Two weeks ago we summarized the stunning impact that ECB Predit Mario Draghi’s ‘whatever it takes’ efforts have had on European capital markets in one simple chart…
The European Central Bank now owns 14.8% of all eligible European corporate bonds.
However, as WolfStreet.com’s Wolf Richter points out the ECB’s efforts to buy corporate bonds as part of its stupendous asset buying binge has not only pushed a number of government bond yields below zero, where investors are guaranteed a loss if they hold the bond to maturity, but it has also done a number – perhaps even a bigger one – on the euro junk-bond market.
It has totally gone nuts. Or rather the humans and algorithms that make the buying decisions have gone nuts. The average junk bond yield has dropped to an all-time record low of 2.42%.
Let that sink in for a moment. This average is based on a basket of below investment-grade corporate bonds denominated in euros. Often enough, the issuers are junk-rated American companies with European subsidiaries – in which case these bonds are called “reverse Yankees.”
These bonds include the riskiest bonds out there. Plenty of them will default, and losses will be painful, and investors – these humans and algos – know this too. This is not a secret. That’s why these bonds are rated below investment grade. But these buyers don’t mind. They’re institutional investors managing other people’s money, and they don’t need to mind.
It’s perfectly good to invest in risky instruments as long as you’re being paid to take those risks or have a chance to make serious money. If you buy gold and silver bullion, you know you could make or lose a lot of money. But at a yield of 2.42%, these junk bonds will never make any money if you hold them to maturity, except for covering mild inflation. The risk of losses – including from default – are large. And investors are not getting paid to take those risks. It’s one of the most obviously lopsided deals out there.
The average yield of these junk bonds never dropped below 5% until October 2013. In the summer of 2012, during the dog days of the debt crisis when Draghi pronounced the magic words that he’d do “whatever it takes,” these bonds yielded about 9%, which might have been about right.
Since then, yields have plunged (data by BofA Merrill Lynch Euro High Yield Index Effective Yield via St. Louis Fed). The “on the Way to Zero” in the chart’s title is only partially tongue-in-cheek:
The chart below gives a little more perspective on this miracle of central-bank market manipulation, going back to 2006. It shows the spike in yield to 25% during the US-engineered Financial Crisis and the comparatively mild uptick in yield during the Eurozone-engineered debt crisis:
How does this fit into the overall scheme of things? For example, compared to the US Treasury yield? US Treasury securities are considered the most liquid and the most conservative investments. They’re considered as close to a risk-free financial instrument as you’re going to get on this earth. Turns out, from November 2016 until now, the 10-year US Treasury yield has ranged from 2.14% to 2.62%, comfortably straddling the current average euro junk bond yield of 2.42%
This chart shows the BofA Merrill Lynch Euro High Yield Index (red line) and the 10-year Treasury yield (black line). Note how they used to be worlds apart, and how the spread between them blows out when investors suddenly see risks again, with junk bond prices plunging and yield surging, while Treasuries barely quiver:
If you want to earn a yield of about 2.4%, which instrument would you rather have in your portfolio, given that both produce about the same yield, and given that one has a significant chance of defaulting and getting you stuck with a big loss, while the other is considered the safest most boring financial investment out there?
The answer would normally be totally obvious, but not in the Draghi’s nutty bailiwick. That this sort of relentless and blind chase for yield – however fun it may be today – will lead to hair-raising losses later is a given. And we already know who will take those losses: The clients of these institutional investors, the beneficiaries of pension funds and life insurance retirement programs, the hapless owners of bond funds, and the like.
In terms of the broader economy: When no one can price risk anymore, when there’s in fact no apparent difference anymore between euro junk bonds and US Treasuries, then all kinds of bad economic decisions are going to be made and capital is going to get misallocated, and it’s going to be Draghi’s royal mess.
WASHINGTON (Alliance News) – Crude oil futures were lower Friday morning, slipping below USD49 a barrel ahead of the weekly US rig count.The post <b>Crude Oil</b> Rally Needs More Fuel appeared first on crude-oil.news.
And now the dovish Fed has another problem: the BLS reports that in July the US added 209K jobs, beating consensus expectations of a 180K print, while June was revised higher to 231K from 222K, even as May was revised modestly lower from 152K to 145K, …
September West Texas Intermediate crude oil futures are trading lower shortly before the regular session opening. Barring any surprise news, it looks …The post <b>Crude Oil</b> Price Update – Break Under $48.52 will Lead to Ran…
After failing to break above the $50.0 p/b level on Thursday, WTI dipped sharply lower in US trading with lows below $49.00 as crude came under …The post Supply Concerns Hamper <b>Crude Oil</b> Prices, US Rig Data In Focus appeared f…
It took stocks only a few minute to “price in” the latest political shock out of Washington, and as of this morning Emini futures no longer care that Mueller has a grand jury, trading 0.08% in the green with European stocks and Asian shares all little changed as investors await the looming July jobs report, which is expected to show a slowdown in hiring from 222K to 180K but will have little impact on either the Fed’s thinking or the market.
Stocks, gold and most metals headed for a fourth week of gains on Friday, as fresh political woes for U.S. President Donald Trump and the prospect of a trade war with China kept the dollar depressed ahead of payrolls. The Bloomberg Dollar spot index inched lower for a third day, hovering near the weakest in 15 months, while cable rose to $1.3154, the euro hit a fresh two-and-a-half year high against the dollar and oil retreated.
Global stocks were just barely in the green this morning with the MSCI All-Country World Index rising less than 0.05%. In key overnight macro moves, the Aussie dollar gained against the greenback despite RBA warnings about currency’s strength, while the USD/JPY fell as much as 0.2% to 109.85, the weakest since June 15, before paring decline to 110.03.
In Asia, Japan’s Topix index slid 0.2% and Australia’s S&P/ASX 200 Index lost 0.3%. South Korea’s Kospi was up 0.5 percent after sliding 1.7 percent on Thursday. Japan’s Nikkei ended the week little changed, dropping 0.4 percent on Friday as a stronger yen weighed. Wall Street was expected to start marginally higher, having seen the Dow index break through 22,000 points this week. Hong Kong’s Hang Seng Index was little changed, while the Shanghai Composite Index swung between gains and losses.
European markets got off to an underwhelming start, with Britain’s FTSE 100, Germany’s DAX and France’s CAC 40 all lower. The FTSE was on course for its best week in two months, boosted by the latest tumble in the pound. The Stoxx 600 traded sideways as Swiss Re AG’s profit drop weighed on insurers. The rising Euro, which ING now expects to rise as high as 1.20 in the next 4 weeks, has capped Stoxx gains in recent months, on concerns it will pressure exporter earnings. The U.K.’s FTSE 100 Index gained less than 0.05 percent to the highest in more than a week. Germany’s DAX Index jumped 0.1 percent.
The dollar index, which has just recorded its worst run of monthly losses since early 2011, was 0.1 percent lower at 92.766 on the day and about 0.6 percent during a week in which it fell to a 15-month low of 92.548. “We think things are overdone in terms of negative sentiment around the dollar,” said PineBridge Investments fund manager Hani Redha, quoted by Reuters. “Overall we think global growth is going to be quite solid but we think the leadership is going to change back towards the U.S.,” he added, saying Trump was also likely to get at least some fiscal stimulus measures through in the coming months.
