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The London Bullion Market Association ISSUE 53 February 2009

In this issue

After the GoldrushWhat Drives Investor Demand Today?

By Suki Cooper

page 3

Gold Lease RatesA Rapidly Changing Market

by Raymond Key

page 6

Survey ResultsYour Responses to the Alchemist

and Membership Surveys

by Ruth Crowell

page 8

Third LBMA Assaying andRefining Seminar Programme

page 10

The Bullion Market,Then and Now

by Nicholas Frappell

page 12

Gold Jewellery Consumptionby GFMS

page 14

LBMA Newsby Stewart Murray

page 16

Editorialby Martyn Whitehead

page 18

LBMA Charitable Givingby Ruth Crowell

page 19

The lightnings flash from pole to pole;Near and more near the thunders roleFrom Tam O'Shanter, Robert Burns

Amidst rough seas and stormy skies the precious metals market holds to her course.

LBMA Vice Chairman Martyn Whitehead reflects on stability in the Editorial Comment.


2/20

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

page 3

After the GoldrushWhat Drives Investor Demand Today?

By Suki Cooper, Commodities Research Analyst, Barclays Capital

Golds quickstep with $1000 in

2008 was not a chance meeting.

The first steps in this dance were

taken several years ago, with the

introduction of new avenues to

gain exposure like ETFs, bringing

the metal back into vogue with

investors. Last year, gold not only

breached the all-time nominal

high set in January 1980, but also

set a record annual average high.

Investment demand is still taking

the lead in 2009. This article

examines some of the tunes to

which gold investment dances, and

which is most likely to put on the

moves in 2009.

During March 2008, not only were exogenousfactors neatly aligned, but the metals ownfundamentals had become favourable. Minesupply has disappointed for a number of years,despite prices reaching record highs. TheEuropean central banks Gold Agreement hasbeen a successful tool for the European banks

to dispose of gold holdings without causingmarket instability yet providing marketconfidence. Indeed, subdued sales in recentmonths added to the bullish sentiment.Despite the higher prices, growth in recyclinghas not been sufficient to offset the declineelsewhere. Gold scrap accounts for about30% of total supply,leaving most of the supplyinelastic. Jewellery consumption still makesup the bulk of the end use of gold and tends toprovide a floor to prices: when pricesencounter a downward trajectory, physicalbuying returns to the market.

One of the key dynamics that has been

crucial in the change of fortune for gold hasbeen the swing in producer strategy fromhedging to de-hedging. The additional

demand created through restructuring andposition buybacks has been significant. Theglobal hedge-book peaked at over 3000 tonnesat the start of the decade; the latest data fromthe Fortis/VM Group report estimates theglobal hedge book fell to 512 tonnes as at Q308 less than a fifth of that peak.

Investment demand has been the one flowthat has shown tremendous growth, partly dueto the new channels of investment that make

holding gold easier and partly due to theexternal environment that has providedinvestors with a plethora of motives to holdgold. Investors in search of a safe haven haverapidly increased their exposure towards gold.Fears of a recession, uncertainties regardingthe credit markets, Fed rate cuts, a fallingdollar, as well as inflationary concerns aresome of the factors that helped gold toconquer $1000/oz and cause shortages ofphysical gold worldwide.

Looking at four factors dollar hedge,inflation hedge, recession hedge and equitymarket hedge from a simple return

point of view shows that some of themare purely theoretical, not all areequally important, and indeed thosethat drive prices sometimes switchplaces in the driving seat.

Dollar HedgeMost commodities are priced in USdollars, so it is not surprising that anegative relationship exists betweencommodity prices and the value of thedollar. Golds legacy as a monetaryasset, with key consumption being

outside of the US, helps it to rank topin terms of the strength of itsrelationship with the dollar over thepast ten years.

To the casual observer, aweakening dollar would certainlyappear to be broadly supportive ofan uptrend in gold prices, but theconverse does not necessarily holdtrue. Taking selected isolatedperiods of significant change in theEUR/USD shows during periods ofdollar weakness (Figure 1), goldprices do tend to benefit. For

example, between February 2006and April 2008, the EURstrengthened by 32% against the

USD and gold prices rose 64%. Gold pricesrose more than the dollar weakened. As thetable shows, this is not always the case: goldprices do not always appreciate by a setmagnitude of dollar decline. Conversely,between October 1998 and October 2000, theEUR fell 29% against the USD, while goldprices fell 9%. Notably between August 1992and February 1994 where the EUR weakenedagainst the USD by 20%, gold prices still rose

some 11%. Although a weakening dollar issupportive of higher gold prices, it is notessential; furthermore, a strong dollar doesnot necessarily prevent gold prices fromappreciating. It is a strong relationship that isoften traded but not one that willunquestionably cause an equal and oppositereaction. The correlation between the USDand gold prices is currently firmly in positiveterritory, but history shows this relationshiptends to weaken during periods of dollarstrength, and the relationship becomesstronger during periods of dollar weakness.

Period

% change in

EUR/USD

% change in

spot gold price

Jul 1980 - Aug 1981 -30% -36%

Mar 1985 - May 1987 72% 51%

Aug 1992 - Feb 1994 -20% 11%

Nov 1996 - Aug 1997 -16% -14%

Oct 1998 - Oct 2000 -29% -9%

Feb 2002 - Dec 2004 50% 54%

Feb 2006 - Apr 2008 32% 64%

Selected isolated periods of significant movement

Figure 1

Source: EcoWin, Barclays Capital

0 0.1 0.2 0.3 0.4 0.

Natural Gas

Wheat

Corn

Coffee

Oil

Nickel

Lead

Copper

Zinc

Aluminium

Platinum

Palladium

Silver

Gold

10-Year CommodityCorrelations with EUR/USD


Figure 2


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

page 4

Back in March 2008, when gold pricesbreached the $1000 level, the USD had hitrecord lows against most major currencies. Inturn, our expectation for the USD to weakenagainst the EUR on a 12-month basis bodeswell for gold.

Inflation HedgeGold is sometimes bought as a hedge againstinflation, but it is far from a perfect ordynamic hedge and may need to be held forlonger periods to be effective. As illustratedin Figure 3, inflation and gold prices have

broadly moved together but gold has been farmore volatile: while US CPI has movedbetween zero and 16% since 1971, gold priceshave fluctuated between minus 50% and200%.

In the past ten years, since the launch ofthe TIPS (Treasury Inflation ProtectedSecurities) data, TIPS offer a better inflationhedge because they have provided acontinuous positive return. Gold, on theother hand, underperformed inflation for thefirst six years, but then overshot the US CPIindex over the last four years (Figure 4). It

follows that inflation hedging is not thedriving factor in gold investment demand.

Recession HedgeGolds performance during recessionaryperiods is inconsistent as it is in inflationaryperiods. Figure 5 highlights recessionaryperiods in the US after the gold price wasfreely floated. Assuming gold is bought at thestart of a recessionary period and held untilthe end of the recession, the return variessignificantly and there is no clear pattern.

The impact of recessions on gold demand

also varies. Jewellery demand is not just afunction of income, it is also dependent onother factors such as price levels and pricevolatility. Industrial demand is too small aproportion of overall demand to function as amajor depressant. Investment buying,whether through small bars and coins or morerecently through ETFs, has generally risenand, in turn distorted overall demand.

Although periods of rising interest rateshave yielded far better returns for commodityindex investors than periods characterised bymonetary policy easing, golds performance

appears to be littleaffected fromfluctuations ineconomic growth.There is not a strongconsistent pattern ofgold price behaviourduring recessionaryperiods (see Figure5).

