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 updated with Bank of England gold custody vault holdings
as of 30 April 2017.
Ignoring the LBMA 3-month lagged vs 4-month lagged anomaly, the LBMA’s
first vault reporting update, for vault data as of 31 March 2017, states that
the 8 sets of vaults in question (which includes the Bank of England gold
vaults) held a combined 7449 tonnes of gold and a combined 32078
tonnes of silver.
Also included in the first batch of LBMA data are comparable London vault
holdings figures for gold and silver for each month-end date from July 2016
to February 2016 inclusive. Therefore, as of the 31 July 2017, there is now
an LBMA dataset of 9 months of data, which will be augmented by one month
each month going forward. Whether the LBMA will play catch-up and publish
April 2017 month-end and May 2017 month-end figures simultaneously at the
next reporting date of 31 August 2017 remains to be seen.
One of the
Bank of England gold vaults
The New Vault Data – Gold and Silver
For 31 March 2017, the is LBMA 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.
Table 1: LBMA London Vaults and Bank of
England Vaults – Gold holdings, July 2016 – March 2017
Turning to silver, as of 31 March 2017, the LBMA is reporting total
vaulted silver of 32,078 tonnes held in London vaults. The vaulted silver
data also shows a notable increase over the period from the end of July 2016
to the end of March 2017, with a net 2485 tonnes of silver added to the
vaults.
Since the Bank of England vaults only store gold in custody on behalf of
customers and does 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.
Table 2: LBMA London Vaults – Silver holdings,
July 2016 – March 2017
How small is the
London gold float?
Previous Vault Estimates for Gold and Silver
Prior to the new LBMA and Bank of England vault holdings data reports, the
only way to work out how much gold and silver were in the London vaulting
network was through estimation. Between 2015 and 2017, a number of these
estimates were calculated for gold and published on the BullionStar
website and the GoldChartsRUs website.
See BullionStar page “How
many Good Delivery gold bars are in all the London Vaults?….including the
Bank of England vaults” and GoldChartsRUs page “LBMA/BOE
VAULTED GOLD, 2016 Update – The London Float”, and BullionStar page “Tracking
the gold held in London: An update on ETF and BoE holdings”.
The “Tracking the gold held in London” article, published on
5 October 2016, took a LBMA statement of 6500 tonnes
of gold being in London, the earliest reference to which was from 8
February 2016 Internet Archive page cache, and also took a Bank of
England statement that the Bank held 4725 tonnes as of the
end of February 2016 period,and then it factored in that the UK net
imported more than 800 tonnes of non-monetary gold up to August 2016
and 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 lower
number of the estimate is 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.
Table 3: ETF Silver
held across LBMA commercial vaults in London, early July 2017
The above article about the number of silver bars in the London vaults
also drew on some data from precious metals consultancy Thomson Reuters GFMS,
which each year publishes a table of identifiable above ground global silver
supply in its World Silver Survey. One category of silver within the GFMS
identifiable above ground silver inventories is called ‘Custodian Vaults’.
This is distinct from silver holdings in ETFs and silver holdings exchange
inventories such as COMEX. A simple way to view ‘Custodian Vaults’ silver
holdings is as an opaque ‘unreported holdings’ category as opposed to 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 32,078 tonnes,
stored in the LBMA vaulting network in London (and 31,238 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 Europe
region in 2016.
These new LBMA vault figures are basically implying that all of the GFMS
custodian vault figure for Europe (and some more) is all held in London and
not anywhere else in Europe. But that could not be the case as there is also
a lot of silver vaulted in Switzerland and other European countries such
as Germany, to think of but a few.
This begs the question, does the GFMS Custodian vault number for Europe
need to be updated to reflect the gap between the non-ETF holdings that LBMA
claims are in the London vaults and what GFMS is reporting in a European
‘Custodian vaults’ category? If the LBMA reporting actually broke down the
silver vaulting quantity number into Good Delivery silver bars and other
categories, it might help solve this puzzle as it would give an indication of
how much of this 32,000 tonnes of silver is in the form of bars that are
accepted for settlement in the London Silver Market i.e. Good Delivery silver
bars.
Could some of this 32,000 tonnes of silver be in the form of silver
jewellery, and private holdings of silver antiques and even silver artifacts?
