08 August 2014

JPM's 18 tonne Comex fat finger

In Ed Steer's August 7th Gold & Silver Daily, he commented that:

"Ted pointed out something that I'd missed in Tuesday's column on Comex gold inventories---and that was the fact that the 595,102 troy ounces that the report showed withdrawn from JPMorgan on Friday was, with the exception of a few ounces, totally reversed in Monday's report from the Comex."

This big adjustment was also noted by "Pirocco" on the SilverStacker forum here. When questioned by Pirocco, Comex’s response was that "the adjustment column allows the depository or warehouse to make changes to their inventory in either of the categories for various circumstances as needed", which as Pirocco notes, just avoids answering the question because "various circumstances" says nothing.

Well I’ve worked out what one of those "various circumstances" is. If you subtract the 594,506.898 Monday adjustment from the Friday figure of 595,102.000 you get 595.102. That is not a coincidence. In other words, the Friday figure was a fat finger keying error, where someone at JPM keyed in "595 comma 102" instead of "595 point 102"! Hence JPM had to do an adjustment of 594,506.898 to turn 595,102.000 into the correct figure of 595.102.

I do wonder if the fat finger extended to the paperwork sent to the receiver of the erroneous 595,102 ounce withdrawal - perhaps a temporary bit of excitement that they were getting an unexpected 18+ tonnes?

What is surprising is that this sort of data transfer between warehouses and the CFTC isn't automated. Worryingly, this is not an isolated incident:
  • CFTC charging JP Morgan $650k for repeatedly submitting "large trader reports that contained hundreds of errors"
  • Screwtapefile's Warren finding discrepancies between the numbers in the GLD trade settlement spreadsheet and the GLD bar list
  • Rand Refinery losing 87,000 ounces ($113 million) of gold
  • Canadian Mint's 2009 $15 million gold inventory "discrepancy"
It makes you wonder if the whole gold industry is held together with spreadsheets. Be afraid, be very afraid.

28 July 2014

205,000 or 205 tonnes of gold, why commas matter

Karen Hudes latest refers to "The UBS is holding 205,000 MT under the Global Debt Facility for the benefit of humankind" and she provides a link to a letter from UBS and associated gold certificates as proof of the figure.

The letter says that "... volume of 205,000 Metric Tons issued last June 15, 1977 is unrestricted for collateral ..."

Unfortunately, given that the letter and certificates are issued by UBS, a Swiss firm, and that Switzerland is one of the countries that uses commas as a decimal mark (thanks Wikipedia), then the "205,000" figure is actually referring to 205.000 tonnes.

205 tonnes is approximately $8,567,975,000.00 (or $8.5 billion, just in case anyone misinterprets the commas) and while that is a nice sum, I doubt it will be as helpful to "humankind" (a word I note excludes aliens/reptilian life forms) as $8,567,975,000,000 (or $8.5 trillion).

17 July 2014

How Eastern Gold Demand Is Transforming The Gold Market

GoldSilverWorlds has a good post up summarising my tweets and Al Korelin interview about the LBMA Forum in Singapore. Below are some additional notes I took which I didn't tweet or talk about.

Zhang Bing Nan of China Gold Association (view his slides here) when asked about the West to East flow gave what I think is a classic Chinese answer: the globe is round so what is East and what is West, which got a laugh. Other comments:
  • no matter who you lend your dollars to it is not safe; not the same with gold
  • fortunate we have different perspectives on gold (ie you Westerners want to sell while we want to buy)
  • gold in people’s hand makes them feel safe
  • Asians unlike westerners as don’t have same financial products hence they buy gold
From the Zhang slides I thought the comment that "improving the gold market and pushing forward the gold consumption and the “gold held by people” will play a important role in promoting the gold-content of RMB" shows that for China it isn't necessarily important how much gold they have in official reserves, it is about just increasing the total gold held in the country. Whether that indicates they have a contingency plan to confiscate privately held gold if the world moves back to a gold backed monetary system of some sort, or just that they see the country as more wealthy the more gold its people hold I think is an open question.

Note also that China's development of its gold market is not just about physical: "China is speeding up the legislative process of the gold market, actively developing the gold derivatives quoted in RMB". Zhang also made a point about the China Gold Association being a 5A class national social organization which "ranks the highest level assessed by China's Ministry of Civil Affairs and ranks the fifth in the 177 participating national social organizations", which shows how importantly the Government views the gold market.

