Feb 032016

At the beginning of each year the London Bullion Market Association (LBMA) polls a range of respected precious metals analysts in the large banks and independent consultancies for their forecasts for metal prices for the coming year. This year contributors are “predicting price increases across the board for all four metals”. Their forecasts for the average price during 2016 are:

Gold – $1,103, ranging from $978 to $1,231
Silver – $14.74, ranging from $12.63 to $16.78
Platinum – $911, ranging from $748 to $1,076
Palladium – $568, ranging from $413 to $674

LBMA forecasts have been quite accurate historically. The charts below show the actual average gold price each year as a line against the lowest (bottom of red bar), highest (top of green bar) and average of the forecasts (where red and green bars meet). Note that these charts are of the yearly average, so during 2016 prices will move around these figures (see the survey for more detail).


This year the range of forecasts for gold is quite tight, indicating more consensus or confidence amongst the analysts about gold. The most pessimistic analyst is René Hochreiter who forecasts a low for gold during the year of $850 while Martin Murenbeeld sees a high of $1,375.

The LBMA analysts are less accurate in the case of silver. This year their range is wider but overall see a downtrend. Bernard Dahdah sees a low for silver of $11.00 with Philip Newman seeing silver getting as high as $19.50 during 2016.


In the chart below I’ve worked out an approximate gold:silver ratio forecasts for those analyst who forecasted both gold and silver. It is not exactly the same as an actual ratio forecast because it is just dividing an average by an average, but as gold and silver tend to move together it is a reasonable approximation.


In line with the tight ranges for gold and silver, the LBMA analysts don’t see much change in the ratio for 2016 and certainly not back down to long term averages around 50.

Feb 022016

Since my article on the LBMA Silver Price on Friday, more market participants have come out criticising the process:

  • Afshin Nabavi, MKS: “People are going to lose all faith in the fix if this keeps going.” (link)
  • Brad Yates, Elemetal: “When Thursday’s number came in, people initially thought CME would void it, it was so far out of line with the market. When they endorsed it and it became the official print, the benchmark immediately lost credibility. We had two clients shift business away from pricing on the fix to live pricing.” (link)
  • Simon Grenfell, Natixis: “The new silver price setting mechanism appears broken. It is clearly an issue that the regulator should be looking at.” (link)
  • Grzegorz Laskowski, KGHM: “The large discrepancy between the spot price and the fix is very alarming to us especially that it happened twice in a row. I think the LBMA needs to make every effort to explain why it happened and needs to help to develop a system that would help to avoid these kind of situations in the future.” (link)
  • Unnamed bullion banker: “People are too scared to change their orders in the middle of the process so it got stuck. In the old days, banks would step in and take positions in order to balance the process. No-one dares do that anymore, as then they have to answer to compliance etc.” (link)
  • Unnamed precious metals dealer: “The system is broken. In the old days, if it was out of line, someone would have bought the fix and then sold the futures. It’s a joke — that’s all I know.” (link)

The most damming comment comes from Ross Norman as he is respected enough to be included in LBMA’s oral history project ‘Voices of the London Bullion Market’, who noted that “ten times in the last six months the silver price has been ‘fixed’ outside the trading range of the spot price for that day which is nonsensical. … A benchmark or reference price it is not. … the so called LBMA silver price does not come close to reflecting reality – and it is clearly vulnerable to manipulation – it is therefore effectively invalid.”

It seems the LBMA is certainly feeling the heat, with Ronan Manly noting this recent change to the LBMA’s website:

Ross asks why the LBMA Silver Price oversight committee (on which the LBMA sits) has “not come forward and explain what is going wrong and what they are going to do about – it is after all their job”. However I think there isn’t much they will be able to do about it because, as Ross himself notes, the real problem “is that banks are increasingly unwilling or unable to place corresponding orders where they perceive a mis-pricing because of fears of being accused of abusing a situation and facing the wrath of the regulator or their compliance departments.”

To fix the Fix, bullion bank traders (whether they are direct participants or not of the fix process) have to be able to “buy the fix and sell the futures” when the fix gets swamped by sell orders (or vice versa). The problem is that banks have a wide range of clients who hold positions with them across spot, forwards, futures, options, ETFs and so on. It is therefore highly like that one of those clients would be the loser of any such activity (and others winners) and complain (as did the client Barclays’ trader Daniel Plunkett traded against) about it. Alternatively, the regulator may decide to investigate markets from time to time.

The problem is that when a regulator comes looking at trades after the fact they could construe manipulative intent when no such thought was going through the trader’s mind – who was just arbitraging a market imbalance – and the trader finds themselves fined £95,600 and banned from trading, as Plunkett was.