As SocGen’s Kit Juckes writes this morning, the US Treasury market is heading towards today’s non-farm payroll data with 10s at 2.23%, in the bottom half of their 2.12-2.42 range. The RBA sees lower inflation thanks to the AUD’s rise to date and a threat to growth from further appreciation, Japanese wages fell and even smoothed show the same lack of wage growth as we see everywhere, despite a tightening labour market.
Just taking those three bits of information I get a now-familiar snapshot of the world. Anchored US rates and yields will make sure that capital goes on flowing out of dollars and into anything that’s perceived as more interesting. Other central banks will grumble (at the very least) about the weaker dollar trend and in Japan, the need to reboot inflation expectations remains as clear as ever, the difficulty of doing so likewise, and the danger that anchored US yields drag USD/JPY down and is pretty clear too.
Previewing today’s payrolls report, the SocGen strategist writes that with consensus forecasts of +180k in NFP an 2.4% in average hourly earnings, “the BOJ, RBA and the ECB for that matter, will be hoping for an upside surprise. An NFP surprise would provide some relief, a huge upside surprise in wage growth would really help them a lot. That doesn’t make it likely, sadly.”
WTI fell below $49, extending its weekly loss with the Baker Hughes rig count due later. “It was very natural on the technical side that we should see consolidation around the 200 day moving average,” Torbjorn Kjus, chief oil economist at DNB Bank, told Bloomberg. Brent is trading below 200-day MA Friday after moving above that level last week and settling above the marker for past 2 sessions; WTI also below Friday
In rates, Europe’s 10-year benchmark government bond yield and U.S. equivalents were pinned near one-month lows of 0.45 and 2.23% respectively amid the U.S. political uncertainty. U.S. yields have been falling for most of 2017 as the President’s travails have cooled expectations for growth and inflation. 10-year gilt yield +1bps to 1.16% after Bank of England kept rates on hold Thursday.
In commodities, West Texas Intermediate crude dipped 0.8 percent to $48.66 a barrel, the lowest in a week. Gold was steady at $1,269 an ounce and set to score and modestly weekly rise, which will be its fourth in a row. Copper advanced 0.2 percent to $2.88 a pound.
S&P 500 futures up 0.05% to 2,473
STOXX Europe 600 down 0.05% to 378.75
MSCI Asia up 0.01% to 160.92
MSCI Asia ex Japan up 0.2% to 529.07
Nikkei down 0.4% to 19,952.33
Topix down 0.2% to 1,631.45
Hang Seng Index up 0.1% to 27,562.68
Shanghai Composite down 0.3% to 3,262.08
Sensex down 0.04% to 32,225.85
Australia S&P/ASX 200 down 0.3% to 5,720.58
Kospi up 0.4% to 2,395.45
EUR/USD: +0.1% to 1.1880
USD/JPY: steady at 110.09
GBP/USD: +0.1% at 1.3154
German 10Y yield rose 0.3 bps to 0.456%
US 10-year yield +1bp to 2.23%
Italian 10Y yield fell 2.6 bps to 1.697%
Spanish 10Y yield rose 1.6 bps to 1.468%
Brent Futures down 0.8% to $51.62/bbl
Gold spot up 0.06% to $1,269.40
U.S. Dollar Index down 0.1% to 92.75
Top Overnight News
BOE Is Said to Find Error Behind Spike in U.K. Mortgage Arrears
Rosneft Aids Venezuela’s State Oil Producer With Prepayment
Toyota, Mazda Announce Tie Up, Plan $1.6b U.S. Plant
Icahn-Backed Change in Biofuel Rule Is Said to Near EPA Rebuff
Trump’s Reboot of Sanctions Ushers In ‘New Normal’ for Russia
Mueller Is Said to Use Washington Grand Jury in Russia Probe
Allianz, CPPIB Buy Stake in Gas Natural’s Distribution Unit
Abe’s New Cabinet Shows Continuity in Japanese Economic Policy
Pearson to Cut 3,000 Jobs, Dividend as Education Woes Remain
Apple Can’t Duck Consumer Fraud Claim Over iPhone Screen Defect
AMC Entertainment Holdings, Reports $100M Share Buyback Program
Netflix Announces First Chinese-Language Original Series
Mubadala Sells 40M Shares in AMD, About 3.9% of Co.
Nigeria Concludes Talks With GE to Run Rail for 30 Years: Punch
McDonald’s Japan July Sales Helped by Desserts, Hawaiian Burgers
Teva Debt Sells Off After Warning May Breach Covenants
Japan Tobacco to Buy Indonesia Cigarette Maker for $677 Million
Asian equity markets traded mixed, with the region indecisive ahead of key risk NFP data and after a lacklustre close in US where energy underperformed and the Russian probe seemed to have stepped up a notch. This saw early losses in ASX 200 (-0.2%) and Nikkei 225 (-0.3%), with financials the underperformer in Australia after big 4 bank CBA was accused of breaches to anti-money laundering and counter¬terrorism regulations. Shanghai Comp (+0.2%) and Hang Seng (+0.1%) were slightly positive after the PBoC upped its daily liquidity operations, although upside was capped as this still amounted to a net weekly liquidity drain. RBA Statement on Monetary Policy states recent AUD rise had modest effect on GDP and inflation forecast. Says:
Holding policy steady consistent with growth and inflation target.
Recent increase in AUD has modest dampening effect on economy.
Further strength in AUD would reduce economic growth and inflation.
RBA maintains inflation forecast for 2017 and 2018 at between 1.5%-2.5% for both, 2019 forecast kept at 2.0%-3.0%.
Lowers GDP forecast for 2017 to 2.0%-3.0% from 2.5%-3.5%, 2018 forecast maintained at 2.75%-3.75%, while 2019 forecast was increased to 3.0%-4.0%.
Top Asian News
China Hedge Fund Says Most ‘Violent’ Deleveraging Phase Over
China Millionaires in Jeans Spur Wealth Manager Push Abroad
Abe’s New Cabinet Shows Continuity in Japanese Economic Policy
Summit Announces $1 Billion LNG-to-Power Project in Bangladesh
Indonesia Sees Room to Ease If Inflation, Forex Rate Manageable
JT to Buy Karyadibya Mahardhika for $1b Enterprise Value
China Bulls’ Resolve Tested as Stocks Struggle to Pass Key Level
Indonesia Says Google Agrees to Monitor Negative YouTube Content
Hong Kong Stock Rally Buoyed by Bullish Profit Projections
The majority of EU bourses have come off worst levels, and now trade in marginal green territory. The biggest movers throughout the European morning have been UK Home Building names, with an overnight article from “PropertyWeek” circulating, which states that the Government is reviewing its ‘Help to Buy’ Scheme. Taylor Wimpey (TW LN) and Perisimmon (PSN LN) shares were both down over 5% for the session, as the former generated 45% of its sales from the Scheme. Later reports from a UK government spokesperson stated that it is incorrect to infer that the government are set to cancel the help to buy scheme, did see many of the loses retraced. NFP Friday trade has been evident in fixed income. markets today, with the 1 Oy bund holding its slim range. Underperformance has been seen in peripherals, with delays relaying slight profit taking in BTPs and Bonos. Corporate issuance once again came into fruition today, with Verizon printing AUD 2.2bn “kangaroo” bond, with BAT mandating banks for a multi-currency and multi-tranch bond deal.
