Gold at LBMA 2023: High, Quality, Liquid
Thursday, 10/26/2023 16:59
Taking stock in Barcelona. Lots of gold bar and coin stock...!
ANOTHER AUTUMN, another LBMA conference for the precious metals industry,
writes Adrian Ash at BullionVault.
More attendees than ever joined the London Bullion Market Association's latest shindig, held last week in Barcelona, Spain.
But while everyone got busy meeting with partners, suppliers, buyers, competitors and friends, they got much less news than we've grown accustomed to.
No market-changing rules (responsible sourcing for refiners,
LBMA 2011 in Montreal) or shock exits (Mitsui,
Vienna 2015) or sudden buyers (Reserve Bank of India,
Edinburgh 2009) or existential crises (banking's NSFR regulations,
Singapore 2016).
Instead, this year's event offered a moment to take stock. And as the excellent session on 'Consumer demand in a time of high prices' showed – as well as the cheerful "tumbleweed" comments from many attendees over drinks – there's a lot of stock to take for gold bar-and-coin retailers right now.
If there was a scoop (heavens knows we tried to find you one, beyond the whispers and mutterings about central-bank demand in 2023 beating even last year's post-war
record gold reserves demand) it came on Day 2, in the final formal session of the LBMA 2023 conference in Barcelona.
Because someone, finally, explained what-in-the-hell is HQLA.
"It means 'high-quality liquid asset'," said David Gornall, former head of trading at French investment bank Natixis, chairman of LBMA during the tumult of the early 2010s, and now senior advisor to the Association's executive team.
"Go on..." asked
no one but me.
I mean,
HQLA is banking regulation. Who cares? Who can stay awake when it's explained, even this well?
Turns out, maybe, we all should. Especially the wider banking and finance industry, never mind anyone in physical gold.
You'll find David's explanation, plus the ramifications for the HQLA future of the gold market here on
GoldNews in the next couple of days.
Meantime, and as the latest LBMA conference confirmed, those words – high, quality, liquid – already apply to our market anyway right now. And not necessarily in a good way.
Gold High. Very
Gold prices have rarely been higher than today in US Dollar terms, and they've never traded this high in Chinese Yuan, Turkish Lira, Euros, Japanese Yen, Sterling, Aussie Dollars or most other currencies.
But rather than giving a bullish tone to LBMA 2023, and despite the very upbeat mood of delegates in person, this left the Barcelona conference's forecast for gold prices looking pretty deflated...
...with the average delegate prediction for October 2024 (when we next meet, in Miami, Florida) coming in at just $1990 per Troy ounce.
Yes, that's a big number. Gold was trading nearly $375 lower than that only this time last year. But even with gold prices now trading at their highest ever for the LBMA's October conference (even in Dollar terms) it doesn't mark the highest-ever such forecast.
For that, see Montreal 2011 predicting $2019 off $1800, or lockdown's 2020 conference online predicting $2177 off $1900 at the time of asking.
Moreover, last week's forecast predicted only a 4% rise from where gold was trading as the conference began. And that broke the mold if not the cupola...
...because while LBMA delegates
peering at their crystal balls tend to forecast a bullish move after seeing one over the prior 12 months...
...the conference's 4% twelve-month outlook contrasts with the last 12 months' 15% gain in gold prices.
That was the 5th biggest bullish move from October-to-October of the last 15 LBMA conferences. Yet in percentage terms, LBMA conference attendees just gave their least bullish prediction since the depths of gold's post-financial crisis bear market in 2015. And that was the only time since the early 2000s that delegates – on average – said prices would drop.
What gives?
"Delegates historically trend overly bullish," notes Nicky Shiels, precious metals strategist at Swiss refining and finance group MKS Pamp (and moderator of Day 1's excellent PGM session), in her round-up of last week's LBMA conference.
"[So] the mildly bullish forecast from delegates is indicative of a lack of conviction" in the face of higher-for-longer interest rates, even "while physical [consumer] regions AND central banks continue to be super supportive."
Contrarian klaxon? Reviewing the history of LBMA conference forecasts, maybe the past 12 months' gains in gold just weren't big enough. Because, if you map prior conference predictions against what just happened to prices...
...rather than trying to see if those forecasts hold any predictive value...
...then the chart makes much more sense.
Especially if you allow for the fact that, for many LBMA conference attendees, the price they charge – whether for coins, small bars or jewelry – comes a little or more above spot prices anyway.
Gold Quality
At root, the LBMA exists to set and maintain the Good Delivery standards for the fineness, shape and size of bullion bars acceptable to the London market, heart of precious metals trading and storage worldwide.
That way, LBMA members – and their customers – trade only the very best metal, good every time it's delivered and without needing an assayer to check and re-check quality each time the gold is moved from one specialist vault to another.
