alchemist aug 2011

7/29/2019 Alchemist Aug 2011

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In this issue

REACH Challenges

Past, Present and Future

By Violaine Verougstraete

page 3

LBMA Executives Visitto Brinks New Vault

By Varsha Peiris and Collett Roberts

page 7

Loco London Liquidity Survey

By Stewart Murray

page 9

LBMA Summer Secondment

By Emma Attridge

page 11

The Real Price of Gold

By Fergal OConnor

and Dr Brian Lucey

page 12

The Shanghai Gold Exchange

and its future development

By Wang Zhe

page 17

Regulation Update

Supply Chain Due Diligence

By Ruth Crowell

page 23

LBMA News

By Stewart Murray

page 24

Editorial Comment

By David Gornall

page 26

Facing Facts

By Paul Burton

page 27

Banro Corporations Gold Mine Project Legitimate Mining in the DRC

The issue of conflict minerals, including gold, in the Democratic Republic of Congo is being hotly debated in

the wake of the US Dodd-Frank Act. Most discussions focus on illegal mining operations. But there is another

side to gold production in the DRC. The photograph shows Banro Corporations gold mine project at Twangiza

in the east of the country which is expected to start commercial production in the fourth quarter of 2011.

For further information see the Regulation Update Supply Chain Due Diligence article on page 23.


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A review of the challenges facedby industry and regulators with

regards to REACH. REACH is

the European Community

Regulation on chemicals and

their safe use. It deals with the

Registration, Evaluation,

Authorisation and Restriction of

Chemical substances.

The entry into force of the REACHRegulation (EU Regulation No 1907/2006)has given significant impetus to non-ferrousmetals science and to the development oftools, so as to be able to address itschemicals management requirements.

The need to maintain access to the EUREACH market and the obligation todemonstrate responsible care within a fixedtimeframe have forced us to acquire a betterunderstanding of the hazards and risks of ourmaterials along their lifecycle, and across theexposures, uses and forms of the substances.

Moreover, we had to take over the duty ofensuring the proper risk management of asubstance, from cradle to grave, therebygoing beyond the usual management area,e.g. a production site.

These obligations have prompted a hugeeffort to generate data since 2006;prompting industry to go back to existingknowledge either publicly available oravailable as grey literature lying around indrawers in an attempt to fill in the holesin the somewhat frightening data gapanalysis exercise. Strategies to make the bestuse of available data, to generate the missinginformation, and to develop methodologiesand tools had to be agreed by groups ofpeople sharing interests in one and the same

substance, but who did notper se know eachother. This all had to be done within alimited timeframe, which triggered someanimated discussions on technical, cost-sharing and resource aspects.

Besides being an information generator,REACH has actually proven to be anincredible communication challenge, forcingthe actors within the same supply chain toestablish work and communicationprocedures, to exchange information onwhat constitutes the reality of the one andthe other, and to ensure rapid and joint

familiarisation with the subtleties of both thelegal context of REACH and itsimplementation.

A significant number of metals and metalcompounds had to be registered before thefirst REACH deadline (1 December 2010),which added considerable time pressure tothese knowledge and communicationchallenges, resulting in some exhausted looksfrom consortia managers when we asEurometaux conveniently not registering had to announce changes in guidancedocuments or in the tools.

All in all, the sector was able proudly toannounce on 1 December that the non-ferrous metals industry had successfully

A L C H E M I S T I S S U E S I X T Y T H R E E

page 3

REACH Challenges- Past, Present and Future

By Violaine Verougstraete, Health and Alloy Manager, Eurometaux


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reached the first REACH registrationdeadline, and even to add, in the sameenthusiastic sentence, that we were awarethat this first deadline was only a first stepand that other challenges would follow.

The post-2010 registration recovery

period has actually been short. Not onlybecause the sector had to get down to thebusiness of preparing the registration oflower tonnage substances, but also becausesome of the challenges that we had foreseenin December soon began to show their faces,during post-registration debriefingsorganised by industry and in meetings withthe REACH enforcement regulatoryauthorities.

Future Challenges

At this point, let me mention some of thechallenges I see in the follow-up to

registration at consortia, regulatory and sitelevel. The focus will deliberately be on someof the technical challenges, which may in myopinion have an impact on the overallvaluation of the data collection effort forregistration.

To start with, the fact of havingsubmitted a dossier for a substance on1 December did not mean that the R(Registration) page of REACH could beturned. It remains an active process,requiring further attention and resourcesfrom consortia not always planned for atthe time when the consortia were set up.There will be the necessary updates of thesubmitted files linked to for example newinformation becoming available, or triggeredby ECHA guidance changes and/or futurereviews of REACH. In addition, somecosmetic updates of certain files arenecessary. As a matter of fact, it should berealised that despite the general willingnessand considerable efforts made, the dossierssubmitted in 2010 have often only been asgood as possible and could still have someweak spots when it comes to evaluating their

completeness and defending a substance.Even in the non-ferrous metals sector, whichhas a solid tradition of co-operative workand is skilled at working together on multi-metallic risk assessment and classificationprojects, some differences among thedossiers can be detected. The approachesused are broadly similar, but the devil islurking in the detail behind missingjustifications, overly brief explanations, andsometimes inconsistencies between onecompound and another. These flaws are avisible sign of the lack of time before the2010 deadline, which did not enable all themetals to move together, at the same speed,towards complying with all the informationrequirements. Work has begun on addressingthese shortcomings, but it will take time and

will involve further resources that will haveto be accounted for in consortia workprogrammes.

Within the last four years, industry has ofnecessity built up significant expertise inchemicals management and in thinking in

applied mode. We have been driven by theneed to find pragmatic solutions toconceptual issues. Some examples are:a) how to deal with the aspects of data-richsubstances in a system designed for data-poor and safety factor approaches; b) themanagement of uncertainty versusprecaution; and c) the consideration ofaspects such as the massive form ofthe material or its complexcomposition. To overcomedefaults in guidance documentsor overly predictiveestimations generated by

models that did not takeaccount of metal-specificaspects such as naturaloccurrence, certainbiological mechanismsand essentiality, wehad to go back to thesector data anddevelop metal-specifictools and approaches.These solutions haverequired discussions,exchanges ofinformation,workshops andsignificant volumes ofguidance notesspread throughout allthe consortia.Interestingly, thisessential move topragmatism has enabledmore industry people tobe involved in the technicaldiscussions, previously leftup to the metals scienceprofessionals. Compared with

three years ago, both inassociations and companies, manymore industry people are now used tofinding their way around the jungle ofacronyms used in metals science; theyunderstand what risk assessment means andquestion the practical implications ofclassifications, Derived No Effect Levels(DNELs) and Exposure Scenarios. Thesituation naturally still leaves room forimprovement, but overall, knowledge hasincreased and been brought right up to date.

Regulators and Industry Experts

Communication Challenges

What about the regulatory bodies experts?The setting up of REACH and its sequentialimplementation (focusing first on

registration, then evaluation and finallyauthorisation) seem to have put certainregulators on hold to some extent. They hadto prioritise the organisation of enforcementactivities and resources for the furtherREACH processes. They also had to wait forthe dossiers to become available, rather than

being actively involved in brainstorming ontechnical issues in the dossiers as they mayhave been in the past. Regulators seem tohave been somewhat out of the technicalinformation circuit. On the other hand,several regulators seem to have made use ofthat registration time to better qualify what

they are expecting from the REACHprocess and to identify the

shortcomings of REACH thatneed to be addressed (e.g.combined effects).

There is an

unfortunate timingincompatibility here:while we as industryare now awaitingtheir evaluation andwould now be in aposition tocommunicate onlessons learnt fromregistration, theREACH Regulatorsare now themselvesfaced with a hugeamount ofinformation, aresubject to timepressure and arepropelled towardslearning by doingwithin newly set-upcommittees, with newfields to address.

Breaking in the systemand limited timeframes

do not give regulatorsmuch opportunity either to

familiarise themselves with

the recent science andtechniques built up for REACH

by the various sectors, or tocommunicate on their registration periodreflections.

This mismatch in schedules and prioritiesnow leaves us with a kind of gulf betweenauthorities and industry. For as long as bothsides cannot meet and find means anddialogue on their respectively acquiredexpertise, this gulf could, in my opinion,adversely affect the discussions on theREACH dossiers and substances:

First of all, despite the fact that we havenever had as much information as now, theword precautionary again seems to be

T H E L O N D O N B U L L I O N M A R K E T A S S O C I A T I O N

page 4

All in all, the sector

was able proudly to

announce on 1 December

that the non-ferrous metals

industry had successfully

reached the first REACH

registration deadline, and

even to add, in the sameenthusiastic sentence, that

we were aware that this first

deadline was only a first

step and that other

challenges would

follow.


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page 6

actively part of the debates. Withoutbecoming familiarised with this mass of data,how to handle the latter and theirlimitations, the unknown remains a barrier,whatever the amount of information thatmay impel regulators to remainprecautionary or not to fully consider the

data collected.