Top European News
BOE Says Companies Need Clarity as Brexit Crimps Investment
German Factory Orders Jump in Sign of Robust Economic Growth
Allianz Buys LV= Unit in Deal Valued at as Much as $1.3 Billion
RBS’s Investment Bank Drives Second-Quarter Profit Beat
Constellium Is Said to Weigh Options After Takeover Interest
Swiss Re Drops as Earnings Succumb to Market-Pricing Pressure
U.K. Housebuilders Fall After Reports of ’Help to Buy’ Review
BOE Is Said to Find Error Behind Spike in U.K. Mortgage Arrears
Rosneft Aids Venezuela’s State Oil Producer With Prepayment
In currencies, GBP has seen the majority of volatility this morning as EUR/GBP and GBP/USD both briefly broke out of the post EU trading range. Elsewhere, overnight volatility was seen in AUD, following the release of the RBA’s statement of Monetary Policy, with no fears of an overvalued currency, AUD/USD begun to gain some bullish pressure, we have continued to see buying following the bounce of August’s low, with bulls now looking to retest 0.80. USD & CAD will both await their jobs reports due at 13.30BST. However, it is worth noting the greenback did once again see concerning news as political tensions continue with US Special Counsel Mueller empanelling a Washington Grand Jury in Russia probe.
In commodities, Asian oil demand has been seen to shift back to the Middle East and Russia in Q4 following the recent rise in Brent. Elsewhere, OPEC has delivered a record high adherence to its oil cut in 2017, struggles do remain with Iraq and the UAE yet to show how they can meet their targets. Trade yesterday saw the USD 50.00/bbl level hold once again and the rejection has leaked into trade today, with WTI now trading around USD 48.80. Precious metals all trade in marginal positive territory, likely abiding to the risk tone following the recent acceleration in the US Russian probe.
Looking at the day ahead, Friday is relatively quiet day for data in both Asia and Europe with only German factory orders data for June due and Italy’s retail sales for June. The US will be in greater focus as the July nonfarm payrolls number is due (180k expected) along with other labor market data. Alongside that, we will also get the trade balance reading for June. Onto other events, the Baker Hughes US rig count will also be out. Notable US companies reporting include: Cigna, Berkshire Hathaway and CBOE. Notable European companies reporting include: Allianz, Swiss Re and Erste Group.
US Event Calendar
8:30am: Change in Nonfarm Payrolls, est. 180,000, prior 222,000;
Change in Private Payrolls, est. 180,000, prior 187,000
Change in Manufact. Payrolls, est. 5,000, prior 1,000
Unemployment Rate, est. 4.3%, prior 4.4%
Average Hourly Earnings MoM, est. 0.3%, prior 0.2%; Average Hourly Earnings YoY, est. 2.4%, prior 2.5%
Labor Force Participation Rate, prior 62.8%
Underemployment Rate, prior 8.6%
8:30am: Trade Balance, est. $44.5b deficit, prior $46.5b deficit
DB’s Jim Reid concludes the overnight wrap
Hello Payrolls Friday. On a day we pore over how many people have been employed and how much they’ve been paid in the US, I’m still trying to come to terms with the €222 million buy out clause activated for the transfer of Brazilian Neymar from Barcelona to PSG. This is broadly equivalent to the annual GDP of the equatorial Marshall Islands (population over 53k) which is around the 190th biggest nation in the world. If you include his wages over a 5 year contract you can nearly double this and you get close to the annual GDP of Tonga – home to over 100k people. The Marshall Islands aren’t a hot bed of economic activity although I did note that their income tax rates are 8% and 12% and corporation tax is at 3%. Anyone coming with me to set up a company? Although make sure you can afford your current buy-out first though.
Back to US jobs and consensus expectations are for a 180k gain (222k previous) today. Our US economists project a more optimistic figure of 200k for headline and private payrolls, which they expect to be sufficient to lower the unemployment rate a tenth to 4.3%. However, they note that the July ADP survey and the employment subcomponents of the manufacturing and non-manufacturing ISMs add some downside risks to their forecast as their payrolls model (which uses the first reported values of ADP and the ISM composite employment reading) projects private payroll gains of around 165k. Counterbalancing this risk however is the fact that private payrolls have recently fallen short of the levels implied by ADP and the ISMs, and payrolls (including revisions) have accelerated in the past following similar misses. On other detail aspects of the report, they expect that hours worked should remain steady at 34.5 along with a 0.3% gain in average hourly earnings (AHEs), which would lower the YoY growth rate of the series to 2.4% (with a risk of rounding up and remaining at 2.5%). However, as long as there is no material surprise in either direction, they do not expect this month’s AHEs to meaningfully impact policymakers’ intermediate-term inflation expectations. Finally, the team notes that even if July payrolls fall below their forecast, Amazon’s hiring spree this month could result in an upside surprise in next month’s (August) data, which will likely factor more prominently into the Fed’s decision process going into the September 20 meeting.
So another report where the market will look for any life in inflation and a reason for bonds to sell-off. This report comes on the back of a sizeable bond rally yesterday which seemed to be kickstarted by a relatively downbeat outlook from Mr Carney on a day the BoE cut their growth and wages forecast. Before we review this it’s worth highlighting that the Wall Street Journal reported 30 minutes before the US close that Special Counsel Robert Mueller was said to have impaneled a grand jury in the ongoing Russia probe. It led to a small spike lower in risk (see below) into the close and it’s another cloud for the Trump presidency to contend with.
Back to the BoE. As widely expected, the Bank left rates steady at 0.25% with the number of dissent votes declining from three to two, due to Kristin Forbes’ departure. The Bank reiterated future policy may need to be tightened slightly more than the current market yield curve implies (the first hike is priced in 2H18), but DB’s Mark Wall notes that Governor Carney made no attempt during the press conference to re-price dovish market expectations for this year. In Carney’s opinion, the UK was still experiencing exceptional circumstances ‘and would do so for some time’, with Brexit-related risks to the forefront. The bank has also cut its economic growth projections to 1.7% in 2017 (vs. 1.9% previous) and 1.6% in 2018 (vs. 1.7% previous). Looking ahead, with two new members on the MPC as of the September meeting, our team think it will be difficult for the hawks to gain a majority on the MPC without the support of the Governor. So our team continues to expect the BoE to NOT tighten monetary policy until Brexit related uncertainty has been sufficiently reduced.
Post the BOE release, Gilt yields dropped ~5bps in 10 mins of trading and continued to fall to close 9bps lower for the day. The more dovish rates outlook and cautious comments from Carney had a similar impact across most government bond markets with Gilts (2Y: -6bp; 10Y: -9bps), USTs (2Y: -2bps; 10Y: -5bps) and German bunds (2Y: +1bp; 10Y: -3bps) yields mostly notably lower. Elsewhere changes were a bit more modest with Italian BTPs (2Y: unch; 10Y: -2bps) and OATs (2Y: +1; 10Y: -3bp).
