Alchemist Issue 60

The London Bullion Market Association ISSUE 60 September 2010

In this issue

Gauging the Long-Term Cost ofGold Mine Production

by Mark Fellows

page 3

Silver Investment in theUnited States and India

by Michael DiRienzo

page 8

Broking: Computerweltby Darryl Hooker

page 11

LBMA Edelmetalle ConferencePreview 2010

by Edel Tully

page 14

London Good Delivery HistoryThe Making of a Masterpiece

by Alice Toulmin

page 16

LBMA News by Stewart Murray

page 17

Regulation and ClearedForwards

Editorial Comment

by David Gornall

page 22

The Rise and Fall of theGold Producer Hedge Book

by William Tankard

page 22

Open Pit Gold Mine – Castle Mountain Mine, near Searchlight, Nevada.

Mark Fellows discusses gold mine economics on page three.

All the metals – all the angles – all the time

Gauging the Long-Term Cost of Gold

Mine ProductionBy Mark Fellows, Managing Director, GFMS Mine Economics

What is the ‘true’, fully loaded

cost of global gold mine

production, and what factors

decide it?

In this article, we aim to quantify

the long-term equilibrium price

required to sustain the industry.

We also examine the impact of

changes in the main production

cost drivers: orebody quality, input

costs, currency value and metal

prices.

Believe it or not, gold mining is not a simpleactivity. Despite the archetypal image of a basicindustry, with grizzled miners toiling awayshifting dirt, gold mines are in fact highlycomplex, dynamic systems. Multiplecontrollable and non-controllable factors, someof which interact in unpredictable ways, affectoutput levels and profitability. To add to thecomplexity, global gold mines areheterogeneous, varying widely in geology, scale,technologies and cost structure.As a result, considerable care must be takenwhen analysing, summarising andprognosticating about the industry. Bearingthat in mind, this article draws upon theanalysis in GFMS’s Gold Mine Economicsservice to reach some conclusions about thelong-term economics of the sector.

The Gold Mine Economics servicecomprises detailed mine-by-mine analysis ofreserves/resources, production, operatingcosts, capital costs and cash flows for more than300 gold mines and projects, with historicaldata and forecasts to 2030. By benchmarkingdetailed technical, operating and financialparameters, we aim to provide the best possibleinsight into the drivers of the industry’s coststructure. Based on a stringent methodologyfor analysing mine operating costs, analysis is

derived from a ‘bottom-up’ understanding ofresource quality, orebody geometry, mining andprocessing methods, labour costs, productivity,energy usage and consumable input costs.

The Drivers of Gold MineProfitabilityFigure 1 shows the main factors that interact todictate the profitability of a gold miningoperation. At first glance, the diagram wouldseem to imply that few of the drivers can besignificantly influenced by mine management,but this is not really the full story, as the relativeimportance of the factors shown variesenormously.

Strategy is the overriding factor, dictatingthe scale of operation, mining and processingtechniques used, and mine lifespan. This is inturn dependent on resource quality, which is tosome extent uncontrollable, but a key point inthis regard is that resource size and grade canbe influenced by strategy. How much ismanagement willing and able to invest inexploration ahead of production? What cut-offgrades do they select?

Cut-off grade selection is arguably the mainfactor deciding the economics of a mine, as itdictates the tonnage and grade of ore to bemined, and in turn the scale, lifespan andprofitability of the operation. Cut-off grade isdefined as the lowest grade of ore that it iseconomically feasible to extract, and it in turndepends on forward-looking metal prices,operating parameters and cost assumptionsmade by mine management.

Cut-off grade provides the mechanism bywhich miners respond to changing metalprices. If prices rise, they can extend mine life

by reducing cut-off grade, exploiting previouslyuneconomic mineralisation. This has the effectof extending mine life, while lowering goldoutput and causing costs to rise. Some minesare inherently more flexible than others, withlarger, higher-grade, ‘massive’, near-surfaceorebodies having significant advantages in thisregard.

page 3

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

All the metals – all the angles – all the time

Figure 1: Drivers of Gold Mine Economics

Hanau

[email protected]

Phone +49 6181.35-2750

When Germany introduced the Gold Standard in 1871, our company had already been a world leader in precious metals for 20 years…

At one time precious metals were the currency of the world. Even today they are still treated and traded as financial products; globally, unrestricted by place and time. For just as long, precious metals have also played a vital role in a manifold of industrial applications.

Heraeus has played a vibrant role in both areas for almost 160 years, and during this time our company has earned a reputation as a leading expert and competent partner for the refining, trading and manufacturing of precious metals.

Strongly supported by our four trading units in Hanau, Hong Kong,Shanghai and New York, we assist our customers in professionallymanaging the risks associated with the physical acquisition, price fluctuations or financing of precious metals.

In addition, our company also offers a large number of productsto investors: A wide range of gold, silver, platinum and palladiuminvestment bars, from a filigree 1 gram gold bar right up to a massive 5 kg silver ingot, can satisfy the wishes of any physical investor.

Precious Metals Trading. Refining. Investment. Industrial Products. An entire world in just one word: Heraeus.

Hong Kong

[email protected]

Phone +852 2773 1733

Shanghai

[email protected]

Phone +86 21 33575675

New York

[email protected]

Phone +1 212 7522180

140 years later we are still setting the standards when it comes to precious metals expertise.

www.heraeus-trading.com

As gold prices have risen roughly five-foldsince 1999, average gold mine ore grades havefallen by nearly 30%, in large part dueto this cut-off grade response. Thisalso partly explains why goldmine production has notincreased significantly, asproducers have focusedinstead on extending theirmine lives. This has beenexacerbated by a ‘discoverydrought’, with very fewworld-class gold orebodiesbeing discovered in recentyears, despite recordexploration expenditure. Overthe same period, all-in productioncosts have more than doubled, partlydue to severe input cost inflation, but alsodue to lower cut-off grades.

Figure 2 shows the sensitivity of gold mineproduction costs to the main drivers, on aglobal average basis. For instance, a 10% fall inglobal average ore grade gives rise to a $50/ozrise in average production costs.

Besides grades and process recoveries,production costs have the highest sensitivity tochanges in exchange rates, with a 10%strengthening of the dollar giving rise to a$47/oz fall in average production costs on aglobal average basis. Exchange rates are usuallythe largest single determinant of year-on-yearglobal average production cost changes.

With regard to input costs, labour is by farthe most sensitive cost component, by virtue ofits large proportion of a typical operating costbase.

Production Cost Metrics: What’s Useful?GFMS contends that the gold mining industry’shistoric preference for reporting andcomparing cash cost parameters, rather thanadopting a profitability measure that is morereflective of the true, ‘fully loaded’ costs ofproduction, has ultimately proved misleadingand counterproductive.

The fixation on cash costs has fostered ageneral perception that global gold minemargins are higher than is actually the case.

All-in cost is a proprietary GFMS MineEconomics $/oz cost metric, designed toreflect the full marginal cost of gold mining. Inaddition to mine site cash expenses (mining,ore processing, on-site general andadministrative costs), refining charges, royaltiesand production taxes, by-product credits,depreciation, amortisation and reclamationcost, it includes ongoing capital expenditure,indirect costs and overheads. The latterincludes corporate administrative costs, interestcharges, mine site exploration and anyextraordinary charges, such as retrenchmentcosts, carrying value write-downs, etc.Ongoing (‘stay-in-business’) capital expenditure

is defined as capital expenditure necessary tosustain production rates at a mine. The global

average all-in cost for 2009 was$717/oz, up $27/oz on 2008.

Although cash cost measuressuch as total cash cost are a

useful gauge ofcompetitiveness at the mine-by-mine level, they do notaccount for a substantialportion of the cost requiredto develop and sustain goldmining operations, so are

arguably less useful as ameasure of ‘real’ industry

margins, or the long-term goldprice required to incentivise gold

mine production growth. The historic relationship between all-in

costs and gold price paints a clear picture.During the 1997 to 2001 bear market, averageall-in cost margins were strongly negative, withcosts tracking the gold price downwards in aneffort to regain profitability, or at least remain

in production. As the gold price recoveredfrom 2002 onwards, positive all-in cost marginswere quickly re-established and maintained.However, until 2009, miners were unable todeliver sustained production growth, given thatthey were reducing cut-off grades to takeadvantage of higher prices, extending mine lifeat the expense of higher costs.

