In March of this year, the London Bullion Market Association (LBMA) released a series of short videos about various aspects of the London precious metals markets and the role the LBMA claims to plays in those markets. In the words of the LBMA:
“LBMA, the Global Authority for Precious Metals, has released five short films highlighting the pivotal role it plays in the global wholesale precious metals market by setting standards and developing market services thus ensuring the highest levels of integrity, transparency and quality.”
While calling these short clips ‘films’ is a bit ludicrous, the series of videos – which are indeed very short – are as follows, and they can be seen on the LBMA website as well as on the LBMA’s YouTube channel:
‘Who We Are’ (2:33 minutes)
… in which Paul Fisher (LBMA Chairman) and Ruth Crowell (Chief Executive) “discuss the central role that LBMA plays in the global OTC precious metal markets. From setting standards on the purity, form and provenance of the bars to the way in which they are traded.”
How the Market Works – OTC Overview (1:14 minutes)
… in which Jonathan Spall, LBMA Head of Communications “looks at how LBMA is at the heart of the 24-hour a day global OTC precious metals market with its bespoke transactions, which are tailored for clients’ needs.“
[Note: This video is called ‘Market Infrastructure Key Elements’ on the LBMA website.]
Good Delivery (1:08 minutes)
…in which Neil Harby (Chief Technical Officer) “takes you through the stringent Good Delivery criteria – the de facto standard trusted across the world – that enable the global trade in gold and silver bars.“
… in which Sakhila Mirza (General Counsel) and Neil Harby (Chief Technical Officer) “discuss LBMA’s Precious Metals Integrity and Provenance initiatives, ensuring the responsible sourcing of precious metals and the protection and integrity of the global supply chain.“
The commentary of each of the videos is also in transcript form on the LBMA website, and given that the videos are so short, the transcripts are likewise bitesize. While the Good Delivery and Responsible Sourcing videos deal with technical aspects of the the LBMA’s interaction with precious metals refiners, it is the ‘Who we Are’ and ‘How the Market Works’ videos which are worth discussing in the context that neither answers the questions that their titles suggest.
Who we Are
With a title of ‘Who We Are’, a newbie viewer might think that the first LBMA video would provide some insight into who is behind the LBMA and what really goes on in the London Gold Market and London’s other precious metals markets. But not surprisingly, it does not.
Instead, the LBMA’s chief executive Ruth Crowell, and LBMA chairman Paul Fisher take turns in reciting sound bites that focus exclusively on aspects of the physical precious metals markets while ignoring the vast fractionally-backed paper (synthetic) gold market and the secretive London gold lending market.
LBMA video – Who We Are’ (2:33 minutes). Source: YouTube
The video begins with a claim that the LBMA is “the world’s authority for precious metals“. An authority appointed by whom? There is no mention in the video that the LBMA is a private organisation established in 1987 by the Bank of England, or that the original founding members were 6 bullion banks involved in the London Gold Market including Rothschild, J Aron (Goldman Sachs), and Morgan Guaranty (JP Morgan). For details of the LBMA – Bank of England symbiosis, see BullionStar article “Blood Brothers: The Bank of England and the London Bullion Market Association (LBMA)”
Ruth Crowell states that “our Board has an independent Chairman, as well as Non-Executive Directors, which ensure the independence of the governance of the LBMA.” But the chairman she is referring to is of course Paul Fisher, 26 years at the Bank of England, head of the Bank of England’s FX and Gold Division in the 2000s, and an observer on the LBMA Management Committee from at least 2004.
You would be hard pressed to find less of an insider than Fisher for the role of ‘independent’ chairman of the LBMA. But not surprisingly, the LBMA video makes no mention of Fisher’s background. As James Rickards commented at the time of Fisher’s appointment to the LBMA:
For details of what Rickards was referring to, see BullionStar article “From Bank of England to LBMA: The ‘independent’ Chair of the LBMA Board“. In the video, Crowell’s use of the words ‘Non-Executive Directors’ is also misleading since, apart from Fisher, there is only one non-executive director on the Board, Andrew Quinn. Nor does she mention that the LBMA Board still contains a Bank of England observer, namely Andrew Grice.
Crowell states that ‘there are also elected Market Directors who sit on the Board and ensure the market is steering the development of the Association‘, but fails to say that half of these directors, the market makers, are from the powerful bullion banks which dominate the LBMA, such as JP Morgan and UBS.
Nowhere in the ‘Who we Are’ video does it mention that the LBMA system trades vast -quantities of unallocated fractionally-backed synthetic gold positions, that the LBMA publishes no trade reporting of any trades in the London market, that the LBMA Gold and Silver auctions are dominated by its powerful bullion bank members, that the LBMA oversees the secretive London Precious Metals Clearing Limited (LPMCL) clearing cartel for paper gold and silver, and that there is a hidden gold lending / gold swapping market in London between central banks and bullion banks, facilitated by the Bank of England.
Instead, there are multiple references to physical bars and real metal, something that is very thin on the ground in the world of the LBMA, but that gives the impression of a predominantly physical precious metals market, when in fact the opposite is the case. For example, the video refers to the following:
‘the standard-setting organisation that defines how precious metals are refined’,
‘the quality and the integrity of the metal’,
‘mined from rock in the ground, being refined, being transported’,
‘the appearance and the shape of the bars themselves’
‘physically inspect each bar as it comes through the door’
As per usual with the LBMA, this ‘Who we Are’ video also makes claims that the activities of the LBMA promote a ‘transparent market‘, when the exact opposite is the case. This must be some kind of inside joke that they insert into all LBMA media publications, i.e. that the LBMA promotes transparency. For details on how opaque and non-transparent the London Gold and Silver Markets that the LBMA oversees really are, see ‘The Gold Market – Where Transparency means Secrecy’.
The Transcript of the LBMA’s ‘Who we Are’ video can be read below:
Ruth Crowell: The LBMA is the world’s authority for precious metals.
We’re the standard-setting organisation that defines how precious metals are refined, as well as traded around the world. It’s our job to ensure the quality and the integrity of the metal itself, as well as the market participants.
Paul Fisher: Our members are leading firms involved in the full lifecycle of precious metals. From being mined from rock in the ground, being refined, being transported, being stored and then finally being sold, whether as a bar or as a piece of jewellery. These miners, refiners, banks, trading houses, ETF providers, security companies, vaults, even central banks must follow LBMA standards for the benefit of customers around the world.
RC: Our Board has an independent Chairman, as well as Non-Executive Directors, which ensure the independence of the governance of the LBMA. But they’re also elected Market Directors who sit on the Board and ensure the market is steering the development of the Association. Beyond that we have many sub-committees and working groups, in which market participants can be engaged and steering everything that LBMA does.
PF: We provide quality control for the metal produced and we set high standards for business conduct. And we are also the voice of the market for governments, regulators and investors.
RC: We do that through the Good Delivery List and the Global Precious Metals Code. The Good Delivery List defines what’s acceptable when it comes to the appearance and the shape of the bars themselves. It’s also considered the de facto international standard for gold and silver.
The Global Precious Metals Code is a code of conduct which promotes a fair, effective and transparent market. It provides market participants with principles and guidance, to uphold high standards of business conduct. All of this creates confidence in the market for all participants.
We work closely with the commercial vaults, as well as the Bank of England. And the vaults only accept bars which meet the Good Delivery Standards. They also physically inspect each bar as it comes through the door, to make sure that it’s up to standard. As such, they act as the gatekeepers of the Market.
PF: We’re also leading the world in Responsible Sourcing, thanks to the strength of our Responsible Sourcing Programme.
RC: Our aim is to maintain integrity, as well as proactively develop the Precious Metals Market. That means we are always looking forward and anticipating any future needs and requirements.
How the Market Works
For whatever reason, the LBMA decided to split the ‘How the Market Works’ (the London OTC precious metals Market) into 2 separate videos, each of which is very short, lacking in any substance, and whose content is practically pointless.
Viewer discretion is advised because it will surely lead to disappointment for anyone wanting to find out how, for example, the London OTC Gold Market works. Despite the titles, this duo of videos will not tell you, and they are so short that the transcripts of each video are not more than a few sentences long. The entire exercise is a missed opportunity to properly explain details of how the London market really works.
LBMA video – How the Market Works 1 (1:14 minutes). Source: YouTube.
The first video is titled “How the Market Works – OTC Overview” and is just 1 minute 14 seconds long. The second video is titled “How the Market Works – Five Elements” (with an alternative title of “Market Infrastructure Key Elements”, and this is just 2 minutes long. Both videos are narrated by Jonathan Spall, LBMA’s Head of Communications.
The first of these videos claims to “look at how the LBMA is at the heart of the 24-hour a day global OTC precious metals market with its bespoke transactions which are tailored for clients’ needs” but at a mere one and a quarter minutes long, how is this possible even if the will was there? The second of these videos aims to “highlight how the LBMA plays a crucial role in the five main elements that allow the smooth functioning of the global OTC market.”
The (exceedingly short) transcript of the How the ‘Market Works – OTC Overview’ video is as follows:
Jon Spall: Internationally, precious metals are traded on a 24-hour basis. Either for immediate delivery, known as spot, or for a date in the future. LBMA accredited refiners annually refine approximately 5,000 tonnes of gold and more than 30,000 tonnes of silver.
Good Delivery Bars of gold and silver are traded globally in what is referred to as Over The Counter or OTC market. Approximately 25 billion dollars worth of gold is settled each day in the global OTC market, with London at its centre. This means all transactions are conducted between two parties without the need for an exchange.
An OTC market offers flexibility, in that two parties can negotiate bespoke transactions that precisely meet the needs of the customer. For example, in terms of price, amounts to be bought or sold, and time to maturity. It maintains confidentiality and means that all risks, including those of credit, exist only between the two counterparts. Typical market clients include miners, central banks, governments, fabricators, investors, hedge funds and refiners.
Despite its title, this video does not discuss how the OTC market works. The commentary, short that it is, opens with a reference to gold and silver refiners and good delivery bars, which are a very small percentage of trading in London. There is no reference to the fractionally-backed cash-settled synthetic gold claims which make up the vast bulk of trading.
The reference to approx 25 billion dollars worth of gold being settled each day is actually referring to the value of paper gold that is cleared each day by the secretive London Precious Metals Clearing Limited (LPMCL) run by five bullion banks (e.g. 18.7 million ounces of gold equivalent cleared each day in London during March 2018). There is no mention in the video of gold or silver trading statistics since this data is still off-limits to the public despite years of promises from the LBMA that it would publish such information.
This video has no reference to the secretive gold lending market between central banks and bullion banks, a market where outstanding ‘gold deposits’ owned by central banks are constantly passed around between the LBMA bullion banks and never closed.
How the Market Works – Part Deux
The second ‘How the Market Works‘ video, covering “five key market infrastructure elements” of the market is as lacking in detail and revelations as the first, and is again narrated by Jonathan Spall. These ‘key elements’ are LPMCL clearing, good delivery, vaulting, pricing, and unallocated accounts.
How the Market Works – Five Elements (2:01 minutes). Source: YouTube
The secretive LPMCL gets a one line mention with no explanation that its a private company run by JP Morgan, HSBC, UBS, ScotiaBank and ICBC Standard that keeps the either fractionally-backed London gold market afloat. Luckily, you can read about the LPMCL here in ‘Spotlight on London Precious Metals Clearing Limited‘.
Spall says that ‘there are a number of vaults in the London area operated by eight companies, including the Bank of England, which physically hold either gold or silver bars or both’, but this is as far as it goes and there is no discussion of the vault operators or the vault locations. For those interested, some of the vaults locations can be viewed here, here and here, and of course the Bank of England vaults here. While ‘London is home to one of the world’s largest physical holdings of gold’ as the video says, it does not mention the fact that most of this gold is held by central banks and ETFs, and that the bullion bank float of gold underpinning the entire market is quite low. See ‘LBMA Gold Vault Data – How low is the London Gold Float?‘ for discussion of this issue.
On the issue of pricing, the coverage is again lacking in any substance and fails to mention how the bullion banks control this aspect of the market too. There is no reference to price discovery of the international gold price, discovery which predominantly is based on the interactive trading of gold derivatives and cash-settled OTC gold positions between the London OTC Gold Market and COMEX. See ‘What sets the Gold Price – Is it the Paper Market or Physical Market?‘ for details.
