neatly be released after 30 June and would cover month-end March 2017. As a reminder, the Bank of England gold vault data shows:

“the weight of gold held in custody on the last business day of each month. We publish the data with a minimum three-month lag”

Why the vault data on a platinum and palladium can’t be published at the same time as the gold and silver data is also puzzling, because the London Platinum and Palladium Market (LPPM) is now officially integrated into the LBMA following a change in the LBMA’s governance and legal structure in 2016, so both sets of data are now under the remit of essentially the same Association.

It also remains to be seen whether the LBMA data will have a 6-year historical look-back as the Bank of England data does, or whether it will just begin with a one month-end snapshot? For consistency with the Bank of England data, the LBMA vault data should ideally cover the same time period, i.e. every month beginning at January 2011. In short the LBMA press release is lacking quite a lot of detail and unfortunately invites guesswork.

Carmel

The Importance of the Vault Data

Turning quickly to why this gold vault data is important. Simply put, at the moment there is little official visibility into how much physical gold is stored in the London Gold Market, and how much of this gold is available as “liquidity” to back up the market’s huge fractional reserve gold trading volumes. Albeit for silver.

In my coverage on 28 April of the Bank of England data release, I had phrased the relationship between physical gold and gold trading in the London market as follows:

“this physical gold stored at both the Bank of England vaults and the commercial London vaults underpins the gargantuan trading volumes of the London Gold Market”

Interestingly and somewhat synchronistically, in its 8 May press release one week later, the LBMA uses very similar phraseology, as well as the identical verb ‘underpins’, when it states that:

“the physical holdings of precious metals held in the London vaults underpins the gross daily trading and net clearing in London

Another coincidence perhaps, but the LBMA is now also saying that the physical gold bars which they will report on starting in summer 2017, and which the Bank of England has just started reporting on, literally ‘underpin’ or support the massive volume of gold trading in the London Gold Market.

Net clearing” refers to London clearing volumes for gold and silver that are processed through the LMPCL’s clearing system AURUM, and that are published each month by the LBMA, a recent example of which, covering month-end March 2017, can be seen here. In March 2017, an average of 18.1 million ounces of gold (563 tonnes) and 203.2 million ounces of silver (6320 tonnes) were cleared each trading day.

Since trade clearing nets out actual trading volumes, these clearing figures need to be grossed up to reveal the true trading figures. Using a 10:1 ratio of trading to clearing, which is a realistic multiplier as discussed here,  this would be equivalent to 5630 tonnes of gold and 62,200 tonnes of silver traded each day in the London wholesale gold and silver markets. On an annualised basis, for gold, this would imply that the equivalent of over 1.4 million tonnes of gold are traded per year in the London gold market, quite an achievement, seeing that less than 200,000 tonnes of gold is said to have ever been mined throughout history, and half of this total is held in the form of jewellery.

The LBMA press release goes on to say that:

Publication of aggregate physical holdings is the first step in reporting for the London Precious Metals Market.

The next step is Trade Reporting.

The collection of trade data will add transparency to the market and provide gross turnover for the Loco London market. Previously gross turnover had been calculated from one-off surveys or estimated from the clearing statistics.

With the LBMA vault reporting being the first step, but only coming out in the summer of 2017, its anyone’s guess as to when LBMA trade reporting will be coming out, a project which has been bandied about in the financial media and by the LBMA for nearly 3 years now, but which must take the record as the slowest fintech formulation and release in the history of London financial markets, ever.

BOEGoldReserves01t
Source: www.GoldChartsRUS.com

The Bank of England’s latest physical gold holdings for January month-end 2017 is only in the region of 5100 tonnes of gold bars. Furthermore, since the LBMA say that there are only about 6500 tonnes of gold in the entire London market, the LBMA commercial gold vaults in London have to hold far less gold than the Bank of England. Add to this the fact that the gold in the commercial vaults is mostly held on behalf of gold-backed Exchange Traded Funds (ETFs).

Given the above, it becomes increasingly clear than when the LBMA does decide to release gold vault holdings figures sometime in summer 2017, whatever figure(s) is released, will most likely confirm that there is very little gold in the London market which is not claimed to be owned by either a central bank or a gold-backed ETF. It will also provide a field day for all sorts of theories and calculations about the true ratio of gold trading volumes to gold bar vault holdings, and how much of this gold is allocated and earmarked, and how much can be considered a combined bullions banks’ float.

A Quick Calculation

Its possible to go someway towards estimating a minimum figure for how much gold to expect the LBMA to report on the commercial vaults when it begins vaults reporting this summer. The same exercise could be conducted for silver but is beyond the scope of this analysis. For gold, when such a figure is calculated and added to the amount of gold in the Bank of England vaults, it gives a grand total of how much gold is in the combined LBMA and Bank of England vaults in London.

A large number of high-profile gold-backed ETFs store their gold bars in LBMA vaults in London, mainly in the vaults of HSBC and JP Morgan. The HSBC vault in London holds gold on behalf of the SPDR Gold Trust (currently 853 tonnes) and ETF Securities (about  215 tonnes). The JP Morgan gold vault in London holds gold on behalf of ETFs run by iShares (about 210 tonnes in London), Deutsche Bank (95 tonnes),  and Source (100 tonnes). An ABSA ETF holds about 36 tonnes of gold with Brinks in London. In total, these ETFs represent about 1510 tonnes of gold. For the approach used to calculate this type of figure for gold-backed ETFs, please see “Tracking the gold held in London: An update on ETF and BoE holdings“.

ETF gold holdings (most of which are stored in London) have been relatively static since mid March 2017. See chart below. Therefore if the LBMA starts reporting vault gold holdings for a month-end date such as month-end March 2017, it would probably reflect about 1500 tonnes of ETF gold, mostly held by at HSBC and JP Morgan vaults in London. This is assuming that some of the ETF gold is not held in sub-custody at the Bank of England vaults.

ETF transparent 6 month weekly
Source: www.GoldChartsRUS.com

Until the LBMA starts its vault reporting, its unclear how much other gold is in the commercial vaults in London above and beyond the ETF holdings. However, non-monetary gold regularly flows in and out of the London Gold Market from gold trade with countries such as Switzerland. While March 2016 to October 2016 was a period in which the UK was a strong net importer of non-monetary gold from Switzerland, since then the UK has been a net exporter of gold to Switzerland, and has exported 325 tonnes of gold from October 2016 to end of March 2017. Therefore, whatever data the LBMA starts reporting, it logically should reflect the renewed outflow of gold from London to places like Switzerland and would tend to suggest that whatever excess bullion bank float gold is in the London commercial vaults, it is less than it would have been in the absence of these renewed outflows.

The vaulting page of the LBMA website still has there are:

“6,500 tonnes of gold held in London vaults, of which about three quarters is stored in the Bank of England”

While this web page text is probably slightly out of date, a literal interpretation would imply that 4875 tonnes of gold are in the Bank of England (which is not too far from the actual figure) and that 1625 tonnes are in the commercial vaults (which would mean that very little non-ETF gold is in the commercial vaults).

The Bank of England claims to have about 72 central bank customers with gold accounts, For month-end January 2017, the Bank of England is reporting that there was approximately 5100 tonnes of gold in its vaults. At least 3800 tonnes of this gold is claimed to be owned by 34 known central banks. See “Central Bank Gold at the Bank of England” for more details. That would leave about 1300 tonnes of gold at the Bank of England owned by a selection of other central banks and bullion banks. As to how much gold the bullion banks hold at the Bank of England is not clear, but since central bank gold holdings are relatively static (at least when excluding gold lending), then most of the month-to-month movements in Bank of England gold vault holdings are most likely due to bullion bank activity.

As to how easily bullion bank gold holdings at the Bank of England can switch to or be transported to the vaults of the commercial vault operators in London is also unclear, as logistics is a secretive area of the London Gold Market.

So with (1500 ETF tonnes of gold + X) in the commercial vaults, and 5100 tonnes of gold in the Bank of England vaults, this gives a grand total of 6600 tonnes of gold + X in all the vaults of the London as of early 2017. X could be 400 tonnes, it could be 1400 tonnes, or it could be any other figure of similar magnitude. My guess is that there is not that much gold in the commercial vaults above and beyond whats in the gold-backed ETFs. Maybe a few hundred tonnes or so. However, we will have to wait until the dog days of ‘summer’ in London to know this definitively.

More Bad News for the LBMA Silver Price, but an Opportunity for Overhaul

On Friday 3 March 2017, in a surprise announcement with implications for the global silver market, the London Bullion Market Association (LBMA) informed its members that the current administrator and calculation agent of its recently launched LBMA Silver Price auction, Thomson Reuters and the CME Group respectively, will be pulling out of providing their services to the problematic London-based silver price benchmark within the near future. Thomson Reuters and the CME Group issued identical statements.

This is surprising because Thomson Reuters and the CME Group only began administering / calculating the LBMA Silver Price auction two and a half years ago in August 2014, when, amid much hubris, the duo were awarded the contract after a long-drawn-out and high-profile tender process. Notably, the Thomson Reuters  / CME contract with the LBMA was for a 5-year term running up to and into 2019. So the duo are now pulling out mid-way through a contract cycle.