While we are on China, I would recommend reading this post by Ben Hunt:

"A number of readers asked if China’s accumulation of physical gold played a significant role in China’s current and forthcoming challenges to the Western monetary policy status quo. Absolutely! It has exactly the same meaning as the recently announced dollar-free natural gas trade agreement with Russia. It’s a fang. It’s a claw. It’s a tool in the construction of an alternative monetary policy regime structure."

Hector Freitas of UBS said that their wealth management division saw clients selling gold for a couple of months post the April gold price crash but that these were opportunistic investors who were now in equities, rather than being longer term diversification holders. He said UBS was seeing demand to shift physical gold to the East for storage and noted that there was more wealth in the West than the East, so if the West begin to distrust currency or war or other events occurred than the West will dominate gold demand. In that situation I can't see the East selling it so not sure where the West will get it from.

Tony Reynard of Singapore Freeport was interesting, saying that they never intended to build the Freeport for gold storage and that it was planned for art but they were asked by the market if they could store gold. Of the 25,000m2 of vault space only 10% is for gold. He said that gold is not a good return for them as they lease space by the square foot and gold doesn’t take up much space (note that Freeport is just a landlord, they don’t operate the vaults themselves, so the money is made by the storage firms who have a fixed lease cost but change a % of value). Of most interest was the statement that they have been asked to build similar facilities around the world including Luxembourg, China, South Korea, Macau, Japan and that all of these were requiring precious metal vault capability, which he took as a sign that the operators see a market for precious metal storage. Related comment from Guy Bullen of Brinks was that they found it physically challenging to handle the 2013 volume of gold going into China.

Regarding the talk about new Asian price benchmarks in competition with the London Fix, I missed who made this comment but they said that whether a benchmark can compete or become established depends not just on its volume but also whether there a big enough premium/discount due to fundamental difference between the location and existing benchmark locations from a physical point of view. For example, if the cost of moving gold from an existing benchmark location like London and the new one is say only $0.20 per ounce, then the market will just continue to use London as a benchmark due to its liquidity and the new benchmark won't get volume. Liquidity will only move if there is a big enough difference.

On India, Rashesh Shah of Edelweiss said that Indians save approximately $500bn each year of which 10% goes into gold resulting in a $40-50bn flow of money into gold each year. One ongoing debate with pro market analysts is whether gold demand will hold up as China and India develop, the theory being that people are mostly buying gold due to a lack of trusted financial and insurance products and as those products become more widespread gold demand will reduce. Rashesh felt that as India's financial sector become more sophisticated Indians will still buy gold but there will be more willingness to buy gold in financial vehicles, so he thought it would be the same consumption of physical gold and the change would just be in how it was bought. He said that currently India’s interest in gold was due to a view that it was the best bet against inflation, was easy to invest in and was a cheap way of "exporting" capital (getting around capital controls) by getting exposure out of the Rupee.

Finally, Harriet Hunnable of CME Group made the following comment on a panel session which she shared with LME and Tocom (it turned into a bit of a competitive pitch between CME and LME for the silver fix):

"We are not keen on financially settled gold contracts, market wants integrity of a physically settled contract."

Only comment I will make is that there is a big difference in "integrityness" between a market with the option of physical settlement and where only a few percent of contracts physically settle (eg Comex) and one where you have to physically settle and there is a 10% penalty if you don't (eg the new SGX kilobar contract).

16 July 2014

Indian monsoon & 12.5% interest gold loans

I have a short post up on the corporate blog on the current state of the Indian monsoon, which matters because poor agrarian Indian farmers are purported to buy over 60% of Indian gold. If monsoon rains are good they buy gold, if not they sell some to buy next year’s crop.

While writing this article came up which is mildly negative for Indian gold demand (as it is only talking 80 tonnes) as it seems the jewellery industry is going to be further crimped by a new rule limiting their gold deposit schemes (ie people lend gold to jewellers to fund their business) to 25% of their assets. The really interesting thing is that the new law also prevents the jewellers from paying more than 12.5 per cent annual returns on those gold loans! Talk about using gold as money. I suppose they have to pay those rates due to the risk of them running off with the gold or going bankrupt.

Just wait to Wall Street finds out about these yields - beats current junk bond rates. With investors desperate for yields in ZIRP environment will we see Wall Street selling Indian Jeweller bonds at 10% (yep 10%, where do you think those bankers bonus come from)?

