The Relative Sizes of the LBM OTC Market and the COMEX/GLOBEX Futures Exchange

Is the COMEX/GLOBEX ‘the be all and end all’ of the world’s precious metals market places, or does the LBM also play a large role, one that even surpasses the former, not only in volume but perhaps also in significance when it comes to certain aspects?

For me, this issue of the relative size, and therefore potentially the importance, of the LBM (London Bullion Market – see end note) in comparison to the COMEX recently arose in a small circle of those I regularly correspond with on matters pertaining to gold and silver. I sent around a posting by Victor the Cleaner on one of the more popular PM sites, in which he said that the LBMA dwarfs the size of the COMEX. One of my correspondents thought that was interesting enough to ask Ted Butler personally if that were true. Ted replied that he didn’t think that was correct. He has now stated this in his newsletter as follows (as ‘stolen’ by Ed Steer in his March 22 Gold and Silver Daily):

"For more than 30 years, I have noticed that on unique U.S. holidays, when Europe is open for business and the US closed, worldwide trading almost stops altogether in gold and silver. That wouldn’t seem to be the case if the COMEX were [smaller than the LBMA]. Further, the most dominant COMEX traders are also the most dominant traders on the LBMA and the OTC markets...and the allegations of manipulation are principally aimed at these traders anyway." ...

I don’t know why Butler has concluded that ‘trading almost stops altogether’ when the LMBA is open and the COMEX is closed for the day, unless he is just going on the volatility in prices on those days, which does not say anything at all about the volumes traded Over the Counter on the LBM, and could indeed be just because the US players are not active in either the LMBA or GLOBEX on those days, pushing apparent prices around. Whether or not the dominant COMEX traders are also the dominant traders on the LMBA is possible, but I would like to see some hard information backing up that assertion. In any event, how prices are established on the LBM, and on the COMEX/GLOBEX will need to be a matter for another post on another day if there seems to be enough interest in this effort, which begins the investigation of the relative importance of the two by establishing the relative magnitude of trades on each one. What would seem to matter most are those trades that result in the physical transfer of precious metals in the two very different ‘markets’, so that will be my focus in what follows, to the extent that relevant data can be readily discovered using only the Internet in a very finite amount of time.

The LBMA publishes monthly LBM clearing statistics for both gold and silver going back many years (http://www.lbma.org.uk/pages/index.cfm?page_id=50&title=clearing_-_statistical_table), in millions of ounces transferred per day. The reported total value in US$ billions and the number of transfers also appear to be daily figures. The table below shows data for 2011, and although not explicitly stated on the page with the statistics, the associated clearing background page (http://www.lbma.org.uk/pages/index.cfm?page_id=49&title=clearing_background) implies that the figures include both allocated and unallocated transfers. In the final three columns, I have added the number of business days in each month (including any holidays as I don't know what they were in the UK) and on that basis have calculated the approximate total ounces transferred per month, in millions. Quarter 1 totals are included for comparison with the second table, below:

Table 1: BD = Business Days

The yearly totals are 5,811,200,000 oz Au (180,730 Tons) and 45,403,000,000 oz Ag (1,412,048 Tons). Those figures are huge multiples of annual world production and, in the case of silver in particular, existing world stocks.

Fortunately, there are LMBA Liquidity Survey Figures for Quarter 1, 2011 (http://www.lbma.org.uk/assets/Loco_London_Liquidity_Surveyrv.pdf - thanks to Bron Suchecki for the link), which help greatly in reducing the figures in the first table to more meaningful amounts.

First of all, the figures were assembled on a 'volunteer' basis', and only 36 out of 56 full members of the LBMA chose to participate, although they included all of the 'market makers'. Figures were requested for both sales and purchases with both other members and other parties. Separate figures were also tabulated for spot versus forward contracts and 'other' things like swaps and options, etc, but excluding deposits and loans.