On the surface the LBMA reporting appears to say not since it states that:
“jewellery and other private holdings held by retailers, individuals
and smaller vaults not included in the London Clearing system are not
included in the numbers”
But because this statement reads rather ambiguously, by implication
another interpretation of the LBMA statement could be that:
“jewellery and other private holdings held by retailers and individuals
in vaults that are part of the London Clearing system are included
in the numbers”
The London Clearing system here refers to the vaults of the 7 commercial
vault operators.
Until GFMS comes back with a possible clarification of its ‘Custodian
Vault’ figure for Europe, then this contradiction between the LBMA data for
silver and GFMS data for silver will persist.
The HSBC
vault in London containing the GLD gold
Large Bars but also Small Bars and Gold Coins
According to the LBMA’s press release, while “the LBMA vault holding
data …represent the volume of Loco London gold and silver held in the London
vaults offering custodian services“, surprisingly the new LBMA data
includes “all physical forms of metal inclusive of large wholesale bars,
coin, kilo bars and small bars.”
The inclusion of gold coins, smaller gold bars and gold kilobars in the
LBMA vault data is bizarre because only large wholesale bars are accepted as
Good Delivery in the London gold and silver markets, not gold coin, not
smaller bars, and not gold kilobars. Even the LBMA website states that “the
term Loco London refers to gold and silver bullion that is physically held in
London. Only LBMA Good Delivery bars are acceptable for trading in the London
market.”
Furthermore, the entire physical London Gold Market and physical London
Silver Market revolve around the LBMA Good Delivery lists. Spot, forward and
options trades on the London OTC gold and silver market are only referenced
to a unit of delivery of a Good Delivery bar, both for gold and for silver.
For example, in the LBMA’s “A
Guide to the London Precious Metals Markets” it states that:
“Unit for Delivery of Loco London Gold
This is the London Good Delivery gold bar. It must have a minimum
fineness of 995.0 and a gold content of between 350 and 430 fine ounces….
. Bars are generally close to 400 ounces or 12.5 kilograms”
For silver, the same guide states that:
“Unit for Delivery of Loco London Silver
This is the London Good Delivery silver bar. It must have a minimum
fineness of 999 and a weight range between 750 and 1,100 ounces, although it
is recommended that ideally bars should be produced within the range of 900
to 1,050 ounces. Bars generally weigh around 1,000 ounces.”
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 the
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 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, it 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:
“..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“
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. There are only
2 highly rolled-up numbers per month, one for gold and one for silver,
example 7449 tones for gold and 32078 tonnes for silver.
Contrast this to New York based COMEX and ICE gold futures daily
reporting, which both do break down the 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 interesting 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. This ‘gold owned
or controlled by the bullion banks’ 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 is 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 or the LBMA or 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 extends to
additional bullion banks beyond LPMCL 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, 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 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.
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: 8081 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. So you can see that the London gold trading system is a
fractional-reserve system with tiny physical gold underpinnings.
In May 2011, during a presentation at
the LBMA Bullion Market Forum in Shanghai China, on the topic of London
gold vaults, former LBMA CEO Stewart Murray included a slide which stated
that:
Investment – more than ETFs
ETFs
- Gold Holdings have increased by ~1,800 tonnes in
past 5 years, almost all held in London vaults
- Many thousands of tonnes of ETF silver are held in
London
Other holdings
- Central banks hold large amounts of allocated gold
at the Bank of England
- Various investors hold very substantial amounts
unallocated gold and silver in the London vaults
The last bullet point of the above slide is particularly
interesting as it references “very substantial amounts’ of unallocated
gold and silver. Discounting the fact for a moment that unallocated gold and
silver is not necessarily held in vaults or held anywhere else, given that
it’s just a claim against a bullion bank, the statement really means that
investors have ‘very substantial amounts‘ of claims against the
bullion banks offering the unallocated gold and silver accounts i.e.
very substantial liabilities in the form of unallocated gold and silver
obligations to the gold and silver unallocated account holders.
If a small percentage of these claim holders / investors decided to
convert their claims into allocated gold and silver, especially allocated
gold, then where are the bullion banks going to get the physical gold to give
to these converting claim holders? Neither do the claim holders of
unallocated positions have any way of knowing how accurate the LBMA vault
reporting is, because there is no independent auditing of the positions or of
the report.