15 July 2014

GLD amendment refers to "unforeseen reasons" for unallocated failure

GLD has some amendments to its terms up for vote, one of which is "that creations may only be made after the required gold deposit has been allocated to the Trust Allocated Account from the Trust Unallocated Account" (hat tip I Shrugged; see here for an explanation of the existing creation process). What is interesting is the explanation of why they are making this amendment:

"This amendment provides additional security for Shareholders by eliminating potential risks related to issuing baskets of Shares against unallocated gold if the Custodian was to become insolvent or if the unallocated gold was otherwise not allocated for some other unforeseen reason."

My emphasis on the bold bid. The risk they are referring to here is because the Authorised Participants only deliver unallocated to the Custodian and it is up to the Custodian to find the physical to allocate. This puts all the pressure on the Custodian. The amendment does raise the following questions:
  • Why the need to clarify this now, is there something the World Gold Council (who sponsors GLD) knows about the state of the market that didn't exist before?
  • Why would unallocated gold now have a risk of not being allocated?
  • Is there an increased risk of intra-day failures for large unallocated allocations?
  • What are these unforeseen reasons?
  • And why are none of the more excitable gold commentators hyping this up as more proof of the end of the London bullion banking system? :)(Probably because they didn't get the letter as they are smart enough not to hold GLD, which has numerous other issues which only make it suitable for short term trading IMO).
I don't think this is a case of the WGC responding to public criticism, as I haven't seen any commentary on this detail/technical matter of ETF operation. Maybe they just thought they would close up this risk point while they were making changes to the management fee revenue. However, that would beg the question of when did they become aware of the "potential risks" in the creation process and why didn't they fix it earlier?

At this point I would just note it as a data point, rather than a sign of "an imminent LBMA default", which was first predicted by one commentator in April 2013, which, even by the lax standards of internet accountability, is a fail (don't shoot the messenger, but clearly the fractional reserve bullion banking system is more robust than many give it credit for).

For the Perth Mint at the moment wholesale and retail demand are weak at best. Kilobar demand was so low we were considering shipping gold TO London but there has been a little pick up in kilobar interest this week. The recent GLD additions are positive but other ETFs have had liquidations so this indicator is unclear. All considered I don't see this as a situation where London is under pressure.

The other amendment to GLD is a rejig of who pays its costs and gets its management fee. Currently the Trustee pays (by selling gold behind the ETF):
  • Sponsor (ie WGC): 0.15%
  • Marketing Agent: 0.15% 
  • Custodian: approximately 0.066%
  • Administration Fees: approximately 0.03% to 0.04%
  • Trustee: $2 million
The proposal is that the WGC will take on all costs and only charge the Trust 0.40%. It just formalises the existing "Fee Reduction Agreement" by which the WGC was absorbing any costs above 0.40% so that GLD holders only paid 0.40%.

I can't see any material change here. Possibly the WGC feels they may be able to control or reduce costs better now that GLD is established and hence it sees an opportunity to make a bit more profit out of GLD beyond the current arrangement, as noted in the amendment letter "the net amount earned by the Sponsor could be greater or smaller than the fee of 0.15% of the daily ANAV of the Trust it currently earns, depending on the actual expenses of the Trust."

Coincidental this happens when two large South African miners (Gold Fields and AngloGold Ashanti) dropped out of the WGC and thus the WGC lost a big revenue source? While that announcement happened after the amendment letter, the WGC would have know about this move by the miners for some time. Just another move towards the WGC becoming more self funded.

11 July 2014

No Indian gold import policy change explains RBI gold swap

After a lot of speculation about what changes the 2014 Indian budget would bring for gold import policies, we got zip. That now supports my speculation on why the Reserve Bank of India (RBI) announced, ahead of the budget, a combined quality and loco swap of its gold: it was a temporary political fix to the problem of:

1. Making promises to the gold industry during the election campaign that it would wind back gold import restrictions.
2. Reality, once in office, that such relief on gold imports would negatively affect India's current account deficit.

Standard political MO: "Oh, it is a lot worse than we thought, we can't honour our promises, it is the previous Government's fault". Interestingly, on the eve of the budget the Indian gold industry hadn't read the warning signs and thought there would be relief, with Bachhraj Bamalwa, of All India Gems and Jewellery Trade Federation, speculating that the duty would be cut to 6% and even that "the government might remove the 80:20 rule in a gradual, 'phased' manner". This view was probably helped along by statements from the Government like "any action on gold should take into account the interests of the public and traders, not just economics and policy". Well it is clear they sided with economics and policy.