Equity Hedge

Gold prices tend to follow a differenttrajectory to equity and bond markets. Goldprices and equity markets can move inopposite directions as investors switch assetclasses, but they can also move together asgold returns are liquidated to meet margincalls elsewhere or amid broad risk reduction.Notably, since the start of the subprime crisisthe two diverged, but during October 2008they suffered similarly from risk reduction. Inthe past, gold has shown a low correlationwith the equity markets. For example, during

the 1987 stock market crash when the S&P500 fell over 20% on Black Monday, goldprices closed 3% firmer and were fairly stablein the proceeding weeks. Similarly, during the1998 emerging markets/LTCM crisis, goldprices were relatively steady, while equitymarket volatility increased. On neitheroccasion were gold prices driven substantiallyhigher. In recent months safe-haven buyingseems to have come into play and is buoyingprices amid a deteriorating macro-economicoutlook and rising geopolitical tensions.

As a safe haven, golds job is not

necessarily to provide capital appreciation butto provide less volatility and add stability to aportfolio. Gold volatility remains lowcompared to other asset classes and holds itsattraction for equity hedging investors.

-50%

0%

50%

100%

150%

200%

0%

2%

4%

6%

8%

0%

2%

4%

6

Feb 71 Jul 74 Dec 77 May 81 Oct 84 Mar 88 Aug 91 Jan 95 Jun 98 Nov 01 Apr 05 Sep 08

US CPI (% y/y, LHS)

TIPS 10 year breakeven - impl ied annualised y/yinflation to maturity (%, LHS)

Gold price (y/y % change, RHS)

70

100

130

160

190

220

250

280

Jul 97 May 00 Mar 03 Jan 06 Nov 08

TIPS TR Index

Gold prices

US CPI Index

Indexed at Februar 1997

Figure 3 Gold as an inflation hedge



Figure 4 TIPS vs Gold Against Inflation


5/20


page 5

Conclusion

Golds dual role as a commodity and amonetary asset has meant prices did nottumble as much as other assets orcommodities toward the end of last year.Nevertheless, some market participants weredisappointed that gold prices did not breachthe $1000 level for a second time last year.After all, if gold prices do not thrive in anenvironment of continual downward revisionsto GDP growth forecasts, equity marketsspiralling to multi-year lows, interest ratesslashed to multi-decade lows, new orders

falling to their lowest ever level, plummetingauto sales, tumbling house prices and add tothat cocktail renewed geopolitical tensions,what else is needed to boost safe-havenbuying?

As we have discussed above, recessionaryperiods, low interest rates and poor equitymarket performance do not conclusively resultin higher gold performance. However, if manyof the key factors are favourably aligned and,most importantly, investor sentiment ispositive, gold prices tend to gain upwardtraction.

If we step back to March 2008, when goldprices hit the all-time nominal high of$1000/oz, gold found itself in a very price-positive environment. Three key drivers ofgold were indeed neatly aligned: first, thedollar had reached record lows against mostmajor currencies; second, oil prices were onan uptrend; and, in turn, third, combined withhigher agricultural prices, inflationexpectations were ripe, as well as equitymarket underperformance and tight creditmarkets boosting safe-haven buying. Now the

latter has indeed worsened, but the threeexternal drivers have become less supportivewith the USD bouncing back, oil prices fallingand inflation concerns turning to deflationconcerns. Overall, the drivers are notcurrently stacked as positively as it would firstappear.

In the near term, prices are likely toremain torn between two camps. On the onehand, a sharp pickup in safe-haven buying willsupport prices, but on the other, the need toliquidate positions to meet margin callselsewhere, combined with periods of USD

strength, will cap golds upside potential.Physical investment demand in gold had anexceptional year, with total gold holdingsacross the 15 major ETFs closing 2008 at arecord 1195 tonnes, while retail sales ofcoins and small bars have also soared.In our view, three key factors are set toevolve favourably for the metal: 1) weexpect the USD to weaken against theEUR on a 12-month basis; 2) we expectoil prices to go through an initiallyshallow recovery this year, gainingmomentum as the year progresses; and

3) an inflationary environment isexpected to start to build towards theend of the year. We expect these factorsto support an uptrend in prices later in theyear. Despite a supportive fundamental base,the inevitable slowdown in producer de-hedging means investor sentiment remains keyfor the outlook of gold prices. Where pricestravel from here depends on whether investors

keep turning to gold.n

Suki Cooper

Suki Cooper is the

precious metals analystwithin the Commodities

Research team at

Barclays Capital, based

in London.

Ms. Cooper joinedBarclays Capital in 2004

on the firms ACA

programme, before joining the Commodities

Research team in 2006. Her main focus is the

precious metals markets, ie gold, silver and

the platinum group of metals, which shecovers for Barclays Capitals suite of

commodity research publications. She is also

involved in the teams regular analysis of

commodity investment flows. Prior to joining

Barclays Capital, she was a chartered

accountant at PricewaterhouseCoopers LLP.

0

200

400

600

800

1000

1200

Jan 71 Jan 75 Jan 79 Jan 83 Jan 87 Jan 91 Jan 95 Jan 99 Jan 03 Jan 07

US recessions

-4%

+0%

+1%

+88%

+5%


Figure 5 Golds performance during US recessions


6/20

It is startling how rapidly markets

have changed over the last 15 months

in the face of the worst financial

turmoil since the Great Depression.

The gold market has experienced this

first hand and there have been

ramifications for the gold lease rate

market. It is the purpose of this

article to review how the market has

changed since my speech at the

LBMA conference in November 2007,

and to consider outlook for gold lease

rates in 2009 and beyond.

2008 saw significant volatility in lease ratesand the highest rates observed since May2001. The trading range for the three andtwelve month tenors were 0.03 to 2.93% and0.22 to 2.42% respectively (see Figure 1).

What were the driving factors behind thesemoves and will we see more of this volatilityin 2009?

Firstly, let us examine some of the majordevelopments within 2008. In my paper in2007, I went through the major drivers ofsupply and demand for gold rates. These areas

were central bank supply, the direction andmagnitude of private gold investment andfinally producer (de)hedging.

As a result of the financial turmoil, creditconditions have tightened to extreme levelsand risk appetite has in most cases shrunk.Whilst some market commentators believethat central banks may have added more

liquidity into the gold lease rate markets (asthey did in the currency markets), all of ourevidence counters this argument. In fact, inmy mind 2008 was the year that central banksbecame more co-ordinated in their belief thatthey should not lend gold at such low ratesand also more effectively differentiate bankcredit risk. During the years 2003 to 2008,bullion banks observed some central bankspulling gold lending when rates were below1%, whilst other central banks continued tolend down to 1 basis point. This behaviour ischanging. Whilst is if difficult to accuratelyestimate the amount of lending by central

banks, Virtual Metals believe that lendingdecreased from 2,912 tonnes in 2007 to2,330 tonnes in 2008. Our own insight wouldsuggest that it has fallen more dramatically.In addition, the amount of lending shouldcontinue to drop rapidly if risk reward is at alla factor in central banks behaviour. Leaserates are not high enough to justify un-

collateralised lending. Unless the lending isconsidered necessary for the smoothfunctioning of the gold market (which is notthe current case), then the credit conditionsdo not justify lending below one percent.Figure 2 shows the current credit defaultswaps (CDSs) for a basket of some of the topbullion banks. Note sixty percent of thesebullion banks have CDSs above 100 basispoints (bps), and the average spread is 160bps. This is substantially higher than the 47basis point average CDS at the end of 2007.Central banks should be reluctant to lend goldto bullion banks on an un-collateralised basis.

Turning to collateralised deposits, I notedin 2007 that under certain situations bullionbanks would convert collateral for long datedgold borrowing away from government bondsto gold itself. Given the costs of borrowinggovernment bonds have risen fromapproximately 10 basis points pre August 2007to 50-200 basis points over the last 15months, a number of bullion banks have wiselydeveloped facilities to allow them to convertto gold collateral when gold leases are lowenough to justify it. This will be a continuingfeature of 2009.

