*About the London Bullion Market Association (LBMA) – What is it?
*LBMA Standards have been used globally as the benchmark standard for gold and silver bullion
*Details on members of the LBMA, Bullion Banks, Refineries, Security Logistics
*The role of the LBMA, and the importance of understanding what it does
*LBMA is a standards body that establishes uniformity in purity and form factor to provide a framework for global trade in gold
*Understanding the Good Delivery lists
*How refineries become LBMA accredited refineries
*What are LBMA referee refineries
*Where the members on the Good Delivery lists are located
*Understanding the Chain of Integrity
*How gold enters the system
*Advantages of having the entire history of custody for gold
*Understanding “clearing risk” in gold funds
*Unique positioning of the Physical Gold Fund
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Jon: Hello. I’m Jon Ward on behalf of Physical Gold Fund (PGF). We’re delighted to welcome you to the second podcast in a new series we’re calling The Physical Edge.
In these interviews, I’ll be talking with Alex Stanczyk, Managing Director of Physical Gold Fund. Our focus will be the Fund itself and related questions about the physical gold market. This series is primarily for non-U.S. investors who are considering participation in Physical Gold Fund.
Alex Stanczyk has been involved in Physical Gold Fund since its inception by providing core aspects of the Fund design and structuring as well as coordinating strategic relationships required for launching the Fund.
Prior to this, Alex played a key role as designer and advisor to the world’s first non-bank private-custody precious metals fund, the Luxembourg Precious Metals Fund. For the past eight years, he has served in a range of capacities for the Anglo Far-East group of companies with a focus on the logistics of gold acquisition, transportation, and vaulting.
Throughout this time, Alex Stanczyk has lectured globally to institutional and government audiences on the role of gold in the international monetary system.
Hello, Alex, and welcome.
Alex: Hello, Jon. Thank you. It’s nice to be chatting with you once again.
Jon: Today, we’re going to talk about a central player in the physical gold market, and that’s the London Bullion Market Association (LBMA). Would you tell us first, what is the LBMA?
Alex: LBMA stands for the London Bullion Market Association. This organization was founded back in 1987 by the Bank of England, and its purpose was to maintain the so-called Good Delivery Lists, which we’re going to talk more in detail about shortly.
If you look at the LBMA website, it is described as an international trade organization or a trade association representing the London market for gold and silver bullion. This is interesting, because while London by volume has the largest paper trading gold in the world, the reality is that more physical gold trade is occurring outside of London, and this trend is continuing, moving towards the east.
While the purpose of the LBMA is to be a London-focused organization, in actuality the standards it has created have been exported and used all over the world. There are some people – for example, some non-institutional commentators in the precious metals space – who often refer to the LBMA as some sort of nefarious cabal with ill intentions. I don’t think this is an accurate portrayal of what the LBMA really is. It may just be due to not knowing who’s involved with it or what they really do.
In practice, the LBMA is a working group of institutions that trust each other. Because of this, they form a core network that provides the foundation for global wholesale trade in gold and silver bullion.
Jon: Tell us a little more about this network. Who participates in the LBMA? What organizations make up this important association?
Alex: The LBMA is made up of a number of participants spanning across several industries. First are the bullion banks. These are some of the largest banks of the world and settle over-the-counter trades, or OTC trades as they’re called in the bullion markets. These banks include UBS, Barclays, Scotiabank, JP Morgan, and HSBC. Those five major banks make a market for numerous other smaller entities that trade in the bullion markets.
Most of their trading occurs on an unallocated basis, meaning they do not actually settle in physical metal but rather net out a day’s trades and settle them on their books. On occasion, trades are settled in physical, but due to costs involved in armored transport, auditing, vaulting, and the volumes that are transacted, these banks seem to prefer to settle trades on the ledger versus constantly sending armored trucks back and forth, which does make some sense.
