Howard Davies focuses on EMU
The Deputy Governor of the Bank of England, Howard Davies, proposed the health of the London Bullion Market Association at the LBMA's fifth biennial dinner held at the Gibson Hall, London, on 12 September 1996 (writes Chris Elston, LBMA Chief Executive).
In a speech which focused partly on the prospects for the English soccer season, and for one northern first division team in particular, the Deputy Governor had some serious points to make.
First, on the subject of International Monetary Fund (IMF) gold sales, he re -iterated the UK government's support for the sale of up to 10 million ounces so that income on the proceeds could be used to help the poorer countries. If, despite some opposition, such sales were to go ahead, it would be the UK government's aim to ensure that they should be phased so as to minimise any possible disruptive effect on the bullion market.
Secondly, the Deputy Governor broached the thorny issue of Economic and Monetary Union (EMU) and the implications for the bullion market. "The central banks involved in the EMU process are very significant holders of gold," he said, "with around 15,000 tons between them - a little under half of the total of 35,000 tons owned by all central banks and monetary authorities together. The European Cen tr al Bank (ECB) statutes say nothing explicit about gold, but that does not mean it won't play a part in the reserve pool of perhaps around 50 billion ecus which the Treaty requires EMU members to establish in Frankfurt”. While no decision has yet been taken on this, the Deputy Governor again stressed that the UK government would be arguing against any measures which could disrupt or unsettle the bullion market.
He referred to discussions that the Bank had already held with the LBMA on how its members could be affected. These were part of a wider exercise aimed at assessing the impact of EMU on the City. Despite not knowing whether the UK would be in or out, he considered it important to think through the potential consequences for London.
In this context he saw it as unwise to talk about the City as if it were a homogeneous entity. In any political development there were bound to be both winners and losers, so it was necessary to look at the impact on the City market by market, he said. Done this way, careful analysis had a hard job to provide a simple conclusion. He could find little support for the proposition that the interests of the City would be irremediably damaged if the UK were to sit out the first dance. Likewise, he thought that those who argued that a position outside EMU was inherently desirable from a financial market point of view and that the UK could be the deregulated offshore centre for the Euro tended to underestimate the determination of the ins. He had little doubt that Frankfurt and Par is would do their utmost to exploit whatever potential EMU gave to gain advantage over financial markets in countries staying outs ide.
In conclusion, the Deputy Governor stressed the need for individua l markets and institutions to take a long hard look at the way in which the competitive dynamics of their operations could be affected by EMU, in both the long and the short terms, and irrespective of whet her the UK joined or not. For the bullion market he saw the practical consequences of EMU in the short run at least as modest, but he warned that the single currency could alter the dynamics of financial markets in ways we could not easily predict today. His serious message, therefore, was that we should all usefully engage in the intellectual exercise · of trying to assess those dynamics.
In thanking the Deputy Governor and proposing the health of the guests, Alan Baker, Chairman of the LBMA, paid tribute to the Bank's co -operation and support for the market over the years. "This" he said, 'has undoubtedly been a major contributing factor in the position of London in the world of bullion and something we look forward to continuing in the years ahead”.
Like the Deputy Governor, Alan also touched on the burning topics of IMF gold sales and EMU. On the former he took comfort from the fact that the last occasion when the IMF sold 732 tons over a four- year period in a series of 44 public auctions coincided with a market rally which has since become legend. Perhaps, he suggested, we should just wait for history to repeat itself.
On EMU, Alan reported that the LBMA had become a member of the City of London Joint Working Group on EMU legislation not because he foresaw practical problems of conversion of contact that some markets were having to address but, because it wanted to be involved in discussions on the implications of the introduction of the Euro , whether the UK was in or out. At the same time, he noted, "we have considered the implications for the status of the London Bullion Market if the UK remains outside EMU. Given the standing and experience, combined with the critical mass of the market in London with its representation from all over the world, we really do not envisage any threat, and are sure we can only retain the prominent position in the international market we currently enjoy".
Alan also referred to the gold market's stability. Some people, he admitted, may well be bemoaning its lack of volatility, but was stability really such a bad thing? A market without volatility may limit profitability but, conversely, high volatility is not necessarily a recipe for instant profitability for all.
Still on the subject of volatility, he condemned the continuing indiscretions by the stupid or greedy few who held themselves out to be bigger than the market and damaged the dealing environment in the process. At the end of the day he saw basic honesty, integrity and common sense as the best regulators. "One thing is clear", he said, "the difference between genius and stupidity is that genius has its limits".
Some saw a solution in greater transparency and, while the LBMA was keen to move in this direction, with an enhancement of the Reuters GOFO page and the possible availability of statistics on clearing turnover in the offing, he warned that there was a tightrope to walk in achieving a balance between transparency and confidentiality. And there was the danger that too much information could be used by those manipulating a market to their own ends.
Alan Baker paid tribute to HM Customs & Excise and, in particular, to Stewart Kingaby, whom he welcomed as a guest, for its role in maintaining a close working relationship with the LBMA. This was evidenced by the recent establishment of a liaison group to discuss UK policy on VAT harmonisation in the EU, in which at the top of the agenda was the aim that any changes in VAT arrangements will take place only if they are positive for and in agreement with the London Bullion Market.
Alan also expressed satisfaction at the move towards a closer relationship between the LBMA and the LPPM. A first example of this was the work being done together to include Platinum and Palladium within the ISDA Bullion Definitions. "With so much common ground between our organisations by way of product, market participants and personnel, it would be incongruous if this tendency towards closer co-operation does not continue and, for my part, on behalf of the LBMA support it wholeheartedly".
Finally, Alan paid tribute to the efforts of his fellow members of the Management Committee, of those serving in the various Sub-Committees and of the Executive. He singled out the Public Affairs Committee, now under Jeff Rhodes, for its work on the new brochure and the Alchemist; and the work of the Physical Committee under Peter Smith on updating and refining the Good Delivery List, including the task of bringing into the fold the former Soviet state refineries.
Alan concluded by welcoming the other guests and introducing Timothy Green who, he said, "over the years has taught us more about our own market than we know ourselves."
In responding on behalf of the guests, Tim took his audience on an unashamed and entertaining nostalgia trip. He said that he seemed to get into the gold business some 30 years ago by accident by writing about it as a journalist and had somehow stayed with it ever since.
His career, he thought, had covered the most entertaining era in the history of gold (with the possible exception of the Napoleonic wars - when there was some volatility). He had seen the transition to today's high-tech paper trading from what was, essentially, a physical market where you had to journey to up-country Laos or downtown Jakarta to meet your clients.
Tim reflected on the long history of the London market as the prime crossroads for both gold and silver and sang the praises of the enduring relationship between the market and the Bank. The market, he pointed out, had pre- dated the Bank by some 20 years but, once the Bank was born, it soon worked hand-in-glove with the market. It was worth acknowledging that inheritance which continues today, despite the immeasurable changes in gold. "The Old Lady is doing a beautiful job for the London market", an envious Swiss gold dealer had told him - and so it should, he thought; it has had three centuries of practice.