LBMA at the Movies: Golden Turkeys

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."

Links: LBMA website. LBMA YouTube channel.

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.“

Links: LBMA website. LBMA YouTube channel.

How the Market Works – Five Elements (2:01 minutes)

… in which Jonathan Spall, LBMA Head of Communications “highlights how LBMA plays a crucial role in the five main elements that allow the smooth functioning of the global OTC market."

Links: LBMA website. LBMA YouTube channel.

[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.“

LBMA website. LBMA YouTube channel.

Responsible Sourcing (1:27 minutes)

… 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.“

LBMA website. LBMA YouTube channel.

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:

Banks pick central banker to head #gold market. Like putting an oil exec in charge of Tesla: https://t.co/mwHzNQCBZU pic.twitter.com/k2oJJPdYnh

— Jim Rickards (@JamesGRickards) July 13, 2016

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.

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