The panel consisted of David Gornall (Senior Advisor, LBMA), Matt Slater (Global Head of Precious Metals Forwards & Physical Trading, UBS), Mehdi Barkhordar (Chairman, Neoshapes, SA) and Rory McVeigh (Senior Sales Manager (Precious Metals), SCGC).
Moderated by Adrian Ash (Director of Research, BullionVault), the session explored the changes and challenges facing the bullion market.
Adrian Ash (AA): If you’re looking at the age of our panel and thinking “This the future?!”, well as Winston Churchill once said: “The longer you can look back, the farther forward you can see.” So our panellists can see an awfully long way forward!
Let’s jump in. Rory, if I’d have asked you 10 years ago how you think the London OTC market would look today, what would you have said?
Rory McVeigh (RM): Our market moves at a glacial speed. But the changes that have come through over the years have been changes in the venues. My concern back then was about the impact on liquidity and the physical availability of the London OTC market. Where are those venues going to draw metal out to underpin their contracts? Thankfully, that concern was unfounded – the value of the OTC market is clear to see.
Mehdi Barkhordar (MB): The biggest surprise for me, compared to 10 years ago, is how responsible sourcing and sustainability have become so important. Today, LBMA is championing this in no uncertain terms, and they have really done a great job. This market is about integrity and responsible sourcing is the cornerstone of that.
The panel left to right: Adrian Ash, Mehdi Barkhordar, David Gornall, Rory McVeigh and Matt Slater.
AA: Which part of ESG – environmental, social, governance – do you think is most driving change in gold now?
MB: Governance. ESG equals reputation, which will ultimately motivate the market to comply. Banks are extremely risk-averse, specifically when it comes to reputation. And they will hold the market to the highest standards. If industry doesn’t get its own act together and set standards that are beyond reproach but workable, then somebody else is going to enforce standards that may be beyond reproach but are not workable. One thing is for certain: change will happen. The question is, are you going to be driving that change, or are you going to be suffering the consequences of that change? Is it an opportunity or a risk? I think that there is lots of opportunity out there.
AA: Rory, looking at the ‘E’ in ESG – environmental – is that a challenge or is that a market opportunity?
RM: It’s a challenge because it is usually set by legislation. We need to cooperate more and look at how we come together as an industry to solve the environmental side, as it’s also part of what our consumers are demanding. We are increasingly being asked for metal that has green credentials, especially for jewellery.
AA: Looking at market infrastructure and how London OTC trades, will carbon emissions be a big enough issue to change the way we do business?
RM: We’ve got ESG [Scope] 1 and 2 [tracking carbon emissions directly generated by production], which we can measure. But when we get to ESG3, what happens after we’ve made a bar of gold? Where does it go? How many times does it go around the world? We have no measurement for that. If we can’t measure something, how do we change it? How do we improve it?
One solution is we stop moving gold around so much. Why create this unmeasurable carbon footprint? That’s the problem we need to solve here. That is a challenge: a challenge for the vaults, a challenge for the logistics companies, it’s a challenge for all of us.
ESG equals reputation, which will ultimately motivate the market to comply.
AA: One idea I hear people discussing is for a digital token, somehow enabling gold - wherever it's held - to be settled for a trade elsewhere. Matt, why can't I settle a London contract with gold that's in Zurich today?
Matt Slater (MS): The answer to this core question really comes down to contract law, and legal jurisdictions. Ultimately everything we do boils down to a physical commodity. It’s something you can drop on your foot and it’s going to hurt. And so, it underpins it all. I actually don’t think to stop moving gold around is realistic, because not all end consumers are in London. They’re also in China, India, and other parts of the world – and they need the physical bar. We’re not at a point where trade tokens are actually feasible. But five or ten years from now, who knows? I see a lot of challenges around that, and I really don’t believe that the legal and regulatory environment is at a point where those platforms are a viable opportunity. Most of the proposals I’ve seen only work within their own ecosystem. Looking at the ETFs – we’re looking backwards to look forwards – that’s an incredibly powerful tool to allow investment in gold. But it’s also, effectively, an allocation of liquidity out of the daily market in London. In effect, we’ve fragmented the liquidity pool in London, and that’s where – if we have more and more of this fragmentation – we may start run into liquidity issues and face liquidity questions.
Ultimately everything we do boils down to a physical commodity. It’s something you can drop on your foot and it’s going to hurt. And so, it underpins it all.
AA: A bigger and possibly more present issue right now is HQLA. David could you please explain it for us?
David Gornall (DG): I suppose it’s better to describe what a High-Quality Liquid Asset does, rather than what it is. HQLA was introduced as a list of assets that could be used by banks, for liquidity purposes, as part of the Basel 3 regulations after the global financial crisis. HQLA are held to cover the risk of funds leaving the banks rapidly – a depositor run like what happened in March [at Silicon Valley Bank] – and also to cover the maturity mismatch of banks borrowing overnight to lend long. There are two Level 1 High Quality Liquid Assets: cash and government bonds. Gold was going to be on that list, until the regulator discovered there wasn’t enough data to support it.
To qualify as a high-quality liquid asset, you need to be able to demonstrate high-quality liquidity. But gold does meet most of the criteria, and we think that it can meet all of them at some stage in the future. And gold could help the financial industry from a prudential perspective.
Consider correlation with need to sell. [In a financial crisis] if you were to have an asset that was travelling in the other direction, you could sell that appreciating asset and you wouldn’t actually lose that much money. It would also be good for the wider financial industry, and socially, if gold were an HQLA, as it would free up cash resources for other lending, other investments.
AA: What about our market? What benefits would gold becoming HQLA bring to everybody in this room?
MS: At our bank we spend a lot of time managing this [liquidity coverage] question, because we have to optimise capital. So it’s my opinion that this question of gold as a HQLA is probably the single biggest issue that the financial services side of the market faces,
and it then touches on every other point, from refiners to miners, because of financing costs all along the chain. I think it’s critical that we get this right. Do we think it’ll be resolved in five years? I’d hope so.
I think, within 10, I’d bet my bottom dollar on it, because it just makes sense.
To qualify as a high-quality liquid asset, you need to be able to demonstrate high-quality liquidity. But gold does meet most of the criteria, and we think that it can meet all of them at some stage in the future.
