January 17, 2013 | By Tekoa Da Silva
I realized today I knew very little if anything at all about the LBMA, which stands for “London Bullion Market Association”. Up until today, I assumed the LBMA was much like Chicago’s Comex Exchange, but from what I learned in a telephone conversation with an agent at the LBMA this afternoon…it is anything but.
Here are my notes:
How does the LBMA work with respect to gold trading? How much gold is traded through the LBMA on a daily basis?
“Nothing’s traded through the LBMA. We are not an exchange, we are a trade association, and we don’t sit in the middle of, or oversee any transactions. We are just an association. Our primary function is to determine the standards and the quality of the bars that are traded.”
What does that mean?
“We set the quality standards [for the bars that enter the association], the dimensions, the size, the quality of the gold that’s traded in the London market. That’s our primary function…Underneath that, we accredit the refiners who produce the bars. So they have to be an accredited LBMA refiner, they have to meet the standards that we set down.”
So how does that work? Does that mean you guys have a team of inspectors checking out every single bar that enters the association’s trading system?”
“We appoint a team of referees, who are from the most established and higher quality refiners, and they go around and inspect the output from each of the refiners to ensure they are still producing bars to the required standard…They will be checking the quality both when the bars go into the market, as well as when they go out of the market and into somebody’s vaults. They inspect every bar that they receive.”
How are they bars inspected?
“There would just be a physical inspection, they’d be all weighed, and they’ll be checked for all the correct marks. Assay marks, refiner marks on them. They have the ability if necessary to do ultrasound checking as well.”
What about drilling? Would they drill to confirm the interior of each bar?
“I don’t think any of the refiners would drill into them…We wouldn’t be drilling into bars. It’s not something they would do routinely, but they do have the ability to check using the ultrasound if they see defects. That’s the one area that they might use the ultrasound check to be satisfied.”
So all the gold that ends up coming in through LBMA member refiners…where is that gold stored?
There’s a number of vaults in London where that gold would be stored. It depends on whose buying it and what the purpose is…a lot of it will stay in London in vaults, but some of it may be transferred on outside of London.
Now what about the gold trading itself? How is that done if the LBMA does not create or engage in the exchange-trading side of the market?
“That takes place between the members, essentially between the clearing members. It’s not on an exchange, it’s an over-the-counter market. So they’ll be transacting principal to principal, member to member, clearing-member to clearing-member, or across their own desks by phone, to serve all their clients. So we don’t get involved in any of that. The physical settlement will settle outside of us. It’s outside of the LBMA.”
Additionally, the LBMA put together a piece forecasting a $1753 price prediction for gold for 2013. How did the association come to that figure?
“We have a pool of analysts…24-25 suitable to participate. Once they’ve been approved to participate, the analysts provide a high, low, and an average price for the year ahead. Our forecast for 2013, is the average expectation of 23 of our approved analysts.”
Final Thoughts: I found a few items in this conversation very intriguing. The first—the LBMA is a self-regulating, self-inspecting, self-analyzing, “inspection body”. Meaning, inspectors, analysts, and “regulators” are chosen from among their industry peers and member companies.
Secondly, the market-making member companies are all of the top investment banks, many of which have been involved in financial scandals in recent years.
The last item, which I felt was most important—was that physical inspection (visual & weighting) of bars is the routine method of inspection…which would mean a savvy metallurgist and a lackadaisical LBMA inspector would make for a disastrous combination.
If a scandal of any kind were to ever occur within the market-making members of the LBMA, there would no doubt be an industry-wide cooperation and support to maintain confidence in the system at all costs.
Lastly, the LBMA releases a quarterly publication called, “The Alchemist“. An interesting name for a precious metals publication no doubt.
Thoughts are welcomed.
Tekoa Da Silva
Bull Market Thinking
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