by Ronan Manly, BullionStar:
There has been an unprecedented departure of all the Chinese banks from the LBMA Gold Price auctions.
These departures have gone uncommented by the LBMA, the FCA, the mainstream media, the auction administrator ICE Benchmark Administration, and by the Chinese banks themselves.
The exit of the Chinese banks raises questions as to what this has done to the auction liquidity and price discovery as the auctions are not reflecting supply and demand of gold from China – the world’s largest gold miner, gold importer and gold consumer.
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Fox Guarding the Henhouse
When the twice daily LBMA Gold Price auction was launched on 20 March 2015 to replace the infamous and manipulated London Gold Fixing, one of the mantras from the ‘Fox Guarding the Henhouse’ London Bullion Market Association (LBMA) at that time was that the new improved auction would include an expanded list of participants beyond the old ‘Gang of 5’ cartel of Fixers which had been Barclays, HSBC, Société Générale Scotia and Deutsche Bank.
The strategy was to ditch the tainted London Gold Fixing auction and let the banks operating The London Gold Market Fixing Limited to step back into the shadows, while wheeling out an all new singing and dancing LBMA Gold Price auction.
This news auction would be independently administered on an electronic auction platform, but with LBMA “owning the intellectual property rights.”
The administrator chosen to run the LBMA Gold Price auction was ICE Benchmark Administration (IBA). The LBMA incorporated a company called ‘Precious Metals Prices Limited’ on 1 December 2014 to manage the intellectual property rights of the LBMA Gold Price, as well as the intellectual property rights of the LBMA Silver Price, LBMA Platinum Price, and LBMA Palladium Price.
This “Precious Metals Prices Limited” company was established by LBMA CEO Ruth Crowell and LBMA legal counsel Sakhila Mirza, both of whom are still company directors of this company.
The rebranded LBMA Gold Price auction also had one important regulatory change, namely that the LBMA Gold Price became a regulated benchmark under the supervision of the UK’s Financial Conduct Authority (FCA).
Chinese Banks Welcomed: 2015 – 2016
In the run-up to the re-launch of the “same old wine in a new bottle” in February 2015, Finbarr Hutcheson, the then president of ICE Benchmark Administration (IBA) – which was awarded the contract to administer the new look auction – said that “expanding the number of participants in the auction will increase the transparency and robustness of the data used to calculate the benchmark, giving a better representation of the market price.”
In the same press release, the then and now LBMA CEO Ruth Crowell added that:
“I’m delighted to see a high level of interested participants for the March launch. The intention and the interest has been very positive and creates a more diverse pool of participants which includes Chinese banks. We look forward to having enhanced numbers of participants for day one for the LBMA Gold Price.”
When it came to the crunch, only cartel insiders such as Goldman Sachs and JPMorgan became additional direct participants in the auction from ‘day one’, as no Chinese banks were allowed to join the LBMA Gold Price auctions from ‘day one’ even though Bank of China, the Industrial and Commercial Bank of China (ICBC), and China Construction Bank (CCB) were fully eligible. See BullionStar article from 13 March 2015 “Chinese Banks as direct participants in the new LBMA Gold and Silver Price auctions? Not so fast!”.
However, these three massive Chinese banks did join the daily ‘unallocated gold’ LBMA Gold Price auctions in piecemeal fashion over the next 15 months during 2015 and 2016.
First was the LBMA member Bank of China in mid June 2015. This was such a momentous event that it garnered significant financial media coverage across the world from China to London to New York and everywhere in between.
On 16 June 2015, the Financial Times lauded the development as follows:
“A Chinese bank will join the group of western banks that help set the price of gold in London, giving the world’s biggest consumer of the precious metal a greater say in the process.
State-owned Bank of China’s participation in the twice daily auction, which gold miners and consumers use as a benchmark, will allow the international price to better reflect supply and demand in China, the bank said.
“Although being the world’s largest gold producer and consumer, China has never played a major role in the global gold fixing,” Yu Sun, general manager of Bank of China’s London branch said.
Adding a Chinese bank reflects the shift in gold demand to Asia…Bank of China’s direct participation will also help the Chinese gold market become more international, Mr Yu said.
Then on 30 October 2015, the second Chinese megabank and LBMA member, China Construction Bank (CCB), joined the LBMA Gold Price auction, an event even covered by the Wall Street Journal, which said:
“China Construction Bank Corp. will become the second Chinese bank to join the group of lenders setting the benchmark used to price billions of dollars’ worth of daily gold trades.”
Commenting on the addition of CCB, the then president ICE Benchmark Administration (IBA), Finbarr Hutcheson, said:
