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Investment News and Research / Blanchard Economic Research Unit

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Bullion Banks: Smarter than the Rest of Us or Just More Informed?

Bullion banks are the conduits for central bank gold being loaned into the market. As the gold market has shrunk in the last decade in terms of daily volumes and market participant numbers (http://www.lbma.org.uk/clearing_table.htm), the reduction in the number of bullion banks involved in the market means central bank loans are handled by an increasingly smaller numbers of banks. There are currently only six clearing banks on the LBMA handling gold loan transactions.

The six clearing banks are:

Barclays Bank PLC, ScotiaMocatta, Deutsche Bank AG, HSBC Bank, JPMorgan Chase Bank & UBS AG

Hypothesize the following bullion market situation:

Bullion Bank A wants to borrow 100 tonnes of gold to sell into the market. Bullion Bank A then contacts Central Banks X, Y and Z to borrow that gold, and begins negotiating term lengths and lending rates. Bullion Bank A selects Central Bank X’s terms, securing 100 tonnes of gold through the loan and subsequently sells it into the market. By completing just one transaction with one central bank, Bullion Bank A now knows that 100 tonnes of gold listed in Central Bank X’s IMF gold reserves is actually out on loan, and being the conduit for that gold reaching the market, they know the time and date that gold was sold into the market and length of those loans. Bullion Bank A also knows what amount of gold, lease rates and loan lengths Central Banks Y and Z are willing to accommodate even if they did not complete a transaction with those banks.

Now extrapolate that one transaction over hundreds of transactions annually between Bullion Bank A and dozens of central banks. Bullion Bank A knows gold loan amounts in the market from their own transactions, when those loans were made, and also which central banks are willing to loan what amounts of gold and at what contract term lengths. But bullion banks do not publish their borrowing activity.

The information that one bullion bank now has from its own market activity far exceeds information publicly available to any other market participants outside of other bullion banks. This “inside” information puts the bullion banks at a significant advantage to any other market participant because they are the only beneficiaries of this proprietary market information regarding timing and loan (supply) levels.

Now hypothesize another situation:

Bullion Bank A has gold desk operations in every gold market in the world, Dubai, New York, Sydney, Hong Kong and London. If Bullion Bank A knows that when the London market opens, they will be selling 100 tonnes of loaned gold into the market that has the potential to impact prices, what’s stopping them from front running those trades in other markets beforehand? Nothing. Being the sole beneficiary of their own market activity, Bullion Bank A now has the ability to place their bets in each gold market around the globe with the knowledge that when the London market opens, a certain level of gold that they control will be sold into the market.

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