02 September 2009

No Massive Institutional Gold Market Change

Trace Mayer writes some good stuff, but his recent Massive Institutional Gold Market Change article hypes an midly interesting strategic development in the gold market. There are two statements he makes which are not correct.

“gold demand that was previously satisfied with physical bullion through forward contracts between private parties can now be satisfied with unallocated gold accounts”

This is the key on which the whole article hangs. The problem is that a significant majority, if not all, of institutional forwards are already settled via unallocated. Accordingly, this move by CME is not “a massive change” in the market – OTC market transactions are primarily settled via London unallocated accounts, and will continue to be if they move to CME. No change here.

As a result this so-called "scheme" provides no support for his conclusions that it "will allow for gold demand to be shunted into gold substitute products and keep the price of gold in fiat currencies low" or "the reason for this move is that physical gold bullion is getting increasingly scarce".

“Why the CFTC would allow supposedly gold-backed ETF shares to satisfy the physical commodity component in an exchange of futures for physical transaction” and "like settling either COMEX futures contracts or OTC forwards with GLD ETF shares"

That announcement is about Exchange of Futures for Physical (EFP) transactions, not physical settlement of a COMEX futures contract. I checked COMEX rule 113.02 and there is no mention of ETFs being allowed - only physical is allowed.

The issue with EFPs is explained better by Tom Szabo. His key point is that an EFP is an "exchange" and there is no change in the number of futures at the end of the transaction - therefore EFPs do not settle a COMEX futures contract as Trace claims. I would also refer to the comments of a retired precious metal wholesale dealer who comments on Seeking Alpha.


  1. Thanks for elucidating that Bron. I read the Trace Mayer article and couldn't understand what the hell he was talking about, so let it 'evaporate' out of my mind.

    I've come to the conclusion there is a great deal of that floating about the internet. A good source though, I think, is Doug Noland on PrudentBear.com, you should check his stuff out.

    Maybe add a link on your site, as far as I'm concerned he wipes the floor with Mish.

  2. It is unfortunate when commentators do this, it does their credibility no good (but this assumes people are reading this article).

  3. I sometimes wonder why commentators think they've made a huge discovery when they detect events connected with normal operations. Having worked within the petroleum industry for few years, it was quite a familiar concept to IOU's being agreed at the end of each week in order to balance each company's the books. It was called "borrow and loans". If one company was short for a delivery, it would be made up by another company, and a debt was recorded between the companies. As far as I know petroleum is still flowing, so this means of cooperation within the petroleum industry is probably quite useful.
    I think gold commentators get the idea of hard money so firmly fixed in their heads, that can't seem to understand that weekly settlements will entails some form of IOU between dealers. They seem to think that LBMA is staffed by thousands of gnomes pushing hand carts laden with gold for each and every transaction. These hand carts would also need to arrive without delay to satisfy these gold bugs. Quite ridiculous to contemplate that dealers would be accessing their vaults on an ad hoc basis in order to satisfy an order - goodbye integrity of the good delivery principle.

  4. Thank you for the comment Anon. Everyone in the industry knows bullion bank unallocated is unsecured, and they treat it accordingly.

    As to your comment about ad hoc, in fact bullion banks are very responsive. Perth Mint often gets physical metal ex-London. During the "great silver shortage" a year ago (which was really just a retail shortage) we were requesting 20 tonne shipments ex our unallocated account. Bar lists were made available within a day and the physical out the door a few days later.

    Interestingly, runtogold.com seems to have rejected my comment as comments subsequent to mine have shown up. That tells me a lot about him.

  5. Interestingly, Trace has had his article republished at Seeking Alpha http://seekingalpha.com/article/159747-institutional-gold-market-s-massive-change

    He had my comment directly on his site alterting him to his errors, yet he does not alter his article at all. Thing is he can't prevent my refutation from appearing on Seeking Alpha.

  6. Bron,

    Jesse has a post saying Hong Kong is moving its gold from London to a new vault at the airport.


  7. Justin,
    Yes Doug Noland is good, but even he seems to be getting a bit exasperated with how things are playing out. But still good value nonetheless.

    I hope PM is ready for another rush. Looks like the shorts have been caught napping the last couple of days. They were probably expecting more buying next week, thanks to another piece of gold folklore : nothing happens until after labor day in the US.

    My use of the term ad hoc may have been not well chosen. I was thinking of times eg. when a custodian may hold deliveries while stock takes / audits occur. I agree that response within days is pretty good.

    If you were requesting 20 tonne shipments from LBMA, does that mean Australian producers and others in your catchment area couldn't keep up with the demand ?

  8. "I hope PM is ready for another rush."

    We are upping the capital expenditure but as I've blogged before, as a whole the minting industry does not have the production capacity to meet any sort of mass market interest in gold, so shortages and premium increases should be expected.

    "If you were requesting 20 tonne shipments from LBMA, does that mean Australian producers and others in your catchment area couldn't keep up with the demand?"

    For silver, yes, gold no. AGR Matthey is a gold and silver refinery, but most Australian silver is a by products of other metals and is therefore sent overseas for processing. As a result when demand for our Kookaburras goes nuts, we need to import 1000oz bars as "raw material" for our production.

  9. Trace has replied to my comment http://www.runtogold.com/2009/09/massive-institutional-gold-market-change/#comment-17478 so I take back what I said about him rejecting my comment.

    I will leave a response at runtogold.com