There were some warning signs, with this Reuters article quoting commentators noting that the Government was "moving back and dithering on their decisions, and in a sense playing politics". Another sign was this Report that "India risks losing its investment-grade sovereign rating if it fails to get its finances into shape" with S&P warning "there was a one-third chance of a downgrade [of India] to "junk" without a big improvement in the fiscal deficit and in implementing reforms."

For me, the strongest sign the new Indian government was going to back away from its promises was the RBI gold swap announcement and the local gold industry should have paid more attention to it, because its timing was very unusual: just before the election about gold which had been sitting in RBI's vaults in India for decades. Why was this non-standard gold suddenly an issue?

I think it is a reasonable speculation that the RBI knew in advance that the new Government could not open up the import restrictions and have a flood of gold imports affecting the current account deficit and the country's rating. This gold swap was then a planned action to placate the industry by releasing supply into the local market in a way that would not affect the current account deficit.

The RBI is aware of the local gold supply issues, have loosened the 80:20 rule a little in March by allowing some banks without three years worth of exports to import gold, but only on the basis that they had current customers to export gold to (see this Reuters article).

Sidebar: the clear message from the Indian session at the recent Singapore Gold Forum was that it was the 80:20 rule that halted gold imports and not the duty hikes. On that basis I was expecting some duty cut as that would have made it look like the Government had done something while not making any difference to how much gold could be imported.

So how does this gold swap work and not impact the current account deficit? Firstly, a swap involves two legs, as explained here, in this case being:

1. Sell non-LBMA standard gold loco India
2. Buy LBMA standard gold loco UK

No doubt the RBI had some interest in upgrading its non-standard gold (as it makes it easier in the future to mobilise it in a financial crisis, like it did in 1991) but it could have just sent it to a local refinery. However, this would not have had any impact on local supplies as the gold would have just went straight back into the RBI's vault.

The key is that the swap results in a net supply of gold into the local Indian market, but the replacement gold is supplied from London (or Switzerland, as we will see shortly). The net supply in India will result in a reduction of the local premium (which the public will welcome) but more importantly, it will give the local gold industry material to work with (of which they are starved) and this should increase employment. The reason this swap will not affect the current account deficit is because the cash legs of a swap are netted, so the RBI will only be paying a few dollars per ounce out of its offshore USD reserves.

Regarding the swap, I had a debate with twitter based precious metals analyst Silver Watchdog who thinks the RBI swap would also involve leasing. I see this as unnecessarily complex, which his diagram indicates. The leasing angle only makes sense if you believe that there is a shortage of gold in London (as the second leg of the swap pulls physical out of the London market), so only if the RBI subsequently leases their newly acquired London gold will this take pressure off the London market. Apart from there being no indication that the RBI was intending to do this, Perth Mint does not see any such shortages in London at this time.

I would note here that while bullion banks will probably quote on this swap, the advantage is with the refiners given the quality upgrade required. The one in the box seat is the local Indian refinery PAMP-MMTC who, through PAMP's parent MKS, is capable without bullion bank help to do "options, hedging and EFP’s; location, purity and quality swaps; forward leasing arrangements". PAMP would have no problem refining the gold locally and supplying 400oz bars into London out of its Switzerland operations.

While India has 557 tonnes of gold reserves, there is no indication of how much non-standard gold they hold or are looking to swap. This Reuters article notes that the RBI "would decide further in regard to quantity, swap-ratio [i.e. swap fee], timing etc. of the gold to be swapped". The reference to "timing" implies that the RBI is looking to supply their gold over a period of time, which would make sense if you want to alleviate local gold industry supply problems and help them out for as long as possible.

Whatever amount is involved it will only last for a limited time, in the order of months, not years, given India's appetite for gold. So this is just a short term fix to a political problem and ultimately shortages will resume due to the 80:20 rule.

Of course, it is entirely possible that the RBI's swap is solely about upgrading its gold reserves and the timing is purely coincidental. That would clearly be the case if the replacement gold was going back into the RBI's vaults in India, rather than with the Bank of England as reported by Reuters. However, as we are dealing with central banks, where transparency even on simple matters is rare to come by, we just don't know what the real motivation is and thus have to resort to speculation. I hope you got some value, in terms of how the industry works, out of my speculations even if they turn out to be wrong.

