LBMA Precious Metals Conference 2009 - Edinburgh

The Future of the London Precious Metals markets

Phil Clewes-Garner, LPPM Chairman

Good morning ladies and gentlemen welcome to the last session of the 2009 LBMA conference focusing on the future of the London precious metals markets. I could go on for hours particularly about the history but unfortunately you will hear a condensed version.

To know the future we must take a quick glimpse at the past but rather than go back to the year dot lets just look at the major points that put London on the map. The London market had handled gold production from Brazil since the start of the 18th century and later from Russia up until about 1848 but really came of age in the mid 19th century when the structure of the market changed. The Bank of England’s Bullion office, the only route for both gold and silver dropped its one broker Mocatta and Goldschmidt. The Bank became open to the purchase or sale of gold and silver on the tender of any sworn broker. This meant three brokers Sharps & Wilkins, NM Rothschilds along with Mocatta and Goldschmidt were on equal footing. The Bank actually created the initial good delivery list the definition of a good delivery bar being a maximum weight of 200 troy ounces of ‘standard’ gold at 916 fine or 22 carats, the present 400 ounce 995 fine good delivery bar dating from 1919. It was at this time that gold from Australia really put the market under pressure and the Bank sent for Johnson & Matthey who immediately became ‘assayers to the Bank of England’. In 1852 one Stewart Pixley a senior clerk at the Bank opened a brokerage house and Samuel Montagu son of a Liverpool silversmith set up a bullion and exchange business in Leadenhall Street. The London silver fixing was established in 1897 and the gold fix in 1919 providing much needed bench mark for the industry still as important today as they were then . So for the next 100 plus years the London precious metals market was Mocatta, Sharps, Pixley and Montagu basically as brokers with Rothschilds as bankers and refiners and Johnson Matthey as refiners later also to become bankers.

This continued until the late 1970’s when, with the gold price moving higher, reaching $850 an ounce in 1980, fuelled by high inflation, high oil prices and international tension, an influx of international players were attracted to the market. The growth in market participants combined with the introduction of the Financial Services Act in 1987 encouraged the formation of the London Bullion Market Association (LBMA) basically a trade organisation set up to provide a formal framework for the gold and silver industries.

The London market owes its establishment and its strength as the leading bullion market in the world to the Bank of England who has maintained its support, be it varied in strength, over the years. The ‘Old Lady’ has been a unique asset and ally to the market, providing storage facilities for other central banks, supra-nationals and market participants often acting as a go between. Indeed I still believe there is no other central bank with such close ties to the bullion market.

So London’s strength has evolved over 250 years around physical, maintaining quality via a good delivery list and storage facilities.

The market was very vanilla until the early 1990’s with dealers market making spot and forwards some loan business and the odd vanilla option and as the market grew there was an ever growing need to maintain further storage and clearing facilities culminating in the fact that more or less 100% of all loco swaps still have London on one side and London still supplies the majority of physical gold and silver in good delivery bar form required globally.

So what has the last 20 years brought ….

The development of gold loans for consumers and the mining industry leading to an explosion in structured products.

Clearing precious metals has become more streamlined with most clearers providing an ‘e’ platform of sorts be it to aid transfers or balance reconciliation. Due to credit concerns particularly over the last 18 months there has been a move away from the normal unallocated accounts to allocations mitigating any credit exposure the customer has on his clearer, requiring segregation and provision of a bar list. The process is quick and convenient and benefits from zero tax implications, a system not followed in most countries involved in bullion. Custody services will continue to grow as products backed by physical become the norm.

The LBMA has grown in stature to become the number one gold and silver organisation globally. The ‘good delivery’ list of approved brands now forms the backbone of nearly all global gold and silver markets. This has been strengthened in the recent past with the initiation of a proactive monitoring system, its focus to maintain the high standards required. This is very high maintenance when you consider the need to reference materials and train the next generation of vaulting staff.

Fragmentation is a question heard on a regular basis as more and more ‘local markets’ have evolved but London has not suffered due to fragmentation, the pie has actually grown dramatically and if anything London’s share has grown proportionately with the dramatic change in product appetite particularly over the last 5 years.

London has shown its ability to adapt to an ever changing environment. The growth in change has been remarkable particularly with the enormous uptake in gold as an investment asset class mainly through the development of precious metals ETF’s and the desire to hold physical. This has coincided with global financial concerns adding more momentum to the uptake and in doing so has inadvertently created a significant depth of public knowledge and understanding of precious metals particularly gold. Current ETF holdings are 57 million ounces of gold and 360 million ounces of silver the majority of the metal held in London in good delivery form on an allocated basis. ETF’s have significantly increased the physical attributes of the good delivery bars backing the product the enormous benefit to London being the ability to demonstrate the highest levels of credibility.

My personal view is that London will continue to adapt to any change needed to maintain its number one position in the bullion world. Its strengths still lie in its experience in all aspects of the business over a considerable amount of time. We all know that the next priority is a cleared forward facility ongoing at present.

The amount of publicity given to investment in precious metals over the last two or three years will continue to see ETF markets and derivatives based on them grow and the insatiable appetite from the Western world investment fraternity for physical will continue. One dear friend, a highly respected member of the bullion fraternity, referred recently to Germany as the new emerging market given its incredible appetite for physical gold and silver.

Precious metals will not return to the days of “maybe” as an asset class when only the Swiss Banks understood its importance.

The future of the London precious metals market?

What a silly question.