ISSUE 99 November 2020 Digging into the LBMA Trade Data page 4 WILL THE TRUE GOLD/SILVER RATIO PLEASE STAND UP? page 8 The Golden Man – The Search for El Dorado page 17 Global Precious Metals Conference 2021 3 30+ 300+ 5 Days Expert Speakers Organisations Venue REGISTRATION NOW OPEN LISBON 19 - 21 September 2021, EPIC SANA Lisboa Hotel, Lisbon, Portugal ALCHEMIST ISSUE 99 EDITORIAL BY ISABELLE STRAUSS-KAHN, LBMA NON-EXECUTIVE DIRECTOR ISSUE HIGHLIGHTS About two years ago, I quoted LBMA has just Digging into the LBMA Precious 2 published a Metals Trade Data Stefan Zweig in the Alchemist Call for Action for By Dr. Fergal O’Connor, page 4 (Edition 91 – ‘Removing the International Bullion Centres, after Will the True Gold/ Silver Ratio having developed Cloak from Central Bank Gold Please Stand Up? recommendations By Adrian Ash, page 8 Operations’). In 1932, he compliant with the visited the gold storage of OECD Due Diligence Guidance framework. LBMA News the Banque de France (BDF), poetically That initiative will By Ruth Crowell, page 14 calling it “the epicentre of invisible further ensure a responsible supply The Golden Man – waves that shake stock exchanges and chain. It also gives The Search for El Dorado due attention to By Simon Rostron, page 17 banks”. Thinking about invisible waves, supporting and I didn’t imagine an undetectable virus protecting Artisanal Regulation Update and Small-Scale By Rachel Hart, page 22 would later shake the world economy in Mining communities. a stronger way than the subprime virus It concerns the Facing Facts hidden in securitised assets did during whole responsible By Federico Gay, Samson Li sourcing eco-system, and Cameron Alexander, page 24 the Global Financial Crisis. governments, and local, regional Front cover – Golden Raft of the Muisca True, finance was part of the problem after 2008, while it is expected and international showing the investiture of a new king or to be part of the solution now. Yet, in both cases, gold has played its institutions, as LBMA ‘zipa’. Museo d’Oro, Bogota, Colombia, role of a safe haven, peaking at $1,895 on 6 September, 2011 and cannot improve featured in the article on page 17. again at $2,067 on 6 August 2020. governance alone. On a more personal note, I was delighted and honoured to be LBMA also developed the Global Precious Metals Code, a appointed as LBMA’s third Independent Non-Executive Director from 3 counterpart of the FX Code that was developed by central banks 1 July 2020. My only regret has been the need to hold all meetings and the BIS. The Code’s purpose is to ensure that all trading virtually, including my first Board meeting on 3 July. Nevertheless, counterparties in the gold market respect the highest standards and even if I have not been able to physically meet with the LBMA team, behaviours. While all LBMA members and the Bank of England have I’ve been very impressed by the sheer amount of work they are signed the Code, work continues to engage other central banks. In undertaking across the precious metals space. I’M EXCITED TO 2021, LBMA will be working with the Precious Metals Code Working Group, as well as the central banks, to update the I’m excited to be part of an organisation that is BE PART OF AN Code and make sure it remains relevant, especially given striving to make a real difference, particularly to ORGANISATION how much the world has changed in 2020. improve standards and transparency. In recent years, LBMA has also engaged closely with central THAT IS STRIVING We have also seen LBMA take centre stage since March banks, a community that is close to my heart. My TO MAKE A REAL as global markets grapple with the fall-out of the COVID-19 experience at the BDF, the Bank for International DIFFERENCE pandemic, by actively communicating with key stakeholders Settlements (BIS) and the World Bank leads me PARTICULARLY and sectors of the market to ensure the market continues to to focus on governance. To achieve an integrated, TO IMPROVE operate efficiently. responsible and transparent market, governance is key, not only at the LBMA organisation level, but STANDARDS AND So, a lot has been achieved but, as always, there also at all levels within the gold market. TRANSPARENCY remains more to be done.The 2021 agenda is full with our commitments to pursue all initiatives at stake and LBMA lies at the centre of the global over-the counter (OTC) market remain agile during what looks like being a prolonged time of and its role is ever more important, particularly in terms of setting uncertainty. I have been impressed by how LBMA has swiftly adapted and enforcing standards and representing the interests not just of its to its working environment, particularly given it is such a small team. members, but of all market participants. I also want