ISSUE 98 August 2020 VALUE CHAIN FOR PRECIOUS Transported by METALS Land or Air Transported by • Industrial Land, Sea or Air • Grain Fabrication • Semi Finished Products • Large & Small bar Dore Fabrication fabrication CUSTOMS CUSTOMS Transit Vault Transit Vault • Store Extraction Deliver to Refinery/Inside Refinery • Pick & Pack • Inventory & Value Added Services • Assay RISK & SECURITY Transit GEOLOGICALFEASIBILITY SURVEY STUDY Transported CUSTOMS • Industrial Factory by Land or Air Vault Exploration • Jewellery Factory CUSTOMS • Retail CONSTRUCTION FINANCING Destination Delivery & Collection Transported by Land or Air First Annual Responsible Sourcing Report with Country of Origin Data – Out in September page 16 COVID-19 Extraordinary Golden Cities and Rise of ETFs of the World - Beyond in 2020 Nome, Alaska page 4 page 9 page 13 LBMA ASSAYING AND REFINING CONFERENCE 2021 14 - 17 March Hilton London Tower Bridge, London, UK REGISTRATION OPENS SOON! • Meet leading industry figures and specialists • Comprehensive programme, technical sessions and expert speakers • Exceptional networking opportunities Don’t miss out! INTERESTED IN SPONSORING OR EXHIBITING? Enquire Now [email protected] www.lbma.org.uk/events ALCHEMIST ISSUE 98 EDITORIAL BY SIMON POTTER, FORMER LBMA NON-EXECUTIVE DIRECTOR ISSUE HIGHLIGHTS Unfortunately, in July, I had to leave my COVID-19 and beyond: Implications for Precious Metals role as a Non-Executive Director (NED) By Dr. Jonathan Butler, page 4 as I am entering full-time employment in The Extraordinary Rise of the financial services sector. For good ETF Holdings in 2020 governance reasons, I believe this is the By John Reade, page 9 appropriate action for all parties. The following is a “THE STRANGEST COMMUNITY” review of my time as a director and is written in the Golden Cities of the World – Nome, Alaska spirit of transparency with which LBMA conducts By Simon Rostron, page 13 all its work. LBMA News By Ruth Crowell, page 16 My first LBMA board meeting was on 3 March In the case of gold, fairness has a much 2020. In normal time, this was not long ago, deeper meaning than in, for example, the Is Gold Still a Safe-Haven Asset? but in COVID-19 time, it feels like a very FX market, because of the critical need By Jiao Jinpu, page 19 long time ago. For example, 3 March was an for responsible sourcing. All through the in-person meeting where the interview process and then Regulation Update protocol around greetings was in board meetings and other By Rachel Hart, page 24 still open to debate and there LBMA IS UNIQUE interactions, it was clear to was still some confidence that IN BRINGING me how important responsible the annual conference would TOGETHER sourcing is to LBMA. This is Facing Facts take place. It was also the reflected in the launch of the By Cameron Alexander And Samson Li, STAKEHOLDERS page 25 day when the G7 met, took AS DIVERSE AS first Responsible Sourcing no direct action and then, in Report next month, and I a surprise move, the Fed cut MINERS REFINERS would encourage you all to Front cover – Graphic extracted from the rates by 50bps to 1%. At the AND MARKET read it and learn about all the upcoming first LBMA Annual Responsible almost-socially-distanced staff MAKERS IN good work that LBMA is doing Sourcing Report. Modified from original, party at the end of the day, THIS RESPECT in this regard. kindly provided by Brink’s Ltd. it was clear that the financial Issues around good market markets were encountering functioning, best practices, good delivery and Since then, there has been a keen focus difficulties in absorbing the immense responsible sourcing are outputs that LBMA on how to control costs while maintaining rebalancing required to manage the direct either directs or supports. It has a very strong strategic initiatives and ensuring that LBMA’s impact of COVID-19 and the uncertainty over reputation and track record on these outputs. convening power for the industry adapts. the policy response. This success needs to be underpinned by Third, strategic initiatives need to be In the following few weeks, all financial an agile, focused and flexible organisation. maintained and adapted to the new markets received a stress test. For the COVID-19 has affected organisations like environment induced by COVID-19. precious metals markets and other physical LBMA in many ways. delivery markets, we learnt that the fine details In working with CEO Ruth Crowell over the First, all work needs to be conducted virtually, on delivery and contract obligations could be last six months, it has been clear how with the ability to react quickly to breaking critical, as described in the Editorial by Paul focused she is on strategies to further news while respecting the tensions to normal Fisher