And instead of explaining and coming clean about the fact that nearly all trading in the OTC market is in the form of unallocated precious metals positions that are merely claims against bullion banks and that the unallocoated system lies at the heart of the London market, the video merely says that ‘Most OTC transactions settle via unallocated accounts. The customer does not own specific bars, but has a contractual claim against the clearer.’
The video ends with the audacious claim that:
“The LBMA is at the very heart of this global market, providing standards, promoting transparency, instilling confidence, and thus maintaining integrity for all.”
That the LBMA did not make films (or videos) really explaining who runs the show in the London Gold Market, or how that market really works, is not surprising. Anyone acquainted with the writings of ANOTHER will understand this, when he wrote the following lines, which in these circumstances, appear particularly apt:
“Did you think that the high powered world of the LBMA would operate in a fishbowl for all to see? We cannot take what is on the outside as evidence for what is on the inside.”
Likewise, we cannot take what is in these LBMA videos as evidence of what goes on in the London Gold Market, at the Bank of England, in LBMA Board meetings, or in the dealings of the high powered bullion banks that control the London Gold Market.
On 29 January 2018, the Commodity Futures Trading Commission (CFTC) Division of Enforcement together with the Criminal Division of the US Department of Justice and the FBI announced criminal and civil enforcement actions against 3 global investment banks and 5 traders for involvement in trade spoofing in precious metals futures contracts on the US-based Commodity Exchange (COMEX). COMEX is by far the largest and most active futures exchange in the world for trading precious metals futures including gold futures contracts and silver futures contracts.
The CFTC is bringing the charges under what it calls “commodities fraud and spoofing schemes“. Spoofing of orders is illegal under the US Commodity Exchange Act. The 3 banks in question are Deutsche Bank, UBS, and HSBC. As part of the CFTC’s prosecution, Deutsche Bank is being fined US$ 30 million, UBS US$ 15 million, and HSBC US$ 1.6 million.
The CFTC’s Order against the banks maintains that from at least February 2008 to at least September 2014, Deutsche Bank traders were involved in a scheme to manipulate precious metals futures prices by spoofing orders for those futures contracts, and also by extension that this spoofing triggered customer stop-loss orders.
Similarly, the CFTC Order says that UBS traders on the UBS precious metals spot trading desk were involved in spoofing orders in gold futures and silver futures contracts from January 2008 to at least December 2013, and likewise triggering customer stop-loss orders.
In the case of HSBC, the CFTC says that HSBC, through its New York office, spoofed orders in gold futures and other precious metals. However, the CFTC Order does not specify the period under which HSBC is accused of engaging in such spoofing. This may be because, according to the CFTC, HSBC cooperated during the CFTC’s investigation and offered to settle. But overall, the spoofing by one or more of the named banks was said to have run from January 2008 to at least September 2014.
As part of the process, the CFTC also announced civil enforcement actions against precious metals traders Andre Flotron formerly of UBS, and James Vorley and Cedric Chanu formerly of Deutsche Bank for what the CFTC describes as “spoofing and engaging in a manipulative and deceptive scheme in the precious metals futures market“.
According to the Department of Justice (DoJ) press release on the matter, Vorley (a UK citizen) and Chanu (a French citizen) are being charged in a criminal complaint in the Northern District of Illinois court with “conspiracy, wire fraud, commodities fraud, and spoofing offenses in connection with executing a scheme to defraud involving both solo and coordinated spoofing on the COMEX“. During that time, Vorley was based in London with Deutsche bank and Chanu was based in London and Singapore with Deutsche Bank.
Flotron is charged in an indictment in the District of Connecticut for “conspiracy to commit spoofing, wire fraud, and commodities fraud” during the time when he worked at UBS as a precious metals trader on the UBS trading desks in Zürich, Switzerland, and Stamford, Connecticut USA.
The DoJ statement also names Edward Bases and John Pacilio, and says that Bases and Pacilio are charged in a criminal complaint with “commodities fraud in connection with an alleged scheme to engage in both solo and coordinated spoofing on the COMEX“. Bases was at Deutsche Bank until June 2010 at which point he moved to a unit of Merrill Lynch. Pacilio worked for a unit of Merrill Lynch during 2010 and 2011 when some of his trade spoofing is alleged to have taken place.
Note that according to the DoJ “a complaint, information, or indictment is merely an allegation, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law“.
For an excellent explanation of some of the spoofing activities that these traders are accused of have engaged in, please see the recent article ‘US Gold & Silver Futures Markets: “Easy” Targets‘ by specialist researcher Allan Flynn posted on the BullionStar website and on his own ‘COMEX We have a Problem’ website here.
Spot, Fixes and Futures in the Gold and Silver Markets
While gold and silver futures trading is one side of the wholesale precious metals markets, it is not the full picture, because as well as COMEX, the over-the-counter (OTC) London Gold and Silver Markets are key gold and silver trading venues for these same investment banks, as well as key components of gold and silver price determination. And central to the London Gold Market and London Silver Market are the daily fixing auctions for gold and silver.
The investment bank precious metals traders who trade gold and silver in the wholesale market do so not just through exchange traded futures contracts or OTC contracts, but both. And they constantly trade across the London and COMEX ‘venues’ at the same time. In both gold and silver, predominant price discovery for the international gold price and for the international silver price occurs in the London OTC Market and on COMEX.
Price movements in one location, for example on COMEX futures, get instantly reflected in the London OTC spot quotes, and vice versa. Therefore price quotes in the London market, including opening prices and round prices for the London daily Fixings can be influenced by moving the futures prices. For example, if there is collusion among traders to push the futures prices lower so as to benefit other traders who have positions based on Fixing levels, this can be done by the trader from one bank pushing the futures price lower, while a trader at a second bank benefits from this movement in terms of his exposure to the Fixing price which has also moved lower. Such price movements are documented in the ‘Final Notice’ that the UK Financial Conduct Authority (FCA) levied against Barclays Bank and one of its precious metals traders in May 2014 (See below for details).
As highlighted below, the majority of the banks mentioned in the CFTC fines were also central to these gold and silver fixings, and astoundingly one of the traders mentioned above and subject to the CFTC and DoJ actions, James Vorley, was even a director of both of the private companies that oversaw the London Gold and Silver Fixings.
With the CFTC / DoJ fines, complaints and indictments against the banks and their traders for manipulating gold and silver futures prices now in the public arena, the question of manipulation of the London Gold and Silver fixing auctions now comes back in focus, and the question now needs to be asked – where are the regulators in investigating (and perhaps prosecuting) banks and traders for gold and silver fixings manipulation?
Because even a superficial look at the banks and traders, the trading desks and their operations, the trader chat room transcripts, and the connections between the futures and fixings at the time of the fixings should give even the most dullard regulators and prosecutors pause for thought.
Deutsche Bank and HSBC – New York Futures and London Fixings
As a reminder, the London Silver Fixings were a daily auction of (paper) silver at midday in London that operated up until August 2014 when they were replaced by the LBMA Silver Price auction. The London Gold Fixings were a twice daily auction of (paper) gold at 10:30 am and 3:00 pm in London that operated up until March 2015 when they were replaced by the LBMA Gold Price auction.
The London Silver Fixings were administered by a private company called London Silver Market Fixing Ltd (LSMFL) whose three members were Deutsche Bank, HSBC and the Bank of Nova Scotia. Deutsche Bank, HSBC and Bank of Nova Scotia were also the only 3 entities allowed to take directly participate in the silver fixings, and each had become a member of the silver fixings by acquiring one of the 3 traditional companies that had run the fixings – ScotiaBank acquired Mocatta in 1997, Deutsche acquired the old Sharps Pixley in 1993, and HSBC had acquired Samuel Montagu and rebranded as HSBC during its 1990s reorganisation.
The London Gold Fixings were administered by a private company called London Gold Market Fixing Ltd (LSMFL) which had 5 members, namely Deutsche Bank, HSBC, Bank of Nova Scotia, Barclays, and Societe Generale (SocGen). Only these 5 banks were allowed to directly participate in the gold fixings. These 5 banks were also the only banks in the gold fixings from 2004 all the way to 2014.
So from “January 2008 to at least September 2014“, the period stipulated by the CFTC that covers manipulation of gold and silver futures, the same banks, i.e. Deutsche Bank and HSBC, were at all times active members of the daily gold and silver fixings in London.
Even more amazingly, James Vorley, the Deutsche Bank trader who is the subject of the CFTC / DoJ accusation of “conspiracy, wire fraud, commodities fraud, and spoofing offenses” on COMEX was a Director of both London Silver Market Fixing Ltd and London Gold Market Fixing Ltd from September 2009 until May 2014, which is all the way through the period of ‘at least February 2008 to at least September 2014’, when Deutsche Bank precious metals traders were involved in a scheme to manipulate precious metals futures prices by spoofing orders for those futures contracts. You couldn’t make this up!
Vorley, along with Deutsche’s Kevin Rodgers resigned from the London Gold and Silver Market fixing companies in May 2014, when Deutsche Bank dropped out of the daily gold and silver fixing auctions. Matthew Keen of Deutsche Bank had previously resigned as a director of the gold and silver fixing companies in January 2014 when he left the bank and was replaced by Rodgers who was Global Head of Foreign Exchange at Deutsche Bank at that time. But curiously, Rodgers also left Deutsche at the end of April 2014.
There is plenty written elsewhere on how the LBMA maintained its stranglehold over the London gold and Silver reference price benchmarks when the old tarnished fixings were no longer viable and the bullion banks running those fixings had to quickly pretend to distance themselves from the fixing while at the same time maintaining total control over the new versions of the auctions. But in summary, in August 2014, when the new LBMA Silver Price auction was launched by the LBMA with just 3 bank members, HSBC and Bank of Nova Scotia continued as 2 of these members. When the LBMA Gold Price auction was launched in March 2015, the existing incumbents of the old Gold Fixings namely Barclays, HSBC, Bank of Nova Scotia and SocGen, rejoined the new auction along with its new members, UBS and Goldman Sachs.
Barclays Mini-Puke: Gaming the Gold Fixing
In May 2014, the UK Financial Conduct Authority (FCA) fined Barclays Bank £26 million for systems and controls failings and conflicts of interests in relation to the London Gold Fixing auctions of which it was one of the 5 bullion bank participants. According to the FCA, these failings persisted from 2004 (when Barclays joined the fixings) until 2013. The year 2004 was also when the gold and silver fixings stopped being conducted in a room in Rothschilds offices and began to be conducted remotely.
As part of the May 2014 fines of Barclays, the FCA also fined Daniel Plunkett, one of the Barclays London-based precious metals traders, £95,000. While the fine for Plunkett was specifically to penalise his placement and cancellation of orders which were intended to manipulate prices within the rounds of the fixing, the commentary supplied by the FCA on the case is interesting in that it shows how gold futures price movements external to the fixings also very much influenced the fixing round prices during the auction that the FCA penalised Plunkett for.
At the start of the 28 June 2012 Gold Fixing at 3:00 p.m., the Chairman proposed an opening price of USD1,562.00. However, the proposed price quickly dropped to USD1,556.00, following a drop in the price of August COMEX Gold Futures (which was caused by significant selling in the August COMEX Gold Futures market, independent of Barclays and Mr Plunkett).
You can see here the interactions and influences that the COMEX gold futures prices movements had on the opening price that the Gold Fixing Chairman proposed to the begin the auction with. And now that we know there was collusion between the various precious metals traders across the bullion banks, it is not difficult to accept that the traders from one bank could be moving the futures lower to not only help themselves but as a favour to precious metals traders at other cartel banks that were also involved in the collusion schemes.
Banging the Fixes – Chat Room Transcripts from Class Action Suits
But there is also direct evidence of trader collusion to manipulate prices in the London gold and silver fixings in the form of trader chat room transcripts. This is not speculation, it is fact. Facts that have been documented in class action proceedings in the New York courts brought by plaintiffs against the bank member of the London Gold and Silver Market Fixing companies.