There is a normal human tendency to goback to what is known rather than divinginto the unknown, particularly when there ispressure to deliver a certain amount ofwork. This can now be observed in thechoice of some substances to be scrutinisedthrough REACH processes: some of thesehave already been extensively andexhaustively discussed in earlieror other Chemical Managementsystems, and the questionthen arises as to whether

this will enable theobjective of REACH tobe achieved, i.e. tostreamline andimprove the formerlegislativeframework.

Going Forward

It is imperative toavoid discussionshampering theadded value of theefforts made byboth industry andregulators.Although the rolesand rules for theREACH actors arewell outlined in thelegal text andguidance documents,this does not preventemotion and/orfrustration from bubblingup. I believe that it is evenmore vital to overcome this

communication challenge whenconsidering that it was not possibleto solve all the technical issues in riskassessment and classification beforeDecember 2010. In the metals sector, westill have ahead of us a number of importantquestions to solve, related for example tothe characteristics of complex materials, totesting difficulties and/or to data generation.We need a platform where we can discussmethodological proposals with expertsinvolved in REACH committees andregulators involved in enforcement, so as tobe able to propose the most appropriate safeuse solutions to industry. Such platformswould allow us to discuss also forthcomingscientific challenges that are currently not

covered by the scope of the REACH, suchas the importance of diffuse emissions,mixture toxicity, etc.

Finally, we need to address the challengeof making the best use of the data generatedat all levels, thinking beyond just the

REACH-related steps. This is true for theEU, where companies are still exposed tolegislation and regulatory hints other thanREACH. While efforts are being made atlegislative level to solve some potentialoverlaps and to streamline the overallframework, responses should be found in themeantime to the practical questions thatcompanies may pose: how to evaluate the

REACH data, how to make the bestuse of the core tools of

REACH, such as ExposureScenarios and DNELs, howthese should be

incorporated into day-to-day practice versus olderreferences or toolsproposed by otherpieces of legislation.To address this couldavoid fillingcupboards onceagain with piles ofunread papers.

Outside the EU,several jurisdictionsare following withinterest what isongoing in theREACH scene, inorder to both drawlessons and getinformation. This isan opportunity for

some harmonisation ofdatasets and of technical

aspects; and the OECDdefinitely plays a key role

in this field.

ConclusionREACH does not end with the

successful submission of a completedregistration dossier. This is only thebeginning, in fact. A number of challengesand difficulties arise that could impact on thefurther process and its success. While thesechallenges seem to weigh preferentiallyeither on the industry side or on theregulatory side, they concern all the REACHactors involved, and it is by solving themtogether that we shall guarantee thefunctioning and valuation of the efforts madeup to now.

It is imperative

to avoid discussions

hampering the added value

of the efforts made by both

industry and regulators. Although

the roles and rules

for the REACH actors are welloutlined in the legal text and

guidance documents, this does

not prevent emotion and/or

frustration from

bubbling up.

Violaine Verougstraete

Eurometaux

Violaine Verougstraete studied medicineand toxicology at the Catholic Universityof Louvain, did a DEA in Public Healthand obtained her PhD in Public Healthin 2005 from the Catholic University ofLouvain (Belgium).

She worked as a researcher at theIndustrial Toxicology and OccupationalMedicine Unit of the Catholic Universityof Louvain for eight years. Shecollaborated in the EU Risk AssessmentCadmium and Cadmium Oxide. SinceMay 2005, she has been working forEurometaux as Health and AlloysManager. She is currently co-ordinatingthe scientific activities and projects ofEurometaux, such as for example theHERAG and MERAG (risk assessment)projects, classification projects, and

human toxicology and ecotoxicology-related activities.


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page 7

LBMA Executives Visitto Brinks New VaultBy Varsha Peiris and Collett Roberts, LBMA

In April 2011, the LBMA

Executive embarked on a visit to

Brinks UKs new bullion vault,

located within the M25.

About Brinks

Brinks is a secure logistic organisationinvolved in various sectors including thetransportation, handling and vaulting ofprecious metals, with over 150 years ofexperience. It is the third-largest bullionvaulting organisation yet the only one whichis not a banking institution and the largestbullion carrier in the UK. Brinks Ltd (UK),headquartered in London, has been anOrdinary Member of the LBMA sinceApril 1988.

First Impressions

We arrived at the secret location; Brinksnew above-ground vault. Instantly, there wasa distinction compared to its other vaultsthat we have visited when attending barinspections. The new vault had adistinguished interior and exterior primarilydue to the apparent massive investment inexternal security. This vault joins the ranksof Fort Knox, which also has above-groundvaulting facilities.

Once through security, we were met bySimon Churchill, Sales Executive. Simonintroduced us to various senior members of

staff, including Ms Orit Eyal-Fibeesh,Managing Director, and Phil Wright, Headof Security, who gave us the LBMAsexclusive tour.

The Need for Expansion

Before the long-awaited tour started, wewere given an informative briefing as to whyBrinks had taken this huge step to expandand build a new vault. Due to theuncertainty in the financial market, investorskeen to invest their funds in a securecommodity had turned to the preciousmetals markets. In light of this perception,they had begun investing in gold because itwas seen as a safe haven, and retail as wellas wholesale transactions caused the demandfor supply to rise significantly. Consequently,

the transportation and storage of physicalbullion had increased in line with thisdemand for physical stock. Having a vaultabove ground made dealing with the highervolumes and physical movement easier, dueto the good access points.

Security

The vault took nearly two years to build,using impeccable security skills and materials

to make it the highest European CEN gradethat currently exists. Given its unique statusof one of the first above-ground vaults inLondon, additional security was required.Layers upon layers of structural securityprecautions were included in the build.These were to prevent lorries from beingable to ram the vault as well as to preventintruders approaching by helicopter orcatapult. This new vault actually has higherthan the maximum security rating required,which leads us to think that it should benominated for a scene in a James Bondmovie.

The Tour

The Executive began their journey aroundthe labyrinth of steel and high-tech security;it was like walking around a showroom.However, we were instantly reminded thatwe were in a bullion vault when we reachedthe stacks of silver bars. These bars werestacked on pallets to almost full capacity ofthe floor, which felt like the size of half afootball pitch. The sheer depth and volumeof the vault was very overwhelming.

After travelling through the silver andcoin vaults, we finally reached one of thegold vaults. Working at the LBMA, we were

particularly excited to see the London GoodDelivery bars. However, security at thispoint was of course extremely high. It wasan amazing feeling to be standing so close tothese gold bars that were locked up behindbars. So close, but yet so far!

During the tour, it was interesting to seeboth new and old machinery being used,such as the electronic weighing scales andthe traditional beam balances. It was clearthat although vault staff were keen to usethe new electronic scales introduced in2010, they were not quite ready to let go ofthe tried and trusted way of weighingbullion on the traditional beam balances.

Future Plans

After our exclusive morning tour, we weretreated to a lovely lunch with all of ourBrinks hosts and were given the backgroundof Brinks Ltd as well as the opportunity to

ask questions. It was interesting to learnabout the importance for Brinks to maintaina perfect balance between storage volumeand liability/security. We were surprised tolearn that although this new vault had onlybeen open for a very short period, it wasalready nearly full. Due to the continueddemand for secure vaulting space, Brinkswas already considering expanding bybuilding another new vault.

The LBMA would like to thank all the staff at

Brinks involved in arranging this visit and we are

looking forward to our tour of their next vault!


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Loco London Liquidity SurveyLBMA Gold Turnover Survey for Q1 2011

By Stewart Murray, Chief Executive, LBMA

Background

At its meeting in April, the ManagementCommittee agreed that the Executive shouldcarry out a survey of Members tradingturnover in the loco London gold market.All members were asked to volunteer data,by providing, on a confidential basis, theirturnover figures for spot, forwards and othertransactions in the first quarter of 2011, withthe data to be divided, if possible, between

trades with other members and trades withnon-members. As most readers will beaware, the LBMA is not an exchange and itdoes not require its members to report onturnover. The only statistics which areproduced on a regular basis by the LBMA arethe monthly clearing statistics, based onreturns from the six clearing members whichtogether form the London Precious MetalsClearing company. The only previous surveysof trading turnover were those carried out bythe Bank of England in 1991, 1994 and1996, and these were restricted to theLBMAs market makers.

So, why did the Management Committeedecide to authorise a survey of membersgold trading? The answer lies in Europe or,more precisely, in the discussions within theBasel Committee on Banking Supervision onthe new liquidity regulations for banks. The

issue is whether gold should be considered asa high-quality liquid asset so that it can beincluded in the liquidity buffers that banksmust meet. Although the Basel Committeedid not recommend the inclusion of gold inthese liquidity buffers, the implementation ofthe Basel guidance by national legislators andthe European Union legislators may stillallow gold to be included if they can bepersuaded that gold is, indeed, a high-quality

liquid asset. The World Gold Council hasbeen pursuing this goal over the past twoyears and it requested the LBMA to carryout a survey of turnover in order tostrengthen its argument that the goldmarket is sufficiently deep and liquid tojustify golds characterisation as both highquality and liquid.