More surprisingly, in their statements of 3 March, the LBMA / Thomson Reuters and CME allude to the European Benchmark Regulation being in some way responsible for the hasty departure. However, given that the units of CME and Thomson Reuters that are parties to the LBMA contract are their specialist benchmark units “CME Benchmark Europe Limited” and “Thomson Reuters Benchmark Services Limited”, which specialise in administering and calculating benchmarks, this excuse makes no sense.

In essence, this development is an embarrassment for all concerned and could lead to further reputational damage for the parties involved. It also now re-focuses market scrutiny on an area which the LBMA and its associates could well wish to forget, i.e. the former London silver fixing run by the infamous London Silver Market Fixing Limited, a company which itself is still one of the defendants, along with HSBC, Bank of Nova Scotia and Deutsche Bank, in a live New York class action suit that is scrutinizing the manipulation of the London silver price.

LBMA Silver Price: A Regulated Benchmark

Note that the LBMA Silver Price benchmark is now a “Regulated Benchmark” under United Kingdom HM Treasury Legislation, and is one of 8 financial market benchmarks regulated by the UK’s Financial Conduct Authority (FCA). So this is not some backwater obscure benchmark that we are talking about here. This is a benchmark with far-reaching effects on the global precious metals markets and a sister of the LBMA Gold Price benchmark. The reference prices from these benchmarks are used from everything from valuing Exchange Traded Funds (ETFs) to being the price reference points in ISDA swaps and bullion bank structured products such as barrier options.

According to the LBMA’s usual public relations mouthpiece Reuters, which relayed the news to the broader market on 3 March, the LBMA will be:

“looking to identify a new provider in the summer, and have the new platform up and running in the autumn”

This dramatic “exit stage right” by Thomson Reuters and the CME Group is a far cry from their initial and continued corporate spin of being committed to the silver price auction, which they claimed both at auction launch in August 2014, and also as recently as 2016 when they grovelled with promises of process improvement and wider participation in the auction in the wake of the silver price manipulation fiasco in the LBMA Silver Price auction on 28 January 2016.

It was on 28 january 2016 that the midday auction took a whopping 29 rounds to complete and the price derived in the auction was manipulated down by a massive 6% under where silver spot and silver futures prices were trading at that time. See the beginning of BullionStar blog “The LBMA Silver Price – Broken Promises on Wider Participation and Central Clearing” for further details about the 28 January auction.

TRCMEsquare

 

Where is the Commitment?

On 15 August 2014, the day the LBMA Silver Price auction was launched, William Knottenbelt, MD at CME Group stated:

“Through our existing relationships with market participants and the broader silver marketplace we are uniquely positioned to provide a seamless transition for the spot silver benchmark in London.” 

“CME Group has a long and successful history of offering benchmark risk management and price discovery solutions for the global precious metals markets.” 

Then, on 22 March 2016, when CME and Thomson Reuters introduced some changes to the auction in the wake of the 28 January 2016 auction price manipulation, both parties released more spin on their continued commitment to the auction. Thomson Reuters’ Head of Benchmark Services, Tobias Sproehnle, in a statement that now looks to be hollow, said:

“these changes together with a comprehensive consultation with the broader silver community – producers, intermediaries and consumers - are a further demonstration of Thomson Reuters and CME Group’s commitment to providing innovative, market leading benchmarks for the Silver market.

While Gavin Lee, the head of CME Benchmark Services, led with an equally hubristic statement that:

“in consultation with Silver market participants, we are always looking for new ways to develop this benchmark further

These statements from CME and Thomson Reuters, less than a year ago, run totally contrary to the fact that the duo are now going to abandon the LBMA Silver Price auction ship, which will necessitate the appointment of a replacement administrator and calculation agent. Where is the continued “commitment” to the silver benchmark and the silver market that they were we eager to espouse last March?

Why the Hasty Departure?

According to the Reuters news report last Friday 3 March:

A spokesman for Thomson Reuters confirmed the company was stepping down from the process. CME could not immediately be reached for comment.

Not very informative or cooperative from either party when one of the providers was not even available to explain its exit rationale, and the other merely confirms a fact to its in-house news arm, a fact which the LBMA had already announced earlier that day to its members.

However, if you look at the CME Group website, a short announcement was added to its website on 3 March 2017, which states:

The forthcoming European Benchmark Regulation, due to be implemented in January 2018, prompted a review of the existing LBMA Silver Price administration arrangements and, in consultation with the LBMA, CME Group and Thomson Reuters have decided to step down from their respective roles in relation to the LBMA Silver Price auction.

This statement was also added to the Thomson Reuters website on 3 March.

Before briefly looking at the relevance of this “European Benchmark Regulation”, which the Reuters news article even failed to mention, its notable that the CME / Thomson Reuters early withdrawal was also covered on 3 March by the MetalBulletin website.

According to MetalBulletin (subscription site), the above statement by CME is apparently part of an identical statement which the LBMA released to it members on Friday 3 March (the LBMA statement).

MetalBulletin adds in its commentary that:

“CME is looking to streamline its precious metals division, with contracts in this area being its fastest growing asset. The exchange wants to focus on its core products, Metal Bulletin understands.”

What MetalBulletin means by this I don’t know. The logic doesn’t make any sense. The sentence doesn’t even make sense. Benchmarks are a core product of CME group. CME even states that it offers:

“the widest range of global benchmark products across all major asset classes”

CME Benchmark Europe Limited was specifically set up in 2014 to provide the calculation platform for the LBMA Silver Price. Furthermore, CME has just launched a suite of silver and gold futures contracts for the London market (launched in late January 2017), the silver contract being the “London Spot Silver Futures (code SSP)“. Even though these CME contracts have had no trading interest so far, the CME claims that it is currently “working with major banks to synchronize their systems to start trading” these contracts (London Spot Silver Futures and London Spot Gold Futures).

So why would CME want to voluntarily ditch the provision of a high-profile London silver benchmark, when it could attain trading synergies between the LBMA Silver Price and its new London silver futures contracts, or at the very least improve brand recognition in the market?  And not to forget CME and Thomson Reuters claim a”commitment to providing innovative, market leading benchmarks for the Silver market“.

European Benchmark Regulation

Turning to the new “European Benchmark Regulation”, what exactly is it, and why would it be relevant for the LBMA and CME and Thomson Reuters to mention the European benchmark Regulation in the context CME and Thomson Reuters pulling out of the LBMA Silver Price auction?

At its outset, the European Benchmark Regulation was proposed by the European Commission. The Commission’s proposal was also issued in coordination with a range of entities and initiatives such as MiFID, the Market Abuse Directive, the benchmark setting processes of the  European Securities and Markets Authority (ESMA) and European Banking Authority (EBA), and also the IOSCO financial benchmark principles.

According to law firm Clifford Chance:

The new [EU] Regulation is a key part of the EU’s response to the LIBOR scandal and
the allegations of manipulation of foreign exchange and commodity benchmarks

“The Regulation imposes new requirements on firms that provide, contribute to or use a wide range of interest rate, currency, securities, commodity and other indices and reference prices.”

“Most of the new rules will not apply until 1 January 2018″

“The new Regulation imposes broad ranging and exacting requirements
on a wide range of market participants. It may reinforce the trend to discontinue benchmarks and reference prices

According to law firm Simmons & Simmons:

The Regulation seeks to:

  • improve governance and controls over the benchmark process, in particular to ensure that administrators avoid conflicts of interest, or at least manage them adequately
  • improve the quality of input data and methodologies used by benchmark administrators
  • ensure that contributors to benchmarks and the data they provide are subject to adequate controls, in particular to avoid conflicts of interest
  • protect consumers and investors through greater transparency and adequate rights of redress.

The Regulation aims to address potential issues at each stage of the benchmark process and will apply in respect of:

  • the provision of benchmarks
  • the contribution of input data to a benchmark, and
  • the use of a benchmark within the EU.

All of these goals aspired to by the legislation of the European Benchmark Regulation seem reasonable and would benefit users of the LBMA Silver Price auction, so given the above, it seems very bizarre that CME and Thomson Reuters and the LBMA stated last Friday 3 March that:

The forthcoming European Benchmark Regulation, due to be implemented in January 2018, prompted a review of the existing LBMA Silver Price administration arrangements

Remember that the CME and Thomson Reuters service providers to the LBMA Silver Price are their specialist benchmark units “CME Benchmark Europe Limited” and “Thomson Reuters Benchmark Services Limited”. That is what these units do, administer and calculate benchmarks. This European benchmark Regulation has been known about for a few years. Especially known about by the benchmark units of CME and Thomson Reuters. The Regulation didn’t suddenly appear out of nowhere last week, as the above statement is appearing to hint at.

And why such a brief and unclear statement from CME, Thomson Reuters and the LBMA? Is this European Benchmark Regulation just an excuse being thrown out to distract from other issues that might really be behind CME and Thomson Reuters stepping down.