Another factor in gold lease rate tradinglast year was bullion banks strategicallyholding lower levels of gold inventories in anattempt to reduce their balance sheet usage or


page 6

Gold Lease RatesA Rapidly Changing Market

By Raymond Key, Deutsche Bank

0

1

2

3

4

5

6

7

8

9

10

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Gold Lease Rates

Gold lease rate 3M

Gold lease rate 12M

Source: LBMA

Figure 1

-300

200

700

1200

1700

2200

2700

3200

Dec-06

Feb-07

Apr-07

Jun-07

Aug-07

Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Basis

pointSpread

Bullion Bank CDS spreads

Dresdner

Ci

Barclays

GS

MS

HSBC

DB

Soc Gen

BNPP

JPM Chase

Figure 2

Source: Reuters


7/20


page 7

they used the inventory to raise USD throughthe gold swap market. This inadvertentlyfacilitated the spike in lease rates as thisreduced their ability to lend into the risinglease rate market.

I believe the above issues have been themain driver of lease rates throughout 2008. Ialso believe that none of these issues have beenresolved so we are likely to experience furtherspikes in 2009 and I would expect rates toremain at elevated levels when compared tothe previous six years.

Another issue that I believe will have widerattention this year is producer hedging.Traditionally, producer hedging provided theprimary demand for gold borrowing. At itspeak the demand was approximately 110million ounces in 1999, however as at the endof 3Q08 it only accounted for 16.9 millionounces (Fortis-Virtual Metals report).

A few comments on the topic: it is

interesting that the reduction from 2Q08 to3Q08 was the lowest in two years. Are we atthe end of de-hedging and about to enter intoa new era? Does it make sense to spendscarce cash flow or debt on buying backhedges in the current environment? Thelesson in base metals markets is that supernormal profit margins have been destroyed ina matter of months and a large number ofproducers will not survive if industrial metalsremain at current prices. Certainly the goldproducers are in an enviable position wheregold acts as a safe haven asset and remainedsolid in the face of widespread liquidation and

demand destruction. However, what happenswhen markets stabilise later in 2009? Costsare unlikely to increase for the next two yearsgiven the global economic outlook. Is this notan opportunistic time for them to lock inmargins on a two to three year basisopportunistically? Have they not been giventhe second chance that most of their industrialmetal peers did not get?

To put this in perspective see Figure 3.The chart attempts to illustrate thedestruction of margin that golds poorcousins are contending with. Whilst it is very

difficult to calculate marginal cost of

production accurately this chart attempts toindicate relative to current market prices theapproximate margins across various metals.Gold stands out significantly.

In addition, what has happened to the vocalminority of shareholders of those base metalscompanies that demanded the pure play to thebase metal price? Have they exited andabandoned these base metal companies, or aresome still holders wishing that the companieshad locked in super normal profit margins thatwere seen a little over six months ago? Thedebate around hedging will re-emerge in2009. One certainly hopes that any goldhedging that occurs will be implementedwhen the profit margins are as healthy as theyare now and not when it is a matter ofsurvival.

If hedging does begin to become moreacceptable, this could trigger a multi-yearmove higher in lease rates.

Investment demand is the other area thathas an effect on gold lease rates. Thepurchasing of unallocated gold or futuresprovides liquidity to the market, whilst theglobal gold ETFs drain liquidity basis theirholdings being backed by allocated gold. It isinteresting to note relative to a year ago theglobal ETFs are 3.5 million ounces higher andthe Comex speculative long positions arenearly 8 million ounces lower. These both netdrain liquidity from the lease rate market andput pressure on rates to rise.

The caveat to higher lease rates in 2009could come from two factors. Firstly, in the

current environment, where global centralbanks will force interest rates close to zero tore-inflate the global economy, it is difficult forgold lease rates to remain high. It is alsodifficult to push the gold curve intobackwardation - something that has rarelybeen seen in 20 years. The second caveatwould be if central banks decide to put goldinto the system to provide bullion banks withanother form of liquidity. I doubt manycentral banks will consider this necessary yet.

In summary, I believe that gold lease rateswill be floored close to 50 basis points for the

foreseeable future and it is quite feasible that

we will see the highs of 2008 retested.A post script for those that look at lease

rates more deeply: many market participantshave asked during 2008, what is the marketgold lease rate? Every bank now has adifferent lease rate curve when compared toLibor minus GOFO. 2008 has been the yearwhere bullion banks funding rates have neverbeen so diverse. Three month rates acrossbullion banks have ranged from 50 basis pointsunder, to 300 basis points over Libor. This hasmade it more challenging for central banks toassess bullion banks deposit rates relative totheir credit quality and has also reducedliquidity in the inter-bank gold swap market.The outcome of these funding differentials haswidened spreads and pushed the markettowards the gold interest rate swaps market.Some bullion banks have taken advantage oflong-term physical gold holdings to lend goldforwards, and borrow gold interest rate swaps

to raise USD. Given that most bullion bankslong term funding for USD is at least 150basis points higher than Libor, there have beensome great opportunities for banks that haveeither had, or have been able to raise long-term gold they can monetise. Based upon thisfact alone it does surprise me to see the spreadbetween gold forward and interest rate swapsis between 20 to 35 basis points (up from itslows of 8 basis points) and not substantiallyhigher.

Certainly, the terrible events within thefinancial market have breathed life into thegold forward and lease rates markets and the

future does not look dull. n

Aluminium Copper Nickel Zinc Gold

-18% 14% -50% 1% 50%

-60%

-40%

-20%

0%

20%

40%

60%

Market price vs Industry Marginal CoP

Source: Deutsche Bank

Figure 3

Raymond Key has 13 years experience infinancial markets. He began his career with

Bankers Trust in New Zealand, training as an

interest rate derivatives trader before moving

to trade currency options in 1997. When

Deutsche Bank took over BT in 1999,

Raymond joined the DBs metals business to

trade precious metal options and forwards in

Australia. In 2001 he was approached by

Credit Suisse to be a Director, managing theirglobal vanilla options and forwards books in

London. When CS withdrew from the market

late in 2001, Raymond then moved to Morgan

Stanley to trade both precious and base metal

derivatives. In June 2007 Raymond was

approached by Deutsche Bank to become

Managing Director, Global Head of Metals

Trading.


8/20

In the second half of 2008, the LBMA

conducted two surveys asking for

feedback from the Membership. As

you may have seen, the LBMA sent

out a questionnaire with the

December issue of the Alchemist

asking for feedback on the content

and format of the current Alchemist.

The LBMA also hired a market

research company to conduct a more

direct survey of Members views on

more general issues such as value of

Membership, the website and the

Conference. Twenty-two

representatives of Members and

Associates participated in telephone

and in-person interviews for the

Members Survey and over 150

readers completed questionnaires for

the Alchemist. Thanks for all your

feedback and thoughtful suggestions.

AlchemistSurvey

Respondents seem satisfied with the currentAlchemist; the only major requests were foradditional content and an additional electronicformat. New items which readers would liketo see in theAlchemist include: a newinternational feature section, a regular focuson selected companies, more intense coverageon the topics of central banks & refining andmore focus on silver, platinum and palladium.

Regarding the idea of the LBMAproducing an electronicAlchemist, 45% ofrespondents would like to receive both a hardand electronic. 25% of respondents wouldlike to receive only an electronic version while20% prefer to receive only a hard copy. Dueto the high interest in an electronic version,the LBMA has been investigating differentformats and will most likely launch anelectronic version later this year. The LBMAwill retain however, the hard copy version oftheAlchemist, due to its popularity and itsability to help members to stay in touch inthis faceless electronic age.

Another popular idea that came out of oursurvey is the addition of two new sections intheAlchemist: an international feature sectionand a regular focus on selected companies. Aninternational feature section might selectdifferent geographical areas in each issue. Thiscould work together with a focus on selectedcompanies from that area. The LBMA isconsidering the addition of both of these intothe currentAlchemist format.

Otherwise in terms of content, readersseemed pleased with the five major subjectareas currently included in theAlchemist, i.e.

