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The London Bullion Market Association ISSUE 60 September 2010

In this issue

Gauging the Long-Term Cost of

Gold Mine Production
by Mark Fellows
page 3

Silver Investment in the

United States and India
by Michael DiRienzo
page 8

Broking: Computerwelt
by Darryl Hooker
page 11

LBMA Edelmetalle Conference

Preview 2010
by Edel Tully
page 14

London Good Delivery History

The Making of a Masterpiece
by Alice Toulmin
page 16

by Stewart Murray
page 17

Regulation and Cleared

Editorial Comment
by David Gornall
page 22

The Rise and Fall of the

Gold Producer Hedge Book Open Pit Gold Mine – Castle Mountain Mine, near Searchlight, Nevada.
by William Tankard Mark Fellows discusses gold mine economics on page three.
page 22
All the metals – all the angles – all the time





Gauging the Long-Term Cost of Gold

Mine Production
By Mark Fellows, Managing Director, GFMS Mine Economics

What is the ‘true’, fully loaded

Figure 1: Drivers of Gold Mine Economics
cost of global gold mine
production, and what factors
decide it?

In this article, we aim to quantify

the long-term equilibrium price
required to sustain the industry.
We also examine the impact of
derived from a ‘bottom-up’ understanding of by reducing cut-off grade, exploiting previously
changes in the main production resource quality, orebody geometry, mining and uneconomic mineralisation. This has the effect
processing methods, labour costs, productivity, of extending mine life, while lowering gold
cost drivers: orebody quality, input energy usage and consumable input costs. output and causing costs to rise. Some mines
are inherently more flexible than others, with
costs, currency value and metal The Drivers of Gold Mine larger, higher-grade, ‘massive’, near-surface
Profitability orebodies having significant advantages in this
prices. Figure 1 shows the main factors that interact to regard.
dictate the profitability of a gold mining
Believe it or not, gold mining is not a simple operation. At first glance, the diagram would
activity. Despite the archetypal image of a basic seem to imply that few of the drivers can be
industry, with grizzled miners toiling away significantly influenced by mine management,
shifting dirt, gold mines are in fact highly but this is not really the full story, as the relative
complex, dynamic systems. Multiple importance of the factors shown varies
controllable and non-controllable factors, some enormously.
of which interact in unpredictable ways, affect Strategy is the overriding factor, dictating
output levels and profitability. To add to the the scale of operation, mining and processing
complexity, global gold mines are techniques used, and mine lifespan. This is in
heterogeneous, varying widely in geology, scale, turn dependent on resource quality, which is to
technologies and cost structure. some extent uncontrollable, but a key point in
As a result, considerable care must be taken this regard is that resource size and grade can
when analysing, summarising and be influenced by strategy. How much is
prognosticating about the industry. Bearing management willing and able to invest in
that in mind, this article draws upon the exploration ahead of production? What cut-off
analysis in GFMS’s Gold Mine Economics grades do they select?
service to reach some conclusions about the Cut-off grade selection is arguably the main
long-term economics of the sector. factor deciding the economics of a mine, as it
The Gold Mine Economics service dictates the tonnage and grade of ore to be
comprises detailed mine-by-mine analysis of mined, and in turn the scale, lifespan and
reserves/resources, production, operating profitability of the operation. Cut-off grade is
costs, capital costs and cash flows for more than defined as the lowest grade of ore that it is
300 gold mines and projects, with historical economically feasible to extract, and it in turn
data and forecasts to 2030. By benchmarking depends on forward-looking metal prices,
detailed technical, operating and financial operating parameters and cost assumptions
parameters, we aim to provide the best possible made by mine management.
insight into the drivers of the industry’s cost Cut-off grade provides the mechanism by
structure. Based on a stringent methodology which miners respond to changing metal
for analysing mine operating costs, analysis is prices. If prices rise, they can extend mine life