The next major category of participants is the security logistics firms. These are firms such as Brink’s, Loomis (which used to be VIA MAT), Group 4 Securicor (which is out of the UK), and Malca-Amit. These security companies have a global footprint and provide a global network of secure transport and vaulting. This allows for large-scale physical gold and silver transactions. Essentially, they’re the conduits by which physical gold moves around the world.
For example, some of this gold might be coming from mines or some of it might be coming from scrap sales – those dealers who offer to buy old jewelry or scrap jewelry. Other transport might include going from refiners to jewelers or to and from refineries to the vaults and end customers.
The gold is typically transported by aircraft and armored vehicle, and they have the appropriate armed escort to go with that. The vaults being operated by these logistic companies include some of the most secret and secure storage facilities in the entire world.
I have personally been to some of these as part of my due diligence in my capacity with previous organizations I’ve worked with and also with Physical Gold Fund. I can tell you from personal experience that the security is very impressive. Some of these organizations go so far as to work with governments around the world to secure vaults in facilities that were prior military installations, some of which are rated to withstand nuclear attack, etc., so they go to quite the extent.
The third major category is refineries. We refer to these as the core of the industry. The LBMA is controlled primarily by bullion banks, but those banks can’t really do anything without the assistance of the refineries. The refineries refine the metal, cast it into acceptable forms, and are, in my opinion, the most important link in the entire system.
Finally, there are a number of dealers and other associated businesses that play a smaller role but are still important to the overall global ecosystem in the LBMA.
Jon: Looking at this from the point of view of investors in physical gold, why is the London Bullion Market Association important to know about? What purpose does it serve?
Alex: For most gold and silver investors, the LBMA may not ever come up on their radar. In fact, many smaller investors may never have heard of the LBMA, and that’s because the LBMA is not really visible at what we call the retail level. Most small bar and coin investors can access gold and silver through their local coin dealer, or maybe they’re ordering it through some kind of wholesale coin dealer, and they may never deal with a member of the LBMA.
However, once you start dealing in six- and seven-figure and larger sales in gold, then it’s likely you’ll be dealing with an LBMA member. If not directly dealing with an LBMA member, you’re probably dealing with a business that is dealing directly with an LBMA member, even if that’s not apparent to the customer. Because of this, knowing what the LBMA is and does is really important for some investors.
The role the LBMA plays in the global market is that of a standards body. What I mean by that is the LBMA maintains an industry standard for purity of gold and the form factor that’s produced by LBMA member refineries. This is no different than any other industry standards body in the world.
Every industry will have standards bodies that set rules for global businesses to achieve uniformity. An example would be for the shape of your electrical outlet or the USB port on your computer or laptop. The shape of that and the standards by which it operates are set globally so that manufacturers, no matter where they are in the world, can produce technology that meets the same standards for interoperability.
It’s this industry standard that sets the stage for compatibility and trust in the market. If it weren’t for these standards, you might have gold arriving in unrecognized form factors. Anyone might create gold in whatever shape they want and/or the purity may or may not be questionable. This would obviously create delays in trade plus additional complications. The LBMA standards allow a well-orchestrated and fully free-flowing trade on an institutional level in gold.
Jon: The LBMA produces something you mentioned called the Good Delivery Lists. What are those?
Alex: The LBMA’s main purpose is to maintain the Good Delivery Lists. There is one list for gold; there is one list for silver. These records are detailed listings of the names of the refiners that meet stringent assaying and quality standards for what they can produce in terms of gold and silver bars. They’re accredited to refine and produce these bars that meet the LBMA standard.
The good delivery standard has become the de facto global accepted standard for purity and form factor around the world, although this has recently been reshaped a little by China, who is the world’s largest gold customer.
The original specifications for good delivery bars required a minimum gold content of 350 fine troy ounces up to a maximum gold content of 430 fine troy ounces. (By “fine” we mean “pure.”) These are approximately 12.5 kilo bars. Also, there are specifications for the kind of dimensions they have to have. They can only be so long, so tall, they have to have a certain luster, they can’t have sharp edges, and things like that.