Conduct of the Survey

All Members were sent the reporting form atthe end of April, which asked for the data onspot and forward transactions to be dividedinto sales and purchases, and betweenmembers and with other counterparties.The third catch-all category of othertransactions was also included to cover,for instance, options and bullion-relatedcommodity swaps. The data to be includedin the survey did not include depositsor loans.

From the outset, great care was taken toensure the confidentiality of the datasubmitted. All Members were given anidentifying code and asked to use that on thereporting form rather than their companyname. The list of identifying codes wasmaintained in an encrypted file that only twomembers of staff had the password for. Allmembers were given two data deliverypoints, which were the LBMA or the Bank

of England.

Results of the Survey

Ultimately, 36 of the 56 Full Membersinvolved in trading gold submitted returns.These included all of the LBMAs spot andforward market makers.

The results of the survey are summarisedbelow in terms of daily averages during theperiod (Figure 1). Also shown forcomparison are the clearing turnoverstatistics. It should be noted that the figuresprovided for trade between members weredivided by two in order to avoid doublecounting. This is rather conservative in thatmany of the trades reported with memberswould be with members that were notthemselves reporting. The figures for salesand purchases should be added to get an ideaof the total trading turnover.


page 9

$7,754,438,081,578 $7,416,798,373,170184,1405,350,183

10,943,926 385,852 $15,171,236,454,748

1,183,459 122,303 $1,640,689,519,546

173,713 6,125 $240,813,277,059

5,593,743

89%

5%

6%

91%

4%

5%

201,713

*Source: LBMA, Comprised of data from 36 LBMA Members, including all spot and forward Market Makers, for spot and forward Loco London transactions


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page 10

It can also be seen that there is anapproximately ten to one ratiobetween the turnover figures andthe clearing statistics (Figure2). It can be seen that spottransactions form the largemajority of the total(around 90%), withforwards and othertransactions eachrepresenting around5%. The averagedaily tradingvolume in theLondon market inthis period was173,713,000

ounces or$240.8 billion(Figure 1).

Basel III

Implementation

European

Parliament

Update

In July, theEuropean Parliamentvoted unanimously torecommend that centralcounterparties accept goldas collateral, under theEuropean MarketInfrastructure Regulation(EMIR).

Natalie Dempster, Director ofGovernment Affairs at the World

Gold Council, commented on

the vote:

It is very significant that theEuropean Parliament isputting its weight behindthe argument that theunique characteristicsof gold make it anideal form of high-quality liquidcollateral. We nowlook forward tothe EuropeanParliament andCouncil of the

European Unionupholding theinclusion of goldin the next stageof negotiationsaround EMIR,which will takeplace in September.The ratificationwould mark a

significant step forwardin redefining what

constitutes a highlyliquid asset under the

Capital Requirements IVDirective too.

Market demand for gold to be used as ahigh-quality liquid asset and as collateral hasbeen building for some time. In late 2010,ICE Clear Europe, a leading Europeanderivatives clearing house, became the firstclearing house in Europe to accept gold ascollateral. In February 2011, JP Morganbecame the first bank to accept gold bullionas collateral via its tri-party collateralmanagement arm. Exchanges across theworld, such as the Chicago MercantileExchange, are now accepting gold ascollateral for certain trades and London-basedclearing house LCH Clearnet has said that italso plans to start accepting gold as collaterallater this year, subject to regulatory approval.As regulators from G20 countries demand

that more OTC trading is centrally clearedand with the on-going world economicdifficulties further eroding thecreditworthiness of other forms of collateral,we expect to see increasing demand byclearing houses, exchanges and investmentbanks to use gold as collateral.

LPMCL Clearing Statistics

Total Loco London Turnover

*

It is very

significant that the

European Parliament is

putting its weight behind the

argument that the unique

characteristics of gold make it an

ideal form of high-quality liquid

collateral. We now look forward

to the European Parliament and

Council of the European Union

upholding the inclusion of gold in

the next stage of negotiations

around EMIR, which

will take place inSeptember.

LPMCL Clearing Statistics*

These figures contain:

- Loco London book transfers from one party in a

clearing members books to another party in the

same members books or in the books of another

clearing member

- Physical transfers and shipments by clearing

members

- Transfers over clearing members accounts at the

Bank of England.

Excluded from these statistics are:

- Allocated and unallocated balance transfers where

the sole purpose is for overnight credit

- Physical movements arranged by clearing members

in locations other than London.


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page 11

LBMA Summer SecondmentEmma Attridge, Bank of England

By Emma Attridge, who works on the Custody team at the Bank of England, recently completed a secondment to theLBMA in June 2011.

The major focus of my work as

an LBMA Secondee was related

to the LBMA Good Delivery

system. This was particularly

interesting to me, given my role

in the Custody team at the Bank

of England. The major projects

I worked on were in relation to

the development of the LBMA

visual guide, including

management of images and

submission of images from theLondon vaults.

Internal Image Management of Good

Delivery Images

The goal was to install, set up and customisesoftware for use by the LBMA in themanagement and organisation of its imagedatabase, specifically Good Delivery relatedimages. I learned about the types of defectsand imperfections that can occur on GDbars, and was introduced to theadministration interface of the GDL website.

Using the defects section of the website as areference point, I customised the Zonersoftware for future use by the Executive. Ialso worked with Rebecca Adamson, LBMAGDL Assistant, to formulate a system foraccepting new images from vaults, processingthem using Zoner and subsequently addingrelevant images to the GDL website.

Vault Submission Process

I was given a brief to produce an Adobeformat form to be used by vaults whensubmitting images of defects andimperfections to the LBMA. I liaised with theBank of England (Barry Gull) during a trialperiod, to ensure the efficiency of the newsubmission form. The form is now in full useby all London vaults. The collection of these

images assists the LBMA Executive increating best practice guides for the GoodDelivery system.

Loco London Survey of

Turnover

The LBMA recentlyconducted a Survey ofOTC Gold Turnover to

assist with the WGClobbying efforts toensure that gold istreated as a high-quality liquid asset bythe EU. I assisted bycollating data as wellas calling outstandingsenior managementlevel contacts at morethan 30 companies tochase up theirsubmissions. This resultedin a sizable submissionfrom the LBMAMembership. For furtherdetails on the LBMA Survey ofTurnover, please see the article onpage 9-10.

Meetings Attended

I attended the Physical Committee meeting,the Referees Meeting and the LBMA AGM,which greatly assisted my understanding ofthe importance of the work I was doing.I also participated in the teams weeklystaff meeting, where I gave a confident and

clear summary of the work I had beendoing to date.

My Time at the LBMA

I am grateful to have been given theopportunity to work at the LBMA for amonth. The experience was valuable in termsof consolidating all previous knowledge I hadof the LBMAs work and building upon it. Ilearnt a lot from all LBMA Executivemembers and appreciate the time that theygave up to share their knowledge with meand answer my questions. It amazes me thatsuch a small team copes with such hugework volumes, especially when there areinternational conferences and meetings toattend. It has been great to meet so manymarket members and finally match names to

faces! I would recommend the LBMASecondment programme to anyone involvedin precious metals trading who wants to

delve into the complex issueschallenging the London market

and become engrossed in theGood Delivery List.

LBMA Secondments

Going ForwardGiven the positiveexperience of Emmassecondment to theLBMA, bothinstitutions have agreedto continue thissuccessful programme.The LBMA is delightedto be welcoming AelredConnelly of the Bank of

England to be the nextparticipant in the

programme beginning inSeptember 2011. Thanks to

all involved, particularly TrevorStone, Louise Lee, and of course

Emma Attridge and Aelred Connelly atthe Bank of England, for making thisprogramme possible.

I am grateful to

have been given the

opportunity to work at the

LBMA for a month. The

experience was valuable in

terms of consolidating all

previous knowledge I had of

the LBMAs work and

building upon it.


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In addition, we must think aboutrational and irrational bubbles. Rationalbubbles are situations where investors knowthe size of the bubble, and have onlydiffering expectations about its duration,but share a common model of thefundamental and bubble component ofprices. Again, however, we require a modelof the fundamental value, as well as some

heroic and unrealistic assumptions aboutinvestors expectations. For some recentstudies on rational bubbles, the readeris referred to Fukuta, 2002 or Cuoado,Gil-Alana, & de Gracia, 2005.

Many articles argue that gold is in abubble phase by looking at its real (i.e.inflation-adjusted) value and that it is

currently far above its long-run average inrelation to all major currencies, e.g. TheEconomist blog 27 July, 2011 Turning goldinto dross. These turn golds nominal dollarprice into a real price using the US inflationrate. In this view, gold is a commodity thathappens to be denominated in US dollars andthus whose price can be deflated in the sameway as any other commodity. If gold ispurely a commodity then its real value inany currency over time can be found usingits US dollar price, the exchange rate

between the dollar and the domesticcurrency along with US inflation. But thatmeans that we cannot easily, if at all,determine the existence of a bubble in goldprices, as the bubble component can beeither the exchange rate or the dollar value,or indeed the price itself. Research oncommodity bubbles, such as the papers bySornette, Woodard, & Zhou, 2009 on oil orJirasakuldech, Campbell, & Knight, 2006 onreal estate, use duration dependence models(such as that introduced by Chan, McQueen,& Thorley (1998)), which while empiricallyeasy to implement, work on the basis thatevery asset must show fluctuations in priceand thus runs of upward-only pricemovements cannot continue indefinitely.

