Do bullion banks even exist anymore, top gold
conference asks...
ORGANIZED by the industry for the industry, this year's
London Bullion Market Association conference in Vienna had a cracking roster of speakers, writes Adrian Ash of
BullionVault – and consensus is they gave the best set of gold, silver and
PGM speeches since the event launched in 2000.
But many of this year's 690 attendees missed these great
presentations, leaving the conference room worse than half-empty in favour of
meeting current and prospective clients and counterparties instead. Because
doing business is the market's real business, after all.
Also missing this year, as David Jollie (currently Mitsui)
and John Reade (formerly Mitsui, then UBS, now Paulson & Co.) noted in
their summing up, was the LBMA conference's usual focus on price.
Yes, several panel debates looked at where precious metals
have been and where they might go – mostly down, in their opinion. But it was
maybe less the speakers' gloom than the relative lack of price analysis which
led attendees to cut their gold price forecasts for 1 year from now (the next
conference, in Singapore).
Between Monday's opening and Tuesday's close, delegates
lowered their average gold forecast almost 5%, down from a mildly bullish
$1216 to only the second bearish call of the last 8 years at $1160 per ounce.
Which may prove a contrarian signal to buy. Or simply show the conference's
average outlook gets more accurate on less volatility.
All told, LBMA 2015 didn't really find any single core
topic on the podium. Detailed insights came instead from fellow LBMA members
and invited speakers from across the market – notably on marketing platinum
jewelry in India, the outlook for diesel auto-catalysts, and the nature and
size of China's gold market.
There was a clear theme, however – a series of what Jollie
called "frankly existential questions" for the world's wholesale
bullion trade. This little crisis of self-doubt and reflection is of course
prompted by the bull market in regulation. But the equally tireless shift of
precious metals from West to East is also changing the professional gold
market, even as China's surging demand shows no impact on price direction and
as India's imports hold unchanged across the last decade around 800-900
tonnes per year despite gold prices quadrupling and then falling 35%.
Bullion banking itself – the business of helping finance
new mining and other long-term deals with gold loans, forwards and swaps – is
shrinking, the conference heard. One comment from the floor asked whether
bullion banks even exist anymore, adding that only a handful have a strong
mandate from their owner bank's senior executives, few of whom understand the
market. Is gold now just another line in the foreign-exchange business?
Electronic platforms are certainly taking over the
day-to-day trading flows. And that risks hurting gold miners if (or when, at
the right price) their shareholders lose their revulsion for hedging future
output by borrowing gold to sell at today's prices. Because, Tuesday's midday
panel agreed, the liquidity simply won't be there for large deals.
Hedging costs have already risen dramatically as the
supply of metal for lending has dried up from Europe's central banks, and
there's not one bullion bank now able to structure a hedging deal out beyond
3 years, one speaker said.
But as it is, the panel also agreed, the chatter about
switching London's "over the counter" market of
miner-to-bullion-bank deals to a single, centrally cleared exchange-traded
contract in gold forwards would solve a problem that nobody has. Miners don't
need it, and it won't provide the depth which still exists in traditional
services provided one-to-one. Bullion banks don't need it either, because the
gold will still need to be sourced from large holders – again one-to-one –
and their borrowing customers do large, lumpy deals infrequently. The
tick-by-tick flow of an exchange-traded contract doesn't fit.
On the other side of that business, the "official
sector" session at LBMA 2015 gave a quiet, diplomatic hint that European
central banks may be more open to providing a little more of their gold for
lending for the first time in a decade. Speakers from both the Banque de France and
the Oesterreichische Nationalbank (OeNB) – headquartered here in Vienna –
noted however that demand is low. Which brings us to back to gold-miner
hedging.
The (relative) success of royalty and streaming companies like
Royal Gold (TSE:RGL) and Silver Wheaton (NYSE:SLW) maybe opens a way to a
sober, sensible discussion of what one speaker on Tuesday called
"prudent" hedging – say 15-20% of the next 7-10 years of a miner's
production. But as John Reade noted in the closing session, there remains an
"almost religious belief" amongst stockholders that hedging can
only ever be bad. Because the lesson of the last bear market, when hedging
was seen pulling down prices, was followed by the hard lesson of the bull
run, when de-hedging the mountain of forward sales made at lower gold prices
dented returns.
Meantime, regulation is going to capture non-bank traders
– such as gold miners hedging production through bullion-bank forwards and
options – making the discussion more complex still, and perhaps forcing other
players to quit entirely. And that to the gloomy price outlook, and it's hard
not to feel a tiny bit bullish.
Because it's only when a market gets this tough and starts
losing participants that the floor might finally be in. The industry making
the gold market is certainly being changed in the process.