But on top of the physical requirements, further rules keep accruing to the Good Delivery standards, adding – most dramatically –
ever more ESG requirements over the last decade and more.
That acronym – environmental, social and governance – covers pretty much everything you might hope to achieve (or be accused of failing to do) over and above turning a profit. But ESG increasingly matters to that profit as well. Because as 4-decade market veteran Mehdi Barkhordar said in the 'Future of Gold' panel on Day 2 of LBMA 2023, "ESG equals R, and R stands for reputation."
Hence the hot topic (again) of trying to
get more gold from artisanal and small-scale mining into London Good Delivery gold bars. Start by adding ASM and LGD to your alphabet soup. Because the volume of gold unearthed by some of the world's very poorest people which finds its way into LGD bullion has collapsed, sinking to barely 1% of the formal market's new annual supply.
Why? ESG of course! Plus all the resulting reputational threats which stepping outside the large-scale stock-market-listed mining sector risks bringing down on your head thanks to ever-tighter rules on conflict-free supply chains, ever-tighter anti-money laundering rules across the financial and commercial sectors, and all the due diligence checks now added since the first Responsible & Sustainable Sourcing rules came into force in 2012. (Yes, add RSS to your acronyms too.)
Now, that figure for LGD gold coming from ASM has risen to perhaps 2% over the last 12 months. So
the LBMA's initiative – working together with the mining industry's World Gold Council – appears to be helping. But that 2% figure still contrasts badly with
estimates of 15-20% for the total volume of all the world's newly-mined gold which comes from ASM's informal, sometimes illegal and often dangerous production...
...and it leaves perhaps 20 if not 40 million people worldwide digging gold out of the ground but locked out of earning the higher prices which the LGD supply chain pays versus the cut-price bid from gangsters and crooks.
What to do? Lots of people have lots of ideas. And demands.
"The LBMA's ASM project applies risk-based due diligence, rather than assuming guilt," noted Gregory Mthembu-Salter, director of South Africa-based Phuzumoya Consulting, chairing the Responsible Sourcing session last week and raising hopes that 'perfect' won't keep being the enemy of the 'good'.
But some NGOs (there's another acronym; non-governmental organizations) are pushing back on that approach, while others demand that refiners on the London Good Delivery list not only take metal from ASM miners but also spend additional money to improve their lives and local society, too.
Together, that risks cementing the "damned if you do, damned if you don't" problem that's forced some major refiners to quit buying metal from entire continents rather than spend time and money just to put their reputation on the line.
Governments also keep making demands of the legal gold industry too...
...rightly pushing against conflict, terrorist and organized crime-funding gold but also raising the risks – over and above reputation – into the courts (if not jail) for anyone daring to try expanding the formal industry's feedstock by engaging with and paying ASM miners.
Why would the refiners and banks bother? Business is humming along anyway, right?
Gold Liquid
Forget the cerveza in Barcelona (if you can recall it to start with). Liquidity in any market, as the LBMA Barcelona conference was reminded in both this year's very strong 'Investment exposure' session and by the 'Future of gold' panel, means the ability to sell as easily as you buy without suffering a deep price discount as you get your order matched.
And for gold – suddenly – retail dealers across the West are finding that their customers
want to sell the stuff back to them at today's all-time or near-record highs.
"This is
the most dramatic change in consumer gold demand I can remember in any major market," said 37-year precious metals veteran Wolfgang Wrzesniok-Rossbach, founder and CEO of consultancy Fragold GmbH, of the German bullion coin and bar market.
How dramatic? Germany's retail gold bar and coin demand is down 78% this year versus 2022. Net silver demand has sunk by 90%.
Sure, this plunges comes off a very high base. Perhaps it's just a return to normal as German and other European citizens finally get to earn a positive rate of interest on their cash savings again (well, positive until you account for inflation) rather than paying a negative rate as they faced from 2014 to 2022.
But the plunge is proving a real shock to some newer German gold and silver retailers, and the sudden lack of new buyers across Western economies – plus the move to take profit among existing private investors, as well as among ETF shareholders and (for instance) BullionVault users – means metal is piling up.
So again, last week's opportunity to take stock of the precious metals market in late 2023 gave many attendees a quick break from counting stock back in their office, shop or warehouse. But for others, as well as for those unsurprised by and prepared for client flows in the other direction, business remains brisk, and the commercial outlook upbeat.
After all, the bear market of 2012-2015 came to an end. So did the long bear market of 1980 to 2001. This too shall pass. But it is an oddity. Record high prices, net investor outflows.
Someone's buying, in short, and they're paying record high prices. Not the usual suspects at the top of a bull run. This time it's emerging-market consumers buying and, most dramatically,
central bank gold holdings.
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