18 June 2014

Allocated Gold at Bank of England declines 755 tonnes

The Bank of England's just released 2014 Annual Report discloses that it was holding 5,485 tonnes of gold as a custodian, down 755 tonnes to around the level it was in 2011 and 2012. Below is a chart of the data against the average gold price over the Bank's financial year ending February, which shows that the amount of gold has basically followed the gold price, very much like the behaviour of the gold ETFs.

The table below details the figures and calculations back to 2005, when the Bank first started reporting its custodial activities.

As at Date Allocated Gold (GBP billions) London PM Fix (GBP) Allocated Gold (tonnes) Year on Year Change (tonnes)
28/02/2005 29 226.514 3,982
28/02/2006 36 318.078 3,520 -462
28/02/2007 43 338.964 3,946 +425
28/02/2008 72 488.854 4,581 +635
28/02/2009 102 669.809 4,737 +155
28/02/2010 125 746.149 5,211 +474
28/02/2011 156 868.682 5,586 +375
28/02/2012 197 1110.484 5,518 -68
28/02/2013 210 1046.719 6,240 +722
28/02/2014 140 793.931 5,485 -755

In this June 2014 Quarterly Bulletin, the Bank reports on page 134 that 72 central banks hold gold with them (which is 65% of the 113 central banks that the World Gold Council records as having gold reserves). It also noted that the "Bank also acts as a bank to certain other financial institutions. One example is central counterparties". Included in that the latter group would be the six London bullion market clearing banks. As it is unlikely that the Bank runs allocated gold accounts for banks that are not central to the gold market, it would be fair to conclude that the majority of the allocated gold it holds is for central banks.

Given there was nowhere near 755 tonnes of central bank selling in the year ending February 2014 it would therefore be fair to conclude that this gold outflow was from the allocated accounts that bullion banks had with the Bank of England. This is not surprising considering that the major gold ETFs lost in excess of 600 tonnes over that same period.

Just one final observation from World Gold Council central bank holdings data: it wasn't until the year ending Q1 2010 that central banks were net buyers. Prior to that they were net sellers (1,011t for 4 years to March 2009), yet the table above shows customers of the Bank of England adding to their holdings (753t for 4 years to February 2009). Now if we remove central banks that most likely don't store with the Bank, this 1,011t net sell figure may change, but I doubt enough to turn it around to anywhere near 753t of net buying. Tentative conclusion is that bullion banks were accumulating a lot of allocated gold with the Bank of England.

Combining the above figures with detailed LBMA turnover figures, UK gold import/exports, London ETF flows, and central bank activity is more work than I have time for at the moment, but it certainly would give us a better picture of the London gold market.

16 June 2014

Fixing the Fixed Fix - Barclays Case

The gold blogosphere is generally not known for its nuance - its a you're with us or against us black and white world. I suppose this is a result of the need for click baiting headlines to drive traffic to your site and I'm sure ambiguity doesn't survive the brutal A/B testing Darwinian selection process that is modern social media (and something I'll probably find out for myself when the Perth Mint gets some proper website software in a year's time and I select myself out of job if I persist with my current ways, such as not getting to the point quickly in the first filled-with-SEO-friendly-words paragraph).

So it is with the two silver Fix stories, being its closure and Barclay's manipulation of. The main example of nuancelessness was confusing manipulation with suppression and thus seeing Barclay's actions as proof of the latter. There is a big difference between the two, as I discussed here:

"I believe in manipulation but not suppression. One is short term, the other long term. Many of the manipulation and suppression theories are simplistic comic book stuff."

The fact that the manipulation in this case was downward fed the confirmation bias. It will be interesting to see the response if the next case (I would not be surprised to see another) has a bullion bank trader manipulating upwards, which, if you don't look at charts with one eye, you would have to say is equally probable given the evidence.

Anyway, below I quote from the Final Notice for Barclays and Daniel James Plunkett which can be found here and make comments after each bit I find interesting. The one good thing about this case is it gives us an insight into the fix which we have never seen before.

"Gold Fixing Members are required to declare their interest in increments of five bars, but there is no such requirement in relation to their underlying customers, i.e. their underlying customers can place their orders for any amount, not only in increments of five. ... At any time a Gold Fixing Member, or their underlying customers, may increase, decrease or withdraw a previously-declared selling or buying order or place a completely new order."