As far as the purity is concerned, the old standard is that the minimum acceptable fineness or purity is 995.0 parts per thousand of fine gold. In other words, if you were to divide the content of a gold bar into 1000 parts, 995 parts out of 1000 have to be pure gold to meet that fineness standard.
China, however, prefers a new standard and has created their own. They require 999.9 parts per 1000 pure. This is called “four 9s” in the industry. They also prefer to have bars in one-kilo size. This isn’t news – the gold market has been talking quite a bit about this over the last couple of years – but that is the direction all of this is headed in terms of what standards are acceptable.
In order to become an LBMA-accredited refinery, that refinery has to submit what are called dip samples. These are small specimens of gold that it has refined. These samples have to be submitted to one of the five global referee refineries.
Referee refineries are identified by the LBMA as the refineries that are able to certify other refineries around the world to meet LBMA standards. The current list of refineries includes: (1) Argor-Heraeus, located in Switzerland, (2) Metalor, located in Switzerland, (3) PAMP, located in Switzerland, (4) the Rand Refinery, located in South Africa, and (5) Tanaka Kikinzoku Kogyo, located in Japan.
These referees are among the most technologically advanced and reliable refineries in the world. They test dip samples and certify them for purity in order for every refinery who wants to be on the good delivery list to be accredited and placed there.
The reason why all this exists is that when a gold bar is issued by a refinery on the Good Delivery List, it’s accepted at face value for purity and the weight that’s marked on the bar by the refinery at the time of fabrication. This, along with the strong custody history we have because of the security logistics firms, is what provides the basis of trust on which global trade in gold is built.
Jon: Although the London Bullion Market Association has the name “London” in it, it’s clearly not restricted to that one location. Where are the organizations on the Good Delivery Lists located?
Alex: That’s actually a really good point. Most of the refineries on the Good Delivery Lists are spread throughout the world and not located in London at all. You can find them in Russia, Canada, Australia, the United States, and China. There are good delivery refineries in over 28 countries.
Very few outside of my industry know, however, that the majority of gold refining each year passes through Switzerland. This is because that’s where the largest refineries in the world reside. It’s also no surprise because three of the five LBMA referee refineries are all located in Switzerland.
Switzerland, from my perspective, is the core of global gold refining. The way I think of it is if you liken the world’s physical gold flow to many small tributaries and streams that eventually create a river, Switzerland is the deepest part of the river.
Because of that, we believe that if there are any kinds of major air pockets in the gold market on the physical side, Switzerland refineries will be the least impacted. In other words, if there is some kind of buying panic, Swiss refineries are going to be the least affected. This is also why we have established relationships with the refiners and vaulting partners there in Switzerland.
Jon: Would you explain another LBMA phrase, the “chain of integrity”?
Alex: That really isn’t an LBMA phrase. I started using that phrase many years ago to describe the closed network of refineries and security transport companies that make up a trusted system and provide these large-scale physical bullion services. Since then, it’s been picked up by others in the industry. What it really means is that as long as the gold stays in this closed system of the chain of integrity, it provides us with specific advantages.
Number one, the gold only enters this system by coming in through the refineries. Now, it may come to the refinery in the form of doré from mines, which is basically refined ore, it might come in the form of scrap, or it might come in the form of older gold bars that are being re-melted and re-refined. But because it comes from a good delivery refinery and enters the system, we can be confident of its purity and its origin.
The second part is that as long as it stays in this closed system, it’s transported by accredited security logistics firms. It’s always insured while in transit, and these firms are trusted in the network.
Finally, for us, it is stored in private, non-bank vaults operated by these accredited security logistics firms.
So we have the complete history of the gold’s refining, fabrication, transport, and vaulting. Because of this, we’re able to easily sell this gold to another LBMA-trusted party. In PGF’s case, we’re selling directly to the refinery, and this provides a really deep well of global liquidity for us.