Or perhaps CME and Thomson Reuters are aware of issues within the current administration of the LBMA Silver Price that would make it difficult to comply with the new legislation or that would make it too onerous to comply? But such rationale doesn’t make sense either because why are CME and Thomson Reuters not bailing out of the all the benchmarks that they are involved in? Furthermore, if the European Benchmark Regulation is a factor, why would any other benchmark service provider such as ICE Benchmark Administration (IBA) bother to pitch in the LBMA’s forthcoming tender process to find a replacement for Thomson Reuters and CME?

Perhaps CME and Thomson Reuters are worried about future reputation damage of being associated with the LBMA Silver Price due to some brewing scandal? Or perhaps the powerful bullion banks within the LBMA wanted to scupper any change that there will ever be wider participation or central clearing in any future version of the auction?

I will leave it to readers to do their own research on this and draw their own conclusions.

A Banking Cartel vs. Wider Auction Participation

One issue which has dogged the LBMA Silver Price auction since launch is that it never gained any level of “wider participation” or market representative participation. There are only 7 bullion banks authorised by the LBMA to be direct participants in the auction, and there are zero direct participants from the silver mining, silver refineries, and silver sectors.

This is despite the LBMA, CME and Thomson Reuters all misleading the global silver market on this issue on many occasions, and claiming that there would be very wide participation in the auction after it was launched. See BullionStar blog “The LBMA Silver Price – Broken Promises on Wider Participation and Central Clearing” for a huge amount of factual evidence to back up this statement, including webcasts by CME, Thomson Reuters and the LBMA, and an interview by Reuters with LBMA consultant Jonathan Spall, formerly of Barclays. Here are a few examples:

The LBMA’s Ruth Crowell was claiming back in July and August 2014 that they were interested in having 111 direct participants:

“clear demand for increased direct participation, and we had 25% of those 444 coming back saying they would be interested, and we’re still interested in having all of those participants on board”

“The advantage with centralised clearing, particularly for the pricing mechanism, is that we can really exponentially grow the amount of direct participants

Jonathan Spall, LBMA Consultant stated that:

“The hope of course is that we get many more participants in the new benchmark process….while it is likely that we will start by having banks involved it is ultimately hoped that the wider market will participate, be they refiners, miners etc.

“Ultimately – and as I said before – the intention is that there is much wider participation. So yes, refiners, miners etc.

Harriett Hunnable, then of the CME Group, stated:

“So this is really the new world, this is not the old fixing…..this is wider participation…and the London bullion market is really encouraging that…this is the new world, or the LBMA Silver Price!”.

According to the CME / LBMA / Thomson Reuters presentations, there was supposed to be a “phase 3 introduction of centralised clearing

Central counterparty clearing will enable greater direct participation in the London Silver Price

In summary, central clearing would allow direct participants to participate directly in the auction without the need for bi-lateral credit lines. However, the plan for central clearing was quietly dropped. The CME and Thomson Reuters have now had 32 months in which to introduce central clearing into the silver auction and it hasn’t happened. Nor will it now. The fact of the matter is that the LBMA banks do not want wider participation and they don’t want central clearing of auction trades either. These banks, which at the end of the day are just costly intermediaries, essentially want to monopolise the silver auction and prevent wider participation, and prevent true silver price discovery. Could it be the banks through their LBMA front that have sabotaged the contract with CME and Thomson Reuters so as to reset the contract and re-start another tender process that will ensure that no wider participation can ever see the light of day?

It’s also important to note that there is no way for miners and refiners to be direct participants in the auction. This is because the LBMA has designed the auction participant rules to keep out refiners and miners (and anyone else that is not a bullion bank). The rules are specifically designed so that only bullion banks can satisfy the LBMA’s Benchmark Participant criteria. See section 3.13 of the LBMA Silver Price auction methodology document accessible here.

Currently only 7 bullion banks are direct participants in the auction, namely HSBC, JPMorgan Chase, Bank of Nova Scotia (ScotiaMocatta), Toronto Dominion, UBS, Morgan Stanley, and China Construction Bank.  Most of these banks are very influential on the LBMA Management Committee. HSBC, Scotia and Mitsui were in the auction from Day 1 on 15 August 2014. UBS joined the auction on 26 September 2014, JP Morgan Chase Bank joined on 14 October 2014, Toronto Dominion Bank joined on 6 November 2014. Mitsui left in either late 2015 or January 2016 (the exact date is unclear). China Construction Bank only joined the auction on 6 May 2016.

Lastly, Morgan Stanley only joined the LBMA Silver Price auction on 25 October 2016 (which is just 4 months ago), at which point the LBMA / CME and Thomson Reuters had the audacity to spin that 7 LBMA bullion banks trading in a shadowy auction of unallocated silver accounts in London somehow represents the global silver market:

CME: “The addition of another member brings greater depth and diversity to the market and underlines the ongoing globalisation of the Silver Price as a leading, liquid precious metals benchmark.”

Thomson Reuters: “With the addition of Morgan Stanley to the panel, the LBMA Silver Price provides even deeper insight into the global silver market. We continue to welcome new participants to this essential mechanism for the markets.”

LBMA: “They [Morgan Stanley] add depth and liquidity to the auction and I look forward to other market participants joining in the future.”

LBMA Silver Price is NOT Representative of Silver Market

But, to reiterate (and as was stated previously in this blog), the LBMA Silver Price auction is not representative of the global Silver Market whatsoever, and it does not meet some of the simplest IOSCO benchmark requirements:

“IOSCO benchmark principles state that a benchmark should be a reliable representation of interest, i.e. that it should be representative of the market it is trying to measure. Interest is measured on metrics such as market concentration. In the Thomson Reuters methodology document (linked above), on page 11 under benchmark design principles, the authors estimate that there are 500-1000 active trading entities in the global silver market.”

The Thomson Reuters methodology document from August 2014 also admitted that “volumes in the LBMA Silver Price are a fraction of the daily volume traded in the silver futures and OTC markets”.

Why then are 7 LBMA bullion banks allowed to monopolize the representation of 500 – 1000 active trading entities from the global silver market within the auction, an auction that its worth remembering generates a silver reference price which is used as a global silver price reference and pricing source?

BullionStar investment silver bars and coins

Refiners and Miners

Based on the current rules, the vast majority of the world’s silver refiners cannot directly take part in the LBMA Silver Price auction.

Only 8 precious metals refiners are Full Members of the LBMA while 25 refiners are associates of the LBMA. Of the 8 full members, 5 of these refiners are on the LBMA refiner Referee panel, namely, Argor-heraeus, Metalor and PAMP from Switzerland, Rand Refinery from South Africa, and Tanaka Kikinzoki Kogyo from Japan. These refiners were added to the panel as LBMA Associates in 2003, and were only made Full Members in 2012. The only reason they happened to be fast-tracked as full members of the LBMA was due to their status as Referees for the LBMA good delivery list. Even the other major Swiss based refinery Valcambi is still not a full member of the LBMA.

Based on the current participant criteria of the Silver auction, where only full LBMA members could conceivably become direct participants, 25 of the refiners that are LBMA Associates cannot directly take part in the auction even if they wanted to. Candidates for Full LBMA Membership also have to jump through a number of hoops based on sponsorship by existing members, business relationships, due diligence, and involvement in the precious metals markets.

For a refiner to even become a LBMA associate, the refiner must have already attained Good Delivery Status for its silver or gold bars. There are about 80 refineries on the LBMA’s current Good Delivery List for silver. The chance of the vast majority of these refiners taking part in the LBMA silver auction is nil since not only are they not LBMA full members, they aren’t even LBMA associates.

Based on the current auction criteria, it’s without doubt literally impossible for nearly all silver producers / miners on the planet to directly participate in the LBMA Silver Price auction. Precious metal mining companies are not normally officially connected to the LBMA, and would more naturally be members of the Silver Institute or World Gold Council or another mining sector organization. So it’s confusing as to why the LBMA even mentions mining companies as possible auction participants since there are no mining companies that are Full Members of the LBMA, so they cannot be participants in the silver auction. The only mining companies that are even “Associates” of the LBMA are Anglogold Ashanti and Coeur Mining.

In 2014, Coeur Mining’s treasurer, referring to the LBMA Silver auction said:

“We hope to have the opportunity to become a direct participant down the road and look forward to working with the LBMA, CME and other silver producers to drive the evolution of this market.”

The unfortunate Coeur Mining now looks like it has been strung along by the LBMA with empty promises that it can somehow someday participate in the silver auction, but this is literally a fiction given the way the auction rules are currently set up.

Conclusion

In its announcement on 3 March, the LBMA said that it will shortly launch a tender process to appoint a replacement provider. The LBMA told Reuters News:

“We would be looking to identify a new provider in the summer, and have the new platform up and running in the autumn”

However, given the abysmal track record of the LBMA Silver Price, the question that should really be asked at this time is why is the bullion bank controlled LBMA even allowed to be in charge of such an important “Regulated Benchmark” as a global silver price benchmark, a benchmark that has far-reaching effects on global buyers and sellers of silver.

Take a brief look back at how the last tender process run by the LBMA for the London silver price was handled.