Again we turn to Allan Flynn, who was probably first to call attention to the manipulation of the silver market by these same banks with his extensive and succinct coverage of the evidence from the New York class action suits in his 8 December 2016 article ‘How to Trigger a Silver Avalanche by a Pebble: “Smash(ed) it Good”‘ posted on the BullionStar website and on Allan’s website here, and in his follow-up article from 14 December 2016 titled “When Gold Pops 1430 We Whack It“, posted on his website and on the ZeroHedge website here.
In the silver class action suit against Deutsche Bank, HSBC, the Bank of Nova Scotia, and UBS, Deutsche agreed in April 2016 to settle with the plaintiffs and to produce“instant messages, and other electronic communications” as part of the settlement. See BullionStar article ‘Deutsche Bank agrees to settle with Plaintiffs in London Silver Fixing litigation‘for full details of the April 2016 announcement.
Attorneys for the plaintiffs subsequently, as Allan Flynn documented “submitted samples of dozens of chat room messages between UBS and Deutsche Bank“, indicating “many efforts to artificially suppress gold prices, and to manipulate gold prices at the time of the Fixing.”
“One chat see’s a Deutsche Bank trader confirming with a UBS trader his trading had indeed influenced the Gold Fix: ‘u just said u sold on fix.‘ The UBS traded replied ‘yeah,’ ‘we smashed it good.‘
Another transcript example contained the following exchange:
“During a trading day which had been less successful the Deutsche Bank trader assured his opposite trader from Bank of Nova Scotia that ‘at least the fix will be fun . . . make it all back there!!!!!!‘”
So here we have precious metals traders actually colluding to artificially move the price levels on the fixings.
Technology Facilitated the Manipulation of the Fixes since 2004
In June 2015, I wrote an article on the BullionStar website titled “The pre-2015 London Gold Fixings – More technologically advanced than reported” in which I set out substantial evidence that the former Gold Fixings up until March 2015 were not some archaic dial-in telephone based auction using paper and pencils to set the price as the mainstream financial media choose to believe, but that the auctions since 2004 in both gold and silver employed sophisticated web-based technology apps, trading software, messaging apps and chat apps, all of which could also facilitate collusion and price manipulation across multiple trading desks in ‘rival’ banks.
When Rothschild pulled out of the Gold Fixings in 2004, Barclays took Rothschild’s place and the fixings moved to a remote model where traders from each of the 5 members banks of the Gold Fixing coordinated remotely instead of meeting twice a day face to face. At the same time, the fixing members introduced this new communication technology to assist their twice daily fixes.
In November 2014, the Swiss financial regulator FINMA announced that an investigation of UBS had found manipulation and attempted manipulation of by UBS Zurich employees of forex and precious metals benchmarks. At the time, Mark Branson, FINMA’s CEO said that “we have [also] seen clear attempts to manipulate fixes in the precious metals markets.”
According to FINMA, it found that chat groups between traders at multiple banks were central to how the manipulation was coordinated:
“In the improper business conduct in foreign exchange and precious metals trading, electronic communication platforms played a key role. The abusive practices were evidenced in the information exchanged between traders in chat groups. FINMA examined thousands of suspicious chat group conversations between traders at multiple banks.“
The introduction of new technology and chat apps from 2004 is also highly correlated with academic research findings showing “a decade of manipulation” of the gold fixing from 2004 until 2013. As highlighted in the Bloomberg article “Gold Fix Study Shows Signs of Decade of Bank Manipulation“
“Abrantes-Metz and Metz screened intraday trading in the spot gold market from 2001 to 2013 for sudden, unexplained moves that may indicate illegal behavior. From 2004, they observed frequent spikes in spot gold prices during the afternoon call. The moves weren’t replicated during the morning call and hadn’t happened before 2004, they found.
Large price moves during the afternoon call were also overwhelmingly in the same direction: down.
On days when the authors identified large price moves during the fix, they were downwards at least two-thirds of the time in six different years between 2004and 2013. In 2010, large moves during the fix were negative 92 percent of the time, the authors found.
There’s no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards, Abrantes-Metz said in a telephone interview this week.”
Well, there is an obvious explanation. The downward price movements identified by Abrantes-Metz and Metz started in 2004 because that’s when the London gold fixings went to a remote model and technology including chat apps was introduced. The suspicious price movements were more prevalent in the London afternoon because that was also the New York morning where COMEX gold futures were more active and where New York based traders could force the futures down causing a corresponding drop in the opening prices and round prices in the fixing auctions.
Prosecuting banks and traders for price manipulation on COMEX futures while ignoring the far larger London market and its gold and silver fixings looks like a job half done. Trading desks and their traders are agnostic to trading venues and with interlinked markets, the COMEX and the London Fixings are two sides of the same coin.
With blatant evidence that the same banks and traders were involved in both markets, and with actual chat room transcripts now confirming that precious metals traders across multiple banks were colluding in fixing price manipulation, then why are their no active regulatory investigations of trader manipulation of the London Gold and Silver Fixings?
Is it because of lack of jurisdictional authority or are the regulators and criminal enforcement agencies such as the FCA, DoJ, FINMA and the German BAFIN too terrified of opening a can of worms into the huge liabilities that would arise from proving a decade long criminal manipulation of the London Gold and Silver price benchmarks and that were used throughout the world the value of everything from ISDA contracts to institutional precious metals products, to ETFs.
This is a guest post by Allan Flynn, specialist researcher in aspects of gold and silver.
BullionStar does not endorse or oppose the opinions presented but encourages a healthy debate.
Following news coverage of the charging of five precious metals traders and three banks in January, Commodities Futures Trading Commission and Department of Justice documents reveal a global criminal cabal of 16 traders operating in at least four major financial institutions between 2008 and 2015 to defraud COMEX gold and silver futures markets.
Of the many examples published, one reveals a UBS AG precious metals trader spoofing sell orders to push down the price of gold futures on September 6, 2011, the day the gold market attained, and commenced a lengthy retreat, from its historic peak of US $1,923.70.
Jury trials are sought for Cedric Chanu and James Vorley of Deutsche Bank, Edward Bases and John Pacilio of Merrill Lynch Pierce Fenner & Smith, and Andre Flotron of UBS AG. The traders are indicted with multiple offences including spoofing, manipulation and attempted manipulation of the precious metals futures market. FBI investigations found many of the traders had placed “thousands” of fake orders over “hundreds” of occasions during the relevant period. Some even more.
Enforcement orders totalling $46.6 million were issued to Deutsche Bank, UBS AG and HSBC. Bank of America Merrill Lynch, parent company of Merrill Lynch Pierce Fenner & Smith, although implicated by the alleged actions of its subsidiaries traders, has not been sanctioned.
The agencies said traders placed genuine orders to buy or sell and concurrently huge opposite spoof orders to present a false picture of supply or demand. Other traders were thus tricked into accepting the genuine orders at prices favourable to the manipulators. The spoof orders being placed far enough away from the current price to safeguard against their actual execution were then swiftly cancelled. The traders had the ability using spoofing to move prices up or down.
By correlating details among multiple court documents and public sources it has been possible, with a high degree of certainty, to match the sample chats provided with the indicted traders, and banks they worked for.
Deutsche Bank trader and Informant David Liew thought so highly of UBS co-conspirator, Trader F, according to Bloomberg’s disclosure of a sealed indictment, that he called him “The Legend.”
In a teaching moment with a colleague about best practice for spoofing, on April 30, 2010, The Legend instructed:
“u gotta be quick with spoofs cause everyone else knows the trick too … except for smaller shops … and algos of course.”
Then contrasting the ease at which spoofing could be pulled off in years past:
“u know i use[d] to do that is Stamford so i can get filled … i’d be short 10k, show a bid for 35 lots … mkt chases it … i shift it lower … and lower.”
Trader F, as CFTC UBS Orders name, worked hard spoofing precious metals futures at UBS, appearing in nine of 12 manipulation samples listed in the CFTC UBS AG Orders, seven of which involve David Liew, Deutsche Bank informant.
Until further details emerge, the identity of The Legend among four UBS traders, two unnamed, remains unclear. While the regulators describe four UBS traders as involved in the scandal, they currently seek a jury trial for only one.
Veteran UBS precious metals specialist ‘Andy’ Flotron’s term at the trading desk predates the bank itself.
He began trading gold and silver in 1982 with the Swiss Banking Corporation, Zurich. While still at the SBC precious metals desk, the corporation amalgamated with the Union Bank of Switzerland becoming UBS AG in 1999.
In over 15 years at UBS, the 55 year old worked two stints each in Zurich and Stamford. In addition to trading, he held also managerial and training responsibilities until January, 2014, when placed on leave from Zurich following an internal investigation.
As the FBI investigators found, a hallmark of Flotron’s spoofing operation became placing of fake orders in quantities such as 22, 33, 44, 55, or 99 contracts by “automated trading software which had the ability to … place, modify, and cancel multiple orders nearly simultaneously.” He undertook this activity with up to 3 other UBS co-conspirators, directing one in particular.
An FBI affidavit describes how from July, 2008, Flotron mentored a new UBS employee in the art of spoofing. Trader#1 sat with Flotron for 2 months at his trading desk in Stamford, Connecticut “shadowing and observing” him with the aim of then transferring to the UBS precious metals desk in Singapore. Trader#1, now the former spoofing Legend, is assisting the FBI investigation in return for immunity from prosecution.
In one example of his larger spoofings, allegedly aiming to manipulate the market down to his own favourable purchase orders on October 17, 2013, Flotron placed and then withdrew three large fake sell orders for futures worth $30.5 million in gold over a 2.5 minute period.
The largest of his fake orders was placed, a parcel of 99 lots worth $13 million in gold, immediately doubled the volume of sell orders compared to buy orders, while “never intending” it to be executed, the indictment says. The multi-million dollar spoof order was sufficient to immediately bring sellers down from $1319.30 to $1,319.20 filling several of the trader’s partially concealed 1-contract bids totalling $1.5 million gold value.
Sometimes the traders could move COMEX much more.
On January 28, 2009, Deutsche Bank’s Edward Bases allegedly shifted the gold futures price two dollars in one attack alone by placing and quickly cancelling a number of large bids in order to “help” his then colleague Cedric Chanu’s resting orders fill.
As a post-spoof chat shows, the technique and camaraderie bore a strong semblance to computer gaming.
Bases: “so glad i could help…got that up 2 bucks…hahahahah.”
“that does show u how easy it is to manipulate so[me]times.”
Chanu: “yeah yeah of course.”
Bases: “that was alot of clicking”
Chanu: “basically you tricked alkll [sic] the algorythm”
Bases: “good man. Correct.i know how to “game” this stuff…”
Chanu: “THAT IS BRILLIANT.”
Bases: “I just dotn have the time to do it.. but i do it a lot in the aftermakete. i f..k the m[ar]k[e]t around a lot…not alot of people…had it figgied out…thats [sic] why i love electronic trading.”
Bases: “im just glad we got you out…”
Besides helping each other achieve better than market prices, the Deutsche Bank traders helped UBS traders and traders from another global financial institution, Bank of America Merrill Lynch. One of the traders, at different times, worked for two of the banks.
Edward Bases was a metals tough guy. A 25-year career trading gold and silver in New York for the world’s largest banks, including a couple of years at Bear Sterns, gave him some trading bristle.
The era of floor trading in commodities and stocks was coming to an end when Bases departed Deutsche Bank for Bank of America Merrill Lynch in June, 2010. There, as he reminisced with a UBS trader in 2015, he was already a formidable spoofer in the pits long before he clicked his way to wealth at Deutsche Bank.
UBS Trader #2: “when you were a younger man where you also this angry?”
Bases: “In a different way”
“I was a tyrant” “Different world” “U called out dealersla” “Sppoofed the mkt” “Lined people up” “It was very physcial and emotional” “I was very good” “At it”
At the trading desk as on the floor, when extra muscle was required to move prices Bases strong-armed it.
Paraphrasing the indictment: on January 28, 2009, his then colleague Cedric Chanu placed an iceberg order to sell 170 contracts with only one visible lot at $892.50. Five minutes later to help him out, Bases placed a spoof order to buy 250 contracts at $890.80, worth $22 million in gold, which he cancelled two seconds later. Straight away Bases placed a 240 lot spoof order to buy at various prices between $890.80 and $892.40, and all 170 of Chanu’s primary orders became filled.