This is one aspect of the fix that very few understand - that the customers (big ones dealing direct with a bullion bank) can also change their orders during the fix. Even someone like Matt Levine in this article falls into the trap of seeing the fix as "five banks, getting on the phone, talking about what the price will be, and adjusting their trading based on that information".

Now I'm not saying that the current fix process is perfect (as the buy/sell balance I believe is not communicated and a bank can change its position in response to customer changes) but the fact that a bank's customers can change their orders as the fixing price changes means that manipulating the fix is uncertain as you don't know beforehand what customers will do, making it a risky proposition (even if you can collude beforehand with traders from other banks). Whatever the fix's problems, it is not some market where the banks just set the price amongst themselves, as Matt and others portray.

"On 28 June 2011, Barclays entered into the Digital with Customer A ... The Digital had a notional amount of approximately USD43m ... customer A paid a premium of 8.18% of the notional value, USD4.4m, to Barclays ... if the price fixed in the 28 June 2012 Gold Fixing at 3:00 pm exceeded USD1,558.96 (the Barrier), a payment of 9% of the notional amount, or approximately USD3.9m, would accrue to Customer A"

Based on PM fix of $1499 on 20/6/11, that puts the notional as around 29,000oz, or nearly a tonne of gold. This is no small customer. What I find interesting is that a client of this size could have "listened in" to the fix on the 28/6/12 and put its own orders in to influence the price. Of course it would have to have done that with another bullion bank, not Barclays.

Given the money on the table, the customer could have justified losing money on a large fix trade, just as Plunkett did (which was only USD 114,000). It certainly would have been an interesting fix, with the customer countering each of Plunkett's orders. Given that Plunkett would not earn all the $3.9m ("Mr Plunkett’s book thereby profited by USD1.75m (excluding hedging") it could be argued that the customer would have won out as it would be prepared to lose more than the $1.75m that Plunkett would have earned (assuming Plunkett would not have included his share of the initial $4.4m).

It may not necessarily have been naivety on the part of the customer to not protect its interests and maybe more to do with the fact it was already down $4.4m and didn't want to reduce its profit on the first option date given the gold market had peaked and it was unlikely to make a profit on the second date.

The above does raise the question I tweeted, namely: "Would it have been OK for client on other side of Barclay's digital gold option to manipulate gold price up by buying on the Fix?"

People's views on this matter differ, as I noted in this blog post:

"Manipulation is a continuum with differing views on what constitutes unlawful or unethical behaviour. Traders I’ve spoken to see most of it as just part of the “game”, like a boxing match to see who is stronger. I tend more towards the ethical end but not naive to think that you can walk in and put all your (price) cards on the table and not get screwed."

What I find interesting about this case is the assumption that their was a principal-agent relationship. It is not like the customer was asking Barclays to broker an order on Comex - a digital option is a pure OTC product and thus clearly for me if I was the customer I would know the bank was taking the other side, and thus we has a principal to principal relationship. That view is what is behind the comments from traders in this FT article quoted at GATA.

"There's a fundamental belief that both parties can aggress or defend their book, and I would have expected my traders to do so."
"If you have Goldman Sachs on one side and JPMorgan on the other, the gloves are off"

For example, when you go to a car dealer, you know they are lying to you about how desperate they are to sell the car and what their lowest price is, just as you are lying about how desperate you are to buy it and your maximum price. If you subsequently found out that the dealer would have sold it for $1000 less, you wouldn't have any cause of action against them. Indeed, you know that the dealer made a profit on the deal. They are not acting as a broker, selling to you at their cost plus and agreed upfront fee.

Now clearly the FCA investigation found that there was a principal-agent relationship but it seems somewhat naïve of the customer to just hope that the bank would say that "pushing around a benchmark is 'not quite cricket'" (as Mr Klapwijk was quoted) when the other side of trade is not a market professional, ignore the fact that practically it was a principal-principal arrangement, and not look to protect themselves from the conflict of interest. Then again, they did in the end protect themselves and were aware of the conflict of interest in querying the trade with Barclays, so maybe that was the most ethical way to address it.

"If the price fixed during the 20 June 2013 Gold Fixing exceeded USD1633.91, a payment of 18% of the notional amount would accrue to Customer A, less any accrued percentage payment related to the 28 June 2012 Gold Fixing."

I note that the PM fixed at $1292.50 on 20/6/13, so the customer net lost $500,000 on this trade.