Bullion Market Products, Supply/Demand &Prices, People & Companies, Industry Eventsand LBMA News. Of these topics, many

respondents would like to see more ofSupply/Demand & Prices and People &Companies. Other topics that readers wouldlike to see more of were Refining and CentralBanks. After that Private Investment andScrap were the next most requested subjects.

Response to the question about theAlchemists strengths and weaknesses,fortunately the weaknesses were small incomparison to the strengths. The major

themes that emerged as strengths were thattheAlchemist is considered informative, wellbalanced and a unique source of informationfor the bullion market. The identifiedweaknesses were the need for an electronicformat, timeliness of reporting, either toomuch or too little technical content and toomuch focus on gold.

In terms of how theAlchemist shouldchange, the electronic format was stressed aswell as an expansion of content, morefrequent publications and further inclusion oftopics such as technical aspects and PGMs.However, most readers replied Fine as it is,

when asked how should theAlchemist change.


37%

25%

15%

19%

4%

Requested New SectionsIntl Feature Focus on Companies

Readers' Letters Q&A

Alchemist and Membership SurveysThe Membership Responds

By Ruth Crowell, LBMA Executive Coordinator

35%

20%

45%

Electronic v Hard Copy

Electronic Only

Hard Copy Only

Both Versions

page 8


9/20


Membership Survey

Universally respondents agreed that the LBMAwas a well-managed and professional tradeassociation which fulfils an important role forthe bullion market. Only 31% of respondentsthought that any of the LBMA services couldbe improved. Of those 31%, most mentionedan improvement of electronic communicationwith Members. In particular an electronicversion of theAlchemist and online marketupdates were mentioned.

Website

The website is the most widely used of theLBMA services and 36% of respondents feltthe site could be improved by adding moreinformation, for instance on PGMs. In termsof external links, 40% of respondents agreedthat more would be beneficial, e.g. links toMembers websites. The website appears to

be the key regular point of contact membershave with the LBMA. Therefore it isimportant that the Executive continue toreview and update it on a regular basis. Allagreed, however, that the site was easy tonavigate and that it provided enoughinformation about the conference/seminars,special events and adequate booking facilities.

Alchemist

As with theAlchemist Survey, the majority ofrespondents were complimentary about theAlchemist and it appears to be a well-read andvalued trade magazine. Although there wereseveral negative comments, in generalrespondents found the magazine informativeand interesting with a good balance of articles,providing a positive image for the LBMA. Itwas suggested that an electronic bulletin maywork in conjunction with the hard copyAlchemist in helping to maintain a regulardialogue with its members.

There was also strong support for themagazine to include editorial coverage ofother precious metals such as platinum andpalladium, although clearly not at the expenseof a reduced coverage of gold and silver.Respondents pointed to the success of thejoint LBMA/LPPM Conference last year andargued there was no reason why further PGM

content could not be included.

Conference

From the survey it can be concluded that theall respondents were aware of the LBMAsConference and that the majority of them hadattended a previous conference with over 50%saying they attended on a regular basis.

However, whilst agreeing the LBMAConference was a great event for the industry,there was concern amongst respondents(40%) regarding the location and the costs ofattending this. However on a positive note themajority agreed it was an event thattraditionally brought all the key decisionmakers in the industry together in one placeand a most useful occasion to network. Alsorespondents universally agreed that theyreceived sufficient notice of the Conferenceitinerary and there were no complaints as tothe advice and info available with respect toflights, hotels and travel arrangements for theconference. The Executive is discussing all ofthe points raised regarding the Conferencewithin the Public Affairs and ManagementCommittee.

Our Thanks

Many thanks to all the respondents who

participated in theAlchemist and MembershipSurveys. We appreciate your comments andare planning on how best to respond to thesuggestions put forward. To those of you whoindicated your interest in contributing oradvertising, the Executive will be in touchsoon! If you have further feedback, please donot hesitate to email [email protected].

LBMA MASQUERADE

THURSDAY 26 FEBRUARY 2009

18.00 LATEEIGHT PRIVATE MEMBERS CLUB1 CHANGE ALLEY, LONDON EC3V 3ND

Admission by ticket only

Programme

Bar & Masque games begin: 6:009:00pm

Drinks Reception: 6.007.30pm

Dinner (fork buffet): 7.308:45pm

Masquerade Ball (disco): 9:30pmlate

Dress: smart casual

Masks encouraged

Reservations should be made by Friday 20th February 2009

Speak to your internal LBMA contact to reserve your place


10/20


page 10

The Third LBMA Assaying and

Refining Seminar Programme23-25 March, 2009

Day One - Monday 23 MarchWelcome Reception at Armourers Hall

Day Two - Tuesday 24 March

Introductory Session

Remarks by the Seminar ChairmanStewart Murray, London Bullion Market Association

Proficiency Testing and Fitness for Purpose in AnalysisProf. Michael Thompson, Birkbeck College

Good Delivery List Recent DevelopmentsPeter Smith, Chairman, LBMA Physical Committee, JP Morgan ChaseBank

Pro-Active Monitoring: Results from the First and Second cyclesDouglas Beadle, LBMA

Assaying and Reference Materials

The Work of the LBMA RefereesStewart Murray, London Bullion Market Association

Comparison and Complementarity of Analytical Methods for theDetermination of the Fineness of Precious MetalsPascal Cassagne, Metalor

X-ray Flourescence Analysis of SilverMichael Steffen, Norddeutsche Affinerie

Reference Materials

A Survey of Available Reference MaterialsDirk Hofmans, Umicore Precious Metals

Development of Silver Reference Materialsby the Royal Canadian Mint and the Rand RefineryNeil Harby, Rand Refinery

LBMA Reference Materials - Project Update

Mike Hinds, Royal Canadian Mint

Manufacturing of Gold Reference Materials by Tanaka KKIchimitsu Itabashi and Hiroshi Sawai, Tanaka KK

Day Three Wednesday 25 MarchPhysical Quality and Weighing

LBMA Visual Guide to Good Delivery Bar AcceptabilityStewart Murray, LBMA

Casting: Getting it RightDavid Stokes, Precious Metal Refining Consultant

Use Of Ultrasonic Analysis for the Quality Control of Gold StandardLarge BarsMichele Genel, PAMPFollowed by comments from London vault managers

The London Approach to WeighingTony Dean, HSBC

Panel Discussion Assaying Reference Materials Physical Quality Weighing

Concluding Remarks and Suggestions for Future WorkStewart Murray, LBMA

THE ARMOURERS HALL81 COLEMAN STREETLONDON EC2R 5BJ

Registration Now Open

Registration is free to all LBMA Members, Associatesand Good Delivery Refiners. Other companies arerequireed to pay a registration fee of 230 (inclusive ofVAT) per person.

To obatin a registration form and further informationplease visit www.lbma.org.uk/events/seminar

If you have any queries, please contact Collett Robertson 020 7796 3067 or [email protected]


11/20


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page 12

Many people in the market today

will be able to recall the dealing

rooms of the late 80s and early

90s. In so many ways, they were

testament to the phrase the past

is another country, a country that

sounded and even smelt a little

different. Blue smoke curled up

from dealers ashtrays; telex

machines chuntered, increasing to

a metallic canter as business

picked up; the beep of Reuters

dealing machines would reach acrescendo of their own on call-outs

from other market-makers. Five

bars - Po Sang and Silver in a

lakh for Saradar? evoke the

passing of old counterparties.

And a broker-box would bark

Dollar Mark in a score? in a

voice that was pure Romford.

The world has changed enormously sincethen, and the market with it. So how dodealers sitting at their desks today find theworld of gold and precious metals tradingcompared to the world of 10 or 20 years ago?And as importantly, how have the constants inthe market evolved, bearing in mind that goldhas been exchanged in one way or another forlonger than almost any other commodity inmankind.