Implications for Long-Term Prices:The FutureAlthough all-in cost is undoubtedly a superiormeasure of ‘full’ industry production costs, weadmit that it does not account for certain costcomponents that also have a bearing on the truelong-term break-even cost of gold mineproduction.

All-in costs include sustained/ongoingcapital expenditure and depreciation of sunkcapital costs, but not current-year projectdevelopment and expansion capital costs. In2009, the gold mining industry invested anaverage of $173/oz of global production inproject development and mine expansion.

page 4

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

Figure 2: Sensitivity of Production Costs to Key Drivers

Source: GFMS Mine Economics

Figure 3: All-in Cost versus Gold Price (rebased to 2009 $ terms)

Source: GFMS Mine Economics

The

fixation on cash

costs has fostered a

general perception that

global gold mine margins

are higher than is

actually the case.

Hanau

[email protected]

Phone +49 6181.35-2750

When Germany introduced the Gold Standard in 1871, our company had already been a world leader in precious metals for 20 years…

At one time precious metals were the currency of the world. Even today they are still treated and traded as financial products; globally, unrestricted by place and time. For just as long, precious metals have also played a vital role in a manifold of industrial applications.

Heraeus has played a vibrant role in both areas for almost 160 years, and during this time our company has earned a reputation as a leading expert and competent partner for the refining, trading and manufacturing of precious metals.

Strongly supported by our four trading units in Hanau, Hong Kong,Shanghai and New York, we assist our customers in professionallymanaging the risks associated with the physical acquisition, price fluctuations or financing of precious metals.

In addition, our company also offers a large number of productsto investors: A wide range of gold, silver, platinum and palladiuminvestment bars, from a filigree 1 gram gold bar right up to a massive 5 kg silver ingot, can satisfy the wishes of any physical investor.

Precious Metals Trading. Refining. Investment. Industrial Products. An entire world in just one word: Heraeus.

Hong Kong

[email protected]

Phone +852 2773 1733

Shanghai

[email protected]

Phone +86 21 33575675

New York

[email protected]

Phone +1 212 7522180

140 years later we are still setting the standards when it comes to precious metals expertise.

www.heraeus-trading.com

Likewise, all-in costs exclude greenfield (i.e.early-stage project) exploration expenditure,which is estimated to equate to $35-$60/oz ofannual production. Taking these additionalcosts into account, GFMS Mine Economicscontends that the ‘true’ long-term cost of goldmine production stood somewhere between$925 and $950/oz in 2009, a sobering thoughtwhen one remembers that this figure does notallow for any return to shareholders.

Long-term equilibrium production costswill remain highly sensitive to the key costdrivers, some of which are partially withinmanagements’ area of influence or control, butmost of which are uncontrollable. Many of

these cost drivers will doubtless continue tocreep upwards in future. The largest single costcomponent, labour costs, continue to rise; forinstance, in local currency terms, South Africanlabour costs have increased by 10% per annumon average since 1999, with the two-yearagreement signed by the main producers in2009 committing to ongoing 7.5-10.5% wageincreases. There is undoubtedly a tendency,now established, toward increasing unit labourcosts in developing countries, as globalisedmining companies export better operatingpractices, along with higher productivity levelsand better pay.

Similarly, other input costs will continue torise in real terms, as energy and consumablecosts are pushed upward by increasedcompetition for resources, and greaterregulatory and tax burdens, such as carbontaxes.

This said, as highly complex dynamicsystems, well-managed gold mines willcontinue to adapt, utilising whatever flexibilityis provided by their orebodies. Despite recordexploration expenditure, the extent to whichthis will be bolstered by the discovery of newworld-class deposits over the coming yearsremains to be seen. n


Mark Fellows isManaging Directorof GFMS MineEconomics.Mark began his 23-year career in themining industry asan explorationgeologist with AngloAmerican/De Beers.He went on to workfor several junior

explorers, prospecting for diamonds,gold, base metals and industrialminerals in Africa. In 1992, hejoined Brook Hunt, a globallyrenowned mineral economicsconsultancy, serving as a director,responsible for BH’s Gold MineCosts study and numerous bespokeconsulting assignments from 1999 to2005.GFMS Mine Economics waslaunched in early 2009, with aim ofdelivering high-quality, detailedinsight into the economics of mineproduction, exploration anddevelopment, across a broad rangeof metals and [email protected]

Toronto Dominion BankTim Gardiner heads the Global Precious Metals team at TDSecurities. He’s joined by Steve Scacalossi,David Swinburne and Matthew Hopkins in Toronto;Bob Davis, Peter Airlie and Alex Pop in London; andRuark Lineker and Joe Bowden in Singapore.

Christian Pfeifer to UBSChristian has joined UBS to trade PM Spot. He will be based inLondon. He previously worked at Mitsui London and prior tothat Heraeus NY.

Lucien Weisen to CommerzbankLucien started his banking career at UBS Luxembourg as an FXtrader in 1984, covering the forward books as well as preciousmetals for wealth management. After 14 years at UBS, hemoved to Dresdner Bank Luxembourg to cover the same rolefor the next 12 years. In April 2010 he joined Commerzbank’sprecious metals desk in Luxembourg, where he covers Spot andForwards.

David Corcoran to Société GénéraleDavid started at SG in late August. He previously worked atDresdner Bank, Credit Suisse, JP Morgan and Johnson MattheyBankers.

John Reid toMetalor Technologies SAJohn has joined Metalor asGroup Treasury. He previouslyworked as Head of Global Marketsfor the Rand Refinery in SouthAfrica and prior to that worked for Barclays Bank, ABN Amroand Nedbank amongst others.

Jamie Grace to Standard CharteredJamie has joined Standard Chartered as Head of Metals OptionsTrading. He is based in London and with the CommoditiesDerivatives Team. Jamie has 16 years’ experience tradingfinancial derivatives and previously worked at Calyon as Head ofCommodity Option trading, and at JPMorgan for 12years, where he held the position of Global Head of Oil OptionTrading.

Market Moves

No. 1 Dealer in Precious Metals – Gold Forwards, Options and Spot, Risk 2010. © UBS 2010. All rights reserved. 04441

www.ubs.com

Your global partner for precious metals

Active in the physical and non-physical markets for almost a century, our award

winning dedicated team offers you a ‘one stop shop’ for precious metals trading,

investing and hedging:

• Gold, silver, platinum and palladium

• 24h global service from hubs in Switzerland, the US, Singapore and the UK

• Physical precious metals custody in our Swiss vaults

• Coins – trading, handling and storage

• Structured products and tailor-made hedging solutions

• Full range of OTC derivatives

• Gold ETF

Quality, security and competitive pricing are backed by seamless clearing and execution and

supported by market-leading research. The UBS Precious Metals team continues to be the

partner of choice around the world. How can we put our resources to work for you?

Zurich: +41-44-239 4111 Stamford: +1-203-719 1178

Lugano: +41-91-801 9990 Singapore:* +65-6495 8474

Geneva: +41-22-389 5335 London:* +44-207-567 6758

*non physical only


page 8

Silver Investment in the

United States and IndiaBy Michael DiRienzo, Executive Director, The Silver Institute

While India and the United

States stand out as two of the

most important drivers for silver

investment demand, how they do

it is a study in contrasts. The

roots of their silver investment are

well established and the past

several years of global economic

turmoil have only served to

reaffirm these two nations’

affinity with the white metal.

Indian silver demand, like gold, is largelyfuelled by rural investors, mainly farmers whoseek to convert some of their income intosavings in the form of bangles, other jewelleryand decorative ornaments. Shifts indemographics are slowly changing investmentpatterns in India, as increasing numbers moveto urban areas. The June-to-Septembermonsoon season remains an important factor insilver demand and bountiful rains are often theharbinger of upticks in investment.

The United States has a rich history of silvermining and investment. American investorshave long had a predilection for physical silver,favouring coins and bars to stash investmentcash. On the retail side, many smaller investorslike the portability of coins and smaller bars,and the discretion that comes with such

investments. More sophisticated investors havesought to leverage silver investing with miningshares and mutual funds and more recently withexchange-traded funds (ETFs).

When examining current silver investmentin the United States and India, it is important tolook at the global picture. Over the course ofthe last three years, world investment has morethan tripled, rising from 61.7 Moz (millions ofounces) in 2007 to 215.6 Moz in 2009.1 From2008 to 2009, global silver investment leapt bya staggering 184%.

