Unlocking Precious Liquidity & Beyond

By Ruth Crowell, Chief Executive, London Bullion Market Association (LBMA)

Published on September 20, 2019

I am delighted to be writing for Crucible in what is the 25th anniversary of SBMA. We have always enjoyed working closely with the association on mutual areas of interest and wider industry initiatives. We are also always happy to support SBMA publications and events. In June, I attended and spoke at the Asia Pacific Precious Metals Conference and LBMA also sponsored the conference dinner. With this article, I thought that I would bring Crucible readers up to speed with some of the things LBMA has been doing as well as some of the things that have happened in the wider industry.

So far, 2019 has been another busy year for LBMA. One of our biggest news stories has been the publication of trade reporting for precious metals, which demonstrates the deep liquidity in the market that we always suspected but have been unable to prove. Our Responsible Sourcing Programme has also expanded to encompass new criteria for Environmental, Social and Governance goals.

It demonstrates that gold in particular is an attractive liquid asset, which compares very impressively against other asset classes and indeed even outperforms the Extremely High Quality Liquid Asset (HQLA).

LBMA-I TRADE REPORTING

LBMA launched its trade reporting service in November 2018 with the publication of weekly gold and silver trade reporting data through our LBMA-i online service that is provided and managed by NASDAQ (previously Simplitium). Since then, we have added further data sets including daily data for gold and silver, daily and weekly data for platinum and palladium as well as data on strike price and tenor.

LBMA-i market data makes it possible for market participants to gauge the size, shape and liquidity of the OTC market as represented by LBMA members. By enhancing transparency, LBMA-i is assisting the forward market and helping market participants better understand gross turnover and liquidity in loco London and Zurich.

This transparency of trade reporting data helps LBMA members understand their share of the OTC market but will also provide stronger support for regulatory lobbying, most notably Basel III’s Net Stable Funding Ratio (NSFR), where we are working closely with key stakeholders to gain a full exemption for precious metals and clearing. To date, the trade data has provided positive evidence of gold’s liquidity and the argument that NSFR should not apply to gold in the same way it does to other commodities.

Using this new trade reporting data, LBMA has undertaken an analysis of the liquidity of gold and the other three precious metals. This preliminary analysis has been compared against the European Banking Authority’s (EBA) data from its 2013 report and is set out in Table 1. It demonstrates that gold in particular is an attractive liquid asset, which compares very impressively against other asset classes and indeed even outperforms the Extremely High Quality Liquid Asset (HQLA).

Figure 1: Trade reporting weekly turnover (12 week moving averages to the period ending 01 September 2019).

Figure 2: Gold trade reporting – 12 week moving averages (million ounces).

Table 1: Liquidity assessment of gold and other precious metals

GOLD AND SILVER HELD IN LONDON VAULTS

Let’s not forget that underpinning the trading volumes is a significant amount of physical gold held in London vaults. As of April 2019, there was 7,650 tonnes of gold, valued at $315.4 billion and 36,067 tonnes of silver valued at $17.4 billion. This equates to approximately 612,025 gold bars and 1,202,222 silver bars. We publish the information on gold stored across the London vaults publicly on a monthly basis on our website.

CENTRAL BANK GOLD AGREEMENT WON’T BE RENEWED IN SEPTEMBER

The European Central Bank announced on 26 July that its 20-yearold Central Bank Gold Agreement was no longer necessary, and that the renewal due in September 2019 would not take place. This is a vote of confidence in the depth and liquidity of the global gold OTC market.

It is reassuring to see that signatory banks also confirm that gold remains an important element of global monetary reserves. This agreement dates back to 1999 and was designed to limit the amount of gold that was collectively sold by (mainly) European central banks to 400 tonnes per year. It was renewed in 2004, 2009 and 2014.

LBMA’S MISSION

Our mission is to ensure the highest levels of integrity, transparency and leadership for the global OTC market. If you are not already a member, come and talk to us. We’d love to tell you more about LBMA and how we can benefit your organisation.