The most obvious impact has been thespread of technology. There has been a greatdemocratisation of trading access via new

electronic platforms that have cheapened thecost of entering the market and putting a tradeon. Electronic platforms allow for blindinglyquick execution, and in addition, a massivedrop in the cost of both computing processingpower and fast servers has enabledalgorithmic traders to exploit opportunities

in futures.Additionally, there has been a rise in the

number of different platforms, and amultiplicity of different users on theseplatforms. The crowd has changed. Comex,Tocom and EBS have been joined by Dubai andMMC and others. Whilst the concentration ofliquidity is still in the OTC market and themain exchanges, there has been afragmentation of liquidity away from theComex floor and London, and to someextent, a fragmentation in the type of differentplayers that long-established precious metals

traders were used to seeing.An additional factor is the rise of the primebroker. Major banks access the EBS platformdirectly in their capacity as Prime Brokers,and in turn, a great spread of clients operatebehind the name of the bank, buying andselling OTC and futures (The PrimeBrokerage facility enables clients to tradeprecious metals using the banks balance sheetand documentation, simplifying life for theclient and earning income for the bank).Again, these clients participate in the market,yet they bypass the traditional dealing desk inthe sense of asking for quotes.

So what does all this fragmentation meanfor traders today? It has shifted the pool ofliquidity away from them to some extent, and

increased intraday volatilityin the process. The oldpyramid where marketmakers sat at the top stillexists, but outside of thepure prop desks, theprofessional market seemsto have narrowed its focusto day-trading of smallerpositions, aware that thereare significant flows

happening on theelectronic such asGlobex or EBS, that canmove prices significantlywithout so much as anounce trading across thetraditional trading desk.

Access to Comex gold and silver contractsthroughout the London trading day means thatdealers are hedging regularly via the electronicplatforms as well. When I worked in Tokyo,TOCOM dealers often joked that a weekendspent practicing at an amusement arcade inShinjuku was time well spent in preparation

for the week ahead in TOCOM. The thennew electronic trading system meant thatresponsible adults were flapping around in ablur trying to hit the right keys for the activemonth. Of course, this was before the adventof the Playstation, or even the Sega Saturn,thereby justifying a trip to the bars andarcades.

Now dealers everywhere are in the sameboat, trying to point and click as fast as theycan. That thin wail you hear every so oftenechoing over the open line is not the sound ofsomeone having their lunch cancelled by a

credit-crunched broker, but rather someonewhose server has decided to give up the ghostat a critical moment.

Technology can have surprising resultshowever. As Ross Norman remarked inKyoto, latency times for trade execution arebecoming ever more critical. So the hedgefund which moved to the Alaskan wildernessso the guys could indulge their taste forsalmon fishing and heli-skiing might yet beforced to leave Juneau for the daily trudge tolower Manhattan.

I havent mentioned the ETFs in detail, asalthough they give everyone more data to look

at, its debatable whether they change theframe of reference for most dealers day-to-day, although ETF market makers will benefit

The Bullion Market,Then and NowBy Nicholas Frappell, RBS Sempra Commodities

I say, threeseparate ashtrays!


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page 13

from the flows. However, what the ETFs arepart of is a huge mobilisation of investmentmoney into almost all markets as aconsequence of a decade or more of easy

money policies and a keen chase for yield inthe face of an aging demographic in the westgenerally, and in Japan in particular.

It is this heavy flow of money into indexesand funds of various kinds, often via newchannels, that have created an Alice throughthe looking Glass world for traders, as moneysurged in on the back of a compellingly-toldcommodity story that made good sense whenprices were low and your commodity curvewas backwardated, allowing indexes who heldlong futures positions to earn yield by rollingtheir positions but became increasinglystretched in a high-price contango world.

What we all learned was that if theparticipants in the gold market ever thoughtthat they were in charge of the game, the sizeof money inflows disabused them. Dealersused to the idea of servicing the needs ofapparently rational players in the market Indian physical merchants, producers andCentral Banks for example, discovered thatmoney was the new fundamental, and it didntseem very rational at all, or rather, the lack ofliquidity has produced intraday price moves

which mystify which is not the same asirrational of course.

Nowadays, structured notes which mighthave payouts linked to the price of (for

example) diesel, copper, agriculturalcommodities and gold in a custom blend arecommonplace, and the optionality embeddedin them is as typical of todays market as aproducer enquiry in 1989.

The most striking thing for todays dealershowever is this: we have stood on theprecipice of financial meltdown, and seen goldtrade to US$1,040 last year compared to theUS$250s seen in 1999.

The centrality of gold in an environment ofwealth destruction and fear for the safety ofbanks and savings is partially demonstratedbelow. In the light of the huge moves

downwards in some of the stock indexes andthe WTI, the -13 % move in the particular S &P / Case-Schiller Index (tracking the USHousing Market) I chose from Januarythrough to October of last year looks trivial,however it represents the continued erosion inthe value of the most important asset thatmost Americans hold.

Until last year, the predictions of extremegold bulls who fundamentally distrusted papermoney and claims on the banking system had

never been tested in any serious way. Nowthey have been, and will continue to be.Whichever side of that debate one stands on,something that was a fringe issue to many hasmoved to centre stage. And the growth indemand for small bars and coin shows thesentiment among the general public. Giventhe scale of wealth destruction in the past 12-24 months, golds appeal isnt too hard tounderstand. Whilst it is too early to saywhether all four horsemen of the financialapocalypse have arrived, for those who stoodin the rain queuing to get money out ofNorthern Rock, or turned up to work atLehman Brothers on 15 September of lastyear, it must have felt as if at least one wastrotting past.

Looking forward, and completely leavingbehind the day to day differences between themarkets of years gone by, and the ones we facenow, one age-old question still remains in the

back of the minds of those who look to thegold market for part of their savings. Whatwould gold be worth in the event of a full-scale collapse of society as we know it?

Now that question is unanswerable indetail, but lets hazard an attempt. It will beworth more than the flip-flops you stand in asyou nervously survey the street for half-crazedcitizenry, palms sweating on the stock of arecently-acquired shotgun. But it mightbeworth far less than the parts for the waterpump that stands between you, your family,and dehydration.

That, however, is a whole article in itself.n


Nicholas Frappell trades on the precious

metals desk at RBS Sempra. He started in precious

metals at Bank of Boston and later worked for

Sumitomo Corporation. He has lived and worked in

Singapore, London and Tokyo.

Nick is a member of the LBMA Membership

Committee and a former member of the

Management Committee. He read Political

Economy at City University, London.

and this orange symbol accompanied bya chime will alert me to a trade with aclient via EBS.

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Shanghai SSE Composite Index

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Gold Monthly AM/PM Fixing Aver age

NYMEX WTI Front Month

LME 3 mo Copper Mean (Monthly Average)


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page 14

Gold Jewellery ConsumptionThe Impact of the Economic Crisis

GFMS

Reviews of gold jewellery

consumption typically focus on the

price sensitive countries of the

developing world, in particular

India, because of their marked

fluctuations in demand. The

industrialised worlds more stable

consumption, however, is still worthy

of analysis.

Firstly, it remains sizeable, at around 600tonnes last year, and has the scope for massivechange. As illustrated in the accompanyingchart, this groupings consumption hasroughly halved since its early 1990s peak.Secondly, its relatively price insensitive naturemeans it has the active ability, at least in

theory, to boost or undermine the gold price,in contrast to the developing worldsconsumption, which may well just passivelyinflate or deflate in response to price movescaused by other factors.

This loss of almost 600 tonnes of demand,as implied above, had three main causes,namely background structural changes, higherand more volatile gold prices, and recentmacro-economic problems. The explanationand importance of each is assessed below.

Background Structural Trends

A historical review of consumption in the

industrialised world shows a downward slidesince 1992 that has been remarkably smooth.The chief reason for this seemingly relentlessdecline is that the bulk of losses within thisperiod are attributable to secular changes.One such change is market share loss by allforms of jewellery to other areas ofdiscretionary spending, such as consumerelectronics or short break holidays.