Perhaps one of the most importantdevelopments in the silver investment marketin the past 50 years was the advent of preciousmetals ETFs in 2004. These investmentproducts, which trade like stocks, have servedto ‘democratise’ global silver investing bymaking it convenient for retail investors whomight otherwise have eschewed silver investingbecause of the difficulties of storage, insuranceand assaying. That convenience, coupled with aglobal financial crisis and greater shifts towardportfolio diversification, has pushed the silverprice higher in recent years. Examining ETFsmore closely, total holdings in 2009 rose by132.5 Moz, ending the year at 397.8 Moz. Thegrowth was the product of increased holdingsof the three funds that were activeat the beginning of 2009, and thelaunch of new silver ETFs inAustralia and United States lastyear. On the whole, between2005 and year-end 2009, thesilver price increased a staggering141%.

Turning to global silver coinand medal fabrication, thissegment of investment demandgrew by a hearty 21% to a new

record of 78.7 Moz in 2009, driven by a spikein retail demand. This increase was ledprimarily by the United States and WesternEurope. Looking at the table below, silver coinand medal fabrication increased nearly 60%between 2000 and 2009.

Silver Investment in the UnitedStatesIn the United States, physical investment insilver is dominated by the purchase of one-ounce bullion coins and 100-ounce bars. Thebars are almost entirely produced locally.However, the surge in demand during 2008 sawa number of other institutions start to producetheir own bars, including private mints andindustrial manufacturers.

The coin market is dominated by the USMint’s Eagle one-ounce bullion coin. A numberof overseas bullion coins have also provedpopular in the United States, particularly theCanadian Maple Leaf, although for example theAustrian Vienna Philharmonic and AustralianKookaburra, Lunar and Koala coins have allachieved some success.

The silver Eagle, first introduced in 1986,saw sales remain broadly stable during much ofthe 2000s, averaging 9.4 Moz during 2000-


page 9

2007. However, since 2008, minting hasincreased substantially, with total coin output inboth 2008 and 2009 achieving successiverecords of 19.6 Moz and 28.8 Moz.Furthermore, 2010 is on course to post a newrecord high, with combined January-to-Julysales up 27% year-on-year. Demand for thesecoins is so strong that the US Mint has at timesstruggled to keep pace. At the heart of theproblem is the difficulty in sourcing sufficientplanchets (or blanks).

The growth in silver investment demandduring 2008 pre-dated the collapse of LehmanBrothers, although the ensuing credit crisis ledto heightened retail demand. This surge alsoled to heightened retail purchases of 100-ouncebars. Again, demand was so marked thatshortages emerged in the bar market, whichencouraged a number of new entrants to begintheir own production.

In 2010, although US bar demand has fallennoticeably, US coin minting has continued togrow, driven by firm demand at home andoverseas, principally in Western Europe,encouraged by Europe’s sovereign debt crisis.

Silver Investment in IndiaToday in India, investment in silver continues totake place in what might be termed ‘traditionalforms’, namely heavy, high-karat, low-labour,plain silver jewellery (silverware, as a form ofinvestment, has been adversely affected inrecent years due to under-karating), as well asthrough the hoarding of bars. In contrast, coinsare a small fraction of the overall Indianinvestment market.

Silver jewellery forms the bulk ofinvestment in rural areas, while urban centresshow a preference for lower mark-up bars.That said, some rural areas have also developedan interest in bars, particularly those that arewell connected to cities. Overall, retailjewellery consumption grew by 6% in 2009,again driven primarily by an improvement indemand from rural areas, which are thebackbone of the heavy jewellery market inweight terms. The modern jewellery segmentsaw considerable growth in 2009, both locallyand for exports. Among other things, highergold prices spurred substitution into silver.Ongoing urbanisation, concerns over elevatedprices and issues related to under-karating

continue to hold off a significant swing to theupside in this segment.

Notwithstanding the preferred form ofinvestment, there still exists an active two-waymarket for each segment. In this regard, whilejewellery would typically be sold back once in agiven year (mainly during May and June to fundthe sowing of monsoon crops), the trading inbars might be more frequent, being moredependent on changing investor priceexpectations.

In terms of recent trends in the Indianmarket, the record level of investment in 2008was due to a combination of strong demandfrom urban dwellers and fromsilverware/jewellery fabricators. Both of thesegroups deemed prevailing silver prices to beundervalued, with expectations therefore ofstrong future gains. Conversely, the rush todisinvest in 2009 was arguably of little surprise,given that rupee silver prices had broadlyfulfilled investors’ expectations, resulting inboth actual dishoarding and the manufacture ofbars into jewellery and silverware, which wouldalso be classified as dishoarding. This patternwas spread throughout the year, despite the fact

In terms of

recent trends in the

Indian market, the record level

of investment in 2008 was due to

a combination of strong demand

from urban dwellers and from

silverware/jewellery

fabricators.


that until July the average year-on-year silver price was some 7% lower.According to GFMS, thisdisinvestment was not price-relatedand essentially was the consequenceof the conversion of bars, acquired bythe trade the year before, intojewellery and silverware. Toward thelatter part of the year, disinvestmenttook a more conventional form –investors taking profits on escalatingprices.

This year, it appears as thoughIndia may see a modest return to nethoarding. With local prices hoveringaround Rs29,000/kg at the time ofwriting, many investors have beendiscouraged from entering the silvermarket. It therefore appears thatprices below Rs25,000/kg may berequired to stimulate retail interest inthe Indian market. However, as goldcontinues to push higher, the Indianinvestor’s desire may increase,especially if bountiful monsoon rainsbring better harvests. n

1World Silver Survey 2010, which is

produced by GFMS Ltd on behalf of the

Silver Institute

Michael DiRienzoserves as the ExecutiveDirector of the SilverInstitute, an internationalassociation whosemembership comprisesmajor participants in thesilver industry. In thatcapacity, Michael managesthe Institute’s overall dailyactivities, budgetdevelopment and

management, implementing the annual plan,and public affairs activities.

From 1999-2002, Michael served asVice President of the Gold Institute, managingthat association’s government and publicrelations activities. Prior to 1999, Michaelserved as a government affairs representative forJanus/Merritt Strategies, a political andstrategic management firm. Michael alsorepresented a member company of the ToyotaGroup as Director of Government Relations.Formerly, Michael served as Legislative Assistantand Press Secretary to the Chairman of theHouse Rules Committee, U.S. CongressmanDavid Dreier (R-CA). During his tenure withthe Chairman, Michael worked on BankingCommittee and Small Business Committee issues.

The London Gold Market Fixing

Limited has announced that

there will be no afternoon gold

Fixings on Christmas Eve,

Friday 24th December 2010,

nor New Year’s Eve,

Friday 31st December 2010.


page 11

Broking: ComputerweltBy Darryl Hooker, Global New/Emerging Market Manager, ICAP plc

It was a balmy August morning in

1980 when I turned the corner

into New Broad Street and stared

at the stone façade of Friars

House, the home of Woellwarth &

Co, a brokerage house, which was

part of the Mercantile House

Group.

I had started my career in the financial marketsand first held what could be considered aDickensian position – trainee scribe. Yes, I hadarrived in the City! Now, this meant that I wasthe chap who watched the guy who wrote thedeal tickets for the broker who did thedeals. However, my biggest challengeduring the first few weeks was not onlyto remember the lunch orders, but alsoto stay awake. I sat facing a dealingboard covered in almost 200rectangular plastic plugs inscribed withthe names of banks. Now to furtherthe hypnotic effect of staring at theseall day, the plugs went from grey toblinking white to red, rather like aChristmas tree, as the banks andbrokers talked to each other all day,transacting short date sterling swaps. Thenoise only came from the brokersthemselves as they called out their ordersand executed their customers’ trades.

The role of the broker is a remarkablysimple one – all you have to do is find a buyerand a seller of the same product, at the sameprice, in the same amount, at exactly the sametime. The broker is not a principal in the tradeand works purely on behalf of his customers’interests. So why should these brokers be sohighly regarded – surely it wasn’t a difficultjob? Of course, you then have to consider otherfactors – the broker is typically working for anumber of clients at once with varyinginterests, he also has to be aware of what all theother brokers are doing on the desk and inwhat order their interests are to be executed (ifat the same price), and then of course, theremay be breaking news. As activity increases, sotoo does the noise, adrenaline levels rise andfall, as do egos, and the ability to master theturmoil becomes of paramount importance. Agood broker is possibly a bank dealer’s most

potent tool if they can communicate welltogether.