Table 2: LBMA Turnover for 2011


* Data Source: LBMA, Comprised of data from 36 LBMA Members, including all spot and forward Market Makers, for spot and forward Loco London transactions
** The original LBMA document uses the dollar for currency symbol, so we assume this is USD.
*** Table split into two sections for clarity. For original table, refer source document

Points to consider:

From the text: 'It should be noted that the figures provided for trade between members were divided by two in order to avoid double counting. This is rather conservative in that many of the trades reported with members would be with members that were not themselves reporting .' This further dilutes the reported figures, perhaps significantly.

Since the turnover figures above are for 'transfers' (presumably meaning traded contracts) they include both turnover and clearing contracts, which were stated to occur at approximately a 10:1 ratio. Figure 2 in the document, a pie chart, seems to approximately confirm that ratio. So, perhaps the decimal points above need to be moved one place to the left to indicate cleared contracts, 90% of those being spot contracts.

The reported average daily trading figure of 173,713,000, multiplied by the assumed 64 trading days in the quarter, equals 11,117,632,000, close enough to the reported 10,943,926,000, so let’s say that the survey indicates that 11 billion ounces were traded in Q1. So, if we move the decimal point one place to the left and take 90% of that, we get close to a nice round 1 billion ounces of Au changing hands on the LMBA OTC market in QI 2011.

Since that survey number is known to be under reported to one degree or another, it is a fair ball park match for the 1.2 billion ounces in Q1 2011 from the LMBA clearing statistics in the first table.

However, figures from both sources would seem to include both unallocated and allocated metal. If we then take Jeffrey Christian's figure of 100:1 for paper versus physical at face value, the decimal points would need to be moved another two places to the left to produce figures for allocated physical gold, producing 12 million ounces settled in Q1 2011.

On that admittedly rough basis, a total of 58 million ounces (1,804 tons Au) of real physical gold may have actually changed hands in London for the whole year, taking the clearing statistics in the first table,at face value and then moving the decimal point three places to the left.

For silver, also from the first table, the corresponding number would be roughly 454 million ounces (14,119 tons Ag) of physical metal changing hands on the LBM in all of 2011.

What about the COMEX, then?

As the final figures above are an attempt to approximate the number of physical ounces of Au and Ag that change hands on the LBMA OTC market on a yearly basis, to make a comparison with the COMEX I needed to come up with corresponding figures. The similar figures most readily available to me are what Harvey Organ provides in his Daily Gold & Silver Report (http://harveyorgan.blogspot.com.au/). Around the last trading day of the month, he provides the total number of contracts delivered and still deliverable, adjusting daily for the number of contracts that appear to be cash settled. In looking for the final monthly figures for 2011, my browser would only let me see the last day in his reporting weeks before the last day of active trading for a month, so the following figures may understate the total number of settled contracts for the month, but the remaining days usually only involve small numbers of contracts of which a number are often cash settled. So I am using what I could find easily. The figures are as follows, the dates being the day of the month of Harvey's reports that I used:

Table 3: Ounces and Tonnes Traded on Comex (source: Harvey Organ Blogspot)

On the basis of all these admittedly approximate figures for 2011, it does indeed seem as though the annual amount of physical gold changing hands on the LMB is roughly 9 times greater than on the COMEX, whereas for silver, the ratio is nearly 12:1.

So Victor the Cleaner was right about the LMBA physical volume being around ten times the COMEX in terms of physically settled contracts, and since Ted Butler thought this was just not the case, one might conclude that he is simply fixated on the COMEX and doesn't appreciate what is going on in the rest of the world. However, before one could legitimately reach that conclusion, there are other things to take into consideration, which will be covered in a subsequent posting or two.

NB. The London Bullion Market Association (LBMA) operates the London Bullion Market (LBM), but the two acronyms are often used interchangeably to refer to either or both. It is important to understand that the LBM is NOT an exchange where prices are ‘discovered’ and disseminated. It is an Over the Counter (OTC) market where buyers and sellers privately agree on the price of a given transaction, much as you might haggle with your local coin dealer over an eventually agreed price you will pay for a particular ASE at a given time. Just as the dealer might agree to a better price if you promise not to tell anyone else what it was, it is in the interests of the participants in the LBM not to advertise what particular prices they settle on.