A second is that consumers have beenchoosing to devote an ever greater percentageof expenditure when buying jewellery toelements other than precious metals. These

elements can be physical, such as diamonds(which explains the norm in most markets forthe share attributable to gemset over plainpieces to rise inexorably), or intangible, such

as the perceived value of a branded item. Onemanner in which this has occurred is the longterm slip in average weights as lighter pieceshave higher making charges on a per gramme

basis. There has also been market share loss bygold to other precious metals in severalmarkets.

It is important to note here that this doesnot imply the value of gold jewelleryconsumption has been falling. A simplemultiplication of the fine weight by theaverage price shows a strong uptrend in valuethis decade and that is before we take intoaccount inflating margins (branded, lighterand gemset pieces invariably carry a highermarkup than plain, unbranded and heavyitems).

The Gold Price Rally

Structural changes, however, cannot explainthe acceleration in the pace of decline from2006 onwards. Instead, it seems fair to blamemuch of this acceleration on the gold pricerally. It might be thought that this wouldprimarily hit consumption throughconsumers budget constraints. However, ofseemingly far greater importance is the tradesmanagement of margins.

In theory, the rise in the gold price couldhave been accommodated by a drop in themarkup over the fine gold content that the

consumer ends up paying but, instead, farmore attention seems to have been paid toshaving the weight of gold to keep piecesbelow key price points, especially in the

United States. Such methods have includedswopping from solid to hollow items or theadoption of electro-forming (a process gearedto producing light weight articles). There has

also been an intensification of structuraltrends, such as incorporating more non-metalelements (a pendant on a leather cord ratherthan a gold chain for example) or addingsmall, inexpensive diamonds to boost apparentvalue.

The Financial and Economic Crisis

It is of course quite reasonable to describe thegold rally as partly the result of recentfinancial troubles. Nonetheless, it isimportant to see if there are direct linksbetween falling jewellery consumption and the

abrupt slowdown in GDP growth in theindustrialised world that began last year. Areview of annual figures is of little help as theacceleration in the pace of consumptionsdecline in 2008 could merely be a function ofrecord gold prices.

To isolate the gold price, we thereforeneed to look at a more detailed time series. Ifwe begin with quarterly figures, there hasbeen a reasonably clear acceleration in thepace of consumption declines over the lastyear or so and, while steeper losses in late2007/early 2008 coincided with rapid pricegains, those in the second and third quarters

were in tandem with prices easing; adevelopment that obviously implies otherfactors at work. (At the time of writing, ourfourth quarter figures have yet to be finalised

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nes,fine&US$/oz

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Industrialised World Jewellery Consumpon, mt

Annual Average Gold Price, $/oz

Figure 1 Industrialised World Gold Jewellery Consumpon & the Gold Price

Source: GFMS

Industrialised countries comprise: Europe (incl Russia, excl other FSU), North Am erica, developed East Asia (Japan, South Korea, Singapore, Hong Kong & Taiwan) & Oceania


15/20


page 15

but these are likely to show slightly greaterlosses again when published by the WGC inmid-Februarys Gold Demand Trends.)

The closer analysis of other factorsinfluence arguably requires monthlyinformation. One useful data set here are thefigures for US gold jewellery imports. Asshown in the chart, there was a marked jumpin the speed of the decline in imports frommid-2007. Up until March 2008, these eversteeper losses closely mirrored the gold rallybut, after that, there were periods of botheasing prices and larger consumption losses.Time lags may partly be the cause but changesin consumer spending or confidence, asgraphed, do appear to have enjoyed greatersimilarity to import behaviour.

The fact that the pace of consumptionlosses has sped up is partly due to anintensification of the process of minimisinggold use. One such area is a move to lowercarats. Before 2008, shifts to lower carats hadbeen comparatively limited, especially in thosemarkets dominated by one standard, say Italyand 18-carat. There was only one obviousexception here, Japan, where there had

already been a swing from 18 to 10-carat.More recently however, there has been a morepronounced shift to lower carats, particularlyin those countries with a mixed caratstructure, for example the United States.There, and in other markets such as Australia,this has taken on a more radical form in thegrowth of gold-filled pieces, jewellery wherecarat gold is clad to a core of another metal,typically silver, to give an effective carat forthe whole item of only three or four.

Another factor that we have seen is greatermarket share loss by gold to other metals. InItaly for example, there was a swing to thenon-precious, such as brass or stone-set steel,while the US market saw a shift from gold tohigh end silver jewellery. The latters resultant

focus on value rather than weight helpsexplain why silvers losses globally to otherforms of jewellery, such as steel, may wellhave outweighed the gains from otherconsumers migration from gold. As a result,silver also suffered accelerating consumptionlosses last year in the industrialised world,although the scale of the drop remained farsmaller than that inflicted on gold. Goldbenefited through substitution from platinumbut this tended to be confined to the first halfof last year, when golds discount was over$1,000/oz, and was centred on the moreprice sensitive Chinese market.

As for the impact of the crisis on thejewellery industry, there is clear evidence ofmanufacturers facing great problems in theirability to borrow gold, whether securingbullion supplies if counter-party risk had beenjudged too great or paying more as true leaserates rose. The securing of credit has also

been a major headache for wholesalersand retailers and one way in which thishas impacted the gold market is throughthe occasional remelt of slow sellingpieces in order to get inventoryvaluations below loan limits.

A ConclusionIt is possible to assess the impact of boththe direct consequences of macro-economic turbulence and their indirecttransmission via the gold price bycalculating how large industrialisedworld consumption might have been ifwe had just had structural change tocontend with. This can be done in aindicative fashion by applying theaverage annual drop in the period 1996-2005 of around 2% to the years from2006 (the first year in which one couldarguably begin to describe prices ashigh) to 2008. If they had fallen at

that average pace, that would have leftjewellery consumption in 2008 some 220tonnes higher than our current figures. Giventhat macro-economic problems are yet morerecent, it is probably fair to blame the bulk ofthese non-structural losses on the price.However, for 2008 alone a roughly equalbilling for the two is perhaps a better stance,given the jump in the scale of the drop from2007 to 2008.

Looking ahead, it is hard to see howanother drop in consumption in the

industrialised world can be avoided, givenbleak economic prospects, possibly higherprices and the background changes whittlingaway at weight. The exact scale of the declinewill be chiefly dependent on the first two butit is easy to envisage a scenario in which lossesin 2009 are a good 50 tonnes. n

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USA Italy Gold Price

Figure 2 Selected Countries' Gold Jewellery Consumpon & the Gold Price(year-on-year change and the quarterly average)

Source: GFMS

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goldprice&

consumerconfidence

indices

year-on-yearchangeinimports

year-on-year change in each month's imports %

consumer confidence index, 1985 = 100

index of monthly average gold price, Jan 06 = 100

Figure 3 US Gold Jewellery Imports, the Gold Price and Consumer Confidence

Source: consumpon & price GFMS, consumer confidence ww w.pollingreport.com


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page 16

MEMBERSHIPMembersRand Merchant Bank wasadmitted as a Full Member witheffect from 1st March, 2009.

Three companies haverecently resigned theirmembership with effect from31st December, 2008: MarubeniEurope plc, Bank of America andBanque AIG.

AssociatesThe LBMA Associate Reviewprogramme requires Associates torenew or replace theirsponsorship on a rolling three-year basis. During this process,Goldas of Turkey did not providethree sponsors from within theMembership and as a result, itsAssociate status was revoked witheffect from 31stJanuary, 2009.

As a result of these changes andthe earlier departures of BearStearns and Lehman Brothers, the

membership list now includes 63Full Members (ten of which areMarket Makers) and 55Associates. During 2008 therewas a net increase in the overallMembership of four, due mainlyto growth in the Associatecategory. The full membershiplist can be found on the LBMAwebsite.