If you think that traders would not be worried about such an unfair claim against them happening, or that client complaints or random regulatory investigations it would be unlikely, you haven’t been reading enough Matt Levine, who, coincidentally on the day of the silver stuff up included the two following stories in his daily article:

  • Nav Sarao, who is facing a 380-year jail sentence, “may not have had a material, or even any, impact on the bout of equity market volatility in May 2010 that later became known as the flash crash, according to a draft research report by University of California, Santa Cruz and Stanford University professors” (link)
  • Tom Hayes, who is serving 11 year jail for LIBOR rigging, saying that he was “thrilled that the brokers can tonight return to their families and their lives” while also “bewildered that he is now in a situation where he has been convicted of conspiring with nobody” (link)

Now I’m not saying these guys are scapegoats, but as a trader these stories would not make you feel comfortable that you would be given the benefit of the doubt. So would you help keep the fix in line with other markets if it risked you going to jail? No you would not, so the traders sat/sit on their hands. No matter what the LBMA, CME or Reuters say, I can’t see traders keeping the fix in line with other markets unless they got a letter from the FCA and SEC saying they will not go to jail, and the chances of that happening are zero.

The only hope for the fix is if non-banks step up to act as market makers/arbitraguers, otherwise “it can only get worse” as Ross says. Bullion Vault’s article hints that some such trading did happen

“As soon as [the benchmark] was done, [futures market] was hit with arbitrage selling and traded down to 14.07 with 5,000 lots trading. Then bounced back to trade $14.30+.”

however given how far the fix was able to drop, and how the futures market dropped much less, such arbitraging was not enough (but highly profitable to whoever executed it). Possibly more non-bank traders will step into the market to take advantage of the fact that the banks are impotent.

The problem for the LBMA Silver Price as a business is that unless traders do step in, more and more clients will stop placing their orders on it, as some of Elemental’s clients have. As the two-way liquidity drains away the chance of imbalances and out of line fixings increases, which causes more to pull out and so on in a death spiral.

unable to place corresponding orders where they perceive a mis-pricing because of fears of being accused of abusing a situation and facing the wrath of the regulator or their compliance departments. … Since Mitsui the only non-bank amongst the price setters departed – (and therefore the least regulation-bound), we have only banks remaining in the benchmark setting process so it can only get worse.

If the alleged email from the CME to its clients below (as reported by Platts and called “nonsensical” by a banking source) is indicative of how this issue is being dealt with, then the future of the fix is fraught.

“The platform worked as it should, in fact perfectly. It’s as good as the orders the participants enter. If you are a client of a ‘participant’ I guess you should direct this question at them. If you want individual flexibility, become a participant.”

Feb 012016

The release of Federal Reserve Bank of New York’s December gold stocks report provides and opportunity to analyse the progress of this current phase of withdrawals from its custodial stocks. I say “phase” because in recent times there have been periods of concentrated withdrawal activity in between periods of little or no activity, as the chart below from Nick Laird at Sharelynx shows.


It is interesting that these phase seem to correspond with economic turmoil – dot.com crash 2000/1, global financial crisis 2007/8, and today?

Note that during 2000 and 2001 the FRBNY was able to consistently ship out 40 tonnes a month. That works out at 2 tonnes a day over 20 business days a month. Commercial vaults designed for high throughput can do more than that but if you look at this National Geographic documentary on the Federal Reserve you can see it is not suited to high volumes. As I explained in this post, “those who think Germany could put 300 tonnes in a big plane or warship and move it in one or a few days have been watching too many Die Hard movies”. In any case, Germany’s 300 tonnes could therefore have been realistically  repatriated in one year.

During 2014 and 2015 we know that Germany repatriated just under 190 tonnes and the Netherlands around 123 tonnes. Given the reported net withdrawals from the FRBNY (back calculated as they only report balance in millions of dollars @ $42.22, I calculate the following delivery schedule.


All figures represent withdrawals, except the one highlighted in yellow, which is a deposit. Note that every figure in this table is a multiple of either a 4.420 tonne or 5.157 tonne “lot”, eg 41.991 = (4.420 x 6 + 5.157 x 3). I have tried a number of possibilities but the above is the only realistic one I can find that fits the reported facts in the lot multiples. Out of this comes two observations:

  1. Another central bank(s) have been withdrawing metal from the FRBNY but not disclosing it, close to 40 tonnes to-date.
  2. Someone deposited 41.991 tonnes just as the Netherlands was about to withdraw 123 tonnes.

As the FRBNY is reporting physical custodial stocks, the only explanation for the deposit is either another central bank deposited physical, or the FRBNY moved some of its (ie America’s) gold reserves into the account of another central bank, which could be the result of:

  1. A new FRBNY lease/swap TO a central bank
  2. FRBNY repaying gold leased/swapped FROM a central bank in the past

Given how tight-lipped central bankers generally are, we are unlikely to know who the mystery (and coincidental) gold depositor was.