A Silver Price Seminar held by the LBMA on 19 June 2014 was not even open to the wider bullion market. As Ruth Crowell, CEO of the LBMA, told the publication MetalBulletin in an October 2014 interview:

“Not just our members, but ISDA members, and any legitimate members of the market were invited to the seminar. We also had observers from the FCA and the Bank of England. We wanted to keep [attendance] as wide-ranging as possible but to avoid anyone who perhaps would be disruptive

What is this supposed to mean? To prevent anyone attending the seminar who might have a different view on how the global silver price benchmark should be operated that doesn’t align with the view of the LBMA?

The actual process of selecting the winning bid from the shortlist of tender applicants was only open to LBMA Full members and Seminar attendees via a 2nd round voting survey. The independent consultant review that was part of the selection process, was conducted by someone, Jonathan Spall, who was not independent of the former fixings and so should not have been involved in the process.

Promises of wider participation involving refiners and miners were abandoned. Promises of central clearing of auction traded were thrown out the window. Prior to launch, the auction platform was hastily built by Thomson Reuters and CME without an adequate market-wide solution for clearing silver trades. Another of the bidders, Autilla/LME, had a working auction solution which would have allowed wider market participation at August 15 2014 go-live, but this solution was rejected by the LBMA Management Committee, LBMA Market Makers and the LBMA Data Working Group, the groups which had the ultimate say in which applicant won the tender.

There were only 3 participants in the LBMA Silver Price auction (all of them banks) when it was launched in August 2014, and two of which, HSBC and Scotia, were parties to the former London Silver Fixing. The LBMA Silver Price auction was therefore an example of same old wine in a new bottle. The same 2 banks, HSBC and Scotia are now defendants in a silver price manipulation class action suit in New York. There are now only 7 direct participants in the LBMA Silver Price. These are all bullion banks. This is 32 months after the auction has been launched. The LBMA accreditation process specifically prevents refiners and miners from joining the auction. As there are 500 – 1000 trading entities of silver globally, the LBMA Silver Price mechanism is totally unrepresentative of the silver market.

The defection of CME and Thomson Reuters now provides a one-off opportunity for the global silver market to insist that the current scandal ridden current auction be scrapped and taken out of the hands of the bullion bank controlled London Bullion Market Association (LBMA). It is also an opportunity to introduce a proper silver price auction in its place that is structured to allow direct participation by hundreds of silver trading entities such as the world’s silver refiners and miners, an auction that employs central clearing to allow this wider participation, and an auction that is based on trading real physical silver and not the paper credits representing unallocated claims that the participating London bullion banks shunt around between themselves. This could help lead to real silver price discovery in the global silver market. However, the chances of this happening with the LBMA still involved in the new tender process are nil.

From Bank of England to LBMA: The ‘independent’ Chair of the LBMA Board

In a recent article titled “Blood Brothers: The Bank of England and the London Bullion Market Association (LBMA)“, I charted the extremely close historical and contemporary relationship between the LBMA and the Bank of England. This article highlighted that:

  • the LBMA was established in 1987 by the Bank of England
  • the original bullion bank founding members and steering committee members of the LBMA represented 6 commercial banks active in the London Gold Market, namely, N.M. Rothschild, Mocatta & Goldsmid, Morgan Guaranty Trust, J. Aron, Sharps Pixley (former Sharps Pixley), and Rudolf Wolff & Co.
  • the Bank of England has been involved in the affairs of the LBMA from Day 1 in 1987, and continues to this day to have observer status on the LBMA Management Committee
  • the Bank of England has observer status on not just the LBMA Management Committee, but also on the LBMA Physical Committee and in the LBMA Vault Managers group
  • the Financial Conduct Authority (FCA) also has observer status on the LBMA Management Committee
  • although there are 2 other London financial market committees closely aligned with the Bank of England, and populated by bank representatives, that publish the minutes of their regular meetings, namely the Foreign Exchange Joint Standing Committee, the Sterling Money Markets Liaison Committee, the LBMA Management Committee does not publish the minutes of its meetings, so the public is in the dark as to what’s discussed in those meetings

Note that “observer status” does not mean to sit and observe on a committee, it just means that the observer has no voting rights at committee meetings. Note also that the structure of the LBMA Management Committee has recently changed to that of a Board, so the Committee is now called the LBMA Board.

One of the most interesting points in the previous article referred to the very recent appointment of a very recently departed Bank of England senior staff member, and former head of the Bank of England Foreign exchange Division, Paul Fisher, as the new ‘independent‘ chairman of the LBMA Management Committee / ‘Board’. Paul Fisher has also in the past, been the Bank of England’s representative, with observer status, on this very same LBMA Management Committee (now LBMA Board) that he is now becoming independent chairman of. Fisher is replacing outgoing LBMA Board chairman Grant Angwin, who if from Asahi Refining (formerly representing Johnson Matthey).

‘Independent’ Non-Executive Chairman

This article continues where the above analysis left off, and looks at the appointment of Fisher as the new ‘independent’ Non-Executive Chairman of the LBMA Board, considers the ‘independence’ of the appointment given the aforementioned very close relationship between the Bank of England and the LBMA, and examines the chairman’s appointment in the context of the UK Corporate Governance Code, which now governs the Constitution and operation of the LBMA Board.

As I commented previously:

Arguably, the pièce de résistance of these Bank of England / FCA relationships with the LBMA Management Committee, is the fact that Paul Fisher, the newly appointed ‘independent‘ Chairman of the LBMA Board, a.k.a. LBMA Management Committee, has already previously been the Bank of England’s “observer” on the LBMA Management Committee.”

This was confirmed in Fisher’s speech to the 2004 LBMA Annual Conference in Shanghai, Fisher, when then Head of Foreign Exchange at the Bank of England, he stated:

I am glad to be invited to the LBMA’s Management Committee meetings as an observer.”

Fisher was Head of Foreign Exchange Division at the Bank of England from 2000 to 2009, so could in theory have been a Bank of England observer on the LBMA Management Committee throughout this period. The Foreign Exchange Division of the Bank of England is responsible for managing the Sterling exchange rate, and for managing HM Treasury’s official reserves held in the Exchange Equalisation Account (EEA), including HM Treasury’s official gold reserves. One would think that when the LBMA announced in a press release in July of this year that Fisher was being appointed as the new LBMA chairman, that the fact that he had previously attended the LBMA Management Committee meetings would be a fact of relevance to the appointment. However, surprisingly, or maybe not so surprisingly, this fact was omitted from the press release.

The LBMA press release, titled “Dr Paul Fisher to be the new LBMA chairman“, dated 13 July 2016, begins:

The LBMA is delighted to announce the appointment of Dr Paul Fisher as the new Chairman of the Association, effective from 5 September, 2016. Paul is due to retire from the Bank of England at the end of July.”

The press release goes on to say:

“Paul brings with him a wealth of financial market experience following his 26 years at the Bank of England. Prior to joining the LBMA, his last role was as Deputy Head of the Prudential Regulation Authority. Paul was selected by the LBMA Board following an independent Executive search procedure.”

“Previously, from 2002, he [Paul Fisher] ran the Bank’s Foreign Exchange Division where he had a constructive relationship with the LBMA and developed a working knowledge of the bullion market.”

Notwithstanding the capability of the appointment, there is absolutely zero mention in this press release of the fact that Paul Fisher used to be the Bank of England observer on the LBMA Management Committee, a committee that he is now being made chair of. Why so? Was it to make the relationship appear more distant that it actually was, thereby reinforcing the perception of ‘independence’?

In addition, the recently added bio of Paul Fisher on the LBMA Board listings features text identical to the press release, with no indication that Fisher previously attended the LBMA Management Committee meetings.

Notice also the reference to an “Executive search procedure” being used to support the new chairman’s appointment.

LBMA Board

At this point, it’s instructive to examine what drove the re-definition of the LBMA Management Committee to become the LBMA “Board”, and the appointment process to that board of an ‘independent‘ Non-Executive Chairperson. It can be seen from the LBMA website archive that until July of this year, the entity providing oversight and strategic direction to the LBMA was the ‘LBMA Management Committee':

mgt

Only in July following a LBMA General Meeting on 29 June did the website description change to LBMA Board:

 

board

The new Board structure of the LBMA allows it to have 3 representatives from LBMA Market Making firms, 3 representatives from LBMA Full Member entities, 3 ‘independent’ non -executive directors (inclusive of the ‘independent’ chairman), and up to 3 representatives from the LBMA Executive staff, including the LBMA CEO.

One of the first references to a future change in governance structure at the LBMA came in October 2015 at the LBMA annual conference, held in Rome. At this conference, Ruth Crowell, CEO projected that in the future:

“To enhance its governance, the new Board will include for the first time Non-Executive Directors whilst giving more power to the Executive so as to ensure any conflicts of interest are eliminated.”

On 29 April 2016, a LBMA “Future Events” summary document confirmed that a General Meeting (akin to an EGM) of LBMA members would be convened on Wednesday 29 June 2016 in London so as to “update the LBMA’s legal structure and governance“.  The same “Future Events” summary also highlighted a change in schedule to the LBMA’s Annual General Meeting (AGM), which due to the 29 June General Meeting, would now be held on 27 September 2016 with an agenda item to “incorporate, into the constitution of the LBMA, the governance and legal structure changes agreed at the General Meeting in June“. 