At the start of 2019, the Board set a number of new targets for LBMA as part of its new three-year strategic vision. This requires us to extend our outreach to engage more closely with sectors of the market where LBMA is under represented, for example, the mining, investment and central bank communities. Our message is that LBMA is the voice, standard setter and quasi-regulator for the global OTC precious metals market.

SETTING THE STANDARDS

One of the key strengths of LBMA is establishing best practices and setting standards through its Responsible Sourcing Programmes, the Good Delivery List and the Global Precious Metals Code. These standards deliver integrity and credibility to the industry, which all LBMA members benefit from. We are continually striving to improve standards, with the latest iteration (Version 8) of the Responsible Gold Guidance introduced on 1 January, encompassing Environment, Social and Governance issues.

As we reflect back on the last 100 years of the Gold Price, we equally look forward to the future and the next 100 years. Today, the Gold Price continues to be set in London and remains the international benchmark price for the gold market.

FIRST LONDON GOLD PRICE CENTENARY

This year 12 September 2019 marks the centenary of the first gold “fixing”, or what is now known as the LBMA Gold Price. On 12 September 1919, the Bank of England made arrangements with NM Rothschild & Sons for the formation of a free gold market and the establishment of a daily gold price.

The first “fixing” took place at 11 a.m. when the price of gold was settled at £4 18 s 9d by the five founding members: NM Rothschild & Sons (chair), Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins. The bids were made by telephone for the first few days, but it was then decided to hold a formal meeting at New Court, the London offices of NM Rothschild & Sons (whilst the original building is no longer with us, the new Rothschild offices stand on the site).

As we reflect back on the last 100 years of the Gold Price, we equally look forward to the future and the next 100 years. Today, the Gold Price continues to be set in London and remains the international benchmark price for the gold market.

Since 1919 the price has evolved and modernised following the closure of the Gold Fixing Company in 2015, when responsibility for the administration and governance of the price was transferred to an independent administrator, ICE Benchmark Administration. The auction is no longer conducted by telephone but on an electronic platform to help enhance transparency and provide for independent governance. The auction now has 15 direct participants, with the potential to grow since central clearing was introduced in 2017.

It is important to restate that the benchmark is set when transactions between buyers and sellers are matched within a certain defined and published tolerance.

London, the world’s leading financial centre, remains at the heart of the price as it did 100 years ago. The guiding principle that all business, whether for large or small amounts, is conducted solely on the basis of a single published price remains as true today as it did 100 years ago. Clients around the world wishing to buy or sell precious metals may all do so at this price, which continues to be globally accepted as the basis for pricing a variety of transactions by all sectors of the international precious metals market. It is important to restate that the benchmark is set when transactions between buyers and sellers are matched within a certain defined and published tolerance. This is also as true today as it was 100 years ago.

LBMA IN ASIA

LBMA continues to extend its global engagement in Singapore and throughout Asia via its arm in the Far East, LBMA Asia. Representing us in the region are Jeremy East, Senior Advisor and Bonnie Li, Executive Assistant (pictured above). Broader industry engagement is crucial to LBMA’s success in fulﬁlling its mission to represent the interests of the global precious metals industry.

Given that we are raising our profile in the region it is appropriate that our annual conference this year brings us to Shenzhen on 13 – 15 October. China is the most important producer and consumer of precious metals in the world so it is important that we engage closely with the market. We hope to see many of you there.

For further details about topics covered in this article as well as other issues, please visit www.lbma.org.uk.

RUTH CROWELL is responsible for the strategic development of LBMA, in partnership with the Chairman and the Board. She maintains accountability to and the quality of, the Association’smembership and Good Delivery refiners as well as representing LBMA’s interests in relation to regulators, investors, media and international precious metals markets. Prior to joining the LBMA, she worked in bank finance and US corporate law and also acted as a monitor at the UN Commission on Human Rights in Geneva.