After three months, I was given a chance tobe a ‘link man’, which meant I spoke to otherbrokers in other centres to see if we couldeffectively put our orders together. I spoke toDublin, Brussels and Paris – but I was still onestep removed from talking to my own set ofbanks. Eventually, I was let loose on an exoticsdesk, where I had free reign over spot, shortand forwards in a slew of Far Easterncurrencies. Of course, I had loftier ambitions,so a year later, I threw my toys out of the pramand demanded to work on a bigger desk oroverseas.

In those days, people listened and reactedquickly, it was the nature of the markets wewere being blooded on, and so it was a weeklater that I started on the spot USD/DEM(Deutschmark) at Marshalls London – thenumber one spot desk in London, and indeedthe world.

Spot FX (or spot anything for that matter)was renowned for two things – speed andsimplicity. It wasn’t rocket science, but you hadto have great mental agility to make sense outof apparent mayhem. Due to the speed andfrequency of trading, each bank required a‘squawk box’ so that it could be heard, and thisalso meant a good broker could comfortably sit

with 12 or 16 boxes and conduct business. Thevolume of noise however was immense, as thiswas open outcry in every sense.

This to me was technically superior to anyother trading environment I had seen – voiceboxes everywhere, tap on/tap off mutefeatures, hand signals, acronyms, banter andabuse, all writhing around me and threateningto pull me under! Everyday, I was totallyexhausted, and when offered the chance sixmonths later to go and work overseas, I had nohesitation in accepting – but that’s anotherstory.

I remember around this time that theEnglish daily tabloids could not get enough ofthe trading markets, young guns with their fastcars, high energy, high jinks, beautiful girls andbad habits. However, I believe it was one of thebroadsheets that wrote a very serious articleaddressing the uptake of technology in the

financial markets, and finally asked thequestion of a chief dealer at a large and

reputable American bank in London:“Would technology one day replace hisbrokers?” His answer was loaded withthe champagne-bubble bravado of theeighties: “Never – because the machinecan’t buy me a beer!” But this articlehas stayed in my mind ever since, andall these years later, it could be arguedthat the chief dealer was both right andwrong.

In 1982, I saw my first Reutersscreen – black background and green

characters. A Swiss colleague had joinedus in London on the proviso that he was

given his own Reuters screen. I wasmesmerised by the way he could type in a four

character code and tell me the weather inGrenoble, or the football scores from Spain lastnight or what the gold prices were across agroup of contributors – it was love at firstsight!

The developments from the ‘squawk boxes’and ‘bat phones’ (an open link to severalbroking offices around the world) soonaccelerated as I recall seeing the firstmicrophones giving multi-quotation to 16customers at once, and this was accompanied(on busier desks) by light systems to indicatebids and offers at the top of the book. The ideabehind all this was of course to increaseefficiency, speed up the execution, move on tothe next trade and ultimately do as muchbusiness as ‘humanly’ possible. But therein laythe fate of some heavily commoditisedproducts, be it XAU/USD or EUR/USD, as by1990, we had maxed out how much was

‘humanly’ possible to transact. The only way itcould have got bigger was for the trade sizes tohave got bigger, which would have meant bankstaking on much larger positions and greaterrisk. But surely this bubble would never burst?

In the early nineties, Reuters developed a‘matching’ system that would automaticallymatch buyers and sellers, according to pre-screened credit and price, who remainedanonymous until a ‘match’ took place,whereupon both parties’ names were disclosedto each other. It was wonderfully efficient, itwas quiet, it didn’t miss prices (the traderdid!), it offered immediate name give-up andnever changed the details on a trade – and as ifthat wasn’t enough, brokerage rates weresavagely cut too.

A turning point for me was in 1997, as abroker on a desk in New York. I casually asked atrader in Toronto if she could show me a price,and immediately she said she would “check thetoy”. That was the day that I knew a few digitson a computer screen offered more reliabilityand comfort to the trader than I did.

So how could Reuters Matching possibly beequalled or indeed improved upon – it justdidn’t seem likely and, for a while, it did enjoya monopoly in this unique space. As we haveseen over many decades, one’s customers oftenbecome one’s competitors, and so it was that,in 1993, a group of a dozen of the world’slargest banks formed EBS. The mandate wassimple: to create a tool as good as or betterthan Reuters Matching and reduce the costs tothe banks – workstation charges and brokerage– even further.

Within a few years, EBS had in the eyes ofits board member banks done precisely this,

and it was in 2000 that EBS became the firstelectronic platform to offer quotations inXAU/USD and XAG/USD too. This was amassive step in a new direction for a platformthat had made its name in spot FX. Again,brokerage levels were slashed and, literallyovernight, the voice brokers found that thesetwo precious metal spot markets had found anew venue for execution. This story wasduplicated a few years later when EBS (nowowned by ICAP) launched spot platinum andpalladium too.

Electronic broking has been embraced withvarying degrees of success by many others.CME could tell a similar story of the transitionfrom the pit to on-screen trading. I rememberbeing quizzed by a colleague as to why CMEelectronic volumes in precious metals hadsuddenly and dramatically risen by 90% (a leadstory from a respected media source). Scrollingthrough the article and down to the reportedfigures, I also saw that the pit volumes weredown by about 90% too (it was the time oftransition).

e-Broking (as we refer to it now) is still atremendously vibrant business as oneinnovation relentlessly follows another. Thebuzzwords these days are ‘latency’, ‘efficiency’and ‘liquidity’, and we use acronyms like API,HFT and MQL. The language may havechanged, but the sentiment hasn’t – make itsimpler, make it quicker, make it cheaper andmake it more liquid.

I used to brag to my friends back in myhometown pub about how many millions I hadtransacted between my customers, and how Idid all these trades in a matter of a few secondsand could keep track of the chaos. Now I am an

‘old hand’ saying very little and maybesometimes pining for the old days. The secondshave become milliseconds (I remember an ITchap correcting my Freudian slip one day whenhe said: “You mean 300 milliseconds not 30 –it’s not possible for a round trip deal time!” Buthe’s wrong now): volumes are now counted inbillions, not millions; and STP systems andarbitrators keep track of trades and actions(keystrokes) beyond any manual capability.

Voice and electronic broking are stillworking side by side in an uneasy alliance, butboth offer unique opportunities to customers.The more negotiable a product, the more itlends itself to voice broking; the morevanilla/commoditised it is, the more it lendsitself towards electronic broking.

This month marks my 30th anniversary inthe financial markets, with similar periods oftime spent both voice and electronic broking. Iam taunted by some of my old broker friendsthat I have defected to the “dark side”, but to behonest, these are all shades of grey. There is nodark side, both types of broking offer uniqueservices and they finesse the work they aregiven. I like to think that being a good broker(electronic or voice) is akin to being a goodreferee – if you don’t notice him, he’s doing agood job of running the game.

So finally, was the American banker in theearly eighties right or wrong when he said thatthe voice broker cannot be replaced “becausethe machine can’t buy me a beer”? I hope wecan discuss it over a pint at the LBMAconference in Berlin – and that will be anotherstory! n


page 12

Darryl Hooker joinedICAP (then EBS DealingResources) in 2000.Previously, having workedfor an underwriter atLloyds of London, Darrylmoved onto ForeignExchange broking with MWMarshall Inc, where heworked in 8 countries on 5continents. Darryl waspromoted to Managing

Director of the New Zealand office and wasthe youngest appointed Managing Directorglobally.

Having worked for MW Marshall for 17years, Darryl moved onto Reuters America, inthe position of Senior Business DevelopmentExecutive, where he oversaw all Spot tradingin the United States.

C:\

call[would sir like a drink?]

METALS AGRICULTURE \ INTEREST RATES \ EQUITIES \ FX \ ENERGY \ WEATHER

The total metals marketplace.

In today’s metals market, more opportunities are

available than ever before. CME Group’s broad product

suite offers the fi nancial safeguards of clearing, plus

fl exible trading solutions. Together, our precious, base

and ferrous products comprise the world’s most liquid

metals futures market. And now that COMEX and

NYMEX are part of CME Group, the world’s leading

metals marketplace is gaining new strength. Learn

more at www.cmegroup.com/metals.

