13 January 2009

London Bullion Clearing

Rob Kirby in this commentary on 12 Jan 09 discusses the LBMA's clearing statistics and says:

"the LBMA would have us believe that, in the past year alone, they physically transferred roughly one and a half times the amount of gold mined in the history of mankind."

That would be incredible if it was physical, but it is not. I quote from the LBMA's "A Guide to the London Bullion Market":

"It [London Bullion Clearing] is a daily clearing system of paper transfers whereby members offering clearing services utilise the unallocated gold and silver accounts they maintain between each other, not only for the settlement of mutual trades, but for third party transfers. ... This system avoids the security risks and costs involved int he physical movement of bullion."

If person A holds 1oz of physical in a warehouse, sells it to B, who then sells it to C later in the day, who then finally sells it to D by the end of the day, then the trading volume/ounces cleared will be 3oz. Just because this is larger than the amount of physical involved does not mean the trades were bogus or the underlying physical did not exist.

The system described by the LBMA is no different to shares. The fact that a company's total shares on issue may turn over many times does not mean that the shares are fictitious. Indeed, is not one of the first things an investor should look at when buying a stock is its liquidity, on the basis that if there is not enought turnover of the stock one may not be able to get out at a fair price? Why should gold be any different? The high ounce turnover should give investors comfort that gold is a highly liquid investment.

1 comment:

MikeB said...

Hi Bron,

This post seems quite relevant with respect to the recent news regarding the 3-25-2010 CFTC public hearing on metals position limits where the GATA folks pointed out the LBMA members fractional reserve system for gold trading.

Can you comment? I am trying to understand their position and this posts seems to suggest the 100:1 leverage they are pointing out may not be as bad as they claim. Can you help me out here? Not being a trader or precious metal expert it is kind of hard to decipher all of this stuff. Thanks!