Guest Post: Bullion Bank Trading – A Closely Guarded Secret

Submitted by Adrian Douglas of Market Force Analysis

Bullion Bank Trading – A Closely Guarded Secret!

I have written extensively in the past about how the bullion banking members of the London Bullion Market Association (LBMA) trade unbelievable amounts of unallocated gold and silver on a daily basis. See for example “LBMA OTC Market – Alchemists Turn Paper into Gold”. I also managed to introduce spoken testimony on the subject at the CFTC March 25th, 2010 hearing on the Metals Markets “LBMA OTC gold market cited as a Ponzi Scheme in CFTC hearing.”

The latest LBMA clearing statistics (Feb 2011) reveal that the LBMA bullion bank members traded a total average net daily gold volume of 18.1 million ounces with a value of $24.8 billion. Some analysts have in the past estimated that the gross volume is likely to be 3-4 times the net volume giving potentially over 70 million ounces of gross gold trading worth 100 billion dollars. This would be equivalent to trading all the gold that is mined in world each year each and every day! Clearly the majority of this trading is unbacked by physical gold. The bullion banks only make a ledger entry for gold sold or bought and as long as the client never asks for delivery the bank never has to have the gold. I have through my studies indicated that probably 45 ounces of gold have been sold for each one that exists.

The bullion banking business is very opaque but it struck me that if the members of the LBMA are collectively trading a net value of $6.2 trillion annually this should be laid out and explained in the bullion banks annual reports. There are over 60 bullion banks who are members of the LBMA. Based on an 80/20 rule we can estimate that 20% of the banks conduct 80% of the business; that is to say that about 12 banks should collectively trade an annual amount of $5 trillion or $400 billion annually each. If gross volumes were to be reported (which they should be by accounting practices) then each bank would be reporting revenue based on $1.2 trillion of gross annual trading.

I turned to analyzing the bullion banks annual reports. I limited the review to the four of the five hundred pound gorillas on the block namely JPMorgan Chase, HSBC, Deutsch Bank, and Scotia Mocatta. The latter three banks are all the only members of the London Silver Fix and three of the five members of the London Gold Fix.

In analyzing the Annual reports of the major bullion banks I made some astonishing discoveries. For most of these banks their bullion banking business is entirely hidden from the accounting. In the text there is almost no mention of gold, silver, bullion, or precious metals. In fact it is impossible to know that these banks are even in the bullion banking business let alone know anything about their trades, assets and liabilities. The only exception is Scotia Mocatta (see below). The bullion banking business is completely obscured from view in the annual reports. We know from our discussion that there should be revenues of $1.2 trillion annually be reported which would make the activity the largest activity in any of the banks, yet instead it is entirely missing! How could such trading and references to it be almost entirely absent from these reports?

I analyzed JPM 2008 annual report. It is 240 pages long.

I searched it for the word “silver”. There are only two mentions of the word “silver”

There is no silver bullet: We believe that all of these actions, if implemented properly and executed – in a timely way and in conjunction with the U.S. fiscal stimulus program – could have an enormous positive impact.

Clearly nothing to do with bullion and

Scott A. Silverstein President and COO The Topps Company, Inc.

You would not believe that this is a bullion bank when there is no reference to silver bullion! There is also no reference whatsoever to its custodial activities of the i-shares ETF SLV!

For the word “gold” most of the references are for “Goldman Sachs” the only reference to the commodity is

The Firm uses forward contracts to manage the overall price risk associated with the gold inventory in its commodities portfolio. As a result of gold price fluctuations, the fair value of the gold inventory changes. Gains or losses on the derivative instruments that are linked to gold inventory are expected to substantially offset this unrealized appreciation or depreciation. Forward contracts used for the Firm’s gold inventory risk management activities are arrangements to deliver gold in the future.

So they talk very briefly about “gold inventory” and hedging it but they don’t mention any silver inventory at all. This is very suspicious because we know from the Treasury department OCC derivatives report that they had over $9 billion in silver derivatives in that year. Why aren’t these mentioned? Does this mean they have a very small silver inventory if only a gold inventory is mentioned? If they don’t have any silver worth mentioning then what are they hedging with $9 billion of silver derivatives? How can they be a member of the LBMA and peddling unallocated accounts a member of the London Fix and not mention any silver bullion? Also the gold that is mentioned is part of a “commodity portfolio” and not anything to do with bullion banking. Is their entire bullion banking business “off balance sheet”? If so, why? The term “Precious Metals” appears nowhere in the report. The word “bullion” does not appear anywhere in the report. Very strange for a “Bullion Bank”! This is highly irregular for the Annual Report of the biggest bullion bank!