Turning to currencies there was a fair bit of intraday activity for Sterling after the meeting. It traded as high as 1.1202 in the morning session against the Euro, but then fell to as low as 1.1052 in the hours after the BoE announcement, before closing at 1.1069 for the day (-0.7% for the day). Sterling/USD also had similar intraday trends, before closing down -0.6% for the day. For other currencies, the USD dollar index dipped 0.2%, partly due to the softer ISM non-manufacturing data and the Euro/USD edged 0.1% higher. In commodities, WTI oil fell 1.3% as investors weighed up reports of rising US production against a decline in crude stockpiles. Elsewhere, precious metals were slightly up (Gold +0.1%, Silver +0.2%), copper was flat, but aluminium fell 0.8%.
Onto equities, the S&P also had its share of intraday action. The index was trading in a tight range for most of the day, but then fell ~0.3% post the Mueller news and closed -0.2% down for the day. The VIX also responded, rising ~+5.5% around that time to 10.5 but closed a bit lower at 10.44. Elsewhere, the Dow edged up ~+0.1%, breaking another fresh all-time high for the 7th consecutive day. Within the S&P, modest gains in the industrials and utilities sectors were more than offset by losses in energy (-1.3%) and materials (-0.7%). European markets broadly strengthened, the Stoxx 600 edged up 0.1%, the FTSE 100 up 0.9% (helped by the fx move) and the CAC (+0.5%), but the DAX fell 0.2%, impacted by Siemens (-3%).
Away from the markets, as noted earlier, the WSJ has reported that Special Counsel Mueller has impaneled a grand jury as part of his probe into Russia’s interference in the US election and possible ties with President Trump’s campaign. A grand jury suggests that the probe has gone beyond investigating what might have happened, to potentially charging people with crimes. Mueller’s office has declined to comment. However, a special counsel to the president (Ty Cobb) added later that he wasn’t aware that Mueller was using a grand jury, but also acknowledged that “…grand jury matters are typically secret…”.
Elsewhere, US senators have introduced two bipartisan bills aimed at protecting Mueller on concerns that Mr Trump may look to dismiss him. We shall no doubt see more news flow on this in the coming weeks.
This morning in Asia, markets are mixed but little changed. The Nikkei is -0.4%, the Kospi recovering slightly (+0.2%) after yesterday’s -1.7% fall, with the Hang Seng flat and China slightly higher on balance.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, data was in line to slightly soft. The ISM nonmanufacturing composite for July was below expectations at 53.9 (vs. 56.9 expected; 57.4 previous), which is the lowest level since a similar downward spike in August last year. Digging into the details, new orders index fell 5.4pt to 55.1 and the employment index fell 2.2pt to 53.6. However, even after factoring in the employment indices from the twin ISM reports together, DB’s economist believes the employment indicators are still consistent with decent payrolls growth (~200k per month). Elsewhere, factory orders for June was in line at 3%, initial jobless claims for July was slightly lower than expectations at 240k (vs. 243k) and continuing claims was at 1,968k (vs. 1,958k expected). The final durable goods order stat for June was reported higher at 6.4% (vs. 0% expected).
Onto Europe and the June Eurozone retail sales were higher than expectations at 0.5% mom (vs. 0% expected) and 3.1% yoy (vs. 2.5% expected), while UK’s Markit services and composite PMI were also a tad higher than expectations at 53.8 (vs. 53.6) and 54.1 (vs. 53.8) respectively. Elsewhere, the final July services and composite PMI for the Eurozone (-0.1pt vs flash composite), France (-0.1pt) and Germany (-0.4pt) were also released and was slightly lower than the flash PMIs.
Looking at the day ahead, Friday is relatively quiet day for data in both Asia and Europe with only German factory orders data for June due (0.5% mom, 4.4% yoy expected) and Italy’s retail sales for June (0.1% mom expected). The US will be in greater focus as the July nonfarm payrolls number is due (180k expected, DB 200k) along with other labour market data. Alongside that, we will also get the trade balance reading for June. Onto other events, the Baker Hughes US rig count will also be out. Notable US companies reporting include: Cigna, Berkshire Hathaway and CBOE. Notable European companies reporting include: Allianz, Swiss Re and Erste Group.
The London Bullion Market Association (LBMA) has just released a first update on the quantity of physical gold and silver holdings stored in the ‘LBMA’ London vaulting network. The LBMA press release explaining the move, dated 31 July, can be read here.
This vaulting network, administered by the LBMA, comprises a set of precious metals vaults situated in London that are operated by the Bank of England and 7 commercial vault operators. For simplicity, this set of vaults can be called the LBMA London vaults. The 7 commercial vault operators are HSBC, Brinks, ICBC Standard Bank, Malca Amit, JP Morgan, Loomis and G4S. ICBC Standard outsources its vault management to Brinks. It’s possible that to some extent HSBC also outsources some of its vault management to Brinks.
Strangely, the LBMA’s initial reporting strangely only runs up to 31 March 2017, which is 4-months prior to the first publication date of 31 July. This is despite the fact that new LBMA vault holdings data is supposed to be published on a 3-month lagged basis, which would imply a latest report coverage date of 30 April.
At the end of April 2017, the Bank of England separately began publication of gold vault holdings for the gold bars that the Bank stores in custody within its own vaults. The Bank of England reporting is also on a 3-month lagged basis (and the Bank actually adheres to this reporting lag). See BullionStar article “Bank of England releases new data on its gold vault holdings”, dated 28 April 2017, for details of the Bank of England vault reporting initiative.
Currently, the Bank of England is therefore 1 month ahead of the LBMA vault data, i.e. on 31 July 2017, the Bank of England’s gold page updated with Bank of England gold custody vault holdings as of 30 April 2017.
Ignoring the LBMA 3-month lagged vs 4-month lagged anomaly, the LBMA’s first vault reporting update, for vault data as of 31 March 2017, states that the 8 sets of vaults in question (which includes the Bank of England gold vaults) held a combined 7449 tonnes of gold and a combined 32078 tonnes of silver.
Also included in the first batch of LBMA data are comparable London vault holdings figures for gold and silver for each month-end date from July 2016 to February 2016 inclusive. Therefore, as of the 31 July 2017, there is now an LBMA dataset of 9 months of data, which will be augmented by one month each month going forward. Whether the LBMA will play catch-up and publish April 2017 month-end and May 2017 month-end figures simultaneously at the next reporting date of 31 August 2017 remains to be seen.
One of the Bank of England gold vaults
The New Vault Data – Gold and Silver
For 31 March 2017, the LBMA is reporting 7449 tonnes of gold stored across the 8 sets of vault locations. For the same date, the Bank of England reported 5081 tonnes of gold held in the Bank of England vaults. Therefore, as of 31 March 2017, there were 2368 tonnes of gold ‘not in the Bank of England vaults’ (or at least 2368 tonnes of gold not counted by the Bank of England data).