It would be quite presumptuous for any normal organisation of members, in the month of April, to not only assume that resolutions that were only being put to its membership in the month of June would be passed, but to also actually hard-code these assumptions into the agenda of a scheduled September meeting. However, this was what was written in the “Future Events” document and appears to be the pre-ordained roadmap that the LBMA Management Committee had already set in stone.

On Thursday 30 June, the day after its General Meeting in London, the LBMA issued a press release in which it confirmed (as it had predicted) that “Members of the LBMA approved by an overwhelming majority a number of important changes to its Memorandum & Articles of Association“.

As well as endorsing the LBMA’s expansion to acquire the responsibilities of the London Platinum and Palladium Market (LPPM), which was the first motion for consideration at the meeting, the press release confirmed that the membership had endorsed the appointment of an independent Non-Executive Chairman:

“The second change was to further enhance the governance of the Association. The UK Corporate Governance Code was incorporated and will govern both the Constitution as well as the operation of the Board. While it is vital for the Board to have a strong voice for its Members, it is important that any actual and perceived conflicts between these parties are balanced by having independence on that Board. This independence protects the interests of the wider membership as well as the individuals themselves serving on the Board. To address this, the LBMA has added an independent Non-Executive Chairman as well as two additional Non-Executive Directors (NEDs).”

Notice the reference to 2 other independent non-executive directors. Nine business days later, on 13 July 2016, the LBMA issued a further press release revealing that ex Bank of England Head of Foreign Exchange and former observer on the LBMA Management Committee, Paul Fisher had been appointed as the “independent Non-Executive Chairman“.

Executive Search Procedure

Recall also that the 13 July press release stated “Paul was selected by the LBMA Board following an independent Executive search procedure.””

Nine days is an extremely short period of time to commence, execute, and complete an ‘independent Executive search procedure‘.  It immediately throws up questions such as which search firm was retained to run the independent Executive search procedure?, which candidates did the search firm identify?, was there a short-list of candidates?, who was on such a short-list?, what were the criteria that led to the selection of the winning candidate above other candidates?, and how could such a process have been run and completed in such a limited period of time when similar search and selection processes for chairpersons of corporate boards usually take months to complete?

How independent is it also to have a former divisional head of the Bank of England as chairman of the London Gold Market when the Bank of England is the largest custodian of gold in the London Gold Market, and operates in the London Gold Market with absolute secrecy on behalf of its central bank and bullion bank customers.

Since the LBMA voluntarily incorporated the UK Corporate Governance Code into the operations of its Board following the General Meeting on 29 June, its instructive to examine what this UK Corporate Governance Code has to say about the appointment of an independent chairman to a board, and to what extent the Corporate Governance Code principles were adhered to in the LBMA’s ‘independent‘ chairman selection process.

 UK Corporate Governance Code

The LBMA is a private company (company number 02205480) limited by guarantee without share capital, with an incorporation filing at UK Companies House on 14 December 1987. Stock exchange-listed companies in the UK are required to implement the principles of the UK Corporate Governance Code and comply with these principles or else explain (to their shareholders) why they have not complied (called the “comply or explain” doctrine). In the world of listed equities, monitoring and interacting with companies about their corporate governance is a very important area of  institutional and hedge fund management. It has to be so as the share owners are able to monitor and grasp if any governance issues arise at any of companies held within their institutional / hedge fund equity portfolios.

Non-listed companies in the UK are also encouraged to apply the principles of the Code, but are not obliged to. When a private company chooses to incorporate the UK Corporate Governance Code to govern its Constitution and operation of its Board, one would expect that it would also then ‘comply’ to the principles of the Code or else ‘explain’ in the spirit of the Code, why it is not in compliance.

comply-or-explain

The UK Corporate Governance Code is administered by the Financial Reporting Council (FRC). The April 2016 version of the Code can be read here. The main principles of the Code are divided into 5 sections, namely, Leadership (section A), Effectiveness (section B), Accountability (section C), Remuneration (section D), and Relations with Shareholders (Section E).

One of the main principles of Section B is as follows:

There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board. “

Section A also addresses the independence of the chairman, and Section A.3.1. states that:

“The chairman should on appointment meet the independence criteria set out in B.1.1″

Section B.1.1, in part, states that:

“The board should determine whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgement. The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director:

  • has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;
  • represents a significant shareholder;”

It goes without saying that the Bank of England has a material business relationship with the commercial banks which are represented on the LBMA Board, and I would argue that although the LBMA has no share capital, because the Bank of England has a material business relationship with the LBMA, and because since Paul Fisher was a senior employee of the Bank of England until July of this year, then the LBMA should “state its reasons as to why it determines that this director is independent“.

Furthermore, although the Bank of England is not a ‘significant shareholder’ of the LBMA, it is the next best thing, i.e. it has a significant and vested interest in the workings of the LBMA and interacts with LBMA banks through the London vaulting system, the gold lending market, and in its regulatory capacity of the LBMA member banks. The Bank of England also established the LBMA in 1987 don’t forget, so the extremely close relationship between the two is of material concern when a senior employee of the former suddenly becomes chairman of the latter.

Section B.2 addresses ‘Appointments to the Board':

“Main Principle

There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board

Section B.2.1.:

“There should be a nomination committee which should lead the process for board appointments and make recommendations to the board. A majority of members of the nomination committee should be independent non-executive directors.

The nomination committee should make available its terms of reference, explaining its role and the authority delegated to it by the board. [7]

[Footnote 7]: The requirement to make the information available would be met by including the information on a website that is maintained by or on behalf of the company.

Was there a nomination committee? As of the time of appointing the new chairman to the LBMA Board, there were zero independent non-executive directors on the Board. And, excluding the newly appointed chairman, there are still zero other independent non-executive directors on the LBMA Board.

If there was a nomination committee, notwithstanding that it couldn’t by definition have a majority of independent non-executive directors when overseeing a search process for an independent chairman, then did it “make available its terms of reference” “on a website that is maintained by or on behalf of the company.” Not that I can see on any part of the LBMA website.

Section B.2.4. of the UK Corporate Governance Code includes the text:

Where an external search consultancy has been used, it should be identified in the annual report and a statement made as to whether it has any other connection with the company.

The company here being the LBMA (which is a private company). There has been no public identification as to the identity of the external search consultancy that the LBMA state was used in the appointment of Paul Fisher as ‘independent’ non-executive chairman.

Section  B.3.2. states:

“The terms and conditions of appointment of non-executive directors should be made available for inspection.[9]

[Footnote 9]: The terms and conditions of appointment of non-executive directors should be made available for inspection by any person at the company’s registered office during normal business hours and at the AGM (for 15 minutes prior to the meeting and during the meeting).

There is no reference on the LBMA website as to the terms and conditions of appointment of non-executive directors being made available for inspection by any person at the company’s registered office, nor was this communicated in the LBMA’s press release wherein it announced the appointment of the ‘independent’ non-executive chairman. It is one thing to claim to incorporate the UK Corporate Governance Code into a Board’s operations, but an entirely different matter to actually implement the principles into the operations of the Board. Given the above, I can’t see how the LBMA has done much of the latter.

Bank of England

Further ‘Independent’ Non-Executive Director Appointments

Given the opacity in the appointment of the Bank of England’s Paul Fisher as the new ‘independent’ non-executive chairman, it is therefore not unreasonable to suggest that the entire appointment process was a pre-ordained shoo-in. Without substantially more transparency from the LBMA, this view is understandable. Nor have there been any announcements about the appointment of “two additional Non-Executive Directors (NEDs)” that was claimed in the LBMA’s 30 June press release.

The LBMA held its Annual General Meeting this past week, on Tuesday 27 September. During the AGM, the outgoing chairman, Grant Angwin commented in his speech that:

I’m delighted to have by my side Dr. Paul Fisher who will be replacing me as the first Independent Non-Executive Chairman of your Association – Paul will introduce himself to you in a moment. Paul and I will Co-Chair the Board until the end of this year. This is the first major step to making the Board more independent, Paul will be joined by up to 2 other Independent Directors in the near future.

“The Board will now comprise of 6 representatives from the market – three each in the categories of Market Markers and Full Members, up to 3 Independent Non-Executive Directors (of which one will be the Chairman) and up to 3 LBMA Executive Directors. We expect to make further announcements on these roles very shortly.”

Given that the new chairman has been appointed, it is odd, in my view, that the 2 other independent directors have yet to be appointed and their identities announced. Likewise, for the 2 new directors from the LBMA Executive, who, if and when they join the Board, will give the LBMA Executive 3 seats on the Board.  Surely the AGM would have been the ideal venue in which to make these announcements, since other board changes were being voted on at this meeting.