The word “silver only appears twice

Awarded the Silver Bauhinia Star by the Hong Kong Government in 2008

which is unrelated to silver as a metal.

The term “precious metals” only occurs twice. One occurrence is in a list of the broad products offered by the bank and the other in the following

Revenues from emerging markets trading and precious metals trading also rose as a result of ongoing market volatility and increased transaction volumes as prices of gold and platinum rose during 2008.

The word “gold” occurs in references to “Goldman Sachs” but only once referring to the metal which is the same quote as above.

The word “bullion” occurs only once where it is under the assets of the bank as

Bullion .............................................................................................................................................. 6,095M$ (2008)  9,244 M$ (2007)

The liabilities of the bank are not broken down into the same level of detail, so it is impossible to know what the net liabilities for bullion are. It is interesting to note that if they are trading approximately $400 billion of net trades annually with 6 $billion of assets then the ratio of net traded gold to actually in vault gold is 50:1.

Reading the HSBC report it would not be possible to determine that they are a major bullion market player. The keywords of gold, silver, bullion and precious metals are hardly mentioned in 472 pages! You would also not know that they are members of both the London Gold Fix and the London Silver Fix. There is also no way to know they are custodians of the i-shares GLD ETF, the biggest gold ETF in the world!


The 2008 DB report is no longer on line so I analyzed 2009.

The report is 436 pages. The word “Bullion” does not occur anywhere, again very strange for a bullion bank and a member of the “London Fixes”. The word “silver” does not occur anywhere. The word “gold” occurs twice in references to “Goldman Sachs” yet it does not occur in reference to the metal. “Precious metal” occurs in a glossary description of “futures” and under OTC derivative contracts held. It shows 101.376 Billion euros of precious metal derivatives which would be equivalent in value to twice the annual global production of gold!

Nowhere in the report could one discern that Deutsche Bank is a bullion banker. Nowhere does it mention any business related to the buying and selling of actual physical metal yet it reports holding a massive precious metals derivatives position.


In the Scotia Bank 2008 Annual report there is an asset table which is shown in Figure 1 and a Liabilities shown in Figure2. In 2008 the report shows Scotia Mocatta had liabilities for gold and silver certificates of $5.619 billion and Precious Metal assets of $2.436 other words Scotia Mocatta was naked short $3.18 billion of precious metals by their own accounting! The price of precious metals would be very different if this $3.2 billion of customer money paid to them for buying precious metals had actually gone to making real purchases of physical metal. Note they were $1.94 billion net short precious metals in 2007 also. Imagine what the losses could have been if the precious metals had not been suppressed and hammered down by JPMorgan and HSBC in 2008 as alleged by at least twenty five class action lawsuits and supported by statements by Bart Chilton, a CFTC Commisioner.




By the end of 2009 Scotia Mocatta was net long $1.7 billion in precious metals. Now that is interesting. How convenient that prices had been heavily suppressed in 2008 when they were net short and they managed to cover their short position and accumulate a net long position. Note, however, that the “assets” do not use the same language as in the liabilities. The liabilities line item is “gold and silver certificates and bullion” while the asset line item is “precious metals”. We don’t know what those assets are because it does not specify “bullion” as is the case for the liabilities. These could be forward contracts or call options or OTC derivatives or some other paper promise for future delivery which is being booked as a precious metal asset. So although they could be net long based on valuation of paper assets there is still the possibility Scotia Bank is net short in terms of bullion. But they were definitely net short of bullion in 2007 and 2008.

There have been many people who have challenged or dismissed out of hand the existence of an organized scheme to suppress precious metals as long and expounded and documented for over a decade by the Gold Anti-Trust Action Committee (GATA). There is without a question of doubt something highly irregular and criminal occurring when a multi-trillion dollar business is not reported in Annual reports of the major bullion banks conducting the business. Further more there is not even any disclosure that these banks are even in the bullion trading banking business, let alone the principle operators of it by being members of the London Fix and being custodians of the world’s largest bullion funds!

If investors think they own large amounts of bullion in “unallocated” accounts they should take a very close look at what has been presented here and try to work out where exactly the underlying assets that back their investment might be hidden. The inescapable conclusion is that the unallocated accounts are unbacked or backed with no more than 2% of the bullion required. The gigantic revenues that the precious metals market generates for the banks seems to be been omitted from the Annual reports entirely.

Anyone with an unallocated bullion position would be well advised to take delivery, or you can hope that there is a very reasonable explanation for all of this.

Adrian Douglas
Editor of Market Force Analysis
Board Member of GATA