Of the gold not in the Bank of England vaults, about 1510 tonnes of this gold in London was held by gold-backed Exchange Traded Funds (ETFs), mainly with the custodians HSBC and JP Morgan. These ETFs include the SPDR Gold Trust and various ETFs from ETF Securities, Source, iShares, and Deutsche Bank etc. This 1510 tonnes figure is taken from an estimate calculated at the end of April 2017 using data from the GoldChartsRUs website. See BullionStar article “Summer of 17: LBMA Confirms Upcoming Publication of London Gold Vault Holdings” dated 9 May 2017 for details of this ETF calculation.
Subtracting this 1510 tonnes of ETF gold from the 2368 tonnes of gold stored outside the Bank of England vaults means that as of 31 March 2017, there were only about 858 tonnes of gold stored in the LBMA vaults outside of the Bank of England vaults that was not held by gold-backed ETF holdings. See Table 1 below.
The lowest gold holdings number reported by the LBMA within its 9 months of vault data is actually the first month, i.e. July 2016. At month-end July 2016, the LBMA report shows total vaulted gold of 7283 tonnes. There was therefore a net addition of 166 tonnes of gold to the LBMA vaults between August 2016 and the end of March 2017, with net additions over the August to October 2016 period, followed by net declines over the November 2016 to February 2017 period.
Table 1: LBMA London Vaults and Bank of England Vaults – Gold holdings, July 2016 – March 2017
Turning to silver, as of 31 March 2017, the LBMA is reporting total vaulted silver of 32,078 tonnes held in London vaults. The vaulted silver data also shows a notable increase over the period from the end of July 2016 to the end of March 2017, with a net 2485 tonnes of silver added to the vaults.
Since the Bank of England vaults only store gold in custody on behalf of customers and do not store silver, there are no silver holdings at the Bank of England and therefore there is no specific Bank of England silver reporting. The LBMA silver data therefore refers purely to silver vaulted with operators such as Brinks, JP Morgan, Malca Amit, HSBC, and Loomis.
There are currently at least 12,000 tonnes of silver stored in London on behalf of silver-backed ETFs such as the iShares Silver Trust (SLV), various ETF Securities products, a SOURCE ETF and some Deutsche Bank ETFs. Subtracting these ETF holdings from the full 32,078 tonne figure being reported by the LBMA would suggest that there are an additional ~ 20,000 tonnes of non-ETF silver held in the London vaults.
Previous Vault Estimates for Gold and Silver
Prior to the new LBMA and Bank of England vault holdings data reports, the only way to work out how much gold and silver were in the London vaulting network was through estimation. Between 2015 and 2017, a number of these estimates were calculated for gold and published on the BullionStar website and the GoldChartsRUs website.
The “Tracking the gold held in London” article, published on 5 October 2016, took a LBMA statement of 6500 tonnes of gold being in London, the earliest reference to which was from 8 February 2016 Internet Archive page cache, and also took a Bank of England statement that the Bank held 4725 tonnes as of the end of February 2016 period, and then it factored in that the UK net imported more than 800 tonnes of non-monetary gold up to August 2016, and also that ETFs had added about 399 tonnes over the same period. It also calculated, using GoldChartsRUS ETF data, that the London-based gold-backed ETFs held about 1679 tonnes of gold as of the end of September 2016.
Therefore, as of the end of September 2016, there could have been at least 7300 tonnes of gold held across the LBMA and Bank of England vaults, i.e. 6500 tonnes + 800 tonnes = 7300 tonnes. As it turns out, this estimate was quite close to the actual quantity of gold held in the LBMA and Bank of England vaults at the end of September 2016, which the LBMA’s new reporting now confirms to have been 7590 tonnes. The estimate is a lower number because it was unclear as to which initial date the LBMA’s 6500 tonnes reference referred to (in early 2016 or before).
Previous Vault Estimates Silver
At the beginning of July 2017, an article on the BullionStar website titled “How many Silver Bars are in the LBMA Vaults in London?” estimated that there were about 12,000 tonnes of Good Delivery silver bars held across 4 LBMA vault operators in London on behalf of 11 silver-backed Exchange Traded Funds. These ETFs and the distribution of their silver bars across the 4 vault operators of Brinks, Malca Amit, JP Morgan and HSBC can be seen in the following table.
Table 3: ETF Silver held across LBMA commercial vaults in London, early July 2017
The above article about the number of silver bars in the London vaults also drew on some data from precious metals consultancy Thomson Reuters GFMS, which each year publishes a table of identifiable above ground global silver supply in its World Silver Survey. One category of silver within the GFMS identifiable above ground silver inventories is called ‘Custodian Vaults’. This is distinct from silver holdings in ETFs and silver holdings in exchange inventories such as in COMEX approved vaults in New York. A simple way to view ‘Custodian Vaults’ silver holdings is as an opaque ‘unreported holdings’ category as opposed to the more the transparent ETF holdings and COMEX holdings categories.
For 2016, according to GFMS, this ‘Custodian Vaults’ silver amounted to 1571.2 million ounces (48,871 tonnes), of which 488.7 million ounces (15,200 tonnes), or 31% was represented by what GFMS calls the ‘Europe’ region. Unfortunately, GFMS do not break out the ‘Custodian Vaults’ numbers by individual country because they say that they receive the data on a confidential basis and cannot divulge the granularity. The early July article on BullionStar had speculated that:
“With 488.7 million ozs (15,201 tonnes) of silver held in Europe in ‘Custodian vaults’ that is not reported anywhere, at least some of this silver must be held in London, which is one of the world’s largest financial centers and the world’s highest trading volume silver market.”
“Apart from London, there would presumably also be significant physical silver holdings vaulted in Switzerland and to a lessor extent in countries such as Germany, the Netherlands and maybe Austria etc. So whats’s a suitable percentage for London? Given London’s extensive vaulting network and prominence as a hedge fund and institutional investment centre, a 40-50% share of the European ‘custodian vault’ silver holdings would not be unrealistic, with the other big percentage probably vaulted in Switzerland.
This would therefore put previously ‘Unreported’ silver holdings in the London vaults at between 6080 tonnes and 7600 tonnes (or an additional 182,000 to 230,000 Good Delivery Silver bars).
Adding this range of 6080 – 7600 tonnes to the 12,040 tonne figure that the 11 ETFs above hold, gives a total figure of 18,120 – 19,640 tonnes of silver stored in the LBMA vaults in London (545,000 – 585,000 Good Delivery silver bars).
But here’s the catch. With the LBMA now saying that as of the end of March 2017 there were 1.031 billion ounces of silver, or 32078 tonnes, stored in the LBMA vaulting network in London (and 31238 tonnes of silver in London as of end of December 2016), of which at least 12,000 tonnes is in silver-backed ETFs, then that still leaves about 20,000 tonnes of silver in the London vaults, which is higher than the silver total attributed to the entire ‘custodian vault’ category’ in Europe (as per the GFMS 2016 report).
Even the lowest quantity in the 9 months that the LBMA reports on, which is month-end July 2016, states that the LBMA vaults held 951,433,000 ounces (29,593 tonnes), which after excluding silver ETFs in London, is still higher than the total ‘Custodian Vault’ category that GFMS attributes to the European region in 2016.