Trade Metals Products:

• Most extensive and liquid metals futures market in the world, including benchmark COMEX gold and silver contracts

• More than 100 years of proven safety and security with CME Clearing

• Access around the world on CME Globex – the most reliable electronic trading platform

• Mitigation of credit risk by clearing OTC transactions through CME ClearPort

• Availability of both physically delivered and fi nancially settled futures contracts

CME Group is a trademark of CME Group Inc. The Globe logo, CME, Chicago Mercantile Exchange and Globex are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange and ClearPort are trademarks of New York Mercantile Exchange Inc. COMEX is a trademark of Commodity Exchange Inc. These contracts are listed with, and subject to, the rules and regulations of NYMEX and COMEX. Copyright © 2010 CME Group. All rights reserved.

It is LBMA Conference

time once again, for this

delegate just a short

hop away, in Berlin. The

storied Hotel Adlon is

our venue, and I’m sure

we shall add to its

legends.

The LBMA’s choice of Germany makes perfectsense; Germany is after all the second largestofficial sector holder of gold.

Through companies such asHeraeus Metallhandelsgesellschaft mbh andDegussa AG, Germany has a multi-centuryrelationship with all precious metals. Itsaffiliation with physical gold was quite obviousthis summer as sovereign risk fears heightenedin May and June, pushing gold to record highsand fuelling a surge in small bars and coindemand – with Germany one of the largestconsumers. Let’s not forget Germany’s autoindustry, which is a significant consumer ofplatinum group metals.

Demand for this Conference has beenexceptionally strong and we’re delighted thatwe have a full house of 450 delegates, makingthis our largest ever. Due to the unprecedenteddemand, we closed registration at the end ofAugust, and disappointed delegates have beenadded to a waiting list. Clearly, based on thisConference, interest in precious metals hasnever been higher!

The past year has served up volatile priceaction for all the precious metals, but interest ingold and silver remains steadfast, whileplatinum and palladium have experienced somedramatic changes in investor appetite. But this

will not be a backward-looking Conference.No other platform offers the opportunity toexplore the multi-layered precious metalsmarkets with experienced industryprofessionals and select external experts. Italso offers the best opportunity to network anddebate – heated or otherwise – the issues mostpressing to our markets and industry goingforward.

Further networking opportunities can befound at the cocktail party on Monday 27th,kindly sponsored by the FachvereinigungEdelmetalle, followed by the Conference dinnerat Charlottenburg Palace. And of course, at thelunches and session breaks.

The International Platinum GroupMetals Association is the kind sponsor ofthe Welcome Reception, beginning thisyear’s event. In the opening session, wewill be fortunate to hear William White,Chairman of the OECD, and GeorgeMagnus, Senior Economic Adviser atUBS, lay the foundations of theeconomic and financial backdrop to thisyear’s discussion. We are, as ever,grateful to all speakers and chairmen forgiving their time and expertise. Thisyear, we attempt to look at the two sidesof the gold argument – has the gold

market entered a new paradigm, or is goldanother boom to bust story? This willpermeate the Conference sessions, includinginvestment, the traditional physical market andthe official sector – all of which haveexperienced significant changes in recent years.The potential impact of regulation receivesattention, and not forgetting that this is aprecious metals Conference, we devote a fullsession to the world of auto catalysts, SouthernAfrica and PGM investment.

The core argument of the Conference willbe dissected further in the presidential styledebate by industry experts specialising indifferent areas of the market. But we don’t juststop there; this platform will venture beyondthe current metals story, so have your questionsready for the panel. This year, we have againinstalled Steve Branton-Speak of GoldmanSachs to chair what has proven to be one of themost popular sessions. To wrap it all up, JohnReade, of Paulson Europe, will summarise thehighlights from each session.

Finally, as Chair of the Public AffairsCommittee, which has the challenging task oforganising the annual Conference, I must thankmy committee members who work alongsidethe LBMA Executive to bring you the bestprecious metals Conference each year. Afterall, it is the Conference, by the industry, for theindustry. n


LBMA Edelmetalle Conference 2010

PreviewBy Edel Tully, Chair, LBMA Public Affairs Committee

Dr Edel Tully isresponsible for preciousmetals strategy at UBSInvestment Bank. Edel hasbeen a member of thePublic Affairs Committeesince 2008 and became itsChairperson in June 2009.Prior to joining UBS earlierthis year, Edel was head ofprecious metals research atMitsui and Co. Precious

Metals Inc. She holds a PhD in goldcalendar seasonality dynamics fromUniversity of Dublin, Trinity College.

London Precious Metals Clearing Limited has announced that the cut-off time for its Members accepting client

instructions for the transfer of gold and silver on Christmas Eve, Friday 24th December 2010, and

NewYear’s Eve, Friday 31st December 2010, will be 2-00 pm London time


London Good Delivery HistoryThe Making of a MasterpieceBy Alice Toulmin, LBMA

When the proposal to publish a

history of the Gold Good Delivery

List was put to the LBMA Physical

Committee in May, 2010, the

Committee agreed that this would

be a valuable reference guide, not

only to the history of the London

gold market but also to the

LBMA’s Good Delivery procedures

and specifications.

Based on Tim Green’s many years of gatheringinformation on the gold market and morerecent painstaking research, the resultingdocument is certainly that. However, when theLBMA Chief Executive, Stewart Murray, hadthe idea of displaying as many GDL bars aspossible on the cover of the publication, heunknowingly initiated the creation of a uniquework of art. Stewart admits that his idea wasonly partly original. He recalled the beautifulcover of “The Gold Companion”, issued byMKS and PAMP in 1991 and showing adiagonal array of their kilobars topped by a

specially engraved bar bearing the title of thepublication.

Rebecca Adamson has been an independentconsultant for the LBMA since 2008, beingemployed initially in the creation of an intranetwebsite containing a database of informationabout GD bars which is used by the Londonvaults. After the departure of Douglas Beadleearlier this year, Rebecca began assistingStewart in the maintenance of the LBMA Good

Delivery System – processing applications foraccreditation and monitoring the ProactiveMonitoring of GD refiners. This experienceprepared her perfectly for the task ahead ofturning Stewart’s idea into a reality.

Realising that it would be difficult to fit allthe different refiners on the cover, Rebeccaplanned the diagonal layout with 1:3 mock-upsof the bars, cutting and pasting to find just theright angle. In the process she became veryfamiliar with the dimensions of many of the

bars on the list! Having solved the problem ofdifferent widths, she constructed shims fromwood and card to raise the height of the bars byprecise millimetres, to form a level surface forthe photograph. Existing GD bars vary inheight from 34 mm to 50 mm!

Most of the bars were from the vaults of theBank of England, which supported the projectwith great enthusiasm and allowed this veryspecial photoshoot to take place on theirpremises. HSBC and JP Morgan contributed afew that were missing from the stock in theBank’s own vaults. The final photographfeatures 76 bars from 42 refiners, and oneunique LBMA GDL bar specially produced byPAMP SA. Good Delivery refiners whose barsdid not happen to be in the London vaults wereinvited to send them in for the photo.

On the day, Rebecca and custody staff at theBank had an hour and a half to lay the bars outon a specially built table. There had been a dryrun the previous week, when it took more thanthree hours to finish the layout, but practicemade perfect and they were ready when thephotographer, Mark Pickthall, of Ion River,arrived at 9.30 am, complete with a hugecollection of lights and reflectors.

After three months of planning and a fewfinal adjustments, the photographs were takenin a matter of minutes.The LBMA Executivewould like to thank Rebecca and the Bank ofEngland Custody Team for their hard work inallowing this unique photograph to be taken. n

Rebecca checks the final

position of the LBMA bar with

photographer Mark Pickthall

Mark Pickthall is adesigner and photographer

who has worked on many LBMA publications.

He can be contacted [email protected]

RebeccaAdamson,LBMAConsultant

To see the finalphotograph inall its glory,order a copy ofthe Good Delivery List History (seeLBMA News) or visit Rebecca’sstand at the LBMA Conference.


page 17

LBMA News

MEMBERSHIP

Credit Suisse was reclassified as aspot and options Market Makeron 19 August, bringing the totalnumber of LBMA Market Makersto ten.