However, if we view gold as a currency,then it should have its own inflation rate.Why should it have the same inflation rate asany other currency? Inflation is the rate atwhich the purchasing power of a consumererodes over time. Merely picking the dollarsinflation rate as it is the currency that gold isgenerally traded through is arbitrary and ahistoric relic. But since gold is not in general

use day to day as a method of exchange,there is no easy way to calculate an inflationrate of gold. Gold is used as a method ofexchange in certain states in America (e.g.Utah), but in a way that seems to precludemeasuring its inflation-adjusted value. Inthese states, purchases made using gold arein practice made at the goods dollar value,not gold weight, and are paid for in gold atits market price relative to the dollar. So apurchase price of $1 for an item is worthabout 1/1,700th of an ounce of gold attodays values. If the market value of goldincreases by $100 dollars an ounce, only1/1,800th of an ounce is needed to buy theitem. This however does not indicate thatgold has suffered a deflation, or the dollar an


page 12

The Real Price of GoldBy Fergal OConnor, LBMA Bursar and Dr Brian Lucey, Associate Professor of Finance, School of Business Studies,Trinity College, Dublin

The extraordinary flows into gold, from investors seeking

safe haven or just prudent diversification coverage, have

contributed to a sustained increase in its price to new nominal

highs. Inevitably, this has given rise to a significant body of

discussion on whether gold is a bubble or not. It can be useful to

step back from the day to day and to think a little about what

exactly a bubble is and is not. From the economic perspective, a

bubble is an unsustainable level (which can of course be either

positive or negative) of an asset relative to its true value. Gold

can be viewed as one of two basic asset classes. It may be thought

of as a currency or a commodity. Which is the truer representation

is important if we view some of the current discussion about

whether gold is currently in a bubble phase.


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inflation. It simply means that the exchangerate of the dollar and gold has changed.It could just as easily be due to a changein relative yields, or some otherfundamental determinant of gold and/orthe dollars value.

If Purchasing Power Parity held in relationto the dollar/gold exchange rate then, in themedium term, the amount of gold in ouncesrelative to dollars would be stable when theirrelative rates of inflation were taken intoaccount. But is it possible to measure thegold inflation rate? To do this, we wouldneed to observe an area where goods priceswere denominated in ounces of gold directly,not through another currency that will haveits own rate of inflation. No such marketexists to our knowledge.

Conclusion

The fact that the inflation rate of gold is notdirectly observed does not prove that gold isor is not in a bubble phase. But the realdollar/gold exchange rate can only be shownif we can observe changes in the relativepurchasing power of gold and the dollar,using their respective rates of inflation, aswell as the dollar/gold exchange rate. Part ofthe puzzle is missing. That is not to say thatgold will always increase in price. It is to saythat it may well be an inherently heroic taskof measurement to determine same.

Fergal OConnor

is the 2011/2012recipient of the LBMA Bursary and aPhD student at Trinity College Dublin.

Dr Brian Lucey

is a Professor ofFinance at theSchool of Businessat Trinity CollegeDublin, where he is

director of the MScfinance programme.He studied atgraduate level inCanada, Ireland and Scotland, and holdsa PhD from the University of Stirling.His research interests includeinternational asset market integrationand contagion; financial market efficiency,particularly as measured by calendaranomalies; and the psychology ofeconomics.

References

Chan, K., McQueen, G., & Thorley, S. 1998. Are thererational speculative bubbles in Asian stock markets? PacificBasin Finance Journal, 6(1-2): 125-151.Cuoado, J., Gil-Alana, L. A., & de Gracia, F. P. 2005. Atest for rational bubbles in the NASDAQ stock index: Afractionally integrated approach.Journal of Banking &Finance, 29(10): 2633-2654.Fukuta, Y. 2002. A test for rational bubbles in stock prices.Empirical Economics, 27(4): 587-600.

Jirasakuldech, B., Campbell, R. D., & Knight, J. R. 2006.Are there rational speculative bubbles in REITs?Journal ofReal Estate Finance and Economics, 32(2): 105-127.Sornette, D., Woodard, R., & Zhou, W.-X. 2009. The2006-2008 oil bubble: Evidence of speculation, andprediction. Physica A: Statistical Mechanics and its

Applications, 388(8): 1571-1576.


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LBMA Bullion MThe local forum for the glob

The LBMA Bullion Market Forum Shanghai

With 196 delegates taking part in this one-day event,the LBMA Bullion Market Forum Shanghai was a greatsuccess. Participants included the bullion departmentManaging Directors from all the major Chinese banks aswell as significant international participation. Our thanksgo to all speakers, delegates and exhibitors forparticipating in this prestigious event. As compared to theLBMAs annual conference, which focuses on issues facingthe entire international bullion market, the LBMA BullionMarket Forum Shanghai focused primarily on the localChinese bullion market. The LBMA has held previousBullion Market Forums in Delhi and Moscow, and islooking to hold a future event in New York.


15/28

ket Forum 2011industry: Shanghai

Management Committee Delegation to China

Thanks also to all those members of the LBMAManagement Committee who took part in the MCDelegation to China. This delegation was made up ofthe following participants: Kevin Crisp of MitsubishiCorporation International (Europe) Plc, Philip Aubertinof UBS, Simon Churchill of Brinks Limited, along withStewart Murray and Ruth Crowell of the LBMA. Thedelegation was a strong group and had many successfuland important meetings. These included meetings inBeijing and Shanghai with the China Gold Association,China National Gold Group Corporation, Peoples Bankof China Financial Markets Dept, Shanghai FuturesExchange and Shanghai Gold Exchange.


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The local forum forthe global industry: New York

The LBMA Bullion Market Forum 2012Spring 2012

As compared to the LBMAs annual conference which focuses on issuesfacing the entire international bullion market, the LBMA Bullion MarketForum New York will focus primarily on the US bullion market. The LBMAhas held previous Bullion Market Forums in Delhi, Moscow, & Shanghai

and is looking forward to holding its 2012 event in New York.

New York, USAwww.lbma.org.uk

SEPTEMBER18-20LBMA Precious Metals Conference

Montreal, Canada

Tel: +44 (0)20 7796 3067

[email protected]

www.lbma.org.uk

27-28Global Mining Investment Conference

London, UK

Tel: +44 (0)207 754 5994

[email protected]

www.objectivecapitalconferences.com

OCTOBER4LME Dinner

London

www.lme.com

25-27World Commodities Week 2011

London

Tel: +44 (0)20 7092 1000

[email protected]

www.terrapinn.com

25-28China Investment Summit 2011

London

Tel: +44 (0)20 7092 1000

[email protected]

www.terrapinn.com

FEBRUARY 20126-9Mining Indaba Conference

Cape Town, South Africa

Tel: +1 859 746 5700

[email protected]

www.miningindaba.com

23LBMA Annual Party

London, UK

Tel: +44 (0)20 7796 3067

[email protected]

www.lbma.org.uk

MAY17-19World Mining Investment Congress

London

T: +44 (0) 207 827 4171

[email protected]

www.terrapinn.com

JUNE9-12IPMI Conference

Las Vegas

www.ipmi.org

DIARY OF EVENTS

page 16


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page 17

The Shanghai Gold Exchange andits future developmentBy WANG Zhe, Chairman and President of the Shanghai Gold Exchange

At the 2004 LBMA Conference

in Shanghai, Central Bank

Governor Zhou Xiaochuan

proposed a three

transformations strategy,

which led the way for the

development of the Chinese

domestic gold market. It is an

honour that six years later the

LBMA has decided to return to

Shanghai to host such a

high-profile forum.

Since then, the Shanghai Gold Exchange(SGE) has embarked on a fast-paceddevelopment. Today, I am here to give youan introduction to the services of theExchange and share our experiences. I willgive a brief history of the development of theExchange over the past six years, andmention some ideas about its futuredevelopment.

History of the SGEThe Exchange was officially openedon 30 October 2002. It currently has163 members, including major domesticcommercial banks, five foreign banks,and firms involved in gold production,consumption and investment. It hasnearly seven thousand institutional clientsand over two million individual clients.The Exchange has twelve types of contract ingold, silver and platinum. It undertakesother business including spot physical,deferred trading, forwards and individualphysical investment.

Since 2004, the Exchange has continuedto develop. Its trading volume has increasedat a rate of about 40% per year, increasingeven more quickly in 2008 and further in2010. In that year, trading volumes of goldand silver reached new records: 6,051 tonnesof gold at a value of RMB 1,615.78 billion,73,615 tonnes of silver at a value of RMB

386.33 billion and 54.69 tonnes of platinumat a value of RMB 19.84 billion. In 2011,the market maintained rapid growth and thevariety of silver contracts grew at anexplosive rate.