COMMITTEESManagementThe Management Committee metin mid-December 2008 and in thebeginning of February 2009, toreview the work of the sub-Committees. One of the mostimportant issues discussed wasthe venue for the 2009Conference. During the lastmonth, many Members (as wellas delegates who have attendedprevious conferences) have askedthe LBMA to reconsider thedecision to hold this yearsConference in Peru, due to the

recent changes in the businessenvironment. Many of them haveexpressed the view thatattendance from both Europe and

Asia would be dramatically lowerthis year if a venue in SouthAmerica were chosen.

The LBMA ManagementCommittee has now decided topostpone the choice of Lima asthe conference venue and to holdthe tenth annual LBMA Conferencein Edinburgh, during the period1st -3rd November, 2009.

The Committee alsoresponded to requests from someMembers for the LBMA to hold aseminar concerning cleared

forwards and it agreed that thisshould be held as an open forumfor all Members and Associatesthree institutions to present theirideas on this topic (see sidebar).

The Committee also discussedthe possibility of making theBiennial Dinner an annual eventas had been suggested by someMembers. However the finaldecision was to continue to holdthese dinners every two years.

PhysicalThe Physical Committee met inDecember and as usual reviewedprogress with applications forGood Delivery listing. Currentlythree applications are beingprocessed and a further elevencompanies have indicated aserious intention to submitapplications during the comingyear.

The Executive has nowreached the halfway point in thesecond cycle of proactive

monitoring. Each quarter,approximately ten refiners arerequired to submit to monitoringwhich involves testing theirassaying proficiency and checkingthe non-technical aspects such asownership, tangible net worthand production levels.

Excellent progress has beenmade by Tanaka in Japan with theproduction of gold referencematerials. The two ingotscontaining different levels of

impurity elements have beenproved to be homogeneous. Thematerials have also been engravedand the final packaging has been

ordered. The final step willinvolve the analysis of the actualimpurity levels involving acollaborative effort by thelaboratories of ten Good Deliveryrefiners.

The project to evaluate a newelectronic scale for the weighingof large gold bars has also madegood progress recently. The newscale has now been delivered toLondon and checked by theLBMAs weighing consultant whoconcluded that it appears to meet

the LBMAs requirements overthe coming months it will bethoroughly tested in comparisonwith the traditional beam balancein one of the LBMA vaults.

Public AffairsThe Public Affairs Committeemet in December 2008 andFebruary 2009. One of the mostimportant issues discussed wasthe venue for the 2009Conference. The LBMA had

previously announced that thiswould take place in Lima, Peru inthe period 1-3 November. TheCommittee discussed theconcerns expressed by someMembers that having anotherlong-haul destination (as far asattenders from Europe and Asiaare concerned) might result in asignificantly reducedparticipation. See the decision ofthe Management Committeeabove.

During the past months, the

Executive has been busy findingout the views of Members andAlchemist readers on a number ofaspects of the LBMAs PRactivities and publications,including the possibility ofproducing an electronic versionof the Alchemist as an alternativeto, or in addition to, the printedversion. Views on the content ofthe Alchemist were consideredduring the February meeting, andthe Executive is researching

options for an additionalelectronic version of theAlchemist.

MembershipThe Membership Committee heldits first meeting of the year on9th February, 2009 to reviewapplications for and changes inthe Membership. Following theresignation from the Committeeof Eddie Nagao (on his return toJapan) and more recently of BobDavis (who is leaving BNPParibas) the ManagementCommittee has accepted theapplications of John Levin ofHSBC and Michael Ludwig of

Paribas to join the Committee.Our thanks go to the three othercandidates who put their namesforward.

FinanceThe Finance Committee met toreview the Management Accountsof 2008 and to consider a revisedbudget for 2009.

CLEARED FORWARDSSEMINAR

The seminar organised by theLBMA for Members andAssociates was held on 21st

January. Three institutions(whose contact details are shownbelow) made presentations onhow Members could use theirclearing facilities for creditmitigation and thus enhance theexisting OTC market. The LBMAis not intending to recommendany of the options that were putforward by these institutions.Rather this is something which

individual Members may decideto consider individually. Thecontact details of the threeinstitutions are:

London Clearing HouseDavid Farrar,[email protected]

CME GroupJames Oliver,[email protected]

NYSE EuronextJennifer Ropiak,[email protected]

LBMA NewsBy Stewart Murray, Chief Executive, LBMA


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page 17

REACHFollowing the deadline for pre-registration on 30th November2008, the LBMA met with Dr.Jeff Levison, the Co-Chairman ofthe EPMF Precious MetalsConsortium, and a further moreformal meeting is planned to takeplace in March or April. This willallow those companies who havepre-registered to have a betterappreciation of the role andactivities of the Consortium.

After taking advice from legalcounsel, the LBMA decidedfinally not to produce a statementindicating that large gold barswere considered to be articlesrather than substances. Thereason for this was that whengold is used as a raw material for

eg, the jewellery industry, it ismelted and alloyed. It was feltthat it would therefore be simplerto allow those Members whichconsidered that they needed to

pre-register to do so with thecertainty of them subsequentlyregistering rather than having aperiod of uncertainty as to thetype of gold and the tonnage bandthat they would have to declare.

ANNUAL PARTY

The LBMAs annual party for staffat Members and Associates willtake place at the Eight Club, on26th February. Contacts atMember and Associate companieshave been sent a form asking forthem to register the participationof their colleagues. The eventwill be subsidised by the LBMAwith the result that the charge perperson will be 25. As thevenues capacity is limited, therewill be a limit on the number of

staff which each Member orAssociate company can registerfor the event (15 for MarketMakers, 10 for ordinary Membersand 5 for Associates).n

FEBRUARY2457th Minesite Forum

London

T: +44 207 562 3381

[email protected]

www.minesite.com

26LBMA Annual Party

London

T: +44 20 7796 3067

F: +44 20 7796 2112

[email protected]

www.lbma.org.uk

MARCH23-25Third LBMA Assaying and Refining

Seminar

London

Details on page 10

23-27Asia Mining Congress

Singapore

www.terrapin.com

T: +65 6322 2700

F: +65 6223 3554

APRIL7GFMS Gold Survey 2009

Johannesburg, London, Toronto

T: +44 20 7478 1750

www.gfms.co.uk

23GFMS Platinum and Palladium Survey

2009

Johannesburg, London

Details as above

MAY26World Silver Survey 2009

New York

T: +1 (202) 835-0185

[email protected]

www.silverinstitute.org

John Chan toMKS Finance,SingaporeMKS Precious Metals ( Singapore ) Pte Ltd will be supporting MKSFinance SA regional offices and services in countries where MKSdoes not have an office. The new office will be headed by JohnChan. Johns last appointment was Managing Director ofCommodities and Banknotes at DBS Bank in Singapore. Prior toDBS Johns business experience included 26 years heading up N MRothschild in Singapore.

Mike Marsh to Baird & Co, LondonMike has rejoined Baird & Co Ltd on their sales and trading desk.Mike has been in the bullion market since 1977, most recently withScotiabank and Baird. Mike left at the end of 2002 to take traveland pursue other interests, and due to changing plans has returnedto help with Bairds continuing expansion.

Marjorie Nadal to Credit Suisse, LondonMarjorie has joined the commodities team of Credit Suisse and wewill be running the Precious Metals Options business in London.Marjorie joins Credit Suisse from Lehman Brothers where she wastrading Precious Metals and Exotics. Prior to that, Marjorie ranExotics trading for Commodities at Calyon UK.

Market Moves

DIARY OF EVENTS

VACANCY on the LBMA Executive

Are you interested in joining the LBMA Executiveteam? The LBMA is searching for someone with

knowledge of precious metals and goodcommunication and computer skills. Job descriptionand further information will be available shortly. Toregister your interest, please contact the ChiefExecutive, Stewart Murray, by phone or email.


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page 18

Forecast Winners 2008Prizes Donated by PAMP SA

by Ruth Crowell, LBMA Executive Coordinator

Looking back at the dramatic

developments affecting allmarkets in 2008, there were a

number of cases where trading

almost completely broke down

in the face of uncertainty about

the value of the assets

underlying these markets.

Whilst the most obvious

example was the sub-prime

mortgage market, the same could be

said for the CDS market and evenLIBOR looked very shaky at one

point. Precious metals have also seen

wild fluctuations, especially in the

PGMs and silver.

It is notable that by comparison, the goldmarket has been a beacon of steadiness thougheven here, volatility was the order of the day.Thus, as measured by the average change inthe daily price, this was double the level seenin the previous two years. Somewhatsurprisingly, however, the overall trading range

at around 34% of the year average price waslittle changed from what was seen in 2006 and2007. Relative to other metals, goldsrollercoaster ride has been almostcomfortable.

This raises the questionof why gold has beenable to demonstratesuch relative stability.There are two aspects toanswering this question.Firstly, concerning themarkets customers, thewidespread perceptionof golds renewed safehaven status has meantthat private investorshave continued to buy

or hold gold, central banks have eithermaintained their positions or at least sold less

than in previous years while mining companieshave not been tempted to engage in large-scaleforward selling. No one can expect that golddemand, for instance in electronic products orjewellery, will remain unaffected by thecurrent recessionary tendencies in most of theworlds economies. But the investment natureof much of the gold sold in the form ofjewellery will undoubtedly mean that theimpact of recession is somewhat muted.

The second aspect concerns the way inwhich the professional wholesale market hasreacted to the credit crunch and to thechanging needs of its customers. It is fair to

say that all market participants have beenstress-tested (in a few cases to destruction) bythe events of the last year. In thesecircumstances, mitigating credit risk andmaximising the efficient use of capital havebecome urgent topics. Nevertheless, many of

the leading players in the London bullionmarket are amongst the strongest of financialinstitutions. Given the emphasis on tradingwith sovereign institutions in the gold market,they have to be. In years past, somecustomers developed a taste for more exoticderivatives but more recently, the favouredproducts in the gold market have essentiallybeen rather simple in nature spot, forwardsand more or less vanilla options but thesehave still allowed traders to provide customerswith the flexibility which they need. In theLondon market, the combination of a triedand tested clearing and vaulting system andthe transparent and trusted fixes together

provide the markets customers with a feelingof confidence about the underlying asset. Onerelatively new product, the ETF, has certainlycontributed to broadening the interest in goldas an investment and this too has clearlyhelped to maintain levels of trading activity.The strength of the London market has beennot only that customers have been able to puton positions but that they have been able toexit from them. Taking a somewhat widerview of London, its role in financing trade andmining activity continues to be a veryimportant adjunct to the trading activitywhich takes place here. With a supportive and

effective regulatory system, it is hard to seehow Londons role could be replaced.

Just as gold survived the 1930s depression,it is showing every capability of being a safehaven for investors during the difficult period

which lies ahead in 2009. n

Steady as She GoesEditorial Comment by Martyn Whitehead, LBMA Vice Chairman

Congratulations go to all three winners,Frederic Panizzutti, Tom Kendall and BobTakai who have taken home a one ouncegold bar for each metal won and in BobTakais case, two bars! Also our thanks toPAMP SA, Switzerland, for theirgenerous donation of the prizes and to allwho took part in the survey.

Despite a year of volatile trading,contributors to the 2008 Forecast had anexcellent year in terms of the accuracy of

their predictions. In a record year forgold, Frederic Panizzutti, MKSFinance SA won the gold prize with anexact forecast of $872. Although silver

did not break any records, the 2008average came in at $14.99, and BobTakai, Sumitomo Corporation, won hisfirst prize with a predicted average of$15.00. Tom Kendall, MitsubishiCorporation won the prize for platinumwith a prediction of $1,575 just $1below the outturn for the year of$1,576. For palladium, Bob Takai,landed his second prize, with a forecastof $350, just $2 below the outturn.

The 2009 Forecast is included with thisissue of theAlchemist. If you areinterested in contributing next year,

please email [email protected]

Tom Kendall,

Mitsubishi Corporation,

receives his one ounce

PAMP gold bar from

Stewart Murray,

LBMA Chief Executive


19/20

Starfish an international charityhelping to support childrenorphaned or affected byHIV/AIDS in Southern Africa

Hospice Association of the

Witwatersrand, South Africa

careing for the needs of patientsfacing life-threatening illnessesand their families

Look London providing aid andinformation to visually impairedchildren

Essex Spina Bifida inmemory of Andy Hoares son

Action Aid a charity withprojects in over 40 countries,providing food, shelter, work,healthcare and education for the

needy

Cancer Research in memoryof Terry Smeeton

Friends of Hillside a schoolthat caters for pupils that havesevere learning difficulties

Arthritis Research in memoryof Chris Saubergue

In 2001, LBMA charitable giving was put onto a different footingwhen a system of fines was agreed by GOFO contributors wherebythey would pay a fine to the LBMA if they failed to contribute to theGOFO page more than three times in a month. It was agreed thatup to half of these fines could be donated to charity. More recently,SIFO contributors have adopted the same system which has swollenthe pot of funds available.

Since 2001, the LBMA has donated over 35,000 to variouscharities, mostly those in which members of the market have beeninvolved. Examples of LBMA charitable giving in the past are listedto the right.

Alongside its charitable giving, the LBMA has also sponsoredbursaries for the support of ear th science students (ie studyingsubjects such as geology, metallurgy and minerals science). From

1988 to 2005, LBMA provided funds in alternate years to two ofthe leading UK mining schools, the University of Exeter (theCamborne School of Mines) and Imperial College (the RoyalSchool of Mines) in London. These funds were to support post-graduate students (one each year) usually from developing countrieswhich had mining industries in the precious metals sector. In 2004,the Management Committee decided that the funds should be usedto support groups of honours students in the University of

Witwatersrand School of Geosciences in Johannesburg.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 Stewart Murray,

LBMA Chief Executive

13-14 Basinghall Street

London EC2V 5BQ

Telephone: 020 7796 3067

Fax: 020 7796 2112

Email: [email protected]

www.lbma.org.uk

page 19

It was amazing how the Gold market supported

Sarah, when we reached out to them last year.

Donations from members & friends from Africa,

Australia, London, Switzerland and the US were

received. Many thanks to the LBMA and all the

members who supported her. David Longhurst

In 2008, the LBMA contributed to the fund-raising effortsof David Longhursts daughter, Sarah, who raised a total of27,360 for cancer research by taking part in thesponsored run Race for Life. Sarah will be running againthis year. Further information can be found atwww.raceforlifesponsorme.org/sarahlonghurst.

Charitable Givingby Ruth Crowell, LBMA Executive Coordinator

The LBMA has been involved in charitable giving since its creation in 1987. This initially consisted of small

donations to charities in memoriam of past members of the market. However, until 2001 the LBMA did not

consider it appropriate to make charitable giving a significant part of its expenditure in that its funds

belong to its members who have their own programmes for supporting various charities.

Sarah Longhurst with her mother, Hilary, after the 2008 Race for Life

Past LBMA Donations


20/20

The conference by the industry for the industry

The LBMA Precious Metals Conference 2009

Theres a place for all market players at the LBMA Conference registration opens late July 2009

London Bullion Market Association13-14 Basinghall StreetLondon EC2V 5BQt. +44 (0)20 7796 3067

f. +44 (0)20 7796 [email protected]

Will investors continue to see gold as a safe haven? How will jewellery

markets be affected if the high gold prices seen recently are sustained? How

will the slump in the auto industry affect PGMs? Will producers return tohedging and if so how will central banks respond?

For answers to these and other topical questions, mark your diaries for the

tenth annual LBMA Conference. The programme includes a wide-ranging

agenda that addresses key issues for gold, silver, platinum and palladium, plus

unparalleled opportunities for networking.

1 - 3 November 2009Edinburgh

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