page 3

As gold prices have risen roughly five-fold is defined as capital expenditure necessary to in production. As the gold price recovered
since 1999, average gold mine ore grades have sustain production rates at a mine. The global from 2002 onwards, positive all-in cost margins
fallen by nearly 30%, in large part due average all-in cost for 2009 was were quickly re-established and maintained.
to this cut-off grade response. This The $717/oz, up $27/oz on 2008. However, until 2009, miners were unable to
also partly explains why gold Although cash cost measures deliver sustained production growth, given that
mine production has not fixation on cash such as total cash cost are a they were reducing cut-off grades to take
increased significantly, as useful gauge of advantage of higher prices, extending mine life
producers have focused costs has fostered a competitiveness at the mine- at the expense of higher costs.
instead on extending their by-mine level, they do not
mine lives. This has been general perception that account for a substantial Implications for Long-Term Prices:
exacerbated by a ‘discovery portion of the cost required The Future
drought’, with very few global gold mine margins to develop and sustain gold Although all-in cost is undoubtedly a superior
world-class gold orebodies mining operations, so are measure of ‘full’ industry production costs, we
being discovered in recent are higher than is arguably less useful as a admit that it does not account for certain cost
years, despite record measure of ‘real’ industry components that also have a bearing on the true
exploration expenditure. Over actually the case. margins, or the long-term gold long-term break-even cost of gold mine
the same period, all-in production price required to incentivise gold production.
costs have more than doubled, partly mine production growth. All-in costs include sustained/ongoing
due to severe input cost inflation, but also The historic relationship between all-in capital expenditure and depreciation of sunk
due to lower cut-off grades. costs and gold price paints a clear picture. capital costs, but not current-year project
Figure 2 shows the sensitivity of gold mine During the 1997 to 2001 bear market, average development and expansion capital costs. In
production costs to the main drivers, on a all-in cost margins were strongly negative, with 2009, the gold mining industry invested an
global average basis. For instance, a 10% fall in costs tracking the gold price downwards in an average of $173/oz of global production in
global average ore grade gives rise to a $50/oz effort to regain profitability, or at least remain project development and mine expansion.
rise in average production costs.
Besides grades and process recoveries,
production costs have the highest sensitivity to
Figure 2: Sensitivity of Production Costs to Key Drivers
changes in exchange rates, with a 10%
strengthening of the dollar giving rise to a
$47/oz fall in average production costs on a
global average basis. Exchange rates are usually
the largest single determinant of year-on-year
global average production cost changes.
With regard to input costs, labour is by far
the most sensitive cost component, by virtue of
its large proportion of a typical operating cost

Production Cost Metrics:

What’s Useful?
GFMS contends that the gold mining industry’s
historic preference for reporting and
comparing cash cost parameters, rather than
adopting a profitability measure that is more
reflective of the true, ‘fully loaded’ costs of Source: GFMS Mine Economics
production, has ultimately proved misleading
and counterproductive.
The fixation on cash costs has fostered a
Figure 3: All-in Cost versus Gold Price (rebased to 2009 $ terms)
general perception that global gold mine
margins are higher than is actually the case.
All-in cost is a proprietary GFMS Mine
Economics $/oz cost metric, designed to
reflect the full marginal cost of gold mining. In
addition to mine site cash expenses (mining,
ore processing, on-site general and
administrative costs), refining charges, royalties
and production taxes, by-product credits,
depreciation, amortisation and reclamation
cost, it includes ongoing capital expenditure,
indirect costs and overheads. The latter
includes corporate administrative costs, interest
charges, mine site exploration and any
extraordinary charges, such as retrenchment
costs, carrying value write-downs, etc.
Ongoing (‘stay-in-business’) capital expenditure Source: GFMS Mine Economics

page 4
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Likewise, all-in costs exclude greenfield (i.e. these cost drivers will doubtless continue to Mark Fellows is
early-stage project) exploration expenditure, creep upwards in future. The largest single cost Managing Director
which is estimated to equate to $35-$60/oz of component, labour costs, continue to rise; for of GFMS Mine
annual production. Taking these additional instance, in local currency terms, South African Economics.
costs into account, GFMS Mine Economics labour costs have increased by 10% per annum Mark began his 23-
contends that the ‘true’ long-term cost of gold on average since 1999, with the two-year year career in the
mine production stood somewhere between agreement signed by the main producers in mining industry as
$925 and $950/oz in 2009, a sobering thought 2009 committing to ongoing 7.5-10.5% wage an exploration
when one remembers that this figure does not increases. There is undoubtedly a tendency, geologist with Anglo
allow for any return to shareholders. now established, toward increasing unit labour American/De Beers.
Long-term equilibrium production costs costs in developing countries, as globalised He went on to work
will remain highly sensitive to the key cost mining companies export better operating for several junior
drivers, some of which are partially within practices, along with higher productivity levels explorers, prospecting for diamonds,
managements’ area of influence or control, but and better pay. gold, base metals and industrial
most of which are uncontrollable. Many of Similarly, other input costs will continue to minerals in Africa. In 1992, he
rise in real terms, as energy and consumable joined Brook Hunt, a globally
costs are pushed upward by increased renowned mineral economics
competition for resources, and greater consultancy, serving as a director,
regulatory and tax burdens, such as carbon responsible for BH’s Gold Mine
taxes. Costs study and numerous bespoke
This said, as highly complex dynamic consulting assignments from 1999 to
systems, well-managed gold mines will 2005.
continue to adapt, utilising whatever flexibility GFMS Mine Economics was
is provided by their orebodies. Despite record launched in early 2009, with aim of
exploration expenditure, the extent to which delivering high-quality, detailed
this will be bolstered by the discovery of new insight into the economics of mine
world-class deposits over the coming years production, exploration and
remains to be seen. n development, across a broad range
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Christian Pfeifer to UBS John Reid to