The New Board Profile

For completeness, the changes to the LBMA Board’s composition that did take place at the AGM, based on Board member resolutions that were put to a vote, are explained below:

Prior to the AGM last week, the LBMA Board consisted of the following members:

  • Grant Anwin – Asahi Refining (co-chairman of Board)
  • Paul Fisher (new chairman of Board)
  • Ruth Crowell – Chief Executive of LBMA
  • Steven Lowe – Bank of Nova Scotia-ScotiaMocatta (and vice-chairman of Board)
  • Peter Drabwell – HSBC Bank
  • Sid Tipples – JP Morgan Chase
  • Jeremy East – Standard Chartered
  • Robert Davis, Toronto Dominion Bank
  • Philip Aubertin – UBS (‘Observer’ status)
  • Alan Finn, Malca-Amit
  • Mehdi Barkhordar, PAMP

Notice that there were 5 LBMA Marking Making reps on the Board, namely from HSBC, JP Morgan, Scotia, Standard Chartered and Toronto Dominion Bank. There was also an ‘observer’ from full LBMA Market Maker UBS. There were 3 Full Member representatives, namely from PAMP, Malca-Amit (the security carrier), and Asahi Refining.

At the AGM on 27 September, there was a vote on the Full Member reps to the Board, of which there are 3 positions in the new Board. The existing Full Member reps had to stand down and they, and other Full Member candidates, could re-stand for election:

The voting results elected / re-elected the following:

  • Grant Angwin, Asahi Refining (and co-chairman of the Board)
  • Mehdi Barkhordar, PAMP
  • Hitoshi Kosai, Tanaka Kikinzoku Kogyo

Because there were 5 Market Maker reps already on the Board, and the new Board structure only allowed 3, there was also an election on which 3 of the 5 would remain: The results were:

  • Steven Lowe, Bank of Nova Scotia-ScotiaMocatta
  • Peter Drabwell, HSBC Bank
  • Sid Tipples, JP Morgan Chase

Noticeably, these 3 remaining reps represent what are probably the 3 most powerful bullion banks in the LBMA / LPMCL system, HSBC,  JP Morgan and Scotia, two of which, HSBC and JP Morgan, operate large commercial gold vaults in London, and all 3 of which operate large commercial COMEX approved gold vaults in New York City. The reps from HSBC and Scotia have also been very long serving members of the LBMA Management Committee / Board, having been re-elected in 2015.

The AGM voting results press release also added that:

“The other two Non-Executive Directors of the LBMA Board will be announced in the near future.”

Given the aforementioned profile of the new ‘independent’ LBMA Board Chairman and ex Bank of England senior staffer Paul Fisher, it will be intriguing to examine the new independence credentials of these 2 new Non-Executive Directors who will be announced in the near future. Will they be truly independent, or will they be former bullion bankers previously affiliated with the LBMA and the London Gold Market, or ex FCA people previously affiliated with the LBMA, or maybe a combination of the two.

As per the UK Corporate Governance Code:

There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board”. The board should also “state its reasons if it determines that a director is independent“. If an external search consultancy is used in finding either of the 2 new non-executive directors, there should be a “statement made as to whether it [the search consultancy] has any other connection with the company [the LBMA]“.

If 2 extra executive directors are also added to the Board from the LBMA’s staffers, to bring the number of Board directors up to 12, who will these 2 people be? My money in the first instance would be on the LBMA’s senior legal counsel (for regulatory reasons) and the LBMA’s communications officer. Whether the minutes of future or past LBMA Board meetings will ever be made public is another matter, but given the persistent secrecy that surrounds all important matters in the London Gold Market, it would probably be very naive to think that real LBMA communication via, for example LBMA Board meeting minutes, will ever see the light of day.

Blood Brothers: The Bank of England and the London Bullion Market Association (LBMA)

The London Bullion Market Association (LBMA) is a London-based, globally active, trade association for “the promotion and regulation of commerce relating to the London Bullion Market”. The “London Bullion Market” here collectively refers to the London Gold Market and the London Silver Market. The remit of the LBMA has very recently also been extended to cover the London Platinum and Palladium Market (LPPM).

While it is generally known to many, vaguely or otherwise, that the Bank of England has a vested ‘interest’ in the London gold market, the consistently close relationship between the Bank of England and the LBMA tends not to be fully appreciated. This close and familial relationship even extends to the very recent appointment of a very recently departed Bank of England senior staff member, and former head of the Bank of England Foreign exchange Division, Paul Fisher, as the new ‘independent‘ chairman of the LBMA Management Committee (a committee which has recently been rechristened as a ‘Board’). Note that at the Bank of England, the Bank’s gold trading activities fall under the remit of the ‘Foreign Exchange’ area, so should be more correctly called Bank of England Foreign Exchange and Gold Division. For example, a former holder of this position in the 1980s, Terry Smeeton, had a title of Head of Foreign Exchange and Gold at the Bank of England.

What is also unappreciated is that the same Paul Fisher has in the past, been the Bank of England’s representative, with observer status, on this very same LBMA Management Committee that he is now becoming independent chairman of. This is an ‘elephant in the room’ if ever there was one, which the mainstream financial media in London conveniently chooses to ignore.

As you will see below, the UK’s Financial Conduct Authority (FCA) also has a close, and again, very low-key but embedded relationship with this LBMA Management Committee.

threadneddle-st

At the ‘Behest’ of the Bank of England

The LBMA states in one of its Alchemist magazine articles, that its Association “was established at the behest of the Bank of England” in 1987, with Robert Guy of N.M. Rothschild, the then chairman of the London Gold Fixing, spearheading the coordination of the Association’s formation. Elsewhere, in a recent summary brochure of its activities, the LBMA states that it was “set up in 1987 by the Bank of England, which was at the time the bullion market’s regulator”, while a recently added historical timeline on the LBMA website, under the year 1987, states “LBMA established by the Bank of England as an umbrella association for the London Bullion Market.”

Established at the behest of“, “set up by” or “established by“, take your pick, but they all clearly mean the same thing; that the Bank of England was the guiding hand behind the LBMA’s formation.

Prior to the formation of the LBMA, and before a change of regulatory focus in 1986, the London Gold Market and London Silver Market had primarily followed a model of self-regulation, but the Bank of England had always been heavily involved in the market’s supervision and operations, especially in the Gold Market. Even reading a random sample of the Bank of England’s archive catalogue material will make it patently clear how close the Bank of England has always been to the commercial London Gold Market. For scores of years, the London Gold Market to a large extent merely constituted the Bank of England and the five member firms of the London gold fixing,  namely NM Rothschild, Mocatta & Goldsmid, Sharps Pixley, Samuel Montagu, and Johnson Matthey.

According to the 1993 book, “The International Gold Trade” by Tony Warwick-Ching, a combination of the advent of the Financial Services Act of 1986 which introduced supervisory changes to the UK’s markets, and the growing power of other bullion banks and brokers in the London precious metals market in the 1980s, acted as a combined impetus for the LBMA’s formation in 1987.

As Warwick-Ching stated:

“The LBMA was partly a response to a growing demand of concerns who were not members of the [gold] fixing for a greater involvement at the heart of the bullion market.” 

Morgan and J.Aron join the Party

Specifically, according to its Memorandum of Association, the LBMA was formed into a Company on 24 November 1987 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. This company is “a company limited by guarantee and not having a share capital”. Given their participation from the outset, presumably J Aron (now part of Goldman Sachs) and Morgan Guaranty (now part of JP Morgan Chase) were members of the ‘growing demand of concern‘ contingent alluded to by Warwick-Ching, who wanted a bigger say in the gold market’s inner sanctum.

lbma-signatories
Signatories to the original LBMA Memorandum of Association

The authorising subscribers of the original Memorandum, on behalf of their respective companies were, Robert Guy (Rothschild), Neil Newitt (J. Aron), Keith Smith (Mocatta & Goldsmid), Guy Field (Morgan Guaranty Trust), Les Edgar (Sharps Pixley), and John Wolff (Rudolf Wolff & Company), and they requested that “We, the subscribers to the Memorandum of Association, wish to be formed into a company pursuant to this Memorandum.” The original steering committee of the LBMA comprised five of the above, Robert Guy (Chairman), Guy Field (Vice Chairman), Keith Smith, John Wolff, Neil Newitt, as well as Jack Spall of Sharps Pixley, the father of Jonathan Spall (current consultant to the LBMA). Note that the incorporation filing at UK Companies House for the LBMA is dated 14 December 1987, about 3 weeks after the date listed on the original Memorandum of Association.

As early as April 1988, there were 13 “Market Maker” members and 48 ‘Ordinary’ members in the LBMA. The market maker members had to be ‘listed money market institutions’, which meant that they were institutions listed under section 43 of the Financial Services Act 1986 (on a list actually maintained by the Bank of England) who conducted  various transactions, including bullion market transactions, which were exempt from authorisation.

The Shadowy Observers: Bank of England

According to the LBMA website:

“The Bank of England has been intrinsically linked with the London bullion market since its foundation in 1694.” 