These new LBMA vault figures are basically implying that all of the GFMS custodian vault figure for Europe (and some more) is all held in London and not anywhere else in Europe. But that could not be the case as there is also a lot of silver vaulted in Switzerland and other European countries such as Germany, to think of but a few.
This begs the question, does the GFMS Custodian vault number for Europe need to be updated to reflect the gap between the non-ETF holdings that LBMA claims are in the London vaults and what GFMS is reporting in a European ‘Custodian vaults’ category? If the LBMA reporting actually broke down the silver vaulting quantity number into Good Delivery silver bars and other categories, it might help solve this puzzle as it would give an indication of how much of this 32,000 tonnes of silver is in the form of bars that are accepted for settlement in the London Silver Market i.e. Good Delivery silver bars.
Could some of this 32,000 tonnes of silver be in the form of silver jewellery, and private holdings of silver antiques and even silver artifacts? On the surface the LBMA reporting appears to say not since it states that:
“jewellery and other private holdings held by retailers, individuals and smaller vaults not included in the London Clearing system are not included in the numbers”
But because this statement reads rather ambiguously, by implication another interpretation of the LBMA statement could be that:
“jewellery and other private holdings held by retailers and individuals in vaults that are part of the London Clearing system are included in the numbers”
The London Clearing system here refers to the vaults of the 7 commercial vault operators.
Until GFMS comes back with a possible clarification of its ‘Custodian Vault’ figure for Europe, then this contradiction between the LBMA data for silver and GFMS data for silver will persist.
The HSBC vault in London which contains the SPDR Gold Trust (GLD) gold
Large Bars but also Small Bars and Gold Coins
According to the LBMA’s press release, while “the LBMA vault holding data …represent the volume of Loco London gold and silver held in the London vaults offering custodian services“, surprisingly the new LBMA data includes “all physical forms of metal inclusive of large wholesale bars, coin, kilo bars and small bars.”
The inclusion of gold coins, smaller gold bars and gold kilobars in the LBMA vault data is bizarre because only large wholesale bars are accepted as Good Delivery in the London gold and silver markets, not gold coin, not smaller bars, and not gold kilobars. Even the LBMA website states that “the term Loco London refers to gold and silver bullion that is physically held in London. Only LBMA Good Delivery bars are acceptable for trading in the London market.”
Furthermore, the entire physical London Gold Market and physical London Silver Market revolve around the LBMA Good Delivery lists. Spot, forward and options trades on the London OTC gold and silver market are only referenced to a unit of delivery of a Good Delivery bar, both for gold and for silver.
This is the London Good Delivery gold bar. It must have a minimum fineness of 995.0 and a gold content of between 350 and 430 fine ounces….. Bars are generally close to 400 ounces or 12.5 kilograms”
For silver, the same guide states that:
“Unit for Delivery of Loco London Silver
This is the London Good Delivery silver bar. It must have a minimum fineness of 999 and a weight range between 750 and 1,100 ounces, although it is recommended that ideally bars should be produced within the range of 900 to 1,050 ounces. Bars generally weigh around 1,000 ounces.”
Additionally, all the new London-based gold futures contracts launched by the LME, ICE and CME also reference, if only virtually, the unit for Delivery of loco London gold, i.e. the London Good Delivery gold bar. They do not reference smaller gold bars or gold coins.
In contrast to the LBMA , the COMEX exchange where the famous COMEX 100 ounce gold futures contract is traded only reports vault inventories of gold and silver where the bars satisfy that contract for delivery, i.e. the contract for delivery is one hundred (100) troy ounces of minimum fineness 995 gold of an approved brand in the form of either “one 100 troy ounce bar, or three 1 kilo bars”. COMEX do not report 400 oz gold bars or gold coins specifically because the contract has nothing to do with these products. Then why is the LBMA reporting on forms of gold that have nothing to do with the settlement norms of its OTC products in London?
Additionally, the LBMA website also states that “only bars produced by refiners on the [Good Delivery] Lists can be traded in the London market.“ All of this begs the question, why does the LBMA bother including smaller bars, kilogram bars and gold coins? These bars cannot be used in settlement or delivery for any standard London Gold Market transactions.
Perhaps these smaller gold bars and gold coins have been included in the statistics so as to boost the total reported figures or to make reverse engineering of the numbers more difficult? While the combined volumes of smaller bars and kilobars probably don’t add up to much in terms of tonnage, the combined gold coin holdings of central banks stored at the Bank of England could be material.
For example, the United Kingdom, through HM Treasury’s Exchange Equalisation Account (EEA), claims to hold 310.3 tonnes of gold in its reserves, all of which is held in custody at the Bank of England. The latest EEA accounts for 2016/2017, published 18 July 2017 state that “The gold bars and gold coin in the reserves were stored physically at the Bank’s premises.” See Page 43, Exchange Equalisation Accounts for details. Many more central banks, for historical reasons, also hold gold coins in their reserves. See Bullionstar article “Central Banks and Governments and their gold coin holdings” for some examples.
As another example, the Banque de France in Paris holds 2435 tonnes of gold of which 100 tonnes is in the form of gold coins, and 2,335 tonnes of gold bars. Even though these gold coins are held in Paris, this shows that central bank gold coin holdings could materially affect LBMA gold reporting that includes ‘gold coins‘ within the rolled up number. But such gold coins cannot be traded within the LBMA / LPMCL gold trading / gold clearing system and if present would overstate the number of Good delivery gold bars within the system.
The Bank of England gold page on its website also only refers to Good Delivery ‘gold bars’ and says nothing about gold coins, which underlines the special status to which the Bank of England assigns Good Delivery gold bars in the London Gold Market. Specifically, the BoE gold page states that:
“..we provide gold storage on an allocated basis, meaning that the customer retains the title to specific gold bars in our vaults”
“Values are given in thousands of fine troy ounces. Fine troy ounces denote only the pure gold content of a bar.
“We only accept bars which comply with London Bullion Market Association (LBMA) London Good Delivery (LGD) standards. LGD bars must meet a certain minimum fineness and weight. A typical gold bar weighs around 400 oz“
The Bank of England has now confirmed to me, however, that the gold holdings number that it reports on its website “is the total of all gold held at the Bank” and that this “includes coins that belong to the Exchange Equalisation Account (EEA) which are held by the Bank on behalf of Her Majesty’s Treasury (HMT)”
This means that the total gold number being reported by both the Bank of England and the LBMA needs to be adjusted downward by some percentage so as to reflect the amount of real Good Delivery gold bars in the London vaults. What this downward adjustment should be is unclear, as neither the Bank of England nor the LBMA break out their figures by category of gold bars versus gold coins.
LBMA numbers – Obscured Rolled-up numbers
Another shortcoming in the LBMA’s vault reporting is that it does not break down the gold and silver holdings per individual vault. The LBMA will be only releasing 2 highly rolled-up numbers per month, one for gold and one for silver, for example, 7449 tones for gold and 32078 tonnes for silver in the latest month.