The spoofing methods and amounts could be tweaked depending which market participants were being targeted.
Hailing from the neighbouring affluent townships of New Caanan and Southport, Connecticut, 50 miles from New York, Bases, 56, and John Pacilio, 54, share an indictment of five charges in connection with Title 7 and 18 spoofing, manipulation, conspiring and fraud involving a commodity for future delivery.
While trading precious metals at a Bank of America Merrill Lynch, subsidiary in New York, John Pacilio is alleged to have spoofed solo and in tandem with his colleagues including Bases, and other banks between January, 2010, and April, 2011. Pacilio’s published trades include the largest of spoofing examples by the six traders.
On February 4, 2011, Pacilio placed and cancelled within the space of less than a minute, spoof orders to sell the equivalent of $74.1 million worth of gold in futures contracts.
His spoofing victims weren’t always human and rational as the trader advised seven others at BOAML including Bases on November 16, 2010.
“guys the algos are really geared up in here. if you spoof this it really moves. thats where alot of this noise is coming from.”
According to court filings, 20 seconds later Pacilio placed an iceberg Primary Order to sell 10 silver futures contracts at $25.48. After 29 seconds he then placed a succession of Opposite Orders totalling 250 lots to buy silver futures at between $25.455 and 25.47, which were cancelled as soon as his Primary Orders were filled.
Three years after commencing with Deutsche Bank precious metals desk London, Cedric Chanu was promoted to Director, Precious Metals Trading Singapore, in 2011, where called on, in between weekend recreations, to promote and represent the German bank in its Asian precious metals business.
When interviewed by the Wall St Journal in September, 2012, Chanu, perhaps alluding to a growing disdain for spoofable forms of gold, noted “a dramatic increase in customers wanting to move out of paper, that is over-the-counter gold, and into physical.”
The trader had a brief stint trading for the Swiss company Gunvor after leaving Deutsche Bank at the end of 2013. The conglomerate got out of precious metals trading however, according to Bloomberg in December 2014, when “executives decided to abandon the precious metals trading business partly because of difficulties in finding steady supplies of gold where the origin could be well documented.” Gunvor, it appears, couldn’t locate unspoofable gold bullion at the same price and volume at which gold futures and unallocated gold investments were trading.
Part owned by Russian billionaire Gennady Timchenko until March, 2014, Gunvor ceased precious metals operations only one month after Deutsche Bank announced it was pulling out of precious metals trading in November, 2014.
Cedric Chanu’s indictment details nine examples out of “hundreds” of precious metals manipulations while at Deutsche Bank between December, 2008, and June, 2013.
A shared indictment for Chanu, 37, and his Deutsche Bank colleague James Vorley, 38, residents of the UAE and the UK respectively, was filed in an Illinois Court on January, 19. A Status Conference for the related civil case titled: CFTC vs Vorley and Chanu is scheduled for May, 7.
London precious metals desk Deutsche Bank trader James Vorley cast himself in the theatre of chat as the quintessential English gent with a strong sense of fair play.
He even told a trader at another firm in October, 2007, of his repulsion at a third firms manipulation of either futures or another precious metals instrument:
“this spofi.ng [sic] is annoying / its illegal for a start…”its just not cricket.”
It was all a bad joke as FBI Special Agent Nevens found, seven months later from at least May, 2008, Vorley was running a “self enrichment scheme” to defraud the COMEX precious metals futures market and spoof training a new employee. His collaborators: Chanu and other Deutsche Bank traders, and those at another bank.
According to the indictment, the FBI uncovered over “a thousand” instances of Vorley trading in a pattern consistent with spoofing, “placing over ten thousand Opposite Orders,” presumably withdrawn, and coordinating in spoofing with his Deutsche Bank colleague Cedric Chanu “over one hundred times” up to March, 2015.
Included, an episode on March 16, 2011, when Vorley is recorded chatting to his colleague about “spoofing it up / ahem ahem” in relation to simultaneous platinum and gold futures trades.
Deutsche Bank co-conspirator turned informant David Liew whom Vorley trained in spoofing, testifies that Vorley preferred the term “jam it” when referring to the illegal act.
After one operation assisting Liew getting an order filled on November 3, 2010, Vorley “submitted and cancelled 29 buy orders at 10 contracts each”, and celebrated after:
“was cladssic [sic] / jam it / woooooooooooo…bif [sic] it up.”
As a sign of gratitude, his understudy Liew responded glowingly:
“tricks from the…master.” (Emphasis supplied.)
Not one to readily admit to wrongdoing, when queried in March, 2015, by Deutsche Bank compliance and employee relations, Vorley told them the term spoofing had been used “to describe more innocent and everyday occurrences.” He went on to defend the reason for his “inopportune use of the word spoof ” as “a bad example of market banter masquerading as sarcasm.”
A study by West Australian University Prof. Andrew Caminschi published September, 2013, observed gold and silver futures, and the GLD ETF, were “significantly impacted” by downward pricing anomalies from the London Gold and Silver PM Fixings leaking, prior to the publishing of the Fixing auction results.
A previously unreported crack through which the Fix prices may have bled from London to Chicago and elsewhere can be found in one of the six futures trader’s connection to the London Gold and Silver Fixings.
At the same time Deutsche Bank’s James Vorley is alleged by the CFTC and FBI to have manipulated COMEX precious metals futures, at least from May, 2008, to March, 2015, he was also a director of London Silver Market Fixing Limited and the London Gold Market Fixing Limited auctions.
The London Gold and Silver Fixings set the world benchmark prices for the precious metals twice daily. Vorley’s tenure on the Fix lasted between September 2009 and May, 2014, for the Gold Fixing, and October, 2015, for the Silver Fixing.
Three short weeks after Caminschci’s paper was published, UBS AG self-reported to global authorities that an internal investigation had uncovered “possible signs of manipulation, collusion and other market abusive conduct in foreign exchange trading” between the bank and other financial institutions. The Precious Metals Desk at UBS was a sub-unit of their Foreign Exchange Desk.
As precious metals class action lawsuits flooded US courts in the following three years, Vorley’s employer Deutsche Bank, failing to find a buyer for it’s seat, dropped out of the London Gold and Silver Fixings, disbanded their precious metals trading unit, payed $98 million to settle class action lawsuits alleging collusion in the London Gold and Silver Fixings, and supplied antitrust plaintiffs with significant evidence against co-defendants.
Short of an innocent sounding explanation as to how the precious metals pricing got so quickly from Fix-to-Futures, “ahem ahem,” it remains to be explored what Fixing information Vorley had prior to its publishing and what use, if any, he made of it in futures trading.
After joining Deutsche Bank as a fresh graduate in 2009, David Liew was assigned, at completion of a short orientation and training period, to the Singapore Deutsche Bank precious metals desk. He was supervised and trained in manual spoofing by Vorley and Chanu, among others in Singapore and the UK, with whom he shared a “common electronic trading platform screen.” Here his trading could be monitored and he in turn could observe his mentor’s spoofing activities on his monitor.
CFTC findings stressed that by allowing the traders to observe each other’s orders, Deutsche Bank facilitated their spoofing activities. The bank’s traders also communicated across the globe via electronic chat rooms and video teleconferencing.
The 31 year old who participated in, solo and coordinated spoofing with other traders “hundreds of times,” and stop loss manipulation coordinated with Trader F at UBS, pleaded guilty in a Chicago court on June 1, 2017. Stop loss manipulations were also undertaken with others at Deutsche Bank in relation to information about a large metals trade for a bank customer.
The penalty handed down by the CFTC for Liew included a lifetime ban from commodity trading, while a monetary fine was not imposed “based upon his cooperation in a Commission investigation and related proceedings.” The DOJ prosecutes his criminal trial where he is expected to receive reduced sentencing in return for cooperation as a witness.
According to the sealed FBI affidavit cited by Bloomberg, after Liew was taught to spoof by Vorley and Chanu at Deutsche Bank he went on to train others in the “tricks.”
Since leaving the bank, Liew has continued to use his business and training skills, as he told the Court in June last year.
“I’ve set up my own businesses. So, I — a co-owner of a restaurant. I own a online toy store for children. And most recently I’ve also started teaching programming to kids.”
Presently up to four Deutsche Bank, two Merrill Lynch and UBS AG traders associated with the alleged manipulations are absent from indictments. Similarly an HSBC trader who allegedly spoofed alone remains at large.
The only US financial organisation implicated, Bank of America Merrill Lynch and its indicted traders, Edward Bases and John Pacilio are absent from CFTC Orders and Complaints.
The first public proceedings for the six traders is to begin in couple of weeks with Flotron’s jury selection scheduled for April, 6. His trial under Judge Jeffrey A. Meyer in Newhaven, Connecticut, is set to commence on April, 16.
Even with the first trial about to start, four years since the last of the allegations, the precious metals probes continue.
The Department of Justice Fraud and Antitrust Divisions opened their precious metals investigations into financial institutions in 2015, but the criminal antitrust probe was closed in January, 2016. The US Government agencies were not the only parties investigating banks precious metals trading though.
The banks, defending also civil antitrust precious metals class action lawsuits, received an extraordinary boost in the form of letter/s from the DOJ announcing closure of the investigations. Predictably the letter was used by defendants straight away in an attempt to convince the Courts to dismiss the lawsuits.
The Court: “You all love this letter, don’t you?”
Defense Attorney: “They are not that easy to get, your Honor.”
The Court: “That’s true. You should have gold bars around it.”
Raising the spectre that the DOJ had botched the antitrust probe, in October the Court denied Motions to Dismiss against all the banks except UBS, the only non-Fixing bank defendant.
Challenging the Courts decision to dismiss civil complaints against UBS, only a short month later in November, the antitrust plaintiffs submitted damning new evidence.
Frank chat messages between traders in different banks, including UBS, about manipulating the Gold and Silver Fixes had been provided to plaintiffs by Deutsche Bank in their settlement cooperation materials. Surprisingly the DOJ had for 13 months sifted the same evidence without finding criminal evidence of antitrust conspiracy.
At the request of the DOJ the Court then placed the civil antitrust lawsuits on a partial stay of discovery for 12 months until December, 2017, doubtless to protect their ongoing precious metals fraud investigation.
To be fair to the DOJ, as Judge Valerie Caproni, former FBI General Counsel, had warned at the April, 2016, arguments, mistakes are not uncommon in government investigations. “Just because a government investigation is closed…doesn’t mean everybody is innocent.”
Another reason for delays in criminal prosecution of the cartel, concerns international treaties. Andre Flotron’s indictment and arrest on US soil in September last year was a stroke of luck for investigators and prosecutors who understand that extradition between countries with different laws can be problematic.
For example in May, 2015, the CFTC brought spoofing charges in gold and silver futures against UAE traders Heet Khara and Nasim Salim for manipulation between February and April, 2015. In 2016 a Federal New York court ordered the duo to pay $1.38 and $1.31 million in civil monetary penalties, but the pair are yet to be indicted in the US.
The FBI is yet to declare if the futures traders were also manipulating the underlying commodity such as the Gold and Silver Fix and spot markets, not to mention other products such as ETF’s.
At Andre Flotron’s pre-trial Status Conference December 4, 2017, DOJ Fraud Section Attorney Micheal Rinaldi hinted at a bigger picture:
“The larger conspiracy includes this much larger universe where Mr. Flotron is spoofing on a regular basis.”
The Swiss trader, was all but named by a Swiss regulator in 2014 who said they had, “seen clear attempts to manipulate fixes in the precious metals markets,” at the UBS precious metals desk in Zurich. FINMA went on to ban two UBS precious metals traders for one year, evidently Flotron, principal trader at the desk since 2010, and another uncharged.
Answering the judge’s question at the October 5, 2017, Status Conference about Flotron’s witness statement and the possibility of new evidence emerging, Assistant U.S. Attorney Jonathon Francis said:
“if we have communications, his chats, his e-mails, something like that, here’s no reason not to give them to them now. It’s when we get into the sort of the everything else. And I’ll tell you, the everything else goes beyond spoofing. Because this investigation dealt with trading more broadly and many banks.”
This article was first published at Allan Flynn’s website here.
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.
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.
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.
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.
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.
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.
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.
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
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
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.