“Although the Bank isn’t a member of the LBMA, members of the LBMA hold gold custody accounts with the Bank”

“The Bank’s vaults hold approximately two-thirds of all the gold held in London vaults and as such plays a significant role in the liquidity within the London gold market. Customers are able to buy or sell gold to other customers, by making or receiving book entry transfers, with ownership transferred in the Bank’s back office system… The service provides a very important element of the gold market infrastructure in London, helping LBMA members and central banks to trade in a secure and efficient way.”

A Bank of England presentation to the 2013 LBMA conference in Rome, titled the-bank-of-englands-gold-vault-operations, gives a good overview of the Bank’s provision of book entry transfers to its central bank and bullion bank clients for the smooth running of the London Gold Lending Market, a market which is totally opaque and completely undocumented. In fact the Bank of England sits at the heart of this gold lending market.

Furthermore, on the clearing side,

“The London bullion clearing members role involves a considerable degree of direct client contact, electronic interfaces between the clearing members and close liaison with the Bank of England…”

From its very foundation in late 1987, the Bank of England was involved in the first steering committee of the LBMA and the activities of the Association. And to this day, Bank of England ‘observers’ attend LBMA Management Committee monthly meetings.

As a historical account of the LBMA’s 1987 formation states:

“From the Steering Committee’s inception, The Bank of England, which held responsibility for the supervision of the wholesale bullion market, was involved in the Association’s affairs and assisted in the drafting of the relevant Code of Conduct. Observers continue to attend Management Committee Meetings to the present day.”

This steering committee ultimately became the LBMA Management Committee, and, in the last few months, has become the LBMA ‘Board’. So the Bank of England is, for all intents and purposes, a highly active partner within the LBMA’s governance structure. As a confirmation of this point, at the LBMA annual general meeting in July 2014, the then chairman of the LBMA Management Committee chairman, David Gornall, of Natixis stated in his speech that:

“The LBMA is also privileged in having an observer from the Bank of England on the Management Committee. The Bank’s presence is of inestimable benefit to us.”

As to what inestimable benefit David Gornall was referring to, or in what way a Bank of England observer participates on the LBMA Management Committee, was not elaborated on. Nor can it be gleaned from any meeting minutes from LBMA Management Committee meetings, because such minutes are not made publicly available (See below).

For anyone not familiar with the concept of an observer on a corporate committee or board, it does not refer to someone who just sits there and observes, as the name may suggest. An observer refers to an attendee at the committee / board meetings who actively participates in discussions but who has no voting rights on committee / board resolutions. Observers can and do fully participate in meeting apart from voting. When voting occurs, they may (or may not) be asked to leave the room.

At the LBMA annual general meeting in June 2013, David Gornall, also chairman of the LBMA Management Committee at that time, revealed that not only was there a Bank of England observer on the Management committee, but there was also an observer from the UK financial regulator, the Financial Conduct Authority (FCA), on the same committee:

“The LBMA is also privileged in having observers from both the Bank of England and the FCA on the Management Committee. Their presence is of inestimable benefit to us.”

In fact, there are many such references within various LBMA related speeches. At the LBMA Precious Metals Conference in September 2013, Matthew Hunt of the Bank of England stated:

“More specifically on gold, even though we are not active traders in the market but we are a large custodian, some of the people in our team responsible for gold observation sit on the LBMA Management Committee and the LBMA Physical Committee as observers. Thus we retain a significant engagement with the gold market via that route.” 

Notably the Bank of England has a team of people responsible for gold observation, but not for the observation of other commodities such as zinc, lean hogs, live cattle, heating oil, soybeans, sugar, beaver pelts etc etc.

In March 2013, Luke Thorn of the Bank of England, while addressing a LBMA Assaying and Refining Seminar, stated:

“We are not a member of the LBMA, but we continue to play a key role in the London market. We have observer status on the Management, Physical and Vault Committees.” 

There are therefore Bank of England observers on 3 LBMA Committees. So, who are these Bank of England and FCA observer representatives? That is not an easy question to answer. There is no mention on the LBMA website’s committee page, and has never been any mention, of any Bank of England observers or FCA observers on the LBMA Management Committee (now Board). Nor are there any published minutes on the LBMA website of any LBMA Management Committee meetings, or the meetings of any of the other five LBMA sub-committees, such meeting minutes as would generally list the attendees of such meetings. More about the lack of minutes below.

Turning briefly to the physical and vault committees, the LBMA website has a listing for its physical committee and does mention that a Bank of England observer called Jennifer Ashton currently is on this committee.

According to the LBMA’s good delivery summary:

“The Physical Committee is made up of industry experts from the physical bullion market. It is responsible for monitoring, developing and protecting the Good Delivery List and works closely with sub-Groups such as the LBMA Referees and the LBMA’s Vault Managers Working Party

There is however, no formal listing of the Vault Manager ‘s group as a LBMA committee within the LBMA’s committee listings section. The only informative reference to such a committee on the LBMA web site is in the good delivery rules explained section, which states:

 “The Vault Managers Working Group, comprising the Bank of England and representatives from those LBMA members with their own vaulting facilities in London, meet regularly to consider issues relating to bar quality and vault procedures. Vault Managers are required to document every case of bar rejection and provide the associated information to the LBMA Executive”

Who is on this committee from the Bank of England, let alone from any of the other committee member companies is not disclosed.

Turning again to the identities of LBMA Management Committee observers, and going back slightly further to the LBMA Annual General Meeting on 20 June 2012, the Chairman, the omnipresent David Gornall of Natixis London Branch, stated:

“Talking of the Management Committee, let me remind you that we are very fortunate to have observers from both the Bank of England and the FSA on the committee. I would like to thank Trevor Stone and Don Groves for their participation in our affairs”.

From a speech at the 2009 LBMA annual conference by Michael Cross, the then Head of Foreign Exchange at the Bank of England, we learn that the Bank of England’s Banking Services area:

“is where Trevor Stone and his colleagues, who will also be known to many of you, work. The Banking Services area provides wholesale banking and custody services to a wide range of bank customers”

These ‘Banking Services’ functions at the Bank of England are similar to Central Bank and International Account Services (CBIAS) services offered to central bank customers by the New York Fed, and include gold custody services.

fca stairs

The Embedded Observers – FCA, Don Groves

On 30 September 2013, the ever-present David Gornall in another speech, this time to the LBMA annual conference in Rome, had this to say:

“We are grateful for the communication and feedback on our work from regulators, particularly that of own regulator the FCA. We are delighted to be joined by Don Groves of the FCA during tomorrow’s financial market regulation session. Don is a long-time observer on the LBMA Management Committee and we thank him for his participation and continued dialogue on our regulatory questions facing the London Market.”

The next day, on 1 October 2013, at the same conference, Ruth Crowell, the then Deputy CEO of the LBMA (and current LBMA CEO) introduced Don Groves as follows:

“With that, I am going to turn it over to Don Groves from the Financial Conduct Authority. Don is a technical specialist in the market contact area of the FCA’s Market Monitoring Department, where he is responsible for reviewing allegations of market misconduct, including market abuse and insider dealing.

Don specialises in the UK commodity markets and has been in market conduct for a number of years. We are also very privileged to have Don as an observer on the LBMA’s Management Committee.

Groves joined the FCA in 1999, and left the FCA in March 2015. While his LinkedIn profile has very detailed listings of his duties while at the FCA, there is no reference to the fact that he ever sat on the LBMA Management Committee, which strikes me as odd, unless that is a deliberate omission.  A previous version of Groves’ LinkedIn profile states:

I am considered to be an expert in Market Conduct matters and market abuse in the UK. I conduct project work pertaining to market conduct issues, contribute to the drafting of European legislation pertaining to market abuse and am an experienced public speaker. My main area of interest is the UK’s commodities markets.

Is it not odd that a FCA regulator was a long-time observer sitting on the LBMA Management Committee, but that the FCA has never had anything to say about the London Gold Market. Perhaps it’s because of the following, which gives the impression of a compliant and embedded regulator. As the FT wrote in October 2013 in an article titled “Gold and oil benchmarks face tighter regulation“:

“I don‘t want to give the impression that the UK is picking on the bullion market or anything else,” Mr Groves told the London Bullion Market Association precious metals conference in Rome. “But a consumer focus is what politicians are looking at…so there’s going to be more focus from us as regulators, on consumer issues.”

“However, [Groves] admitted the regulator did not know enough about physical markets and had launched a project to increase its knowledge. “We are going out as the FCA and learning about those markets,” he said.

What exactly the FCA was doing sitting on the LBMA Management Committee remains unclear, because, to reiterate, there are no publicly available minutes of the Committee’s meetings. At a guess, perhaps Groves was “learning about physical markets“, specifically the physical gold market.

Its also relevant to note that the Bank of England and FCA both crop up as observers when the LBMA holds various seminars, such as the seminar it held in the City of London on 24 October 2014 to showcase various solution providers that were competing to provide the infrastructure for the LBMA Gold Price fixing auction competition that was running at that time:

According to the LBMA press release, “Both the Bank of England and the Financial Conduct Authority attended the seminar as observers.

meeting-minutes

Where are the LBMA Mgt Committee Meeting Minutes?