Contrast this to New York based COMEX and ICE gold futures daily reporting, which both do break down the gold holdings per New York vault. Realistically, the LBMA was never going to report gold or silver holdings per vault, as this would be a bridge too far towards real transparency, and would show how much or how little gold and silver is stored by each London vault operator / at each London vault location.
This does not, however, stop the LBMA from claiming transparency and in its 31 July press release it states that:
“According to the Fair and Effective Markets Review (see here for further details) ‘…in markets where OTC trading remains the preferred model, authorities and market participants should continue to explore the scope for improving transparency, in ways that also enhance effectiveness.’“
Real transparency, as opposed to lip-service transparency, would be supported by providing an individual breakdown of the number of Good Delivery gold and silver bars stored in each of the 8 sets of vaults at each month end. If they want to include gold coins, smaller gold bars, and gold kilo bars as extra categories, then this could also be itemised on a proper report. It would also only take any decent software developer about 1 day to write and create such a report.
There is also the issue of independently auditing these LBMA numbers. The issue is essentially that there is no independent auditing of these LBMA numbers nor will there be. So there is no second opinion as to whether the data is accurate or not.
The Bank of England gold vault reporting is also short of transparency as it does not provide a breakdown of how much of the reported gold is held by central banks, how much gold is held by bullion banks, how much of the central bank gold is out on loan with the bullion banks, and how much gold, if any, is held on behalf of ETFs at the Bank of England as sub-custodian. Real transparency in this area would provide all of this information including how much gold the LPMCL bullion clearing banks HSBC, JP Morgan, UBS, Scotia Mocatta and ICBC Standard hold at the Bank of England vaults.
On the issue of ETF gold held at the Bank of England, it has been proven that at times the Bank of England has acted as a gold custodian for an ETF, for example, during the first quarter 2016, the SPDR Gold Trust held up to 29 tonnes of gold at the Bank of England, with the Bank of England acting in the capacity of sub-custodian to the SPDR Gold Trust. See BullionStar article “SPDR Gold Trust gold bars at the Bank of England vaults” for details.
Soon this will all be mine
The London Float
The most important question with this new LBMA vault reporting is how much of the 7449 tonnes of gold stored in London as of the end of March 2017 is owned or controlled by bullion banks.
Or more specifically, what is the total level of LBMA bullion bank unallocated gold liabilities in the London market compared to the amount of real physical gold bars that they own or control.
This ‘gold owned or controlled by the bullion banks’ metric can be referred to as the ‘London Float’. LBMA bullion banks can maintain their own holdings of gold bars which they buy in the market or import directly, and they can also borrow other people’s gold thereby controlling this gold also. Some of this gold can be in the LBMA commercial vaults. Some can also be in the Bank of England vaults.
In its press release, the LBMA states that:
“The physical holdings of precious metals held in the London vaults underpin the gross daily trading and net clearing in London.”
This is not exactly true. Only gold which is owned or controlled by the bullion banks can underpin gold trading in London. Allocated gold sitting in a vault that is owned by central banks, ETFs or investors and which does not have any other claim attached to it, does not underpin anything. It just sits there in a vault.
As regards gold bars stored in the LBMA vaults in London, these bars can either be owned by central banks at the Bank of England, owned by central banks at commercial vaults in London, owned by ETFs at the commercial vaults in London, owned or controlled by bullion banks, and owned by investors (either institutional investors, hedge funds, private individuals etc). On occasion, some ETF gold has at various times been at the Bank of England.
If central bank gold is held in allocated form and not lent out, then it is ‘off the market’ and can’t be ‘used’ by any other party such as a LBMA bullion bank. If central bank gold is lent out or swapped out to bullion banks, then it can be used or even sold by those bullion banks. The LBMA uses the euphemism ‘liquidity’ to refer to this gold lending. For example, from the LBMA’s recent press release on the new vault reporting it says:
“In addition, the Bank of England also offers gold custodial services to central banks and certain commercial firms, that facilitate central bank access to the liquidity of the London gold market.”
ETF gold when it is held within an ETF cannot legally be used by other entities since it is owned by the ETF and allocated to the ETF. Institutionally owned gold or private owned gold when it is allocated is owned by the holder. It could in theory be lent to bullion banks also.
Some of the LBMA bullion banks have gold accounts at the Bank of England. How many of these banks maintain gold holdings within the Bank of England vaults nobody will say, not the Bank of England nor the LBMA nor the bullion banks, but it at least extends to the 5 members of London Precious Metals Clearing Limited (LPMCL) which are HSBC, JP Morgan, Scotia Mocatta, ICBC Standard and UBS. Gold accounts for bullion banks undoubtedly also extend to additional bullion banks beyond the LPMCL members because many bullion banks have been involved in gold lending at the Bank of England for a long time, for example Standard Chartered, Barclays, Natixis, BNP Paribas, Deutsche Bank, and Goldman Sachs, and these banks would at some point have to take delivery of borrowed gold at the Bank of England.
Note, the gold brokers of the London Gold Market have for a long time, as least since the 1970s, been able to store some of their gold bars at the Bank of England vaults. These brokers were historically Samuel Montagu, Mocatta, the old Sharps Pixley, NM Rothschild and Johnson Matthey.
Since LBMA bullion banks can maintain gold accounts at the LBMA commercial vaults in London, and because some of these banks have gold accounts at the Bank of England also, then this London “gold float” can comprise gold bars at the commercial vaults and gold bars at the Bank of England vaults. It is however, quite difficult to say exactly what size this London bullion bank gold float is at any given time.
Whatever the actual number, its not very big in size because if you subtract central bank gold and ETF gold from the overall LBMA gold figure (of 7449 tonnes as of the end of March 2017) then whatever is left is not a very big quantity of gold bars, and at least some of this residual gold stored in the LBMA commercial vaults is owned by institutions, hedge funds, private individuals and platforms such as BullionVault.
In September 2015, a study of central bank gold held at the Bank of England calculated that about 3779 tonnes of Bank of England custody gold can be accounted for by central bank and monetary authority gold holdings. See “Central bank gold at the Bank of England” for details and GoldChartsRUs page “LBMA/BOE VAULTED GOLD, 2016 Update – The London Float”. Compared to the 4725 tonnes of gold held at the Bank of England at the end of February 2016, this would then mean that there were about 946 tonnes of gold at the Bank of England that was “unaccounted for by central banks”. This was about 20% of the total amount of gold held at the Bank of England at that time.
However, some of this 946 tonnes was probably central bank gold where the central bank owner had not publicly divulged that it held gold at the Bank of England. Many central banks around the world that were contacted as part of the research into the “central bank gold at the Bank of England calculation” either didn’t reply or replied that they could not confirm where their gold was stored. See BullionStar article “Central Banks’ secrecy and silence on gold storage arrangements” for more details.
After factoring in these unknown central bank gold holders at the Bank of England, the remaining residual would be bullion bank gold. It could therefore be assumed that a percentage of gold stored at Bank of England, somewhere less than 20% and probably also less than 10%, is owned by bullion banks. Since central bank gold holdings, on paper at least are relatively static, the monthly changes in gold holdings at the Bank of England therefore probably mainly reflect bullion bank gold movements rather than central bank gold movements.