Joni Teves, UBS, and
Ruth Crowell, LBMA CEO
UBS and LBMA
The last line of the LBMA press release about the new vault reporting
states the following:
“A detailed explanatory commentary follows, prepared by Joni Teves,
Precious Metals Strategist, UBS”
This line includes an embedded link to the Teves report within the press
release. This opens a 7
page report written by Teves about the new vault reporting. By
definition, given that this report is linked to in the press release, it
means that Joni Teves of UBS had the LBMA vault reporting data before it was
publicly released, otherwise how could UBS have written
its summary.
In her report, Teves states that a UBS database estimates that there are “1,485
tonnes of gold worth about $60bn and about 13,759 tonnes of silver worth
about $7.85bn are likely to be held in London to back ETF shares“.
These UBS numbers are fairly similar to the ETF estimates for gold (1510
tonnes) and silver (12040 tonnes) that we came up with here at BullionStar,
and so to some extent corroborate our previous ETF estimates. Teves also
implies that some of the gold in the Bank of England figure is not central
bank gold but is commercial bank gold as she says:
“let’s say for illustration’s sake that about 80% to 90% of BoE
gold holdings are accounted for by the official sector.“
The statement on face value implies that 10% – 20% of Bank of England gold
is not central bank gold. But why the grey area phrase of “let’s say for
illustration’s sake”. Shouldn’t the legendary Swiss Bank UBS be more
scientific than this?
Teves also says assume “negligible amount (in commercial vaults)
comprises official sector holdings“, and she concludes that “this
suggests that over the past year, an average of about 2,945 to 3,450 tonnes ($119-$139
bn) of investment-related gold was held in London.”
What she is doing here is taking the average of 9 months of gold holdings held
in the LBMA commercial vaults (which is 2439 tonnes) and then adding 10% and
20% respectively of the 9 month average of gold held at the Bank of England
(which is 506 and 1011 tonnes) to get the resulting range of between 2945 and
3451 tonnes.
Then she takes the ETF tonnes estimate (1485) away from her range to get a
range of between 1460 and 1965 tonnes, as she states:
… “Taking these ETF-related holdings into account would then
leave roughly around 1,460 to 1,965 tonnes or
about $59bn to $79bn worth of gold in unallocated and allocated accounts as
available pool of liquidity for OTC trading activities“
But what this assumption fails to take into account is that some of
this 1,460 to 1,965 tonnes that is in allocated
accounts is not available as a pool of liquidity, because it is held in
allocated form by investors precisely so that the bullion banks cannot get
their hands on it and trade with it. In other words, it is ring fenced.
Either way, a model will always output what has been input into it. Change
the 10% and 20% range assumptions about the amount of commercial bank gold in
the Bank of England vaults and this materially alters the numbers that can be
attributed to be an ‘available pool of liquidity for OTC trading
activities’.
Additionally, the portion of this residual gold that is in ‘unallocated
accounts’ is not owned by any investors, it is owned by the banks.
The ‘unallocated accounts’ holders merely have claims on the bullion
banks for metal that is backed by a fractional-reserve trading system.
In her commentary about the silver held in the London vaults, Teves does
not comment at all about the huge gap between her ETF silver in London (which
UBS states as 13,759 tonnes), and the full 32000 tonnes reported by the
LBMA,and does not mention how this huge gap is larger than all the ‘Custodian
Vault’ silver which Thomson Reuters GFMS attributes to the entire ‘Europe’
region.
Conclusion
The amount of gold in the London LBMA gold vaults (incl. Bank of England)
that is not central bank gold, that is not ETF gold, and that is not
institutional allocated gold is quite a low number. What this actual number
is difficult to say because a) the LBMA will not produce a proper vault
report that shows ownership of gold by category of holder, and b) neither
will the Bank of England in its gold vault reporting provide a breakdown
between the gold owned by central banks and the gold owned by bullion banks.
So there is still no real transparency in this area. Just a faint chink of
light into a dark cavern.
On the topic of London vaulted silver, there appears to be a lot more
silver in the LBMA vaults than even GFMS thought there was. It will be
interesting to see how GFMS and the LBMA will resolve their apparent
contradiction on the amount of silver stored in the London LBMA vaults.
Ronan Manly
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