By the end of April this year, theExchange had traded 1,909 tonnes of gold,73,569 tonnes of silver and 20.88 tonnes ofplatinum, a total transaction value of more

than RMB 1 trillion.

From the opening of the Exchange in2002 to the end of April this year, morethan 20,000 tonnes of gold, nearly 170,000tonnes of silver and 300 tonnes of platinumwere traded. The total transaction valueexceeded RMB 5 trillion.

Market features

The Exchange can be described in terms ofthe following six major features.

Spot transactions and physical demand

The Exchange focuses on serving the spotmarket to meet the domestic marketsrequirement for large amounts of physicalbullion. China has rapidly become the world'slargest gold consumption market. In 2010,gold spot transactions grew 28% to reach1,626 tonnes and the amount of physical golddelivery at the Exchange reached 837 tonnes,a new record, which guaranteed the leadingposition of the Exchange in the domesticgold spot market.

Deferred trading and derivatives

One of the important points of the threetransformations strategy is the transformationof the domestic gold market from acommodity market to a financial derivativesmarket. The Exchange strives to explore newproducts as well as strengthen its spotmarket. In 2004, the Exchange launched agold deferred trading product, which becameextremely popular. The turnover of golddeferred trading grew 36% to reach 4,423tonnes in 2010. Gold deferred trading hasaccounted for over 60% of the gold marketfor three consecutive years. In 2010, itaccounted for 73% of the market. In additionto gold, silver deferred trading has grownrapidly during the last three years. In 2010,silver deferred trading accounted for morethan 96% of the total trading volume of

The following is an edited

version of a keynote speech

made at the LBMA Bullion

Market Forum in Shanghai

on 26 May 2011.

Chairman Wang Zhe (far right) at the LBMA Bullion Market Forum - Shanghai 2011.


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page 18

73,615 tonnes. All silver trading in the firstfour months of this year was deferredtrading. As you can see, deferred tradingcontracts have become core products ofthe Exchange.

Price discovery andsynchronisation

With the gradual maturity ofthe price discovery functionand pricing mechanism, theExchanges gold price hasdominated the domesticmarket. Now that fivefurther commercialbanks have beenawarded physical goldimport and exportlicences, commercialbanks import asubstantial amount of

gold. The Exchangeplays a critical role inminimising the pricedifference between thedomestic and overseasmarkets. Although thedramatic moves in theinternational gold pricelast year led to a surge indomestic demand, whichpushed up the domestic goldprice and widened the pricedifference, overall the domestic pricenow moves in synchrony with theinternational price. The price differencebetween the two markets has shown a clearseasonal pattern. In the peak season leadingup to Chinese New Year, from November toJanuary, the price difference between thetwo markets could be as wide as two tothree yuan per gram. However, from Aprilto August the difference was narrower,within one yuan per gram.

Members of the Exchange

Drawing on the experience of theinternational market, the Exchange has

supported its financial members (commercialbanks), benefiting from their abundantfinancial resources and strength. Bankmembers' proprietary trading grew 29% in2010 to reach 2,094 tonnes and clienttrading grew 56% to reach 277 tonnes.Currently, the commercial banks accountfor 58% of the market and more growthis anticipated.

Apart from banks, general members alsoplay an important part in the market. In2010, their proprietary gold trading grew12% to reach 1,171 tonnes and clients goldtrading reached 1,356 tonnes, a slightdecrease from the previous year. Proprietarysilver trading grew 104% to reach 1,562

tonnes; clients silver trading grew 83% toreach 19,876 tonnes. Though the institutionalclients are still the most importantparticipants in the market, the market shareof individual investors has soared in recent

years. In 2010, individual gold tradingvolume reached 1,154 tonnes, an

increase of 163%. The number ofindividual investors increased93% to 1,778,500. The shareof individual gold tradingincreased from 9% to 19%.The amount of individualsilver transactions reached49,738 tonnes, morethan ten times as muchas in 2009. During thefirst four months of thisyear, the number ofindividual investors keptgrowing rapidly and

now has exceeded twomillion. The Exchangehas become the mainchannel of investment ofphysical precious metals,fulfilling the needs ofdomestic residents.

Night trading session

The SGE was the first to offera night trading session in the

domestic financial market. Thenight session starts at 9pm and ends at

2.30am the next morning (Monday toThursday). It overlaps with the afternoonsession in London and the morning session inNew York, which is beneficial for thesynchronisation of markets and enablesdomestic investors to arbitrage acrossmarkets. Since the official launch inNovember 2005, the night sessions tradingvolume has increased every year, particularlyin 2008 when trading volume quadrupledcompared to the previous year, accountingfor one-third of total trading volume. In2010, night session total gold turnover rose24% to reach 1,943 tonnes, accounting for

32% of the total gold trading volume.37,553 tonnes of silver were traded, anincrease of 352%, accounting for 51% oftotal silver trading volume. The Exchange isnow considering the launch of a Friday nightsession to fulfil market needs.

Foreign members

Over the past two years, the Exchange hasadmitted HSBC, Standard Chartered Bank,the Bank of Nova Scotia-ScotiaMocatta,Australia and New Zealand Bank and CreditSuisse as members. The SGE is the first andonly exchange in China with foreignmembership. Not long ago, applications fromBarclays Bank and United Overseas Bankwere approved. Very soon they will become

members of the Exchange as well. Besidesthat, many well known internationalcommercial banks, including JP MorganChase, Deutsche Bank, Standard Bank andUBS have shown an interest or are applyingto become foreign members of the Exchange.

Foreign members of the Exchange play anincreasingly important role in the market.From September last year, foreign banksproprietary trading grew rapidly. In 2010,the transaction volume of foreign memberbanks was 168 tonnes, almost 5 times of theprevious year, accounting for 8% of the totalproprietary trading.

The next step

The gratifying development of the goldmarket presents both opportunities andchallenges. It is worthwhile to think abouthow we can take advantage of the

opportunities to innovate and sustain thegrowth of the market, while seekingco-operation with international markets formutual benefit. We would like to proposethe following ideas.

Further improvements in the

Exchanges inter-bank pricequoting system

The Exchange formally launched the pricequoting system in March, allowingcommercial banks to cover paper goldexposure and fulfil the specific needs of OTCforwards. The Exchange combines the tradingmodels of price bid and price quote tonurture and support the domestic goldmarket makers and to attract more investorsinto the market to satisfy their multi-dimensional trading needs. In the future, asthe price quoting system is developed andperfected, we are confident that we areforging a useful tool for the bidding market.

We have also realised that, compared tothe wide variety of personalised products inthe international gold market, such as spot,forward and swaps, our current price quoting

system provides limited products and services,which are mainly focused on physicaltransactions and limited gold lending services.Therefore we need to further improve theprice quoting system, enrich the varietyof products, enhance their functions andgradually adopt international trading products,to meet the banks individual needs.

Establish the gold lending market andform the lending rate.

The lending market is an integral part of theinternational gold market system. In a maturegold market, participants can lend gold andfinance at the market lending rate, in orderto carry out market transactions more easily.In the domestic market, due to the late start,

The lending market is

an integral part of the

international gold market

system. In a mature gold

market, participants

can lend gold and finance

at the market lending rate,

in order to carry out

market transactions

more easily.


19/28


20/28


page 20

the scale of the gold lending market is stillrelatively small, while a market lending ratehas not yet been established. However, inrecent years, with the support of theExchange, the domestic gold lending markethas made great progress. Market players havegradually become more diverse. Foreign

banks, domestic commercial banks andenterprises are actively involved. In 2010, thetotal commercial bank gold lending grew68% to reach 112 tonnes. The potential ofthe lending market is very promising.

Hence, the Exchange should take theopportunity and accelerate the establishmentof the gold lending market. It should supportmore commercial banks to provide goldlending services, attract foreign banks andrefinery companies to join, and facilitate themobility of domestic physical gold. What ismore important is to establish a gold lending

rate in China as soon as possible, toencourage inter-bank gold lending and assistsmall and medium enterprises, thus toimprove market functions.

Build a gold derivatives market.

The first domestic gold ETF - Lion GlobalGold Fund was launched at the end of lastyear, which has gained much attention at theExchange. On the one hand, we intend tofurther reduce the trading hurdle andthe investment threshold ofexisting products in response tothe impact of fund companiesETF products on the marketsystem; on the other hand,we have accelerated thesteps to study goldbonds and ETF productsas an important reserveto explore newproducts and promoteinnovation.

Admit moreinfluentialinternational

banks and golddealers as members

The gold market is aglobal market.However, our goldmarket is not veryinternationalised. Inrecent years, we haveintroduced some influentialforeign banks andendeavoured to communicatewith foreign markets. But this isjust the beginning. Next we willcontinue to increase the number of foreignmembers and introduce more powerfulforeign financial institutions and gold dealersinto our market.