UBS and LBMA
The last line of the LBMA press release about the new vault reporting states the following:
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.
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.
The London Metal Exchange (LME) and World Gold Council have just confirmed that their new suite of London-based exchange-traded gold and silver futures contracts will begin trading on Monday 10 July. These futures contracts are collectively known as LMEprecious.
This 10 July 2017 launch is itself over a month behind schedule given that LMEprecious was supposed to be launched on 5 June but was delayed by the LME.
As a reminder, these LMEprecious gold futures and silver futures contracts represent unallocated gold and silver and there is no direct connection in the contracts to physical gold or physical silver, since settlement is via unallocated gold and silver balance transfers across LME Clearing unallocated metal accounts at member banks of London Precious Metals Clearing Limited (LPMCL).
Still, this hasn’t stopped LME from using terminology in the contract specs that attempts to link them by association to real precious metal. For example, the gold contract spec says that the:
“underlying material” is “Loco London Fine Gold held in London and complying with standards relating to good delivery and fineness acceptable to the Precious Metal Clearer of the Clearing House”.
This is similar to how an estate agent (realtor) would describe a house that’s located in a bad area, i.e. that it’s not too far from a good area.
The LME also fails to mention the fact that the LBMA/LPMCL unallocated account system is a fractionally-based paper gold and paper silver trading system, with trading volumes of unallocated gold and unallocated silver that are 100s of times higher than the available physical metal sitting in the London precious metals vaults. Ironically, these gold and silver futures are starting to trade in a month in which the LBMA has still not begun publishing the actual quantities of gold and silver in the LBMA vaults in London, despite promising to.
For both gold and silver, the LME futures contract suite will consist of a daily trade date (T) + 1 contract (T+1), known as TOM, and daily futures from a T + 2 (equivalent to Spot settlement) out to and including all trade dates to T + 25. Beyond this, there are approximately 36 monthly futures contracts covering each month out to 2 calendar years, and then each March, June, September and December out to 60 calendar months (12 more quarters out to 5 years).
All LMEprecious contracts will centrally clear on LME’s clearing platform LME Clear. The contracts can be traded on LME’s electronic trading platform LMESelect between 1am and 8pm London time, and can also be traded 24 hours a day ‘inter-office’ over the blower (voice-based trading). Apart from trading hours differences, the only other difference between LMESelect and phone is that of the daily contracts, only T+1 to T+3 can be traded via LMESelect, while T+1 to T +25 can be traded over the phone.
The LME also plans to roll out options products and calendar spread products based on these futures, but as to when these will appear is not clear.
Banks, Banks and more Banks
The official line is that LMEprecious has been developed by a consortium of the LME, the World Gold Council and a group of investment consisting of Morgan Stanley, ICBC Standard, SocGen, Goldman Sachs and Natixis, as well as prop trading firm OSTC, but to what extent each of the 5 banks and OSTC has had input into the product development and trading rules of LMEprecious is unclear.
On 3 August 2016, the World Gold Council established a UK registered company called ‘EOS Precious Metals Limited’ to house the arrangement between the Council and the aforementioned banks and OTSC. The first director of EOS was Robin Martin, managing director of market infrastructure at the World Gold Council, while the first registered address of EOS was actually the World Gold Council’s London office at 10 Old Bailey in the City of London.
A slew of other directors were then appointed to EOS Precious Metals Ltd on 9 November 2016, namely:
Aram Shishmanian, CEO of World Gold Council
Raj Kumar – ICBC Standard Bank (formerly of Deutsche Bank and formerly a director of London Precious Metals Clearing Limited (LPMCL)
Bradley Duncan – ICBC Standard Bank (resigned as director March 2017 and replaced by Richard England)
Francois Combes – SocGen (formerly a director of London Gold Market Fixing Limited)
Vinvent Domien – SocGen (formerly a director of London Gold Market Fixing Limited)
Matthew Alfieri – Goldman Sachs (resigned May 2017 and replaced by Donald Casturo)
David Besancon – Natixis
Bogdan Gogu – Morgan Stanley
Hanita Amin – Morgan Stanley
Jonathan Aucamp – Exec chairman of OSTC
Some of these directors, as you can see above, are very much connected to the existing and previous mechanisms of the London Gold Market, eg, LPMCL and the old London Gold Fixing.
But apart from ICBC Standard Bank, suspiciously absent from the list of banks cooperating with the LME and World Gold Council are the big guns of the LBMA and LPMCl members, i.e. HSBC, JP Morgan, UBS, Scotia, all of which are big players in the London gold and silver markets and vaulting scenes in London, New York, and in UBS’s case Zurich. As they control LPMCL, perhaps there is no need for them to be involved in a gold and silvers futures sideshow.
Peter Drabwell of HSBC was re-elected to the Board
Sid Tipples, of JP Morgan was re-elected to the Board
Raj Kumar of ICBC Standard (formerly of Deutsche Bank) was elected to the Board
Kumar replaces Steven Lowe of Scotia who had been on LBMA board Vice-Chairman
When EOS Precious Metals Ltd was established, it only had 1 A share and 1 B share, both held by WGC (UK) Limited. In the incorporation documents, A shares were defined as having voting rights, an ability to appoint a director and a board observer but no rights to dividends. B shares were defined as having no voting rights but with an entitlement to dividends.
On 26 October, a further 999 A shares and 699 B shares were allotted and said to be paid-up. In the in the allotment filing, these B shares are listed in various tranches i.e. 400 B shares, 100 B Shares, 100 B shares, and 99 B shares, with different total amounts paid for each of these tranches.
In total, there are now 1000 A shares and 700 B shares issued in EOS (with a nominal value of US$ 0.10 each), but there is nothing in the filings listing how many shares of each class are owned by each of the companies and banks that have director representation. Given that there are 6 trading entities as well as the World Gold Council, it could be that each of the 7 entities holds 100 B shares.
There are currently also 10 directors on the EOS board, 2 each from the World Gold Council, SocGen, ICBC Standard, and Morgan Stanley, and 1 each from Goldman Sachs and Natixis. Therefore, its possible that the 1000 A shares could be divided out in the same ratio, 200 for each of the World Gold Council, SocGen, ICBC Standard, and Morgan Stanley, and 100 shares each for Goldman and Natixis.
In a related development, on 23 February 2017 Reuters reported that the LME had agreed a 50-50 revenue sharing agreement with EOS precious Metals under which Morgan Stanley, ICBC Standard, SocGen, Goldman, Natixis and OSTC will attempt to generate trading certain volumes (liquidity) in the LMEprecious gold and silver contracts in return for 50% of the LME’s revenue on the products. The terms of this agreement are not public and it’s unclear if the performance of the banks and OSTC will be measured on customer flow or liquidity guarantees, or perhaps some type of credibility measurement of the contracts in the marketplace.
In early March, Reuters also reported that 3 additional banks and a broker had agreed to come on board with LMEprecious as clearing members, specifically, Commerzbank,Bank of China International,Macquarie Bank, and broker Marex Financial
Most recently, on 6 July, Reuters reported that of these 4 additional participants from the Commerzbank / Bank of China / Macquarie / Marex group, the LME has said that only Marex is ready to participate as a “general clearing member”.
Clearing Unallocated into LPMCL
This brings us to the different types of LME clearing members. Of the 6 participants which came on board to LMEprecious in 2016, 4 of these (SocGen, Goldman, Morgan Stanley and ICBC Standard) are General Clearing Members (GCMs) for LMEprecious. However, Natixis is only an Individual Clearing Member (ICM). Furthermore, OSTC is a Non-Clearing Member (NCM). Marex, as mentioned above, is also a General Clearing Members (GCM). See list of GCMs, ICMs and NCMs for LMEprecious here.
According to LME Clear’s membership rules (Rule 3.1 Membership Categories and Application Process):
a “General Clearing Member” or “GCM”, which may clear Transactions or Contracts on its own behalf and in respect of Client Business
an “Individual Clearing Member” or “ICM”, which shall be permitted only to clear Transactions or Contracts on its own behalf
On 6 July, Reuters also reported that an algorithmic trading firm called XTX Markets which is based in Mayfair in London, will also start as a Non-Clearing Member (NCM) participant. Obviously, the Non-Clearing Member (NCM) don’t clear trades, instead they use ‘Administrative clearers’ to do their clearing. XTX will use Marex, and OSTC will use SocGen.
As to why Commerzbank, Bank of China International and Macquarie Bank are still not ready to participate is unclear, but this seems odd given that they announced their intent to participate over 4 months ago.
Meet the New Boss, Same as the Old Boss
– there are now 8 bullion banks, a prop trading firm, and a high speed algo firm lined up to help these LME gold and silver futures get out the gate
– these LMEprecious futures will be trading unallocated gold and unallocated silver.
– unallocated gold and unallocated silver is fractionally-backed paper gold and paper silver
– the 5 LMPCL banks offering these unallocated accounts are HSBC, JP Morgan, UBS, Scotia and ICBC Standard
– the trading of these LMEprecious futures therefore comes full circle and does nothing to change the structure of the London Gold Market or the London Silver Market
– the World (Paper) Gold Council, which claims to promote gold on the behalf of the gold mining industry, is instead front and center in the promotion of more paper gold trading
With similar recently launched London gold futures from CME Group and ICE not having taken off, all eyes will be on these LMEprecious products to see if they can go where no London gold futures have gone before. Therefore, the LME monthly trading volumes page will be one to watch in future.
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.
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.
“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.“
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.
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 isnot 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?
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.
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.
“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.
On 5 February, the Financial Times of London (FT) featured a story revealing that the London Bullion Market Association (LBMA) plans to begin publishing data on the amount of real physical gold actually stored in the London precious metals vaulting network. The article titled “London gold traders to open vaults in transparency push” can be read here (accessible via FT subscription or via free monthly FT read limit).
This new LBMA ‘monthly vault data’ will, according to the FT’s sources, be published on a three-month lagged basis, and will:
“show gold bars held by the BoE, the gold clearing banks, and those [vaults] operated by the security companies such as Brink’s, which are also members of the LBMA.”
The shadowy source quoted in the FT article is attributed to “a person involved in setting up the programme”, but at the same time, although “the move [to publish the data] is being led by the LBMA“, the same LBMA ”declined to comment” for the FT story. This then has all the hallmarks of a typical authorised leak to the media so as to prepare the wider market for the data release.
On 16 February, the World Gold Council in its “Gold Investor, February 2017” publication featured a focus box on the same gold vault topic in its “In the News” section on page 4, where it states:
“Enhanced transparency from the Bank of England
The Bank of England is, for the first time, publishing monthly data revealing the amount of gold it holds on behalf of other central banks.
As a leading custodian of gold, with one of the largest vaults in the world, the Bank of England’s decision is highly significant. Not only will it enhance the transparency of the Bank’s own gold operations; it will also support the drive towards greater transparency across the gold market.
The data reveals the total weight of gold held within the Bank of England’s vaults and includes five years of historical data.”
The Proposed Data
Based on these two announcements, it therefore looks like the gold vault data release will be a combined effort between the LBMA and the Bank of England, the blood brothers of the London Gold Market, with the Bank of England data being a subset of the overall LBMA data. While neither of the above pieces mention a release date for the first set of data, I understand that it will be this quarter, i.e. sometime before the end of March. On a 3 month lagged basis, the first lot of data would therefore probably cover month-end December 2016, because that would be a logical place to start the current dataset, rather than, for example, November 2016.
While the Bank of England data looks set to cover a 5 year historical period, there is no indication (from the FT article) that the wider LBMA vault data will do likewise. From the sparse information in the FT article, the LBMA data will “show gold bars held“. Does it mean number of gold bars, or combined weight of gold bars? What exactly it means, we will have to wait and see.
The Bank of England data will capture “total weight of gold held“. Notice that in the above World Gold Council piece it also states that the data will cover the amount of gold that the Bank of England “holds on behalf of other central banks.” There is no mention of the amount of gold that the Bank of England holds on behalf of commercial bullion banks.
