15 December 2014

Reserve Bank of India 92:1 meme

One of the most persistent memes in the blogosphere is the supposed massive fractionalisation that goes on in bullion banking. Historically bloggers used Jeff Christian's 100:1 statement as proof but I rarely see that mentioned these day. Instead, bloggers focus on the following from a Reserve Bank of India Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loan NBFCs (non-banking finance companies) in India dated January 2013, page 58:
"Interestingly, in the Financial Markets, the traded amount of ‘paper linked to gold’ exceeds by far the actual supply of physical gold: the volume on the London Bullion Market Association (LBMA) OTC market and the major Futures and Options Exchanges was over 92 times that of the underlying Physical Market (Table 5.1)."
The popularity of the 92:1 fractional meme I suspect is due to:
  1. You don't have to give Jeff credit/exposure
  2. It is a more recent reference
  3. It is from a Central Bank
I think that the last reason is the main one, and indeed if you search on the times the 92:1 has been used, it is almost always referred to as coming from the Reserve Bank of India with the implication being that as they are a Central Bank they really know what is going on in the bullion banking game so you are getting the Truth from an insider.
The really amusing thing about that implied inside information is that if you actually look at the report on page 58, which I bet few of the commentators referring to the figure have, you find that in support they have a table showing figures on physical vs futures and LBMA volumes sourced from CPM Group, Jeff Christian's firm. So the 92:1 meme is not confirmation from the Reserve Bank of India about the fractional bullion banking system but just a reference to trading volumes in different markets using figures from a source that goldbugs hate and distrust.
On that last point, for readers new to the issue of confusing turnover with fractional, I have covered that a number of times, here on Sprott and here on Rob Kirby making this mistake, as well as at the 100:1 link in this post above. I would also recommend my series on fractional reserve banking, particularly this one which discusses the difference between turnover, leverage and fractional.


  1. I guess the issue is velocity. The higher the velocity the lower the value of a product. If the velocity would disappear due to the paper gold market crashing, there would be very little volatility, the velocity would become very low, and the prices will become very high.

    Just look at the Dollar, so much printing going on, but velocity is going down, so the value of the dollar going up. If the velocity of dollar would pickup, suddenly the Dollar value will start to go down.

    Its not easy to trade physical gold so if there was no paper gold market there would be little speculation and there would be little velocity. Viola the price of gold will become huge, no need for there to be an existence of fractional gold.

    BTW, I don't really understand the Gold as a foreign currency XAUUSD. Each Currency has their own printer. Who prints XAUUSD? There must be someone, otherwise it wouldn't exist.

  2. More number-parsing and number-crunching?

    Trees. Forest. BIG picture.

    Common sense and logic - and distilling our own observations and readings over a long period of time - absolutely guarantees that leverage MUST be very, very excessive.

    Have you ever seen the financial class restrain itself when presented with nearly-free speculative capital...?

    Ever? Anywhere? In ANY market?

  3. Trees. Forest. BIG picture...

    to an ant, a blade of grass is a billboard; a patch of pasture, a universe...

    likewise, one persons forest is anothers woodlot. Big pictures are in the eye of the beholder. Here, we are looking at 'the way' that people see the gold market, much like the eagle gazes downwards on a world looking around at itself!

    Thanks to Bron's implacable determination to examine the "forest" through the eyes of a forester, we gain an exceptional opportunity to separate dross species from the stands of mahogany or fir. When your livelihood depends pon knowing how an ecosystem REALLY works, there's no margin for myths and legends.

    Incorrect impressions about seemingly small details such as leverage and leasing lead to BIG errors of judgment when investors compound their confirmation biases with data that impairs their critical judgment. That's how the bucolic pleasures of bullion-bearing quickly become a remake of BlairWitch Project!

    There are few indeed who invite us along to see the forests tangled byways and multifarious diversity as they do... asking in return for nothing other than a willingness to see through fresh eyes!

    There are many words and names used to describe a forest, and the tree which make it up - but these outings with Bron are up close and tactile contact with the living thing in itself - on eagles wings/

    Glad to be along for the ride!

  4. Yep thanks Nutlugger, to understand the ecosystem you have to deal in details.

    If you read my fractional series, Cocoabean, you'd realise that it is not guaranteed that the leverage in bullion banking must be very excessive. There are many control mechanisms which give it breathing space.