Meanwhile, we will further improve ourquality of service and provide foreignmembers with better market environment tostimulate their enthusiasm. The Exchange willcommunicate and co-ordinate with PBOCactively to address the concerns of foreignmembers, particularly the foreign exchange

allowance and issues of importing andexporting. The Exchange will encourage ourforeign members to play a greater role.

Connect the domestic physicalcertification system with international

markets.

There is a comprehensive physicalcertification system in the London goldmarket, which is a globally recognisedphysical delivery criterion and plays animportant role in the promotion of globegold trading. At present, although China'sgold quality certification system has met the

standard of the LBMA in both specificationsand standards, and some rules are evenstricter than those of the LBMA, there is nocommon admissible mechanism ofinternational certification which can apply todomestic physical gold. This has handicappedthe development of domestic market. This factmade us realise that we should co-operatewith the LBMA to connect the two physicalcertification systems as soon as possible, so

that gold in China can be accepted in theinternational market and we can

supply gold more efficiently togold market players both athome and abroad.

Increase communicationbetween the two

markets and makeregular visits.

The London gold markethas a history of over acentury. Despite thefact that the Londonbullion market uses anOTC model which istotally different from

the Exchanges model,there are still a lot ofvaluable experiences wecan learn from theLondon gold market inareas of market

management, productinnovation, risk control,

physical delivery, warehousingand logistics. During the last

two years, I have been toLondon twice to study the specific

subject of the tax system, OTC pricequote model, and lending market at theLondon gold market. And I have learned alot. Facing the rapid development of themarket, I feel it is necessary to set up a

regular visiting mechanism between these twomarkets to understand new developments andmarket information relevant to each other.

Now, we are in a special historical timefull of opportunities. In the future, theExchange will further its marketing

innovation, enrich the variety of tradingmodels used and promote improvedfunctioning of the market. We will enhanceour core competitiveness and increase ourinfluence in the international gold market.

Wang Zhe

Chairman &

President,

Shanghai Gold

Exchange

Mr. Wang Zhe, isa member of theCPC and was bornin August, 1960. He has an MBA degree.He started his career in July, 1984 andcurrently serves as the Chairman andPresident of Shanghai Gold Exchange. Hespent four years studying at Jilin Trade &Commerce College before starting hiscareer at the Currency Issue Division andGeneral Office of the Peoples Bank ofChina from July, 1984. After that, heserved as the General Manager of China

Gold Coin Corp. (Shen Zhen) Companyfrom December, 1991 to March 1995.From March 1995 to April 1999, he servedas the Deputy Governor of CITIC Bank(Shen Zhen) Branch, Chairman of DaPeng Securities Co., Ltd. and DeputyGeneral Manager of China Gold CoinCorp. From November 2001 to February2011, he served as the Deputy Chairmanand President of Shanghai GoldExchange. And from February 2011, hebecame the Chairman. Mr. Wang Zhe is awell-known expert in the countrysprecious metals industry with rich

experience in not only the precious metalsmarket, but the banking and securitiessector as well.

Now, we are in a

special historical time

full of opportunities.

In the future, the Exchange

will further its marketing

innovation, enrich the

variety of trading models

used and promote

improved functioning

of the market.


21/28


22/28


page 22

GFMS to Thomson ReutersThomson Reuters has acquired analyst firm GFMS (formerly known asGold Fields Mineral Services), a leader in precious and industrialmetals markets research and analysis.

Philip Klapwijk, former Executive Chairman of GFMS,takes on a new role of Global Head of Metals Analytics at

Thomson Reuters. He has over 20 years experience analysing thegold, silver and PGMs markets, most of this time working for GFMS,which is the worlds leading specialist research consultancy on theprecious metals markets. Philip is a frequent speaker at conferences on

precious metals and commodities, and the print and electronic mediaregularly quote his views on the gold, silver and PGMs markets.

Paul Walker, former CEO of GFMS, has taken on the newrole of Global Head of Precious Metals. After graduating withdegrees in commerce and economics from the University of CapeTown, Paul worked as an economics researcher for a Member ofParliament in the UK House of Commons before joining the UnitedNations affiliated International Lead and Zinc Study Group, where hewas involved in a wide range of economic studies and forecasts. Hehas a PhD in the application of mathematical optimisation to largenon-linear economic systems from the University of Nottingham in theUK. Dr Walker joined GFMS in 1995, where he acted as ChiefExecutive Officer of GFMS, in addition to being responsible for gold,silver and PGM research in East Asia, India and South Africa.

Davide Collini to BNP Paribas

BNP Paribas has added Davide Collini as a Senior Director forprecious metals sales within its Global Equities and CommodityDerivatives business. He reports to Mikko Rusi, European head ofbase and precious metals sales.

Zhiming (Samuel) Yang to Credit Agricole CIBZhiming (Samuel) Yang joined Credit Agricole CIB London in June2011. He will be responsible for precious metals spot and forwardtrading. Samuel previously worked at ABN AMRO N.V., where hecovered market making in precious metals, and before that he had

traded precious metals/foreign exchange for the Bank of China inLondon and Shanghai.

Kevin Crisp to Deutsche BankKevin Crisp is joining Deutsche Bank as Director of Precious Metalsin September 2011. Kevin graduated in Mining Engineering from theRoyal School of Mines, Imperial College and then undertook post-graduate research at Kyushu University in southern Japan. He workedin South Africa and Australia before joining Consolidated Gold Fieldsin London from where he was seconded to Gold Fields MiningCorporation in Denver. On returning to the UK Kevin worked asSenior Analyst for commodity research company GFMS, covering theMiddle East and Asia. He then joined JP Morgan, working as preciousmetals strategist before moving into the marketing side of the preciousmetal business. Kevin spent the last five years managing MitsubishiCorporation (Europe) Plc's bullion business and from 2009 to 2011served as Chairman of the LBMA.

Richard Ringrose

to Deutsche Bank

Richard Ringrose willjoin Deutsche BanksPrecious Metals flow business as a Director in September 2011.Richard has a Masters Degree in Finance from the NationalUniversity of Ireland, Cork and joins Deutsche Bank with 10 years ofexperience in financial markets starting out at Citibank in 2001. Morerecently Richard spent three years at BNP Paribas where he hasfocused predominantly on commodity derivatives.

Matthew Lynch to HSBCMatthew Lynch has joined HSBC as an Associate Director for PreciousMetal Sales. Previously Matthew was with Mitsui for five years, andprior to that, Johnson Matthey.

David Govett to MarexMarex has appointed David Govett as Head of Precious Metals in itsLondon office. In this role, David will focus on establishing adedicated Precious Metals division. David joins Marex with over 23years of experience in the Precious Metals market. He began hiscareer on the Precious and Base Metals desk at Prudential BacheLondon and was made Head of Precious Metals in 1987, followed bya similar experience at AIG. David also set up and managed PreciousMetals broking desks at Cantor Fitzgerald and ICAP, before spendingtwo years in Australia heading up the Precious Metals arm of TFS. Hereturned to England at the beginning of 2011.

Shane Lennox to Mitsui & Co Precious MetalsShane Lennox graduated from Amherst College Massachusetts USA inMay 2009. In October 2009 he joined MPM London Branch as a trader.Shane relocated to Mitsui New York office in June 2011 to assistMitsuis global options team.

James Su to NatixisJames joins Natixis in London. He started his career in Australia in2002 at Rothschild, before moving to ABN in 2005.

Kate W. Harada to TANAKA HoldingsKate W. Harada joins TANAKA Holdings with over 25 yearsexperience in precious metals, FX and the fixed income market.She began her career on the Precious Metals desk at SumitomoCorporation Tokyo, followed by variety of experience at MidlandBank, Lehman Brothers, SBC Warburg and Mitsubishi Corporation.

Market Moves


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page 23

The LBMA has continued its

work regarding US and OECD

regulation of conflict gold supply

chains. Both the OECD and the

US are in the process of

creating due diligence

requirements for gold emanating

from conflict areas and in

particular from the Democratic

Republic of Congo (DRC).

Background

As a result of the Dodd-Frank Act, the USnow requires all companies reporting to theSEC to file periodic reports disclosing theiruse of conflict minerals and DRC ConflictMinerals. (This reporting requirementapplies only to SEC reporting companies;which are companies with more than$10 million in assets and whose securitiesare held by more than 500 owners.) Manydifferent groups have been working onmethods to assist companies in filing thesereports to the SEC, including the SEC itself,the UN Working Group of Experts on theDRC, the OECD, the Responsible Jewellery

Council and the World Gold Council.The LBMA will continue to work with allthese groups to ensure that the best possiblescheme is produced and communicated toall members of the market.

LBMA Involvement

The LBMA has become more activelyinvolved in supply chain regulation due to itsunique relationship with international goldrefiners in the form of the LBMA GoodDelivery List.

In January 2010, the LBMA made asubmission to the SEC on fundamental issues,including the need to grandfather in existing

stocks of gold, recycled and scrap metal,public disclosure as well as unintendedconsequences for the gold market and Africa.