"the proposed price quickly dropped to USD1,556.00, following a drop in the price of August COMEX Gold Futures (which was caused by significant selling in the August COMEX Gold Futures market, independent of Barclays and Mr Plunkett"

As Nanex ask, "How does the FCA know the drop at 10:00:23 was unrelated to Barclays or Mr. Plunkett? Do they have access to COMEX audit trail data? If so, why was there no mention of cooperation with the exchange or the CFTC?"

That early Comex move doesn't look like a coincidence. I don't read "independent of" as implying that the FCA actually investigated Comex trading, just that the price move occurred before Plunkett's actions. If you look at it from FCA's point of view, they already have a closed case, with Barclays having voluntarily done an internal investigation and bringing it to FCA's attention. Once they had their man on the illegal trading done 6 minutes later, what's the point of spending more time and money looking into trading on an exchange in another country before that?

I would also note here this quote from a Bloomberg article: "While commodity derivatives are regulated by the FCA, the London gold fixing isn’t. As a result, the trader’s actions fell outside the regulator’s criminal jurisdiction" so the FCA doesn't even have oversight over OTC gold trading, let alone US exchanges, and they only got him on "breaching the regulator’s principles of integrity".

What I think is interesting is that the CFTC should be looking into the 10:00:23 Comex trading, which we don't hear anything about. Seems like a good chance it will payout (in fines) for CFTC, certainly more of a sure thing than some other investigations they could spend their limited time on. Maybe it is because Plunkett contacted the Fed's go-to gold man who all the bullion bank traders have on speed dial to front their manipulative trades (sarcasm). Seriously, the CFTC should be looking into trading at this time.

While we are on Nanex, I would note that the timing of this case shows that Comex trading influenced the Fix, not the other way around as it is often presented, and as it was misinterpreted in this case. This is not surprising as an LBMA Alchemist article showed that price influence worked both ways between London and New York, shifting over time.

Indeed, the other observation is that Plunkett's subsequent Fix actions 6 minutes does not seem to have had much impact on Comex, which is not surprising considering how small it was relative to Comex volumes in this case.

Nanex also asked a few questions in their article, which I will have a stab at answering:

1. "Do poker players show everyone their hand at the beginning of a round?" Did Nanex actually read the FCA document, Plunkett was emailing internally, he wasn't showing his hand.
2. "Is Mr. Plunkett really that lucky?" Not sure why Nanex asks this, the whole case proves he wasn't and manipulated it down.
3. "Mr. Plunkett made no attempt to manipulate prices during the crucial first 6 minutes" He waited because he had the luxury of doing so as he could see how the fix was progressing. They normally take a couple of minutes, so 23 seconds in he had plenty of time to step in, but why do so and risk losing (as he did) on your fix trade if you don't have to and the market moves your way?
4/5/6. "How does the FCA know the drop at 10:00:23 was unrelated to Barclays or Mr. Plunkett?" Agreed, CFTC needs to look further into this.

"placed a large sell order of between 40,000 oz. (100 bars) and 60,000 oz. (150 bars) ... which led to Barclays declaring itself to be a seller of 52,000 oz. (130 bars)."

Not sure why it says "between", I mean don't they know exactly? Anyway, I love all this detailed stuff, which while only showing one day and not representative of all Fix trading, is interesting for me as to what it says about the volume of trading done on the Fix.

The key is the statement that after Plunkett's first order, the Fix was at "155 bars buying/345 bars selling", which is 2 tonnes buying, 4.3 tonnes selling. That selling is only $200m or so, which doesn't seem like a lot.

Subsequent Fix positions were "155 bars buying/215 bars selling" and finally "155 buying/145 selling". That is only two tonnes or $100m worth of trades. Not a lot and thus easy for a bullion bank or hedge fund to influence, which is probably why Plunkett was successful.

"before the price was fixed, there were a number of further changes in the levels of buying and selling in the 28 June 2012 Gold Fixing, which coincided with an increase in the price of August COMEX Gold Futures."

This bit is important because there are those that don't know the Fix is constantly being arbitraged to OTC and other market exchanges (which is obvious to any professional) like academics Caminschi and Heaney who "found" that "information from the fixing is leaking into markets prior the fixing results being published, and there exist economic returns for trading on these information leaks". Wow, you don't say, and given that customers can also adjust their fix orders during the process, they too can get economic returns, but if any serious player can do it, is it really an unfair leakage (as their work was presented in the blogosphere)? Caminschi and Heaney - you are just observing arbitrage here.