Overall, this doesn’t exactly sound like it is “enhancing the transparency of the Bank’s own gold operations” as the World Gold Council puts it. Far from it. Enhancing the transparency of the Bank of England’s gold operations would require something along the lines of the following:
Identities of all central banks and official sector institutions (ECB / IMF / BIS / World Bank) holding active gold accounts at the Bank of England. Active gold accounts meaning non-zero balances
Identities of all commercial / bullion banks holding active gold accounts at the Bank of England
A percentage breakdown between the central bank gold held in the Bank of England vaults and the bullion bank gold held in the Bank of England vaults
An indicator for each gold account as to whether it is a set-aside earmarked custody account or whether it is a fine troy ounce balance account
Information for each central bank and official sector institution as to whether any of “its” gold is lent, swapped or repo’d
Information for the bullion bank gold accounts as to whether the gold recorded in those accounts is borrowed, sourced from swaps, sourced from repos, or otherwise held as collateral for loans
Information on the gold accounts of the 5 LPMCL clearing banks showing how much gold each of these institutions holds each month and whether the Bank of England supplies physical gold clearing balances to these banks
Information on when and how often the London-based gold-backed ETFs store gold at the Bank of England, not just using the Bank of England as sub-custodian, but also storage in their own names, i.e. does HSBC store gold in its own name at the Bank of England which is used to supply gold to the SPDR Gold Trust
Information on whether and how often the Bank of England intervenes into the London Gold Market and the LBMA Gold Price auctions so as to supply gold in price smoothing and price stabilisation operations in the way that the Bank of England’s Terry Smeeton seems to have been intervening into the London Gold Market in the 1980s
Information on the BIS gold holding and gold transactions settlements accounts at the Bank of England and the client sub-account details and central bank identities for these accounts
Information on gold location swaps between gold account holders at the Bank of England and gold accounts at the Federal Reserve Bank of New York, the Banque de France, and the Swiss National Bank, and BIS accounts in those locations
Gold for oil swaps and oil for gold swaps
Anything less is just not cricket and does not constitute transparency.
And its important to remember that any publication of gold vault data by the LBMA and Bank of England is not being done because the LBMA suddenly felt guilty, or suddenly had an epiphany on the road to Damascus, but, as the FT correctly points out:
“the LBMA, whose members include HSBC and JPMorgan, hopes to head off the challenge and persuade regulators that banks trading bullion should not have to face more onerous funding requirements.”
The Current Data
As a reminder, there is currently no official direct data published on the quantity of real physical gold bars held within the London gold vaulting system. This vaulting system comprises the vaults of eight vault operators (see below for list).
Once a year in its annual report, the Bank of England provides a Sterling (GBP) value of gold held by its gold custody customers, while the LBMA website states a relatively static total figure of “approximately 6,500 tonnes of gold held in London vaults” that it claims are in the vaults in its network. But beyond these figures, there is currently no official visibility into the quantity of London Good Delivery gold bars held in the London vaults. There are, various ways of estimating London gold vault data using the Bank of England annual figure and the LBMA figure together with Exchange Traded Fund gold holdings and central bank divulged gold holdings at the Bank of England.
The September 2015 estimates calculated that there were 6,256 tonnes of gold in total in the London vaults, with 5,134 tonnes at the Bank of England (as of end February 2015), and 1,122 tonnes in London “not at the Bank of England“, all of which was accounted for by gold-backed ETFs which store their gold in London. These calculations implied that there was nearly zero gold stored in London outside the Bank of England that was not accounted for by ETF holdings.
The “Tracking the gold held in London” estimates from September 2016 used a figure of 6,500 tonnes of gold in total in the London vaults, and showed that there were 4,725 tonnes inside the Bank of England vaults, of which about 3,800 tonnes was known to be held by central banks (and probably a lot of the remainder was held by central banks also) and that there were 1,775 tonnes of gold outside the Bank of England. The article also calculated that there were 1,679 tonnes of gold in the gold backed ETFs that store their gold in London, so again, there was very little gold in the London vault network that was not accounted for by ETFs and central bank gold.
The Vaults of London
Overall, there are 8 vault operators for gold within the LBMA vaulting network. These 8 vault operators are as follows:
The Bank of England
HSBC Bank plc
JP Morgan Chase
ICBC Standard Bank Plc
Malca-Amit Commodities Ltd
G4S Cash Solutions (UK) Limited
Loomis International (UK) Ltd
HSBC, JP Morgan and ICBC Standard are 3 of the London Gold Market’s clearing banks that form the private company London Precious Metals Clearing Limited (LPMCL). The other two member of LPMCL are Scotia Mocatta and UBS. Brink’s, Malca-Amit, G4S and Loomis are the aforementioned security companies. The LBMA website lists these operators, alongside their headquarters addresses.
Bizarrely, the FT article still parrots the LBMA’s spoon-fed line that the vaults are “in secret locations within the M25 orbital motorway”. But this is far from the truth. Many of the London vault locations are in the public domain as has been covered, for example, on this website, and the FT knows this:
It’s slightly disappointing that we spend time and effort informing the London financial media where some of the London gold vaults are, and then they continue to parrot the LBMA’s misleading “secret locations” line. I put this fake news down to a decision by the FT editors, who presumably have a stake in playing along with this charade so as not to rock the boat with the powerful investment banks that they are beholden to.
The FT also reminds us in its article that “last year a gold vault owned by Barclays, which can house $80bn of bullion, was bought by China’s ICBC Standard Bank.“
This Barclays vault in London was built by and is operated by Brink’s, and presumably after being taken over by ICBC Standard, it is still operated by Brink’s. Logistically then, this ICBC Standard vault is most likely within the Brink’s complex, a location which is also in the public domain, and which even hosts an assay office as was previously mentioned here over a year ago. The Barclays vault (operated by Brink’s) is even mentioned in a Brink’s letter to the SEC in February 2014, which can also be seen here -> Brinks letter to SEC February 2014.
Given the fact that there are eight sets of vaults in the London vault system (as overseen by various groups affiliated to the LBMA such as the LBMA Physical Committee, the LBMA Vault Managers Working Party, the gold clearers (London Precious Metals Clearing Limited), and even the LBMA Good Delivery List referees and staff, then one would expect that whatever monthly vault data that the LBMA or its affiliates publishes in the near future, will break out the gold bar holdings and have a distinct line item in the list for each vault operator such as:
HSBC – w tonnes
JP Morgan – x tonnes
ICBC Standard – y tonnes
Brink’s – z tonnes
At the LBMA conference in Singapore last October, there was talk that there were moves afoot for the Bank of England to begin publishing data on the custody gold it holds on a more regular basis. It was also mentioned that this data could be extended to include the commercial bank and security carrier vaults but that some of the interested parties were not in favour of the idea (perhaps the representative contingents of the powerful HSBC and JP Morgan). Whatever has happened in the meantime, it looks like some data will now be released in the near future covering all of the participating vaults. What this data will cover only time will tell, but more data than less is always welcome, and these data releases might also help show how near or how far we were with earlier estimates in trying to ascertain how much gold is in the London vaulting system that is not accounted for by ETF holding or central bank holdings.
Revealing the extent of the gold lending market in London is critical though, but this is sure to remain a well-kept secret, since the LBMA bullion banks and the Bank of England will surely not want the general market to have any clue as to which central banks don’t really have any gold while still claiming to have gold (the old gold and gold receivables trick), in other words, that there is serious double counting going on, and that some of the central bank gold has long gone out the door.
UBS and other precious metals traders on how to wreak havoc in silver markets
Written by Allan Flynn, specialist researcher in aspects of gold and silver.
“An avalanche can be triggered by a pebble if you get the timing right”
Earlier this year at April’s hearings for London Silver and Gold Fix lawsuits, the judge and defendant’s attorney quipped about trader chats named “the mafia” and “the bandits” published in prosecutors findings of Forex investigations but conspicuously absent from precious metals investigation findings, and the silver and gold antitrust lawsuits under consideration.
THE COURT: “Those were bad facts for the defendants.”
LACOVARA: “I think, your Honor, that if we had chat rooms that said “The Cartel”, we might be having a different focus to oral argument today.”
THE COURT: “I think that is correct.”
Given the judges skepticism of the allegations described in an earlier article, it came as a surprise early October when the banks listed were ordered by magistrate Valerie E. Caproni to face charges. More surprising perhaps was the exemption granted Swiss bank UBS, which despite having been found guilty and fined for “precious metals misconduct” by the Swiss Financial Market Supervisory Authority FINMA in November 2014, was granted motion to dismiss from both silver and gold lawsuits.
All that may be about to change according to documents filed in a New York district court December 7th, where plaintiffs claim that transcripts showing conspiracy to manipulate silver, provided by Deutsche Bank as part of an April settlement agreement, includes extensive smoking gun evidence involving UBS and other banks. Plaintiffs describe a “multi-year, well-coordinated and wide-ranging conspiracy to rig the prices of silver and silver financial instruments that far surpasses” that of the previous complaint, including potentially incriminating evidence of UBS precious metals traders allegedly conspiring with other banks.
Five additional banks to the remaining defendants HSBC and Bank of Nova Scotia are mentioned including Barclays Bank, BNP Paribas, Standard Chartered Bank, Bank of America and Merrill Lynch. The Memorandum of Law signed by Vincent Briganti on behalf of Lowey Dannenberg Cohen & Hart for plaintiffs on Wednesday 7th December seeks leave to amend the existing complaint filed with the United States District Court Southern District of New York.
Included in the memo are numerous astounding transcripts indicating coordination between UBS and other banks of “pushing,” ”smashing,” ”bending,” ”hammering,” ”blading,” ”muscling,” and “ramping” the prices of silver and silver financial instruments.
In support of claims of conspiracy to manipulate the price of silver downward the following gem is attributed to UBS Trader A: “so we both went short” “f*cking hell it just kept going higher” “63,65, then my guy falls asleep, it goes to 69 paid!” “then finally another reinforcement came in.”
Discussions supposedly of coordination between UBS and their competitors about fixing the price of physical silver by offering only wide spreads between the bid and ask (where a “lac” is reference to an Indian measure equaling 100,000 units) go like this:
UBS Trader B: “what did u quote let me check”
Deutsche Bank Silver Fix Trader-Submitter A: “44/49”
UBS Trader A: “just quote wider if they call me in 1 lac I will quote 7-8 cents”
Deutsche Bank Trader B: “how wide u making 1 lac today 5 cents?”
UBS Trader A: “silver actually steadier than gold i would make 5-6 cents wide in silver”
UBS Trader A: how wide would you quote 5 lacs silver?”
Deutsche Bank Trader B: “10cu>?”
Deutsche Bank Trader B:”how wide u quote for 3 lacs?”
UBS Trader A: 10 cents”).
Manipulation of the Silver Fix price to benefit their silver trading positions in derivatives by UBS is claimed in the following exchanges:
Deutsche Bank Trader B: “u guys short some funky options” “well you told me to no one u just said you sold on fix”
UBS Trader A: “we smashed it good.”
Deutsche Bank Silver Fix Trader-Submitter A: “UBS boring the market again”…”just like them to bid it up before the fix then go in as a seller…they sell to try and push it back.”
It’s further alleged by plaintiffs that UBS implemented an “11 oclock rule” where both UBS and Deutsche Bank would short silver at 11A.M.
As examples of the comparative ease by which UBS moved the silver market the memo reveals Deutsche Bank Trader B added UBS Trader A to a chat with HSBC Trader B, which UBS Trader A deemed “the mother of all chats,” and leading to the trader’s own analysis:
UBS Trader A to Deutsche Bank Trader B: “if we are correct and do it together, we screw other people harder”
UBS Trader A: “an avalanche can be triggered by a pebble if you get the timing right” and “silver still here, u can easily manipulate silver”, and in reference to UBS supposed manipulative influence by an unnamed party: “u guys WERE THE SILVER MKT.”
UBS intended to reap financial rewards by manipulation of the price of physical silver and associated financial instruments, the memo says as UBS Trader A suggested: “go make your millions now jedi master…” “pls write me a check when u aer a billionare,” and “i teach u a fun trick with silver” to which Deutsche Bank Trader B replied: “show me the money.”
Confident of their ability to manipulate UBS made bold predictions according to the following alleged extracts:
UBS Trader A: “gonna bend this silver lower”; “i will bend it lower told u”; ”hah cool its gonna get ugly”; “use the blade on silver rg tnow it’ll hold it up,”
Deutsche Bank Trader B: “yeah,”
UBS Trader A: “gona blade silver now.”