To date, the LBMA has acted as anobserver on various groups which haveaddressed the issue of gold supply chains,including:- The World Gold Council- The Responsible Jewellery Council- The OECD- In the US, the Electronic Industry Citizen

Coalition (EICC).The LBMA will continue to act as a conduitof information to the market on the issue of

conflict gold. The LBMA will also continueto keep Members, Associates and, mostimportantly, Good Delivery Refinersinformed as supply chain regulations develop.The Regulatory Affairs Committee (RAC),the Physical Committee as well as the GoodDelivery Referees group have all beenactively involved in finding a practicalsolution to the challenge of enabling all GDrefiners to indicate that the metal they supplyto the market is free from conflict gold.

LBMA Responsible Gold Guidance

In order to ensure that supplies from allLBMA GD refiners are free from conflictgold, the RAC and the Referees have beendeveloping guidance on the due diligence

needed to demonstrate this. It is envisaged bythe RAC that the LBMA Guidance shouldform a foundation of legal compliance that iscredible to the outside world and feasible forall Good Delivery Refiners.

The drafting of the Guidance Document isnow at an advanced stage. The LBMA willhold a Workshop on Conflict Gold on20 September 2011. This will follow ondirectly from the LBMA Conference inMontreal, Canada. Prior to this, a finaldraft of the Guidance will be circulated toall GD Refiners.

Key Dates

15 September 2011

Expected publication of SEC rules toimplement the Conflict Minerals sectionof the Dodd-Frank Act.

20 September 2011

LBMA Conflict Gold Workshop -

Montreal, Canada

31 December 2011

Expected publication of OECD GoldSupplement

31 December 2011

LBMA will publish final ResponsibleGold Guidance

Regulation Update - Conflict GoldSupply Chain Due Diligence LBMA Involvement

By Ruth Crowell, Commercial Director, LBMA

Bullion Market Regulation

Workshop: Responsible GoldLe Centre Sheraton Hotel, Montreal

14:15 - 16:00 20 September 2011

Chairman - Ruth Crowell, Commercial

Director, LBMA

OECD Due Diligence - GoldSupplement

Tyler Gillard, Legal Expert - InvestmentDivision, OECD

LBMA Responsible Gold Guidance

Stewart Murray, Chief Executive, LBMA

Conflict Gold - The Good, the Bad

and the Ugly

John Bullock, Chairman, IPMI Environmental

and Regulatory Affairs Committee


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page 24

LBMA News

MEMBERSHIP

Members

Effective 1 July 2011, BacheCommodities Ltd will be knownas Jefferies Bache Ltd, due to anownership change.

Associates

On 12 May 2011, Dillon GageInc. of the USA was admitted asan Associate.

On 25 July, Gold StandardDMCC of Dubai was admitted asan Associate.

These additions brought themembership to a total of 125companies, comprised of 60 FullMembers, 61 Associates and 4Affiliate Members. This is thefirst time that the number ofAssociates has exceeded thenumber of Full Members.

AGM

The 23rd Annual General Meetingof the LBMA took place inArmourers Hall on 22 June. Inhis report for the past year, theoutgoing Chairman, Kevin Crispof Mitsubishi CorporationInternational (Europe) Plc,commented on the ever-

broadening activities of theAssociation and thanked all LBMACommittee Members for theirtime and effort in supporting themarket as a whole especially at atime when there are so manydemands upon the individual. Acopy of his speech can be foundon the LBMA website:www.lbma.org.uk. The reports

by the chairmen of the five sub-committees give a comprehensivepicture of the LBMAs activitiesand are contained in the minutes

of the AGM, which are availablein the members area of thewebsite. Any staff in Member andAssociate companies can obtaintheir user ID and password toaccess this part of the websitefrom the Executive.As well as the normal statutory

business of approving the accountsand appointing the auditors, theAGM elected the members of theManagement Committee.

The new committee metimmediately after the AGM andelected David Gornall asChairman and Steven Lowe asVice Chairman.

COMMITTEES

Management

The Committee met in June toprepare for the AGM and alsoheld its first meeting after theAGM in early July. As usual, theCommittees work largely consistsof reviewing and guiding thework of the subcommittees andmaking decisions based on theirrecommendations. A particularfocus in recent meetings has beenthe formulation of a policy onconflict gold based on

discussions in the RegulatoryAffairs Committee, the PhysicalCommittee and the Refereesgroup. See the Regulatory AffairsCommittee section below and theRegulation Update on page 23.

Noting that final decisions onthe future regime for bankliquidity and capital will bepromulgated by the BaselCommittee for BankingSupervision (the Basel III regime)

by the fourth quarter, theManagement Committee hasdecided that the LBMA shouldorganise a seminar for Membersto inform them about thetreatment of gold under Basel III.The seminar is likely to be heldin early January and may alsocover other regulatory matters.

The Committee noted theresignation of John Levin (owingto his return to Australia).Market Makers were asked to putforward nominations forreplacement candidates to be

co-opted on to the Committee.These nominations wereconsidered by the ManagementCommittee and it was agreed toco-opt Jeremy Charles of HSBCto replace him. Johns role asManagement Committeerepresentative on the MembershipCommittee will be taken over by

Jeremy East.

Regulatory Affairs

The RAC met twice in the lastquarter to discuss a variety ofregulatory issues. This includedprimarily conflict gold as well asEU and US proposals formandatory clearing of OTC

products via a centralcounterparty. It also assisted theWorld Gold Council in itslobbying efforts to ensure thatgold is considered to be a high-quality liquid asset in the BaselIII regime. This included theone-off survey of LBMAMembers gold trading turnover,which was carried out on thebasis of their trading activity inthe first quarter of 2011 (seearticle on page 9). However, themajority of the Committees

work has focused on conflictgold due diligence. The LBMAhas become more activelyinvolved in this area of regulationdue to its unique relationshipwith international gold refiners,which are accredited under theLBMA Good Delivery system.From discussion in the RAC andManagement Committee, aconsensus has emerged that theLBMA should require GoodDelivery refiners to indicate thatthey are taking measures to avoidreceiving conflict gold in theirfeedstock. To achieve this, theLBMA has tasked the RAC andthe LBMA Referees withdeveloping guidance to allow GDrefiners to demonstrate that theirproduction is conflict free. It isenvisaged by the RAC that theLBMA Guidance should form afoundation of legal compliancethat is credible to the outsideworld and practicable for allGood Delivery refiners. The

Guidance has recently beencirculated to all refiners on theGood Delivery List. It has alsobeen submitted to the OECDwith a view to it beingincorporated into the OECDsown guidelines on supply chainmanagement.

Ruth Crowell, our pointperson on Conflict Gold, is nowplaying an active role on theOECD drafting committee that isdeveloping its gold guidelines.

For more on conflict gold andother regulatory issues facing theprecious metals market, see theRegulation Update on page 23.

By Stewart Murray, Chief Executive, LBMA

LBMA Management Committee elected 22nd

June 2011

Grant Angwin, Johnson Matthey Inc

Philip Aubertin, UBS AG

Simon Churchill, Brinks Ltd

Jeremy East, Standard Chartered Bank

David Gornall, Natixis

Raymond Key, Deutsche Bank AG

John Levin, HSBC Bank USA NA, London Branch

Steven Lowe, Bank of Nova Scotia ScotiaMocatta

Clive Turner, JPMorgan Chase Bank

Our thanks go to Martyn Whitehead of Barclays who steppeddown in June for his seven years of service on the Committee.


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page 25

Physical

The Committee has met eachmonth other than August thisyear. The work of theCommittee, other than GDLapplications and Pro-ActiveMonitoring, has focused on thework of the vaults. A meetingof London vault managers tookplace in May to discuss variousoperational issues aimed atstreamlining transfers betweenvaults (for example,standardising the arrangement of

bars on pallets and theassociated weight lists). It alsodiscussed the best way ofensuring a consistent approachto the assessment of physicaldefects. The meeting also agreedon a standard form for use bythe vaults when reportingexamples of rejected bars to theLBMA Executive. Previously,vault managers have met on anad hoc basis, but it is nowplanned that these meetings willtake place more regularly in thefuture. The Committee alsodiscussed the possibility ofcreating an LBMA AccreditationScheme for vault staff. If it isdecided to go ahead with thisidea, further details will bepublished in a future edition ofthe Alchemist.

Public Affairs

The Committees work has beendominated by intensivediscussions on the speaker

programme for the successfulShanghai Bullion Market Forumheld in May (see review onpage 17). In addition, theCommittee has spent manyhours discussing the speakerprogramme for the forthcomingconference, which will be heldin Montreal in September. TheCommittee has also beenconsidering various venues forthe 2012 Conference as well asthe organisation of a BullionMarket Seminar in the US in

the spring of 2012. Unlike therecent forum in Shanghai, thepurpose of this seminar is not tofocus on the local market butinstead to explain to NorthAmerican investors, traders andregulators how the OTC bullionmarket works.