"After the weekend, on the morning of Monday 2 July 2012, Mr Plunkett sought out his line manager and informed him that he had traded during the 28 June 2012 Gold Fixing. He also subsequently reported his trading to Barclays’ Compliance. During Barclays’ internal investigation, Mr Plunkett provided an account of his trading during the Gold Fixing that was untruthful, in that he did not disclose the true rationale for his trading, or the reasons why he failed to disclose his trading to the Sales Desk on 28 June 2012. In giving this account, Mr Plunkett intended to give the impression that he placed orders in the 28 June 2012 Gold Fixing for reasons other than to increase the likelihood that the price of gold would fix below the Barrier."

So it wasn't a case of the FCA uncovering the illegal behaviour, it was only because the client complained, that set off a chain of events. It does make you wonder how many other derivatives that were close to the Fix which did not pay out will have customers reviewing and complaining. I do find it surprising that Plunkett, after realising that his trading on the Fix would be found out, then persisted it lying about why, given that surely Barclay's investigators would look at his whole book and find the digital option.

Next post I'll have a look at the closure of the silver Fix, and all whether that will fix the fixed Fix.

13 June 2014

Still alive

Apologies for not posting for some time. I have been busy with real work, which is counter-intuitive consider how dead it is for Perth Mint generally in terms of people buying PMs. Main time suck has been involved in finalising a tender for new website software. Over the next year we will be replacing our perthmint.com.au and pertmintbullion.com websites (both run on different platforms) and merging them into one and hopefully improving the connectivity into our backend ERP, which should help with our ability to handle load and avoid these problems.

Other time sucks include ongoing ERP replacement project, annual report prep and general dogsbody work which "Analysis and Strategy" in my job title seems to act like a magnet for.

I will be in Malaysia 23rd/24th June and Singapore 25th/26th for business, including the LBMA Singapore Bullion Market Forum, details of which you can find here. Topics include:

Session 1: The Singapore Market
Session 2: Next Steps for East Asia's Growing Physical Market
Session 3: Gold ETFs - What Future in Asian Portfolios?
Session 4: India - Effect of Regulatory Changes in the Indian Bullion Market and the Road Ahead
Session 5: Is Less More - How Many Gold Futures Contracts Does Asia Need?
Session 6: From West to East - Is It Really a One-Way Ticket for Gold?

If you have any (sensible) questions you want me to ask, leave a comment and I'll consider them. I suppose the thing these days is to live tweet, but not sure if this is a private meeting or Chatham House Rules, although I think the tweets will be quite dry - not sure of the interest in "Wrapping Gold ETF to retail investors in Thailand". I would imagine with the focus on how the silver fix is run, the LBMA would be all for transparency, we'll see how it goes.
Having stuck my head up and mentioned the silver fix, I suppose I should comment on it - see next post shortly.

10 April 2014

Why no direct relationship between price and stocks

A great article by Keith Weiner explaining why open interest in gold has fallen but in silver it has increased - hint: to do with profit from carrying gold. Apart from that, it is also useful for those who falsely think that if the price goes up (or down) then open interest should increase (or fall), and also that ETF holdings should increase (or decrease).

It does puzzle me why people think there should be a direct relationship between open interest or ETF stocks and price, given that they don't have any problem understanding that the price of a company's shares can go up and down while the number of shares on issues doesn't change.

For a company ownership of shares is just transfered between buyer and seller and that doesn't drive price. Price is a function of there being more buying pressure resulting in buyers not being willing to sit around waiting for people to accept their bids and instead accepting seller's offers (and vice versa).

The same can happen with precious metal ETFs. ETFs shares are only created or redeemed if the person on the other side of the trade is someone with no interest in the ETF (ie a market maker). Where existing holders sell to new buyers no new shares need to be created, yet the price can still go up if the buyers are willing to accept the seller's offers (and the non-market maker sellers are adjusting their offers to match gold prices on Comex or the spot market.

Also, check out Warren's latest bullion bars project post, where he notes that 70% of bars added to GLD during 2013 where previously in the GLD list, demonstrating that "there is a really large stock of gold in London and that it doesn't necessarily all vanish instantly to China". He also predicts the return of specific bar numbers by July 30th - now that's a real forecast, no vague hedged cop out wording.