LBMA disconnects gold's price from metal's fundamentals
says Paul Mylchreest:
By: Chris Powell, GATA
Published: Thursday, 30 January 2020
Dear Friend of GATA and Gold:
Our friend Paul Mylchreest, now an analyst for financial research firm Hardman & Co. in London, demolishes the London Bullion Market Association with an "open letter" released today, blaming the group's trading and reporting systems for suppressing the offtake of gold to about 5 percent of what it would be otherwise
. These systems, Mylchreest suggests, benefit primarily the LBMA's major members, bullion banks that short the metal, as well as central banks.
LBMA operations, Mylchreest writes, contrive a price for gold credit and derivatives rather than for the metal itself, and as a result the nominal price of gold has been declining for years even as fundamental factors in favor of gold have been strengthening.
Mylchreest writes: "We believe that the reason the price of gold can defy fundamentals is due to structural trading practices in London. The LBMA estimates that 95 percent of trades are in unallocated gold contracts, which are 'gold credit,' not gold bullion, meaning that the London over-the-counter market has been almost entirely derivative-ized.
"This has virtually eliminated the need to deliver gold bullion.
"With only 5 percent of gold trades requiring metal delivery, demand for actual gold bullion is diluted by a factor of around 20. On the supply side, therefore, the number of short contracts can theoretically be expanded in an almost elastic fashion without commensurate bullion delivery risk
"It's logical that diluting bullion demand by substituting it with gold credit, in combination with an elastic supply of this gold credit, will lead to a 'gold price' disconnected from bullion fundamentals.
"Consequently, the source of gold mining company revenue and value of investors' assets has been crowded out of price setting by the sheer volume of gold credit.
"Some will see this derivative-ization as creating an uneven 'playing field,' since it dramatically increases the capacity to sell/short unallocated gold. Commentators might conclude that the main beneficiaries are major banks/short sellers.
"We estimate that the aggregate loss in cash flow to gold mining companies worldwide from the fall in the gold price during October 2012 to December 2015 was more than $157.5 billion
. Many mining executives and investors remain unaware of their plight. ..."
Mylchreest notes central bank participation in the LBMA's trading scheme. He continues: "After analyzing trading volumes, we conclude, that, at this time, for much of the typical trading day central banks might be heavily influencing London gold trading. This has been widely speculated in the past, but perhaps not the scale."
If gold credits and derivatives did not dominate the gold market in London, Mylchreest concludes, London could run out of real metal "in a matter of hours." Mylchreest asks the LBMA to consider reforming itself.
"We would welcome being part of this debate and, in short, our recommendations for reform would include, but are not limited to, the following, with the goal of transitioning to accurate price discovery for gold bullion:
"-- The LBMA should be reformed from a trade body into an exchange.
"-- Regulation should cover the entire London trading day and have statutory backing.
"-- Level the playing field by removing the advantages to banks/short sellers by eliminating the convention of trading gold credit/derivatives in the form of unallocated gold.
"-- Volume and price of all trades should be reported shortly after execution.
"-- And vault data should be provided not later than one month in arrears."
Mylchreest appends to his open letter a report detailing the fundamental factors arguing for a substantial increase in the gold price.
His open letter is titled "Price Gold Bullion, Not Gold Credit" and it's posted at the Hardman & Co. internet site here: https://www.hardmanandco.com/wp-content/uploads/2020/01/Gold-Hardman-Jan
Of course investors should send the link to the executives of the gold-mining companies whose shares they own and ask for comment, as if most such executives don't already know all about the LBMA's racket and are too scared to complain about it. But with enough clamor the executives might learn how to spell "fiduciary responsibility."
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.