In order to qualify as anLBMA Market Maker, a companymust offer two-way quotations inboth gold and silver to the otherMarket Makers throughout theLondon business day.Reclassification is theresponsibility of the LBMAManagement Committee. Indeciding on the issue ofreclassification, the Committeetakes account of the views of theother Market Makers on theperformance of the candidatecompany during an approximatelythree-month probationary period.

The full list of Market Makerson the LBMA website now showsin full the products (spot,forwards and options) providedby each company, theirparticipation in the gold andsilver fixes and whether they actas clearers.

GOOD DELIVERY LISTThe silver refinery of Kazakhmysplc, located in Balkhash,Kazakhstan, was added to theSilver List on 21 July, 2010.

PT Antam’s refinery inJakarta, Indonesia – better knownas Logam Mulia – registered anew gold bar in July 2010 withamended dimensions andmarkings which fully comply withthe LBMA’s Good Deliveryspecifications.

Good Delivery History –

A New Publication

The LBMA has commissionedTimothy Green, the well-knownauthor on gold, to write a historyof the Good Delivery List. Hiswork covers the era from the firstlisting by the Bank of England ofrefiners whose bars wereacceptable to it in 1750 to themodern era in which the List ismaintained by the LBMA. AllMembers, Associates andcompanies on the Good Delivery

List will be sent a complimentarycopy of the publication, which ispriced at £25.

COMMITTEESManagement

In addition to its normal meetingsin July and September, theCommittee held a special strategymeeting in July to look at some ofthe longer term issuesconfronting the Market. TheCommittee has also reviewed theoperation of the Market Makingsystem in London for spot,forwards and options.

Physical

At its meetings in July andSeptember, apart frommonitoring progress with GoodDelivery applications andproactive monitoring, the PhysicalCommittee considered a draftBest Practice document forbullion vaults. It is felt that this isthe most appropriate way ofproviding guidance to the vaultingcommunity, including thosecompanies which may beinterested in setting up newfacilities. The Committee is nowclose to finalising a Memorandumof Understanding on theapplication of VAT in the Precious

Metals Market. This has beenprepared with input from theLPPM so that the document cancover platinum and palladium aswell as gold and silver. The MOUwill be circulated to all Membersonce it has been discussed withand approved by HM Revenue &Customs. The Committeediscussed at its most recentmeeting the implications for theMarket of the ideas put forwardin the Editorial in the JulyAlchemist written by Tim Wilsonof JP Morgan Chase. Hesuggested that the LBMA shouldhave a greater focus on what ishappening in the Asian market.

Public Affairs

The Committee’s work has beencontinuously dominated byintensive discussions on thespeaker programmes for both theupcoming conference which willbe held in Berlin, as well as theBiennial Dinner and theassociated seminar on 25thNovember. The Committee hasalso been investigating possiblerecipients for the LBMA bursary,in addition to its continueddevelopment of the LBMA’s mainPR activities such as the websiteand the Alchemist.

COMMERCIAL ACTIVITIESReference Materials

Gold & Silver ReferenceMaterials have now beendistributed to all the GoodDelivery Refiners who preordered them. It is encouragingto see that sales of the ReferenceMaterials are now mostly tocompanies which are neithermembers nor represented on theGood Delivery List. The LBMA isnow beginning to plan for thenext phase of the ReferenceMaterials project. A frequentsuggestion has been that materialssuitable for x-ray fluorescenceanalysis would be useful. Anycomments on this idea would bemost welcome.

Data Commercialisation

The automated production of theLBMA Market Makers’ GoldForward Curve will be deliveredat the end of September. Therehas also been good progress onthe LBMA/LME legalarrangements. We expect tofinalise these legal arrangementsshortly and look forward tofurther development in the areaof LBMA data commercialisation.

Use of Good Delivery List

Possibly the LBMA’s mostvaluable intellectual property isthat contained in the GoodDelivery List. Until now,Exchanges and Funds which makeuse of the List have been able todo so free of charge. In future,however, such use will be subjectto a licence and an annual charge.The Executive has started tocontact Exchanges which makeuse of the List in this way.

EVENTSVisitors

Recent visitors to the LBMAincluded delegations from twoChinese banks, ICBC and theBank of Communications.

By Stewart Murray, Chief Executive, LBMA

BIENNIAL DINNER - 25 NOVEMBER

The Biennial Dinner this year will be held on the evening of

25th November in Goldsmiths' Hall. Details of the event

will shortly be circulated to all Members and Associates.

Tickets will cost £110 plus VAT per person. The LBMA has

as usual invited a number of guests from the precious

metals industry and the official sector.

On the afternoon of the same day, the LBMA is holding

a seminar in Goldsmiths' Hall which will address a number

of topical issues, including regulation, developments in the

London Market and issues facing central bankers.


page 18

REACHThe LBMA’s work on REACH isalmost complete, at least for themoment. Pre-registered companieswill shortly be contacted by theBrussels-based Precious MetalsConsortium about how they can gainaccess to the necessary RegistrationDossier to complete theirregistration (and importantly thecost of obtaining it).

STAFFWe are delighted to welcome twonew members of staff who joined usin the past month. Stuart Playford isour new Operations Director. Hewill take day-to-day responsibilityfor general administration of theAssociation, including specificresponsibilities in Finance, HumanResources, IT Systems and OfficeManagement. Prior to joining theLBMA, Stuart was the OperationsManager at Triland Metals Ltd inLondon. He has thirteen years ofexperience in similar Operationsroles, with a particular focus onFinance. He is also a fully qualifiedMember of the Chartered Instituteof Management Accountants.The other new member of theExecutive team is Alice Toulmin whotakes up the role of looking after theAlchemist and website, among otherthings. Alice is no stranger to theLBMA, having previously workedhere in a similar capacity on atemporary basis. n

OCTOBER7World Gold Investment Congress 2010

London

T: +44 (0)20 7092 1322

F: +44 (0)20 7242 1508

[email protected]

www.terrapinn.com

15-172010 China International Silver

Conference

Beijing

T: +86-10-58276078

T: +86-10-62561821

www.jewellery.org.cn

www.antaike.com

NOVEMBER23-25Mongolia Investment Summit 2010

London

T: +44 (0)20 7827 5997

F: +44 (0)20 7242 1508

[email protected]

www.terrapinn.com

25LBMA Biennial Dinner

London

T: +44 (0)20 1196 3067

F: +44 (0)20 1196 2112

[email protected]

www.lbma.org.uk

DECEMBER2-3China Gold and Precious Metals

Summit

Shanghai

www.chinagoldsummit.com

[email protected]

FEBRUARY24LBMA Annual Party

London

T: +44 (0)20 1196 3067

F: +44 (0)20 1196 2112

[email protected]

www.lbma.org.uk

DIARY OF EVENTS

LIQUID GOLD AND SILVER FUTURES ON NYSE LIFFE U.S.NYSE LIFFE U.S. HAS THE VOLUME AND LIQUIDITY THAT TRADERS ARE LOOKING FOR IN PRECIOUS METALS FUTURES. OUR FULLY ELECTRONIC, TRANSPARENT MARKET OFFERS LIQUIDITY IN 100 OZ. AND MINI GOLD FUTURES AS WELL AS IN 5,000 OZ. AND MINI SILVER FUTURES. TRADE PRECIOUS METALS ON NYSE LIFFE U.S., A MARKETPLACE BACKED BY PHYSICAL GOLD AND SILVER AND THE EXPERIENCE OF NYSE EURONEXT. EXPLORE THE UNIQUE OPPORTUNITIES AT NYSE.COM/METALS OR CALL 212-656-4300 FOR MORE INFORMATION.

WHERE THERE’S LIQUIDITY, THERE’S OPPORTUNITY.

Client Name: NYSE Job Number: 0000034757_M02

Caption: Metals

B: 8.75” x 12”

T: 7.875” x 10.875”

This advertisement prepared by:350 Hudson Street

New York, New York 10014AD:B.Simon AE: M.Rosenwasser

Traf: A.Owens Prod: I.Waugh

BILL LABOR TO JOB NUMBER: 0000034757

©2010 NYSE Euronext. All rights reserved. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of NYSE Euronext. NYSE Euronext and its af� liates do not recommend or make any representation as to possible bene� ts from any securities or investments, or third-party products or services. Investors should undertake their own due diligence regarding securities and investment practices. This material may contain forward-looking statements regarding NYSE Euronext and its af� liates that are based on the current beliefs and expectations of management, are subject to signi� cant risks and uncertainties, and which may differ from actual results.