Membership

The Committee met onceduring the past quarter when itreviewed the operation of thenew sponsorship regime forMember and Associateapplications. The new system issimilar to the Associate Reviewprocess in that it puts the onuson the applicant to ensure thatletters of support are providedin good time by its sponsors.Sponsorship of applications formembership is a serious matterfor Members and this can leadto delays while such requestsare being considered. The newsystem is intended to ensure

that the time required forprocessing applications is kept toa minimum.

Finance

The Committee met in June toreview the three-year forecast inlight of the income andexpenditure for Q1 and Q22011. The Committee alsoagreed on the currency hedgingfor the 2011 Conference inMontreal.

RefereesThe Referees group held itsregular quarterly meeting inJune where it discussed manydifferent technical aspectsrelated to the use of the LBMAreference samples for the testingof existing and aspiringmembers of the Good DeliveryList. The meeting also agreedon the arrangements for theplanned proficiency testingscheme for gold fire assayers,which it is hoped will belaunched in October this year.

Staff MattersWe were sorry to lose theservices of Alice Toulmin as ourPR and Media Assistant at theend of July. Anyone interestedin applying for the resultingvacancy should send their CV tothe Chief Executive.

Committee VacanciesFollowing his election to theManagement Committee, GrantAngwin resigned from thePublic Affairs Committee.Darryl Hooker has also left theCommittee as a result of achange in responsibilities at EBS.There is therefore currently avacancy on the PAC. Anyoneinterested in applying shouldsend an email to the ChiefExecutive with a brief statementof their bullion market

experience.

London Precious Metals Clearing LimitedLondon Precious Metals Clearing Limited has also announced that the cut-off time for theacceptance of transfer instructions on Friday 23rd December, and Friday 30th December, 2011,will be 14:00 G.M.T.

The London Gold Market Fixing Limited

The London Gold Market Fixing Limited has announced that there will be no afternoon goldfixings on Friday 23rd December and Friday 30th December, 2011.


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page 26

After having contributed anumber of previous articles(mostly of a technical nature)to theAlchemist, I now have thehonour of writing one asChairman. First of all, I wouldlike to pay tribute to mypredecessor, Kevin Crisp, whostepped down at the AGM aftera two-year stint in which hedemonstrated both leadershipand a tremendous work ethic inthe role as Chairman. I have

first-hand evidence of hisdedication and total attention tothe many tasks involved inchairing the remarkableorganisation that the LBMA hasbecome.

We also have anumber of freshfaces on theManagementCommittee, andat the firstmeeting afterthe AGM, thenew Committeefocused on thegoal of buildingon the work onregulation, whichwas initiated earlier thisyear with the establishmentof the Regulatory AffairsCommittee, or as we now referto it, the RAC. This powerfulnew committee is made up of14 representatives of Member

companies plus Barbara Ridpathof the International Centre forFinancial Regulation. The newCommittees activity is rapidlybecoming an additional pillar tothe Good Delivery system andthe organisation of seminars andconferences.

We have seen a shift inwhat investors expect in both

types of class and performance.

This has led to an increase inphysical demand and an evengreater expectation that thehighest standards will bemaintained in the quality of

metal traded and storedon behalf of

investors.

Whilst thephysicaldemand hasbeenfacilitated bythemarketplacegenerally, it is

of course theGood Delivery

List that assures thequality of the metal.

This integrity provides thefoundation of what is expectedof us.

We now seek to fulfil someother aims that will further

enhance the market in whichour members operate.

There are several pieces oflegislation that require theengagement of the LBMA. Thefirst challenge will be for theLBMA to complete the workalready started to enable thecompliance on the part of theGD Refiners under the US

Finance (aka Dodd-Frank) Actrelating to conflict gold.Secondly, in September, thedebate on bank capital ratioswithin Basel III willrecommence.

Responding to thesechallenges, the newManagement Committee hasagreed that the LBMA must beat the forefront of the currentregulatory debates. Where the

topic is closely related to theOTC Gold and Silver markets,and more particularly when itcomes to discussing changesrelating to refining standards,the LBMA intends to lead thedebate. This will provide aconsensual and informed viewon OTC practices forlawmakers to consider prior toany changes in law that relateto our market.

In short, we intend toreinforce the role of the LBMAas the competent authority forOTC Gold and Silver.

Towards the end of theyear, we plan to organise aseminar on the topic of theRegulatory changes for thebenefit of the LBMAmembership. This shouldenlighten us all about what weface in the post Dodd-Frankand Basel III era.

Finally, lookingahead, we will soon be enteringour 25th year, where we hopeto provide the membershipwith more than just an annualparty. Keep up to date withthese plans and all our othernews through the website andtheAlchemist.

EditorialEditorial Comment by David Gormall, Chairman, LBMA

facingfactsPaul Burton

Managing Director

GFMS World Gold Ltd

The first half of the year was afascinating time for preciousmetal market watchers, withrecord gold prices and rocketingsilver prices grabbing theheadlines constantly. But spare athought for gold equity investorswho, quite reasonably, shouldhave expected spectacular gainson the back of the fast-risinggold price. Gold equities,producers and developers alikehave, however, been laggardsthroughout this booming market.In many cases, not only havethey failed to keep pace with thegold surge, but they haveactually fallen in price a dismaland perplexing outcome forinvestors.

Traditionally, investors havechosen gold-mining sharesinstead of the underlying metalin order to capture returns inexcess of the extent of anymetal price rise. This effect we

call leverage.

For example, when the goldprice goes up 23% (as it didover the 12 months to mid-May), they may have expectedsomething like a 40% rise intheir investments. For certainperiods in the past, theproducers, mainly because oftheir cost structures and the factthat they have a chance toexpand the ounces invested inthrough exploration, but alsobecause of the higher risk ofactually getting the metal out ofthe ground, have outperformed

We have seen

a shift in what

investors expect inboth types of class

and performance.


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page 27

Given the freedom of expression offered tocontributors and whilst great care has been taken

to ensure that the information contained in the

Alchemist is accurate, the LBMA can accept no

responsibility for any mistakes, errors or omissions

or for any action taken in reliance thereon.

The Alchemist is published

quarterly by the LBMA.

For further information please

contact Ruth Crowell,

13-14 Basinghall Street

London EC2V 5BQ

Telephone: 020 7796 3067

Fax: 020 7796 2112

Email: [email protected]

www.lbma.org.uk

The

Alchemistisdesigned

by

Ion

River.

the gold price, in percentageterms, by a considerable amountusually. Leverage is one of themain reasons that fund managersput their money in a gold-producing company rather thanthe metal itself.

But that relationship hasbroken down in recent times. Infact, we can pinpoint the datethat the positive correlation andunique relationship between goldand gold shares disconnected -October 2008. The time theworldwide economic crisis hitthe markets. If you remember,the gold price plunged butrecovered in short order toreassert the bull trend and has,in fact, gone from strength to

strength since that time. Goldshares (developers as well asproducers) were hit even harderin Q4 2008, clearly exhibitingleverage, but sadly on thedownside! But whereas the goldprice has recovered andstrengthened, gold shares, asdefined by indices such as theXAU and the FTSE Gold Mines,havent regained the initiativeand have lagged behind the

upward movement in theunderlying price. This has beenparticularly marked this yearso far.

The chart below shows thegold price and the FTSE Gold

Mines index, both indexed backto the start of the current bullmarket. You can clearly see howthe index performed better thanthe gold price for the bulk ofthe period, but since late 2008,it has been a different story.

So why has this happened?Its difficult to say definitely, ofcourse, but it seems that theremay be two main factors at play.The first is that we have seen ashift in investing patterns away

from gold stocks in favour of themetal. This has been facilitatedby the existence of the ETF goldproducts. In late 2008 and early2009, there was a noticeablesteepening in the demand curvefor such products and theirpopularity has continued,although in early 2011, we sawnet redemptions, partly dueperhaps to the fact that soaringgold prices have led investors to

become overweight in gold,relative to their other assets,prompting them to divert fundselsewhere (such as into silver) orto simply book profits. Thegrowth of investment andjewellery demand in China may

also have been a contributingfactor.

A second reason for thelacklustre performance of goldstocks may be a swing awayfrom the larger gold producersto smaller companies, who maybe producers or developers.Certainly, individual gold sharesin this latter category havedemonstrated great performancesrecently, but the overall pictureis patchy and investors are

clearly being selective. There aresome signs also that investors arefavouring a junior miners ETFrather than the actual miningstocks themselves.

So in conclusion, themarkets lack of leverage overthe past couple of years may bedown to a switch over to golditself (through ETFs), or cash,but may also reflect a move into

smaller gold producers anddevelopers, again through anETF vehicle. The case is notproven but does offer a feasibleexplanation of the longer-termmalaise.

The sharp downturn in thefirst half of this year in all goldindices is more baffling but doespresent a buying opportunity, Ibelieve, over the historicallyweak summer months.

Paul Burton

[email protected]

560

510

Gold

460

410

360

310

260

210

160

110

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FTSE GM

Source:Thomson Reuters, GFMS World Gold


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alchemist aug 2011

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