Through the Non-Investment Products Code (NIPs), the Bank of England interfaces closely with the UK’s foreign exchange, money and bullion markets. The Bank of England explains NIPs as follows:

“The Non-Investment Products Code

This Code has been drawn up by market practitioners in the United Kingdom representing principals and brokers in the foreign exchange, money and bullion markets to underpin the professionalism and high standards of these markets.[1]

It applies to trading in the wholesale markets in Non-Investment Products (NIPs), specifically the sterling, foreign exchange and bullion wholesale deposit markets, and the spot and forward foreign exchange and bullion markets.”

Footnote [1]: Co-ordinated by the Foreign Exchange Joint Standing Committee, the Sterling Money Markets Liaison Group and the Management Committee of the London Bullion Market Association

Of the three, the  Foreign Exchange Joint Standing Committee is chaired and administered by the Bank of England. The Sterling Money Markets Liaison Group (now known as the Sterling Money Markets Liaison Committee) is also chaired and administered by the Bank of England.

On the Bank of England’s web site, there are very extensive informational resources about the Foreign exchange Joint Standing Committee and the Sterling Money Markets Liaison Committee, but surprise, surprise, there is nothing about the LBMA Management Committee. The Bank of England website offers publicly accessible documents of all meeting minutes of the FX Joint Standing Committee, including the representatives names of attendees and the banks and institutions represented at each meeting. These meeting minutes are highly detailed. See May 2016 FX Joint Standing Committee minutes as an example. Likewise, for the Sterling Money Markets Liaison Committee, the minutes of every meeting have been uploaded to the Bank of England website and are publicly accessible. These minutes are highly detailed. See for example the February 2016 Sterling Money Markets Liaison Committee meeting minutes.

However, the only tiny piece of information offered about the LBMA on the Bank of England website is as follows:

“The Bullion element of the NIPs Code is being replaced by a new code which will be established by the London Bullion Markets Association (LBMA). Further information on the bullion code can be found on the LMBA website.” 

Conveniently, the Bank of England passes the buck back to a web site (LBMA’s website) which is notoriously bereft of any information about the meetings of the LBMA Management Committee, the agendas of such meetings, the minutes of such meetings, and the attendees at these meetings. Why is this opacity allowed by the FCA and Bank of England when the foreign exchange and money market brethren have to submit to published minutes of their meetings, which in many cases involve the same banks and institutions? Could it be that discussion of the London Gold Market is highly secretive and a no-go area, and that the institutions involved have a free pass from the Bank of England and FCA to continue their discussions in private, away from the public eye?

Mark Carney and Paul FIsher
Mark Carney and Paul FIsher

 Pièce de Résistance

Arguably, the pièce de résistance of these Bank of England / FCA relationships with the LBMA Management Committee, is the fact that Paul Fisher, the newly appointed ‘independent‘ Chairman of the LBMA Board, formerly known as the LBMA Management Committee, has already previously been the Bank of England’s “observer” on the LBMA Management Committee.

In his speech to the 2004 LBMA Annual Conference in Shanghai, Fisher, the then Head of Foreign Exchange at the Bank of England, while discussing the “Non-Investment Products Code”, a code which regulates the bullion market, the foreign exchange market, and the wholesale money market, stated that:

“In the bullion section, the work is led by the LBMA and the whole is coordinated by the Bank of England. Partly on that basis, I am glad to be invited to the LBMA’s Management Committee meetings as an observer. I’d just like to pay tribute to the professionalism and integrity with which I see the Management Committee operating for the best interests of the global marketplace for bullion.”

One of the more bizarre parts of Fisher’s appointment, in my view,  is that when the LBMA announced in a press release last July (2016) that Fisher was being appointed as the new LBMA chairman, there was no mention of the fact that he had previously attended the LBMA Management Committee meetings. One would think that this would be a very relevant when considering the ‘independence’ of the appointment?

On hearing the news on 13 July about the appointment of the Bank of England’s Paul Fisher as ‘independent’ non-executive chairman of the LBMA Board, James G Rickards, the well-known gold author and commentator, tweeted the below, which succinctly sums up the elephant in the room, which the mainstream media chooses to ignore.

This appointment reinforces the link, or bridge, between the two entities, which is now even more set in stone than previously. It’s as if the Bank of England, at this time, has felt the need to put it’s man directly at the head of the LBMA. The timing may be relevant, but in what way is not yet clear.

A forthcoming article looks at this appointment of a former Bank of England Head of Foreign Exchange as the new ‘independent’ Non-Executive Chairman of the LBMA Board, considers what, if anything, is independent about the appointment given the extremely close relationship between the Bank of England and the LBMA, and examines the appointment in the context of the UK Corporate Governance Code, which now governs the Constitution and operation of the LBMA Board.

Deutsche Bank agrees to settle with Plaintiffs in London Silver Fixing litigation

In a surprising development, a group of plaintiffs in an antitrust litigation case against Deutsche Bank, HSBC Bank plc, the Bank of Nova Scotia, and UBS AG, have just announced that Deutsche Bank is in the process of negotiating the formal terms of a settlement agreement with the plaintiffs. Deutsche Bank, HSBC and Scotia are the only members of the London Silver Market Fixing Limited, a private company that had operated the London Silver Fixing auctions until mid August 2014, after which time that auction was superseded by the LBMA Silver Price auction.

The case (# 1:14-md-02573-VEC) is being overseen as a class action suit by federal judge Valerie E Caproni in the US District Court for the Southern District of New York. A large number of different plaintiffs had taken similar actions and the cases were consolidated into one class action suit. The plaintiffs allege in the suit that Deutsche Bank, HSBC and Scotia colluded to fix the price of silver futures by publishing false silver prices, so that they, as members of London Silver Market Fixing Company would benefit (from the price movements).

The full 1 page letter from the plaintiffs legal representatives Lowey Dannenberg, Cohan & Hart can be read here -> Deutsche letter to Caproni – 13 April 2016 – London Silver Fixing – Lowey Dannenberg Cohen Hart.

In a shocking development for the remaining defendants and the entire future of the current LBMA Silver Price auction, owned by the LBMA, administered in London by Thomson Reuters and calculated by the CME Group,  the letter states that:

“In addition to valuable monetary consideration, Deutsche Bank has also agreed to provide cooperation to plaintiffs, including the production of instant messages, and other electronic communications, as part of the settlement. In Plaintiff’s estimation, the cooperation to be provided by Deutsche Bank will substantially assist Plaintiffs in the prosecution of their claims against the non-settling defendants.

The plaintiffs include Modern Settlings LLC (of New York and Florida), American Precious Metals Ltd, Steven E Summer, Christopher Depaoli, Kevin Maher, Jerry Barrett, Rebeccca Barrett, KPFF Investment Inc, Don Tran, and Laurence Hughes.

The defendants include Deutsche Bank AG and various other Deutsche Bank entities, HSBC Bank Plc, HSBC Bank USA NA, HSBC Holdings Plc, and various other HSBC entities, The Bank of Nova Scotia, and various other Scotia entities, and finally The London Silver Market Fixing Ltd.

Coming on the heels of the unresolved and unexplained fiasco that is the LBMA Silver Price auction and the broken promises by the London Bullion Market Association (LBMA) about greater auction transparency and wider participation in the new Silver auction (see BullionStar blog “The LBMA Silver Price – Broken Promises on Wider Participation and Central Clearing“) it seems difficult to envisage that the LBMA Silver Price can survive in its current form, with its current participants, of which 2 of the remaining 5 participants are HSBC and Scotia. It will also be interesting to see what the Financial Conduct Authority (FCA) will say about this development with Deutsche Bank, especially in light of the fact that HSBC and Scotia are now participating in a ‘Regulated Benchmark’ (the LBMA Silver Price), where price manipulation can be criminally prosecuted.

London Silver Market Fixing Limited

The directors of the London Silver Market Fixing Limited company in the months before it ceased doing the London Silver Fixing auctions, were Simon Weeks of Scotia, Matthew Keen of Deutsche Bank, and David Rose of HSBC, with alternate directors of David Wilkinson of Scotia, James Vorley of Deutsche Bank and Peter Drabwell of HSBC. Since the above list was drawn up, UK Companies House filings show that, for London Silver Market Fixing Limited, David Rose ceased to be a director on 5 January 2016, David Wilkinson ceased to be a director on 16 October 2015, James Vorley ceased to be a director on 27 May 2014, and Matthew Keen ceased to be a director on 18 February 2014. According to those filings, it means that Simon Weeks of Scotia and Peter Drabwell of HSBC are still directors of the company that is a defendant in the above New York class action suite.

Surprisingly to some, Simon Weeks of Scotia is listed on the website of LBMA Silver Price administrator Thomson Reuters as still being a member of the LBMA Silver Price Oversight Committee. See list here. Furthermore, the same Simon Weeks is still listed as being a member of the LBMA Gold Price Oversight Committee, chaired by ICE Benchmark Administration. See list here.

Some of the above directors names will also be familiar to readers as directors of the London Gold Market Fixing Limited company, as profiled in the ZeroHedge article “From Rothschild To Koch Industries: Meet The People Who “Fix” The Price Of Gold“.