THE U.S. FUTURES EXCHANGEOF NYSE EURONEXT

Chief Executive Presentations

The Chief Executive was the guest of honour at the 7th International Gold Convention held inGoa from 27-29 August, where he delivered a paper on “London and India – Two GreatInterlocking Markets”. A copy of his presentation can be found on the website.

The Chief Executive also gave a presentation to a group of Asian Market Makers at a meetingheld in Beijing on 18th September.

LIQUID GOLD AND SILVER FUTURES ON NYSE LIFFE U.S.NYSE LIFFE U.S. HAS THE VOLUME AND LIQUIDITY THAT TRADERS ARE LOOKING FOR IN PRECIOUS METALS FUTURES. OUR FULLY ELECTRONIC, TRANSPARENT MARKET OFFERS LIQUIDITY IN 100 OZ. AND MINI GOLD FUTURES AS WELL AS IN 5,000 OZ. AND MINI SILVER FUTURES. TRADE PRECIOUS METALS ON NYSE LIFFE U.S., A MARKETPLACE BACKED BY PHYSICAL GOLD AND SILVER AND THE EXPERIENCE OF NYSE EURONEXT. EXPLORE THE UNIQUE OPPORTUNITIES AT NYSE.COM/METALS OR CALL 212-656-4300 FOR MORE INFORMATION.

WHERE THERE’S LIQUIDITY, THERE’S OPPORTUNITY.

Client Name: NYSE Job Number: 0000034757_M02

Caption: Metals

B: 8.75” x 12”

T: 7.875” x 10.875”

This advertisement prepared by:350 Hudson Street

New York, New York 10014AD:B.Simon AE: M.Rosenwasser

Traf: A.Owens Prod: I.Waugh

BILL LABOR TO JOB NUMBER: 0000034757

©2010 NYSE Euronext. All rights reserved. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of NYSE Euronext. NYSE Euronext and its af� liates do not recommend or make any representation as to possible bene� ts from any securities or investments, or third-party products or services. Investors should undertake their own due diligence regarding securities and investment practices. This material may contain forward-looking statements regarding NYSE Euronext and its af� liates that are based on the current beliefs and expectations of management, are subject to signi� cant risks and uncertainties, and which may differ from actual results.

THE U.S. FUTURES EXCHANGEOF NYSE EURONEXT


page 20

Collett RobertsBookkeeper/AdministratorOn-site Manager

Collett is responsible for providing support tothe Chief Executive in the management of theLBMA’s financial resources. Collett is theReference Materials manager as well as theevents day manager.

Stewart MurrayChief ExecutiveConference Host

After qualifying with a first class honours degree in metallurgy from London University, Stewartstudied for a PhD on titanium at Imperial College, London. In the decade up to 1984, he workedfor the International Wrought Copper Council, serving as its Secretary General from 1980 to1984. He then joined Consolidated Gold Fields where he was responsible for the group's basemetals commodities research. In 1989, he set up Gold Fields Mineral Services (GFMS) of which hewas Chief Executive for the next nine years. His own area of research at GFMS focused on theMiddle East and the Indian Sub-continent.

His earlier interest in base metals was reflected in his involvement over a twenty-year periodwith the World Bureau of Metal Statistics, of which he was chairman from 1989 to 1991.In October, 1999, he was appointed Chief Executive of the LBMA.

Stuart PlayfordOperations DirectorExhibitor Manager

Stuart will take day-to-day responsibility forgeneral administration of the Association,including specific responsibilities in Finance,Human Resources, IT Systems and OfficeManagement. Prior to joining the LBMA, hewas Operations Manager at Triland Metals Ltdin London. He has thirteen years’ experiencein similar Operations roles, with a particularfocus on Finance. Stuart is also a fully qualifiedMember of the Chartered Institute ofManagement Accountants.

Meet the LBMA Executive

LBMA Conference Team

The LBMA Executive comes to Berlin

in full force to run the LBMA’s annual

Precious Metals Conference. The

LBMA Conference is the premier event

in the industry calendar. 2010 has

been a record year with the highest

attendance of 450 delegates forcing

registration to close on 23rd August.

In 2011, we are looking forward to a

larger venue in Montreal, Canada

(18-20 September).

Stewart Murray, LBMA Chief

Executive, founder of the LBMA

Conference and host, welcomes the

market back to his 11th Annual LBMA

Precious Metals Conference. Ruth

Crowell, Commercial Director for the

LBMA, is the LBMA’s Conference

Organiser. Stuart Playford,

Operations Director who has recently

joined the LBMA Executive, will make

his debut at the Conference. Collett

Roberts is the LBMA’s On-Site

Conference Manager; and Varsha is

Head of Registration. Alice Toulmin

has recently returned to the LBMA

and during the conference will act as

the main contact for speakers and

press.

Welcome to the Conference, and

please come to meet the team!


page 21

Alice ToulminPR and Media AssistantPress and Speaker Contact

Alice’s focus is on the Alchemist and LBMAwebsite. She also works on other publicationsand PAC-related activities.

Ruth CrowellCommercial DirectorConference Organiser

Prior to joining the LBMA, Ruth worked in bank finance and US corporate law at the law firms ofWhite & Case and Norton Rose, as well as acted as a monitor at the UN Commission on HumanRights in Geneva. She has an MSc in History of International Relations from the London School ofEconomics and a degree in English Literature from Kenyon College in Ohio.

Ruth is responsible for the strategic commercial development of the Association, includingIntellectual Property, Communications, and Events. Ruth is also responsible for overseeing thedevelopment of the LBMA Conference, the LBMA's quarterly publication the Alchemist and theLBMA website.

Meet the LBMA Executive

Varsha PeirisAdministrator/PA to Chief ExecutiveHead of Registration

Varsha is responsible for providing support tothe Chief Executive and Commercial Directorin the administration of the Executive Office,including office management, membershipapplications, the LBMA annual conference, theLBMA website and publications.


page 22

facingfactsWilliam Tankard

Senior Mining Analyst

GFMS Ltd

The Rise and Fall of the

Gold Producer Hedge

Book

It was just a few years ago that thehedging activity of certain goldproducers was the main topic ofconversation in the gold market.At their worst, the hedgers wereblamed for depressing the goldprice and, at their best, they werepraised for ensuring the survival oftheir companies in a period of lowgold prices.

With a sustained gold bull runto over US$1,200/oz, hedgingbecame a factor on the demandside of the market and, mostrecently, has hardly been a factorat all.

In this article, we trace thehistory of hedging in the moderngold market.

GFMS calculates that at end-June 2010, the global goldproducer hedge book amounted tojust 224 tonnes, less than 7% ofthe hedge book volume at its peakin mid-1999 of 3,300 tonnes. Thescope for de-hedging to materiallysupport the gold price, as has beenthe case in a number of ralliesduring the current bull run, isnow very limited, making it anappropriate time to briefly reviewthe rise and fall of the practice ofgold producer hedging, which hasat times over the past 20 yearsbeen a significant driver of theprice.

The emergence of producerhedging being undertaken against

Regulation has recently been a topic ofinterest for all financial markets, notexcluding the bullion market. On 2ndSeptember, the European Union votedin favour of the establishment of threepan-European financial regulators. Thisfollowed the precedent set by the USFinancial Reform Act which PresidentObama signed into law on 21 July thisyear. While significant legislation hasbeen passed in both the US and the EU,it remains to be seen what the impacton the bullion market will be, if any. Regulationmay be a hot topic at the moment, but it is certainlynot a new one.

Impact on the Precious Metals MarketsAt the time of writing, it is still unclear how exactlyDodd-Frank will be enforced in the US and beyond.Although the law has been passed, the rules whichwill enforce it still need to be written by the SECand the CFTC. In particular, regulators have untilJuly 2011 to provide details and definitions for keyterms. The definitions of these terms are especiallyimportant in regards to OTC derivatives. Many ofthe key terms in the derivatives legislation are eitherundefined or have been left for the regulators to fillin. How regulators define those terms will directlyshape the impact of the new legislation on the

bullion market. However, a likelyimpact of financial reform legislationon the bullion market will be furtheruse of a Central Counter Party (CCP)to clear forward contracts.