If we look back now at the LBMA vault data for gold as of 31 March 2017, how much of this gold could be bullion banks (London float) gold.
LBMA total gold vaulted: 7449 tonnes
Bank of England gold vaulted: 5081 tonnes
Gold in commercial LBMA vaults: 2368 tonnes
Gold in ETFs: 1510 tonnes
Gold in commercial vaults not in ETFs: 858 tonnes
Gold in commercial vaults not in ETFs that is allocated to institutions & hedge funds = x
i.e. 7449 – 5081 = 2368 – 1510 = 858
Assume 10% of the gold at the Bank of England is bullion bank gold. Also assume bullion banks gold hold some gold in LBMA commercial vaults.
Therefore total bullion bank gold could be (0.1 * 5081) + (858 – x) = 508 + 858 – x = 1366 – x.
Since x has to be > 0, then the bullion bank London float is definitely less than 1300 tonnes and probably less than 1000 tonnes. The bullion banks might argue that they can borrow more gold from central banks, take gold out of the ETFs, and even import gold from refineries. All of these options are possible, but still, the London bullion bank float is not that large. And it is this number in tonnes of gold which should be compared to the enormous volumes of ‘paper gold’ trading that occur in the London Gold Market each and every trading day.
For example in June 2017, the LBMA clearing statistics state that 21 million ounces of gold was cleared each trading day in the London Gold Market. That’s 653 tonnes of gold cleared each day in London. With a 10 to 1 ratio of gold trading to gold clearing, that’s the equivalent of 6530 tonnes of gold traded each day in the London gold market, or 143,660 tonnes over the 22 trading days of June. Annualised, this is 1.632 million tonnes of gold traded per year (using 250 trading days per year).
And sitting at the bottom of this trading pyramid is probably less than 1000 tonnes of bullion bank gold underpinning the gigantic trading volumes and huge unallocated gold liabilities of the bullion banks. So you can see that the London gold trading system is a fractional-reserve system with tiny physical gold underpinnings.
In May 2011, during a presentation at the LBMA Bullion Market Forum in Shanghai China, on the topic of London gold vaults, former LBMA CEO Stewart Murray included a slide which stated that:
Investment – more than ETFs
Gold Holdings have increased by ~1,800 tonnes in past 5 years, almost all held in London vaults
Many thousands of tonnes of ETF silver are held in London
Central banks hold large amounts of allocated gold at the Bank of England
Various investors hold very substantial amounts unallocated gold and silver in the London vaults
The last bullet point of the above slide is particularly interesting as it references “very substantial amounts’ of unallocated gold and silver. Discounting the fact for a moment that unallocated gold and silver is not necessarily held in vaults or held anywhere else, given that it’s just a claim against a bullion bank, the statement really means that investors have ‘very substantial amounts‘ of claims against the bullion banks offering the unallocated gold and silver accounts i.e. very substantial liabilities in the form of unallocated gold and silver obligations to the gold and silver unallocated account holders.
If a small percentage of these claim holders / investors decided to convert their claims into allocated gold and silver, especially allocated gold, then where are the bullion banks going to get the physical gold to give to these converting claim holders? Neither do the claim holders of unallocated positions have any way of knowing how accurate the LBMA vault reporting is, because there is no independent auditing of the positions or of the report.
Malca Amit vaults, London
UBS and LBMA
The last line of the LBMA press release about the new vault reporting states the following:
This line includes an embedded link to the Teves report within the press release. This opens a 7 page report written by Teves about the new vault reporting. By definition, given that this report is linked to in the press release, it means that Joni Teves of UBS had the LBMA vault reporting data before it was publicly released, otherwise how could UBS have written its summary.
In her report, Teves states that a UBS database estimates that there are “1,485 tonnes of gold worth about $60bn and about 13,759 tonnes of silver worth about $7.85bn are likely to be held in London to back ETF shares“.
These UBS numbers are fairly similar to the ETF estimates for gold (1510 tonnes) and silver (12040 tonnes) that we came up with here at BullionStar, and so to some extent corroborate our previous ETF estimates. Teves also implies that some of the gold in the Bank of England figure is not central bank gold but is commercial bank gold as she says:
“let’s say for illustration’s sake that about 80% to 90% of BoE gold holdings are accounted for by the official sector.“
The statement on face value implies that 10% – 20% of Bank of England gold is not central bank gold. But why the grey area phrase of “let’s say for illustration’s sake”. Shouldn’t the legendary Swiss Bank UBS be more scientific than this?
Teves also says assume “negligible amount (in commercial vaults) comprises official sector holdings“, and she concludes that “this suggests that over the past year, an average of about 2,945 to 3,450 tonnes ($119-$139 bn) of investment-related gold was held in London.”
What she is doing here is taking the average of 9 months of gold holdings held in the LBMA commercial vaults (which is 2439 tonnes) and then adding 10% and 20% respectively of the 9 month average of gold held at the Bank of England (which is 506 and 1011 tonnes) to get the resulting range of between 2945 and 3451 tonnes.
Then she takes the ETF tonnes estimate (1485) away from her range to get a range of between 1460 and 1965 tonnes, as she states:
… “Taking these ETF-related holdings into account would then leave roughly around 1,460 to 1,965 tonnes or about $59bn to $79bn worth of gold in unallocated and allocated accounts as available pool of liquidity for OTC trading activities“
But what this assumption fails to take into account is that some of this 1,460 to 1,965 tonnes that is in allocated accounts is not available as a pool of liquidity, because it is held in allocated form by investors precisely so that the bullion banks cannot get their hands on it and trade with it. In other words, it is ring fenced. Either way, a model will always output what has been input into it. Change the 10% and 20% range assumptions about the amount of commercial bank gold in the Bank of England vaults and this materially alters the numbers that can be attributed to be an ‘available pool of liquidity for OTC trading activities’.
Additionally, the portion of this residual gold that is in ‘unallocated accounts’ is not owned by any investors, it is owned by the banks. The ‘unallocated accounts’ holders merely have claims on the bullion banks for metal that is backed by a fractional-reserve trading system.
In her commentary about the silver held in the London vaults, Teves does not comment at all about the huge gap between her ETF silver in London (which UBS states as 13,759 tonnes), and the full 32000 tonnes reported by the LBMA,and does not mention how this huge gap is larger than all the ‘Custodian Vault’ silver which Thomson Reuters GFMS attributes to the entire ‘Europe’ region.
The amount of gold in the London LBMA gold vaults (incl. Bank of England) that is not central bank gold, that is not ETF gold, and that is not institutional allocated gold is quite a low number. What this actual number is difficult to say because a) the LBMA will not produce a proper vault report that shows ownership of gold by category of holder, and b) neither will the Bank of England in its gold vault reporting provide a breakdown between the gold owned by central banks and the gold owned by bullion banks. So there is still no real transparency in this area. Just a faint chink of light into a dark cavern.
On the topic of London vaulted silver, there appears to be a lot more silver in the LBMA vaults than even GFMS thought there was. It will be interesting to see how GFMS and the LBMA will resolve their apparent contradiction on the amount of silver stored in the London LBMA vaults.
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