The Bank of England's Role in the London Gold and Silver Price Rig

Who Watches the Watchers?

Each day, 90% of the global gold trade occurs in The City of London and of that London trade volume, an estimated 90% is in spot (immediate ownership) cash contracts.

It is estimated that the daily total trading volume in London is 200M oz. of gold and 2.92B oz. of silver. However, traders are not trading specific bars of metal in The City but are instead primarily trading promissory notes for metal. This allows theoretical creation and issuance of an unlimited supply of spot contracts to market, converting physical gold and silver into virtual assets. This virtual spot metal trade can continue so long as physical demand for bar delivery does not reveal the only fractional backing to the issued spot contracts through default on physical bar delivery demand.

The value of silver vaulted in London stands at a mere 3.5% of the value of gold vaulted in London. The open interest (or total standing claims) currently in the London silver market is estimated at between 5B and 8B oz. in comparison to total annual global mine production of 823M oz.

How Did London’s Promissory Note Spot Trading Market Arise?

The London Bullion Market Association (LBMA) was created in 1987 consisting of London gold and silver market participants. Robert Guy, Founder Chairman of the LBMA states in the October 2012 Issue #68 of the LBMA’s trade mag The Alchemist, that the UK’s monetary central planners at the Bank of England central bank were given supervision of London’s bullion markets as a result of 1986 Financial Services Act legislation also known as the ‘Big Bang Legislation’.

Pg. 16 header of the 2012 article by Robert Guy in The Alchemist

According to Guy, after the Financial Services Act was passed, “The eventual outcome was that the Bank assumed formal supervision of the foreign exchange and bullion markets" where “the bank” is the Bank of England.

Statement by Robert Guy in his 2012 article in The Alchemist

The LBMA with oversight by the bank of England then created a London Code of Conduct for Non-Investment Products (NIPs) where NIPS include currency and bullion.

Interestingly, whereas Singapore-based BullionStar publishes this Code of Conduct, the NIPs code cannot be found online either on the BoE or the LBMA websites. Please post a link to the code in the comments section if you find it online at either of these oversight bodies.

The NIPs code states in its introduction “The NIPs Code has been drawn up by a wide cross-section of market participants including the Bank of England and the Financial Services Authority.”

In The Alchemist article Why Regulate Precious Metals (July 2010 Issue #59), Joel Cook Global Head of Commodities Compliance, Standard Chartered Bank, states “Compliance with the NIPs code for example is essentially on a voluntary basis.”

In other words, the London gold and silver market is strictly regulated with voluntary compliance codes.

Unallocated Spot (Immediate Ownership) Virtual Metal Contracts

When we look into the NIPs code itself, we find the following definition for Settlement and Delivery of gold and silver for contracts traded in the City of London:

“These include physical delivery at the vault of the dealer or elsewhere, by credit to an allocated or unallocated account with the dealer…”

Extract from pg. 37 of the NIPs code.

The NIPs code contains the following definition of an unallocated account for gold and silver:

Extract from pg. 38 of the NIPS code.

The Bank of England regulatory authority have thus taken oversight of the London gold and silver market with voluntary codes of conduct by traders and allow for creation of Unallocated gold and silver spot contracts that are mere promissory notes of the issuer.

Issuance of unallocated promissory notes in the spot / cash market for gold and silver allow the creation of an artificial supply of metal that is held by investors and traders globally as equivalent to physical bar ownership whereas, due to the potentially unlimited leverage, these contracts are far from that. The holders of unallocated spot contracts are left as mere unsecured creditors.

The ‘money printers’ setting monetary policy at the Bank of England have for decades allowed creation of enormous amounts of promissory note virtual spot gold and silver thus attenuating price signals from these important metals that are essential warning signals of inflationary and loose monetary policy when it is executed by these self-same regulators.

We now have a global debt and speculation bubble that is folding in on itself.

Watch silver. The London spot market claims on this metal appears to dwarf the actual very limited global vault stock and mine supply of this essential monetary and industrial metal.

Best regards,

David Jensen