Of course all the secrecy in the world about the operations was required of the chat groups by UBS Trader A stating: “pls keep all these trick to yourself,” “btw keep it to yourself…,” and “ok rule of thumb EVERYTHING here stays here.”
Examples of other banks alleged transcripts are included in the following:
Deutsche Bank Trader B instructing Barclays trader A: “today u smash,”
Barclays Trader A: “yeah” and “10k silver” “im short.”
It’s alleged that Barclays and Deutsche Bank shared information so often that Barclays Trader A remarked “we are one team one dream.”
Materials in the memo even include the Deutsche Bank and Barclays precious metals traders agreeing at one stage to “stay away” from silver for a week.
The traders of course knew it was terribly wrong with Barclays Trader A responding to Deutsche Bank’s Trader B instruction to “push silver”: “HAHAHA lol i don’t think this is politically correct leh on chat.”
Allegedly fixing the bid-ask spread they offered clients on silver:
Merrill Lynch Trader A: “How wide r u on spot? Id assume 10 cents for a few lacs?”
Deutsche Bank Silver Fix Trade-Submitter A: “im getting ntg but stops”
…Merrill Lynch Trader A: “we had similar” “I sweep them…Fuk these guys.”
Showing disregard to global regulators even after noting their activities the two continued to “sweep” the silver market, allegedly observing at one stage: “Someone got stopped messily.”
BNP Paribas Fortis
Fortis Bank Trader B allegedly conspired with Deutsche Bank to manipulate silver prices, using what he termed a “bulldozer” on the silver market.
Conversations between Deutsche Bank Silver Fix Trade-Submitter A and Standard Chartered Trader A as follows:
“Yeh” “small long out of the fix…” “ok where to sell sivler then?”
“23.40 thru that use it as a stop profit and let it runnnnnnnnnnnnn”
“were on the same wavelength”
“im long silver”…”ilke both [silver and gold] to get the absolute sht squeezed out of them” “im longer silver than i am gold”
Assuming the transcripts submitted are accepted and plaintiffs are permitted to file their Third Amended Complaint, the possible pending “avalanche” of settlements in silver lawsuits will speak volumes for the investigative prowess of the CFTC and the DOJ, both of which were commissioned to investigate long running allegations of silver and precious metals market manipulation over recent years, and came up completely empty.
It appears Judge Caproni, former FBI General Counsel, was on the money when considering the potential of ineptitude in government investigations of precious metals markets at April’s gold hearing: “I don’t put a lot of stock in the fact that there are investigations because I was a government lawyer for a long time and I know what you need to open an investigation. By the same token, the fact that they closed it without charging anybody doesn’t mean that everybody is innocent. So I don’t put a lot of stock in it one way or the other.”
The CFTC proudly announced in September 2013 they had spent five years and seven thousand enforcement hours investigating complaints of manipulation in the silver market, including with assistance by the Commission’s Division of Market Oversight, the Commission’s Office of Chief Economist, and outside experts, but yet found nothing.
The Department of Justice Antitrust Division which were so confident of their investigation of collusion in precious metals they went to the extraordinary lengths in January of this year of providing a letter to silver and gold lawsuit defendants advising they had closed their investigation without findings of wrongdoing.
The Swiss Financial Services watchdog FINMA investigated, published and prosecuted UBS for forex and precious metals trading misconduct but yet said so little about precious metals findings in their November 2014 investigation report, it was impossible for the court to withstand UBS motion to dismiss in both metals.
And finally of the ability of authorities to reign in rogue banks in the precious metals or any other markets, the memorandum flags a fact that should draw the attention of those trying to figure out if they can indeed trust that their bullion bank has their best interests at heart simply by banning participation in trader chat rooms.
“The chats contained in the DB material are just the tip of the iceberg, as evidence suggests that Defendants intentionally communicated in undocumented ways to keep their manipulation hidden.”
For example the memo includes the salient reminder that banks willalways find a way “to evade detection,” in this case where two traders are described as also communicating “via email and personal cell phone.”
The above article was first published at Allan Flynn’s website here.
Allan Flynn is a specialist researcher in aspects of gold and silver. He is currently investigating for future publication on the same topic and works in property and commercial architecture when he needs to eat. He holds shares in precious metals producers and banks.
Written by Allan Flynn, specialist researcher in aspects of gold and silver.
Five months have lapsed without decision, since London gold and silver benchmark-rigging class action lawsuits received a cool response in a Manhattan court. Transcripts from April hearings show, in the absence of direct evidence, the claims dissected by a “very skeptical” judge, and criticized by defendants for lack of facts suggesting collusion, among other things.
Judge Valerie E. Caproni, former white-collar defense attorney, SEC Regional Director and controversial FBI General Counsel, presided over oral arguments for motions-to-dismiss totaling 9 hours on April 18 and 20.
Its “based entirely on statistics with no other,” the judge said, pouring cold water on plaintiff’s claims of bank collusion in gold benchmark rigging. Defense attorney scoffed as much at the silver hearing. “There is not a single fact… that shows an agreement between my client and the other alleged conspirators to fix the fix.”
Seven banks are being sued in separate gold and silver class action lawsuits currently before the US. District Court, Southern District of New York. The plaintiffs: gold and silver bullion traders, and traders of various associated financial instruments, allege banks conspired in secret closed meetings, to rig the London PM Gold Fix, and Silver Fix benchmarks during the period from 2001 to 2013.
If the motions to dismiss are allowed, the complaints will be thrown out. Plaintiffs on the other hand, are hoping to crack open the door to “discovery,” where they get to access confidential bank communications and records. Turning the tables earlier in April Deutsche Bank surprised by promising to provide such evidence ratting out its former fellow defendants. “No. I cannot consider it at all,” the judge said, stonewalling plaintiffs’ arguments mentioning the move. The German mega-bank settled claims a week prior to the hearing but is yet to hand over records.
Alleged proof of downward price manipulation is revealed by averaged charts showing “Anomalous” price drops from 2001 to 2013 in the London Silver Fix and PM Gold Fix. In sympathy, even as the gold price quadrupled from around $300 to $1200 through the period, something counter-intuitive happened. Plaintiffs’ claim during London hours between the AM and PM fixes, the average price declined for each of the 13 years, bar one being flat in 2013. More pronounced effects were seen in silver.
“Those were compelling charts,” the judge responded to a presentation of evidence during the silver hearing. “I mean, seriously, they truly show that something happened.”
Defendants argue rather than collusion, the price drops show normal “parallel conduct.” Loads of precious metals producers all needing to sell, and a bunch of savvy bankers hoping to buy low. Plaintiffs say the banks have a near-perfect record betting on the fix outcome. Well of course, they trade on “the best information in the world about supply and demand,” the banks’ attorneys retorted.
Inclusion of a non-fixing bank UBS, in the lawsuit, is described by defendants as “unfair,” and just to “suck in” a Swiss regulator’s findings. If the Court is to be believed, the FINMA report may be all the cases have going for them. Of its 19 pages, the dominating subject is foreign exchange misconduct, with only a few lines about precious metals. Tip-toeing around the topic of collusion, the report describes a process of “cooperation” between UBS and others in precious metals trading. It says the bank shared sensitive client trade information such as “client names”, “stop loss orders,” and “flow information on large or imminent orders” with “third parties.”
Sharing of client trade information by banks, including UBS, in currency trading, the UK Financial Conduct Authority (FCA) reported in 2014, was for the purpose of collusion. Such communication enabled different banks to plan trading strategies, and “attempt to manipulate fix rates and trigger client “stop loss” orders (which are designed to limit the losses a client could face if exposed to adverse currency rate movements).”
Strong similarities exist between the methods and tools used by currency traders to rig benchmarks, and those used by precious metals traders. Referring to the detailed description of UBS offences including collusion in currency benchmarks, the FINMA report said, “the conduct and techniques inadmissible from a regulatory perspective, were also applied at least in part to PM spot trading.”
Hanging by a Thread
One “misconduct” the report emphasized in precious metals trading was UBS’ manipulation of the silver benchmark in the banks proprietary trading. “A substantial element of the conspicuous conduct in PM trading was the repeated front running (especially in the back book) of silver fix orders of one client.” According to the FCA, front running is a kind of insider trading.
“transaction for a “person’s own benefit, on the basis of and ahead of an order (including an order relating to a bid) which he is to carry out with or for another (in respect of which information concerning the order is inside information), which takes advantage of the anticipated impact of the order on the market or auction clearing price.”
Commenting on the brevity of plaintiffs’ evidence in silver, and the FINMA findings, Judge Caproni pointed out, “your hanging your hat pretty heavily on one line in that report.”
Attorney for defendants found the report favorably vague:
“Your Honor, I apologize. I must say he has made a misstatement three times. The FINMA settlement, Section 3.2.3 talks about UBS conduct with respect to silver. There’s not a not a word or hint about coordination with any other bank. It is between UBS and one of its customers or maybe more than one but no collusion.”
The judge responded, “We have the FINMA report. I knew that wasn’t exactly what it said.”
Confusion about the Swiss findings wasn’t helped by the events of the day. The conference call in German, reported FINMA boss Mark Branson alluding to perhaps more than the report dare, in, “clear attempts to manipulate precious metals benchmarks.” FINMA declined a request to supply a transcript or recording of the conference call, with a spokesperson responding, “We do not publish a transcript, and besides we have nothing to add to the report.”
A couple of things may help explain the regulators haziness, and thus the challenges for sensitive cases as these. Switzerland is a country long associated with gold and banking. In 1970 Zurich was home to the worlds largest gold market. Most of the worlds’ gold is imported to Switzerland for refining. Consider then this impressive feat: An official inquiry is conducted of Switzerland’s largest bank caught up in a scandal involving “precious metals.” Offenses were identified in its Zurich office. The agency reports “serious misconduct” in precious metals trading including sharing of secret client trade orders with “third parties.” The agency head rallies against manipulation of “precious metals benchmarks.” Action against 11 bank personnel, including industry bans of between one and five years, were brought against two managers and four traders for, “serious breaches of regulation in foreign exchange and precious metals trading.” But yet, the word “gold” is absent from the entire report and announcements.
Secondly, FINMA’s 2015 Annual Report describes the sanctions against four now-former UBS traders. It may concern some, that justice is left to financial market regulators when:
“Four further enhancement actions against UBS foreign exchange traders were discontinued in August 2015. Since there were indications that their behavior had contributed to serious breaches of regulatory provisions, FINMA issued reprimands without taking further action against these individuals.”
If the cases proceed, US commodity futures markets may also come under scrutiny. The Court spotted a not-so-obvious paradox concerning allegations the banks suppress gold prices. “Why would they drive the price down when they are sitting on I don’t know how much bullion? They are driving down the price of their own asset,” Judge Caproni posed.
Plaintiffs claim the banks hold a majority of short gold and silver futures on the US-based Chicago Mercantile Futures Exchange, paper instruments tied to the value of London silver and gold, which increase in value as the bullion prices fall. The banks argue that it’s impossible to tell from mandatory government filings, which banks prosper during the declines, and to what extent. The judge agrees, and defendants are pleased. “I’m very skeptical they have a well-pleaded factual allegation of what the banks’…COMEX position is,” the judge said.
“Mr Feldberg: Then your Honor has said that much better than I ever could.”
Where direct evidence of collusion isn’t available, antitrust law allows the pleading of additional circumstantial evidence that lends plausibility to allegations. Other circumstantial evidence, or “plus-factors,“ listed by gold plaintiffs, namely problematic antitrust facts arising out of the very clubby arrangement of the fix meetings themselves, failed to impress particularly.
“The Court: But weren’t all of your plus factors just the natural – they are just a function of the fix?..I thought every plus factor you pointed to was just that’s the nature of the fix.”
The unconvinced magistrate was likely close to a decision, before four weeks back when the banks had one last throw at dismissal. The court in the silver case was asked to apply a recent ruling where warehouse aluminum price manipulation was deemed not to have impacted end users of aluminum. Any decision on this in silver will likely impact the gold case also.