in the May edition of the Alchemist. For LBMA’s impact on good market practices life that the disruption of a pandemic can the gold market, LBMA was able to draw on its and functioning, with the goal of improving bring. I have been very impressed with how long history, strong network and expertise to the precious metals market for all its the Executive and team have dealt with ease some of these frictions. And I know it will stakeholders. LBMA is unique in bringing this change in work and life balance. These take the lead in doing the work required to add together stakeholders as diverse as miners, changes are never seamless, but active further resilience in the market. refiners and market makers in this respect. listening and deep care for colleagues’ well- One of the main attractions being have smoothed some of the inevitable for me about the NED role bumps. The ultimate goal is to provide a market at LBMA was to continue my Second, revenue can fall in unexpected ways, that allows people all over the world involvement in promoting while costs don’t go away. For LBMA, the to hedge against unknown events best practices. As the initial hope that the preamble to the Global and an uncertain world, using the annual conference Precious Metals Code most enduring, best-known and liquid In the case of gold might still go ahead states: "The Code is alternative asset class of precious in October quickly intended to define a fairness has a much metals. The pandemic has again proved turned into a proactive robust, fair, effective and deeper meaning than how valuable this asset class can be. decision to cancel and transparent market where in for example the FX limit the impact on the all participants are able bottom line. to transact following best market because of practice guidelines." the critical need for responsible sourcing 3 ALCHEMIST ISSUE 98 COVID-19 and beyond: implications for precious metals BY DR. JONATHAN BUTLER, PRECIOUS METALS STRATEGIST, Gold, silver and MITSUBISHI CORPORATION The COVID-19 pandemic, the platinum group coupled with an unparalleled global economic contraction, metals in a world and associated fiscal and monetary policy responses of coronavirus around the world, has been sufficient to send gold to fresh all-time highs of over $2,000/oz CHART ONE: REAL RATES AND THE DOLLAR by early August 2020. 104 0.8 102 0.6 10-year inflation adjusted With gold registering a more than one-third price 100 0.4 US Treasury yield (%) increase since the start of this year, the global health 98 0.2 and economic crisis has clearly played to bullion’s 0.0 96 strength as a risk hedge in times of turmoil, and -0.2 94 demonstrated that gold is the asset of choice for -0.4 many investors seeking to capitalise on negative real 92 -0.6 interest rates and a weak US dollar. DXY (US Dollar Index) 90 -0.8 88 -1.0 But what of gold’s sister metals: silver, platinum and palladium? While these principally industrial metals are 86 -1.2 exposed to falling demand in key sectors as the impact of the coronavirus is felt, they are also supported by Jul 2020 many of the same macroeconomic factors as gold, and Dec 2019 Jan 2020 Feb 2020 Mar 2020 Apr 2020 May 2020 Jun 2020 there are some end-use markets that stand to benefit DXY 10 year inflation adjusted US yield as the world finds ways to live with the pandemic. JAN 2015 Source: Mitsubishi from Bloomberg 4 CHART TWO: GOLD PRICE AND GOLD EXCHANGE TRADED FUND (ETF) HOLDINGS 2,100 120 1,900 110 100 ETF holdings (Moz) 1,700 90 1,500 80 1,300 (USD/oz) 70 1,100 60 900 50 700 40 2015 2016 2017 2018 2019 2020 Gold Gold ETF Holdings Source: Mitsubishi from Bloomberg ALCHEMIST ISSUE 98 SUPPORTIVE MACRO ENVIRONMENT DRIVES PRECIOUS INVESTMENT National lockdowns in response to the coronavirus have brought an unprecedented contraction in both the supply and demand sides of the global economy, together with great uncertainty for the future. Central banks were quick to try to alleviate this by cutting interest rates to ultra-low levels, with the US Federal Reserve cutting its benchmark rate by 1.5% HOLDINGS OF GOLD IN to 0.25% in March, the lowest since the 2008 EXCHANGE TRADED financial crisis. Yields on 10-year US Treasury FUNDS (ETFS) HAVE bonds plunged as investors piled into these safe havens. When adjusted for inflation, this RECENTLY REACHED put ‘real’ interest rates in deeply negative RECORD LEVELS territory – ideal investment conditions for OF OVER 100 MOZ non-yielding precious metals. Indeed, holdings of gold in exchange traded funds (EFTs) have recently reached record levels of over 100 Moz. Silver too has seen a surge in ETF buying, taking holdings to all-time highs of over 800 Moz, while even platinum and palladium have seen an uptick in investor purchasing since the pandemic began.