to thank all those who have helped me take my first steps in the organisation. Let me highlight three key initiatives: Let me finish by saying that I look forward to working with the LBMA LBMA’s Responsible Sourcing Programme (RSP) demonstrates Executive and my fellow Board members to support the work of the just how LBMA is committed to maintaining the highest due 1 Association. My deepest wish remains that we all meet in person at the diligence standards for sourcing material in compliance with other next Annual Conference in Lisbon, meaning that we will have eventually international standards (i.e. OECD). A fundamental aspect of the Good emerged from this invisible wave. Delivery List is that gold (and silver) processed through accredited refiners can be trusted to be responsibly sourced. This chain of integrity is vital to maintaining confidence in the global market and has been the foundation for the continuous development of the LBMA RSP. 3 ALCHEMIST ISSUE 99 DIGGING INTO THE LBMA PRECIOUS METALS TRADE DATA BY DR. FERGAL O’CONNOR, LECTURER IN FINANCE, CORK UNIVERSITY BUSINESS SCHOOL After almost two years of being able to see the daily turnover figures for trading in the four precious metals, THE TOTAL US DOLLAR VOLUME it seems like a good time to look at OF GOLD BEING TRADED EACH DAY IS what we know now and what it means LARGE RELATIVE TO OTHER COMPARABLE for the market. A major reason for ASSETS AND THIS IS THE VALUE THAT the collection of this data has been REGULATORS ARE MOST INTERESTED IN to demonstrate to regulators that the gold market is highly liquid relative to other comparable assets and, to me, the data has done this conclusively. FIGURE 1: BREAKDOWN OF VOLUME BY ASSET CLASS FOR THE FOUR PRECIOUS METALS SIZE OF THE MARKETS GOLD SILVER The average daily volume in the gold spot market since November 2018 has been around $32 billion, with a record of $72 billion traded $ in one day in August 2020, and the total across the four gold categories has averaged $51 billion. Silver spot trades a much larger weight on average per day than gold, but is only 15% as large in dollar terms, while platinum and palladium only trade about 2% of gold’s dollar value per day on average. In all the markets, spot transactions dominate, accounting for about 60% of the US dollar volume, as seen here in Figure 1. The total US dollar volume of gold being traded each day is large relative to other comparable assets, and this is the value that regulators are PLATINUM PALLADIUM most interested in with respect to classifying an asset as a High-Quality Liquid Asset (HQLA). To put this in perspective, the total volume traded daily of all UK Gilts, as reported by the UK Debt Management Office, averaged £27 billion ($34 billion approximately) over the same period that we have data for the gold market. And this total covers more than 100 different traded Gilts, with the £27 billion of liquidity divided between these. This means that even on a day with low volume, the spot gold market in London is still more liquid than individual UK Gilts. The total volume of gold traded daily across the four areas reported is roughly equal to the total trading in all government bonds of the EU28.1 Spot Swap, Forward 1. https://www.afme.eu/portals/0/globalassets/downloads/data/government-bonds/ Option Loan, Lease, Deposit afme-prd-govt-bond-data-report-q2-2018.pdf 4 FIGURE 2: MARKET VOLUMES IN $ MILLION BY ASSET CLASS GOLD 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 01/19 05/19 09/19 01/20 05/20 09/20 SILVER 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 01/19 05/19 09/19 01/20 05/20 09/20 PLATINUM 3,000 2,500 2,000 1,500 1,000 500 0 06/19 08/19 10/19 12/19 02/20 04/20 06/20 08/20 PALLADIUM 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 06/19 08/19 10/19 12/19 02/20 04/20 06/20 08/20 Spot Swap, Forward Option Loan, Lease, Deposit IUE L A THE S E AIL S&P INDEX LEVEL AND VOLUME 10,000 3,600 9,000 3,400 8,000 3,200 3,000 7,000 2,800 6,000 2,600 5,000 2,400 4,000 2,200 3,000 2,000 02/20 03/20 04/20 05/20 Volume (rhs) Index (lhs) LBMA SPOT GOLD: PRICE AND VOLUME 50 $1,800 45 $1,750 40 $1,700 35 $1,650 30 $1,600 25 $1,550 20 $1,500 Ozs (per million) 15 $1,450 10 $1,400 5 $1,350 0 $1,300 02/20 03/20 04/20 05/20 Volume (lhs) Gold Price (rhs) FIGURE 1: BREAKDOWN OF VOLUME BY ASSET CLASS FOR THE FOUR PRECIOUS METALS GOLD SILVER PLATINUM PALLADIUM Spot Swap, Forward Option Loan, Lease, Deposit ALCHEMIST ISSUE 99 FIGURE 2: MARKET VOLUMES IN $ MILLION BY ASSET CLASS LIQUIDITY AND COVID-19 GOLD The LBMA Annual Review of 2019 argued that the Loco London and Loco Zurich gold markets were more liquid than government 160,000 bonds based on the European Bank Authority 2013 report data, 140,000 especially using the Amihud Illiquidity ratio for spot gold.