The question of standing, or which plaintiff’s are close enough to the alleged activity to have suffered injury, was well discussed back in April. For example the Court put to defense: “I’m not saying the two guys at a swap meet from Ohio would be a particularly compelling class representative, but why wouldn’t they have standing?” Plaintiffs seemed to have convinced that the issue could be decided later, if it gets to that. Judge Caproni just wasn’t sure firstly if all the statistics, and facts complained were plausible enough to infer collusion, reminding frustrated gold plaintiffs where the balance lies.
“Unfortunately for you I’m the one who has to make the decision here.
Mr Brocket: Again, with the greatest respect, I am trying to resurrect this here but, look. Every fact alone doesn’t prove collusion.
The Court: I agree.”
Decisions regarding motions to dismiss in the London gold and silver benchmark-rigging class actions against banks, initially expected around the end of August, could come any day sooner or later according to someone familiar with the cases.
The above article was first published at Allan Flynn’s website here.
Allan Flynn is a specialist researcher in aspects of gold and silver. He is currently investigating for future publication on the same topic and works in property and commercial architecture when he needs to eat. He holds shares in precious metals producers and banks.
“There are seven custodians offering vaulting services in the London bullion market, three of whom are also clearing members of the LBMA (Barclays, HSBC and JP Morgan). There are also four other security carriers, who are also LBMA members (Brinks, G4S Cash Solutions (UK), Malca Amit and Loomis International (UK) Ltd). The Bank of England also offers a custodian service (gold only).”
These 8 custodians are then listed in a pdf document on the LBMA website with their head office addresses, but not the vault addresses. So where are the actual vaults?
“The London-based Malca-Amit vault is conveniently located close to Heathrow airport. The vault is graded at level XII CD EX, the highest European Vault classification and is complemented by the most up to date security systems including the Avigilon CCTV suite with cameras capturing 29 megapixels per frame.
The vault is authorised by the members of the London Clearing Company and has LBMA approval for the weighing and inspecting of precious metals.“
Notice the reference to London Clearing Company. This is a reference to the London Precious Metals Clearing Limited (LPMCL), a private precious metals clearing consortium comprising HSBC, JP Morgan, Barclays, The Bank of Nova Scotia – ScotiaMocatta, and UBS.
Driving around in Circles?
The London Bullion Market Association (LBMA) actually featured Malca-Amit’s London vault in a slightly tongue in cheek article by Aelred Connelly titled “Visit to Malca-Amit’s New Vault” which appeared in Issue 68 of the LBMA’s Alchemist magazine in October 2012.
The article begins:
“It was a balmy day when we arrived at Feltham station where we were warmly greeted by our host for the day, Allan Finn, Global Commodities Director for Malca-Amit. Allan told us that the location of the vault was top secret so he deviously drove his car round in circles until we were so disorientated we had no idea where he had taken us.”
And ends with:
“Our tour came to an end. Allan drove his car round in circles again until we were so disorientated that we didn’t know where we had come from. But he made up for it by taking us for a nice lunch on the river at Richmond.
Apart from driving around in circles between Feltham Station and the vault destination, the article also tells us that:
“Malca-Amit became a member of the LBMA in March 2012 and shortly afterwards completed the building of a new vault facility close to Heathrow airport…..
…the new secure storage facility was opened in April 2012 near Heathrow airport.“
So it seems that Malca-Amit was granted Ordinary membership status of the LBMA just prior to its new vault becoming operational. The granting of Ordinary membership was probably a precursor to the Malca-Amit vault being, in the words of Malca-Amit, “authorised by the members of the London Clearing Company ..[with].. LBMA approval for the weighing and inspecting of precious metals.”
The LBMA Alchemist profile goes on to say:
“Built above ground, the Malca-Amit vault is one of a number of new facilities that either have been built or which will be opened shortly within the perimeter of the M25….. Proximity to an airport is an advantage.“
“When we eventually arrived at our destination only the sound of planes overhead gave any indication as to where we were.”
“Before we went in to the building Allan explained that the perimeter fencing can withstand a 7.5-ton vehicle at 50 mph and the internal shutter anti-ram barrier which is located behind the entrance gates can withstand a 7.5-ton vehicle at 30 mph.”
“But the thing that strikes you most is the vault. Allan explained that it is a Chubbsafe grade XII which offers the highest possible level of security and provides capacity for more than 300 metric tonnes of gold and 1,000 tonnes of silver.“
“Gold and silver are not the only precious items in storage: there are also diamonds and other precious stones and jewellery which are kept in storage on behalf of clients.”
Where then could Malca-Amit’s recently opened gold and silver vault be located?
Arena Building, Parkway
It turns out that in a similar manner to G4S when it made a planning application amendment for its new vault building at Abbey Road in Park Royal, Malca-Amit was also not shy of listing its building location on the internet, for it too listed the location of its new vault in a planning application amendment submission dated July 2013.
(0 vehicle(s), 0 trailer(s)) New authorisation at this operating centre will be: 4 vehicle(s), 2 trailer(s)
Which leads us to the questions: what is and where is this Arena Building?
In 2011, the already completed Arena Parkway building, profiled in a glossy brochure, was marketed on a UK commercial real estate website called NovaLoca commercial property finder. This brochure pdf file was created on 14 July 2011. So although Malca-Amit may have “completed the building of a new vault facility” as the LBMA stated, it did not build the building in which the vault is located. The building had already been built prior to 2011.
The ‘Arena’ building is in the ‘Parkway Heathrow M4’ industrial estate off Cranford Lane, in Heston, in the Hounslow area to the north-east of Heathrow airport. Anyone who knows that area around Hounslow will know that the one of the landing routes into Heathrow Airport is a very low approach along a route right above where this building is located.
According to the brochure:
“The Arena provides a modern detached warehouse unit of 23,660 sq ft with a self-contained secure yard and benefits from 24-hour security, an on-site management team and surveillance cameras.”
“The unit is available on a new Full Repairing and Insuring lease basis.”
Additional information in the 2011 brochure includes such facts as:
“NEW DISTRIBUTION/WAREHOUSE UNIT 23,660 sq ft (2,198 sq m)”
Description The Arena is a new high quality warehouse suitable for production, storage, research and development, laboratories and general distribution. It has an impressive reception leading to first floor fully fitted offices. The property is constructed of brick and profile metal composite cladding with double glazed windows fitted with solar shading.
Accommodation The property provides the following approximate gross external floor areas: Warehouse 20,430 sq ft 1,898 sq m FF Offices 3,230 sq ft 300 sq m Total 23,660 sq ft 2,198 sq m
Amenities Warehouse, 8m clear height, Two up and over electric loading doors, 200 kVA 3 Phase power supply, Roof lights to 10% of warehouse floor area, Floor loading of 50Kn/m2
Offices Open plan layout, Full access raised floor, Suspended ceilings with recess lighting, Gas central heating, Double glazed windows, Passenger lift Reception area
Exterior Self-contained property, Large secure yard, Access for articulated lorries Allocated parking
Given that this Arena building was being marketed from July 2011 onwards, and that Malca-Amit began operating the vault facility from April 2012, then it would suggest, as would be expected, that Malca-Amit took possession, and then fitted out the building to its own specific requirements, including the vault, before opening for business in April 2012.
The Arena building is in the London Borough of Hounslow, so it is instructive to examine planning applications made for this building in and around the dates that Malca-Amit took occupancy.
A planning search for TW5 9QA on the Hounslow planning website reveals that plans for this Arena Parkway building were submitted from as early as December 2007, but there seems to have been a long drawn out series of planning applications and amendements made for the construction, the latest being submitted in December 2008 and approved by Hounslow Council in February 2009. Therefore, construction of the building would have commenced sometime after February 2009.
The planning applications for the Arena building, which were submitted by CGNU Life Assurance Ltd / Aviva Investors, summarise the project as follows:
“System Reference: P/2008/3669
Planning Reference: 00315/F/P59(6)
Following approval for demolition of the existing office building and construction of new industrial and warehouse unit with ancillary office accommodation, new entrances off existing access road, car parking, landscaping and roof mounted photo-voltaic panels details submitted pursuant to Condition 6 (waste and recycled materials storage) of permission dated 18/03/08
Name Mr Mark Nevitt CGNU Life Assurance Ltd
Address C/O Aviva Investors No.1 Poultry London EC2R 8EJ
The Arena drawings document submitted with the most recent building application shows a layout in keeping with the size and shape of the structure that was actually built, so it looks like the development was completed in accordance with the last approved set of plans.
Following occupancy by Malca-Amit, the only planning application submitted for the Arena Building since then is application “Planning Reference: 00315/F/P61″ which addressed improved fencing around the site.
“System Reference: P/2013/1670
Planning Reference: 00315/F/P61
Site description THE ARENA PARKWAY TRADING ESTATE CRANFORD LANE HOUNSLOW LONDON TW5 9QA
Date received 31/05/2013
Details: Erection of security fencing and bollards along perimeter of site with sliding gate at yard entrance and rising barrier at car park
Ward: Heston West [note that a ward is a sub-unit of a borough]
“The application seeks to improve the existing security around the site. The existing bollards around the site would be made good to existing low-level shrub planting. The fencing around the part of the site would be a 2.4m high 358 mesh panel fence powder 600 mm high electric fence above. This fencing would be on the north, south and west parts of the site. There would be a 6m cantilevered sliding gate, which would be 2.4m high with serrated top – RAL 9005 (black) finish.
In order to secure parking on site a car park gate has been proposed whichruns off the access road. This would be 3m wide rising barrier which wouldbe 1m high, RAL 9003 (white) finish with contrasting red banding. Therewould be 1m wide exit gate which would be next to the unit.”
The Site Plan and Elevation for the above application put some visuals on the above delegated report text. This fencing is therefore the fencing that Allan Finn of Malca-Amit was referring to when he told the LBMA that the”perimeter fencing can withstand a 7.5-ton vehicle at 50 mph and the internal shutter anti-ram barrier which is located behind the entrance gates can withstand a 7.5-ton vehicle at 30 mph.”
The Edinburgh Assay Office and UKAS
Not only is Malca-Amit located in this Arena Parkway Building, but so is the Edinburgh Assay Office. Although the Edinburgh Assay office has its headquarters in Goldsmiths Hall, Edinburgh, in Scotland, it also operates a laboratory at a Heathrow Sub Office where it is accredited for “Chemical Tests for the purpose of hallmarking”.
This fact is revealed in a series of United Kingdom Accreditation Service (UKAS) reports that were posted on the UKAS website in June 2015. On 8 June 2015, UKAS posted a report about the Edinburgh Assay Office on its website titled “The Edinburgh Assay Office Issue No: 010 Issue date: 08 June 2015″. This report lists a ‘Heathrow Sub Office’ for the Edinburgh Assay Office without specifying its address.
However, 4 days earlier on 4 June 2015, UKAS posted a report titled “The Edinburgh Assay Office Issue No: 009 Issue date: 04 June 2015” in which the Heathrow Sub Office was listed with an address of “1st Floor, Arena Parkway, Cranford Lane, Heston, TW5 9QA”.
Although the Issue 010 report from UKAS replaced its Issue 009 version a few days later, the Issue 009 version remained in the Google cache as a Google search result and also as a complete cached document:
Cached version of Issue 009
The commercial logic for the Edinburgh Assay Office having a presence in Malca-Amit’s Arena building seems to be that, in addition to Malca-Amit storing precious metals and precious stones and jewellery in the building, the location is also convenient for the rest of the Heathrow area where precious metals and jewellery are constantly arriving into and departing from. This is the ‘Hallmarking in Transit’ service offered by the Edinburgh Assay Office, offered in conjunction with Malca-Amit, and explained on the Assay Office website here, and also on Malca-Amit’s website here.
This is not the only UK-based assay office to maintain a sub-office in the premises of a secure precious metals transport and secure storage operator near Heathrow Airport. The Goldsmiths Company – Assay Office, which is headquartered in the City of London, also operates a Heathrow Sub Office in “Unit 7, Radius Park, Faggs Road, Feltham, Middlesex, TW14 0NG”. This is listed in a UKAS report “The Goldsmiths’ Company – Assay Office Issue 016 Issue Date 05 August 2014″. This ‘Unit 7 Radius Park’ is a Brinks building and it too contains a vault, but that’s another vault profile for another day.
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