Clearing via CCPNew rules set by the CFTC and theSEC are expected to address theclearing of OTC derivatives via a CCP.On 26th March, 2009, Tim Geithner,United States Secretary of the

Treasury, proposed to force all vanilla OTCderivatives to use a CCP. It is still unclear whetherthe CFTC will make clearing via a CCP mandatoryfor all OTC derivatives. Although it may not bemandatory, the alternative to CCP may be toremain bilaterally settled. However the regulator islikely to charge a higher counterparty credit riskfee, which may make this prohibitive. The pensionfund industry in particular looks poised to beaffected by these new rules. If derivatives and othermarkets are forced to be cleared via a CCP, it iscurrently expected that it will be the buyside thatwill bear any additional costs.

Market ResponseFollowing my article in the Alchemist in April 2009,Cleared Forwards have gained momentum. On21st September, 2009, the CME Group launched itscleared forward product. Now LCH.Clearnet is setto launch its own product in a joint initiative withthe LME on 8th November, 2010. The LBMA hasalso moved ahead in this area with the creation ofthe LBMA Forward Market Makers’ Gold ForwardCurve. This data set has been collated for the pastyear by the LBMA and will be automated by theend of September. LBMA Market Makers have putthe bullion market ahead of the game with thecreation of the LBMA Gold Forward Curve dataset, which is designed to assist all cleared forwardproducts.

While we will have to wait and see whether allOTC derivatives will be forced to use a CCP, theoption to do so is already there. And while there isa lot of fear of the unknown surrounding clearedcontracts, there are also potential benefits. Havingthe option of clearing contracts via a CCP wouldallow better and cheaper credit mitigation. Thiswould also allow more clients, without largebilateral credit facilities with their counterpartybanker or dealer, to access OTC markets. In myopinion, the use of CME Clearport for the energymarkets has already achieved this. n

Regulation and Cleared ForwardsEditorial Comment by David Gornall, Vice Chairman, LBMA

The Dodd-Frank Act and the OTC

Market

The Act aims to: “promote the financial stabilityof the United States by improving accountabilityand transparency in the financial system, to end“too big to fail”, to protect the Americantaxpayer by ending bailouts, to protectconsumers from abusive financial servicespractices, and for other purposes.”

Regulatory agencies and procedure will bestreamlined, redistributing existing powers inaddition to new ones provided by the Act.

The SEC and CTFC have regulatory power overOTC derivatives. Cleared derivatives may berequired to go through central clearing houses,with greater regulator involvement, while un-cleared trades will require a capital offset.

Improving transparency translates to greaterdata collection, to be published for the use ofregulators and customers.


page 23

substantial volumes of goldcommenced in the 1980s.Forward sales were the initialmechanism, but they were soonjoined, and effectively superseded,by the gold loan, generally put inplace against projects as a meansof establishing finance for minedevelopment. The other theme ofthe late 1980s was the limited useof opportunistic forward selling inorder to secure prices perceived ashigh relative to the cost ofproduction. These initiatives werein the main led by Australian andNorth American producers, withthe former, even today, oftenregarded as being a leader wherehedging trends are involved. Atthe other end of the scale, somecompanies sold forward in orderto secure cash flow in times ofdistress; at least one high-costSouth African miner managed tostay in business in the early 1980sas a result of such activity.Towards the end of the decade,hedging intensity waned as thegold price pulled back and thepipeline of projects that requiredfinancing contracted, leaving thetotal hedge book standing ataround 900 tonnes.

As price volatility remainedlow, but with the price itselftrending gradually lower, throughthe early 1990s, the bookregistered a steady butunremarkable build, with theexception of a handful of largeproject financings, many of whichwere tied to capital-intensivedeepening projects in SouthAfrica. From 1996, a renewedslide in price (over a decade toend-1997, gold lost roughly 40%of its value in nominal terms,falling below $300/oz) reinforcedthe utility of hedging:

Firstly, entering into hedgepositions had become anincreasingly necessary means offacilitating debt finance for thosethat required it. This had beenexacerbated by greater investorcaution towards resources stocksin the wake of the Bre-X scandal,making raising capital via theequity markets especiallychallenging.

Secondly, the revenueenhancement that could beachieved versus the spot marketwas plain to see. Those that hadthe foresight, or luck, to embrace

a major hedging strategy early on,such as Newcrest and Normandy(subsequently acquired byNewmont) were the stand-outwinners, with Barrick Gold notfar behind: by 1997, their earlierhedges were enabling thesecompanies to beat the Londonaverage price for gold by $100/ozor more, representing a premiumof 30-40% on their salescompared with unhedgedproducers. As margins wereprogressively squeezed, the starkcontrast between the ‘haves andhave-nots’ served to furtherencourage more producers tohedge as companies vied forsurvival as an increasing numberof producers’ margins turnednegative. In addition toestablishing a floor for a gold price– which, to many, it seemedinevitable would decline further –producers could achieve apremium to spot sales by sellingforward in a market in contango,which for a contract 12 monthsforward was generally around 3.5-4.5% and could be significantlyimproved if compounded overseveral years. In due course, thisled to hedge positionsrepresenting valuable balancesheet assets as the gold price didfall, which of course was partlybeing driven lower by theaccelerated supply of gold by thepractice of hedging itself.These factors were appreciated bycompany management,shareholders as well as the banksthat structured and aggressivelymarketed lucrative products, andwhich led to a hedging explosion.This was the case not only involumes hedged, which GFMSestimates had reached almost3,300 tonnes in mid-1999, butalso in the increasing complexityand potential short gold exposureof exotic products that werestructured for some producers.The first Central Bank GoldAgreement, signed on 26thSeptember, 1999 in an effort tocalm market fears about sporadiclarge-scale official sector sales,limited the participatingsignatories to combined officialsector sales of around 400 tonnesper year. Possibly of moresignificance at the time, it frozethe amount of gold out on loan.This caused a price rebound and a

massive speculatively-driven spikein lease rates, with gold for onemonth briefly reaching 10%. Theconsequent hedging crisis led tomargin calls being made againstseveral producers’ positions and,in some cases, caused insolvencyin late 1999. It certainly caughtout one of the largest hedgers,Ashanti Goldfields, which wasforced to hastily seek arestructuring of its positions withits banking counterparties, leadingto the sale of 50% of one of itsmajor assets, Geita, to AngloGold(and ultimately, the loss of thecorporate identity in 2003, whenit was acquired by AngloGold toform AngloGold Ashanti).

In the wake of these dramaticevents the previous year, 2000represented a period of apparentcalm, or more appropriately,uncertainty, before the situationchanged dramatically. Since thegold price bottomed out, andsubsequently enjoyed an almostcontinuous rally, producers haveaggressively de-hedged in order togain greater exposure to the risingprice. With high production costinflation broadly following thegold price rise, hedged producershave suffered increasinglydiminishing profits due to theprice-capping effect that muchhedging has had on sales revenue.These factors, and occasionally thelack of transparency of hedgingstructures, have led to the nowstaunchly anti-hedging sentimentthat is prevalent among goldequity investors and gold miningcompanies alike. This has led tothe elimination of over 3,000tonnes of hedged gold on a delta-adjusted basis since the peak, asproducers not only delivered intohedges as they matured, but inseveral significant instances,proactively bought back ahead ofschedule, backed by investors,while other significant hedgeswere restructured in the processof industry consolidation orunwound by the administrators offailed enterprises. Latterly, thehistorically low interest rateenvironment has eroded thecontango, reducing any incentiveto hedge.

Although a small handful ofproducers have recently engagedin project hedging and onediversified miner entered into a

multi-year put/call optionstructure to secure the viability ofits gold assets out to 2015,hedging remains firmly out ofvogue with most of the keyproducers. This does lead one tobeg the question of whether wenow find ourselves at the end ofthe hedging era or whether thismarks the bottom of the firstcycle. Since the price will notalways be going up and a decentcontango will likely return fromthe current low levels, don’t writeoff a return to hedging forever! n

Given the freedom of expression offered to contributors

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 Alice Toulmin,

3-14 Basinghall Street

London EC2V 5BQ

Telephone: 020 7796 3067

Fax: 020 7796 2112

Email: [email protected]

www.lbma.org.uk

William Tankard

[email protected]

The

Alc

hem

ist

is d

esig

ned

by Io

n R

iver

Cov

er im

age

from

ww

w.a

irph

oton

a.co

m

Alchemist Issue 60

Documents

Transcript of Alchemist Issue 60