Jon: Alex, there’s one last phrase I’d like to ask you about, and that is “clearing risk.” What does “clearing risk” mean in the context of physical gold transactions?
Alex: Clearing risk is a phrase I use to indicate the risk of a fund or the risk an investor has if they’re required to clear physical gold trades through a bank. This is what happens if markets hit an air pocket and counterparties are unable to trade.
For example, there were hedge funds that cleared trades through various prime brokers back in the 2008 global financial crisis. If their primary dealer/primary broker became insolvent or were frozen, these hedge funds were completely frozen out of the market at that time. In my view, that is the Achilles’ heel of gold funds in the industry today. It’s because they buy and sell their gold through banks.
There are many who feel that bullion banks will never have a failure or insolvency or anything like that, but to me that’s just wishful thinking. It’s the same “unicorns and rainbows” mentality that has the entire world’s financial system in complete chaos right now with everyone literally depending on the omnipotence of central bankers to save us all. It’s not realistic, and it’s not practical.
The facts speak for themselves. These banks are now more consolidated, more leveraged, and have larger derivative books than they did before the 2008 global financial crisis. This reminds me of underbrush that’s been built up and concentrated in a forest just waiting for a stray campfire spark or lightning to strike a fire and set it ablaze.
If a gold fund or an investor is relying on clearing trades through a bank, that is not a position I would like to be in when the next liquidity crisis hits.
Jon: We’ve looked at the LBMA, the Good Delivery Lists, the chain of integrity, and, lastly, clearing risk. They’re all obviously important factors in the market for physical gold. What I’d like you to do now is give us a snapshot of where your organization, Physical Gold Fund, is positioned in relation to this market system.
Alex: In order to structure our fund, we’ve leveraged some exclusive and longstanding strategic relationships with members of the LBMA framework. The relationships we’ve developed in the industry have become the basis for what we call our chain of integrity.
That essentially means the ability to purchase gold reliably at the core of the industry, the deepest part of the river. We know that it’s pure, we know that when it’s being transported, it’s safe, it’s insured, and we know that it’s being vaulted outside of the banking system.
This has been important in the way we’ve structured products for many years now. I recall back five or six years ago talking to some investors who did not really understand that part. They looked at vaulting outside the banking system and were like, “Well, I don’t really understand why this is important.” Today, it’s obvious why this is important, and this has actually become the de facto standard for how private allocated services are now vaulting gold.
PGF clearing is done directly through the refinery. In other words, we’re buying and selling directly through the refinery instead of going through banks. This is reducing our clearing risk in light of what I talked about before, and this gives us access to liquidity both on the buying and the selling side.
There are some people, including experts, in the industry who believe that if there is any sort of buying panic, physical gold will become very hard to obtain. I think this may be true. We obviously have yet to find out if that’s going to occur or not, but because of our relationships with our refineries, we feel more confident in being able to access liquidity.
Next, Physical Gold Fund has options for physical delivery and options for subscription in kind. On the physical delivery side of things, this means if someone wants to redeem their shares with the fund, they can request to have either cash or, if they prefer, we will deliver their gold anywhere in the world. There’s a cost to it that the redeeming party will pay, but that option is available.
Also, we have an option for subscription in kind. This allows an investor to place physical gold they already own into the fund and, in exchange, that gold is now part of a regulated vehicle. This is really important in the future.
In our view, this is going to become more and more important because we believe this is the direction gold ownership is going. There are governments around the world that are becoming increasingly more aggressive in the way they regulate individual private assets, etc. We think this is something that’s going to be strongly looked at by government regulators moving forward.
Another unique point is that we have contingencies in place to cover things like riots, wars, and governments trying to interfere with the Fund’s access to gold. Ultimately, we believe that this is the most thoughtfully constructed and robust gold fund in the world today, and we fully expect it to become one of the largest globally in the years ahead.
Jon: Thank you, Alex Stanczyk, Managing Director of Physical Gold Fund. And thank you to our listeners. We look forward to joining you again soon.
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