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Lucien Weisen to Commerzbank for the Rand Refinery in South
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Silver Investment in the

United States and India
By Michael DiRienzo, Executive Director, The Silver Institute

While India and the United investments. More sophisticated investors have record of 78.7 Moz in 2009, driven by a spike
sought to leverage silver investing with mining in retail demand. This increase was led
States stand out as two of the shares and mutual funds and more recently with primarily by the United States and Western
exchange-traded funds (ETFs). Europe. Looking at the table below, silver coin
most important drivers for silver When examining current silver investment and medal fabrication increased nearly 60%
in the United States and India, it is important to between 2000 and 2009.
investment demand, how they do look at the global picture. Over the course of
the last three years, world investment has more Silver Investment in the United
it is a study in contrasts. The than tripled, rising from 61.7 Moz (millions of States
ounces) in 2007 to 215.6 Moz in 2009.1 From In the United States, physical investment in
roots of their silver investment are 2008 to 2009, global silver investment leapt by silver is dominated by the purchase of one-
a staggering 184%. ounce bullion coins and 100-ounce bars. The
well established and the past Perhaps one of the most important bars are almost entirely produced locally.
developments in the silver investment market However, the surge in demand during 2008 saw
several years of global economic in the past 50 years was the advent of precious a number of other institutions start to produce
metals ETFs in 2004. These investment their own bars, including private mints and
turmoil have only served to products, which trade like stocks, have served industrial manufacturers.
to ‘democratise’ global silver investing by The coin market is dominated by the US
reaffirm these two nations’ making it convenient for retail investors who Mint’s Eagle one-ounce bullion coin. A number
might otherwise have eschewed silver investing of overseas bullion coins have also proved
affinity with the white metal. because of the difficulties of storage, insurance popular in the United States, particularly the
and assaying. That convenience, coupled with a Canadian Maple Leaf, although for example the
Indian silver demand, like gold, is largely global financial crisis and greater shifts toward Austrian Vienna Philharmonic and Australian
fuelled by rural investors, mainly farmers who portfolio diversification, has pushed the silver Kookaburra, Lunar and Koala coins have all
seek to convert some of their income into price higher in recent years. Examining ETFs achieved some success.
savings in the form of bangles, other jewellery more closely, total holdings in 2009 rose by The silver Eagle, first introduced in 1986,
and decorative ornaments. Shifts in 132.5 Moz, ending the year at 397.8 Moz. The saw sales remain broadly stable during much of
demographics are slowly changing investment growth was the product of increased holdings the 2000s, averaging 9.4 Moz during 2000-
patterns in India, as increasing numbers move of the three funds that were active
to urban areas. The June-to-September at the beginning of 2009, and the
monsoon season remains an important factor in launch of new silver ETFs in
silver demand and bountiful rains are often the Australia and United States last
harbinger of upticks in investment. year. On the whole, between
The United States has a rich history of silver 2005 and year-end 2009, the
mining and investment. American investors silver price increased a staggering
have long had a predilection for physical silver, 141%.
favouring coins and bars to stash investment Turning to global silver coin
cash. On the retail side, many smaller investors and medal fabrication, this
like the portability of coins and smaller bars, segment of investment demand
and the discretion that comes with such grew by a hearty 21% to a new

page 8

2007. However, since 2008, minting has Silver Investment in India continue to hold off a significant swing to the
increased substantially, with total coin output in Today in India, investment in silver continues to upside in this segment.
both 2008 and 2009 achieving successive take place in what might be termed ‘traditional Notwithstanding the preferred form of
records of 19.6 Moz and 28.8 Moz. forms’, namely heavy, high-karat, low-labour, investment, there still exists an active two-way
Furthermore, 2010 is on course to post a new plain silver jewellery (silverware, as a form of market for each segment. In this regard, while
record high, with combined January-to-July investment, has been adversely affected in jewellery would typically be sold back once in a
sales up 27% year-on-year. Demand for these recent years due to under-karating), as well as given year (mainly during May and June to fund
coins is so strong that the US Mint has at times through the hoarding of bars. In contrast, coins the sowing of monsoon crops), the trading in
struggled to keep pace. At the heart of the are a small fraction of the overall Indian bars might be more frequent, being more
problem is the difficulty in sourcing sufficient investment market. dependent on changing investor price
planchets (or blanks). Silver jewellery forms the bulk of expectations.
The growth in silver investment demand investment in rural areas, while urban centres In terms of recent trends in the Indian
during 2008 pre-dated the collapse of Lehman show a preference for lower mark-up bars. market, the record level of investment in 2008
Brothers, although the ensuing credit crisis led That said, some rural areas have also developed was due to a combination of strong demand
to heightened retail demand. This surge also an interest in bars, particularly those that are from urban dwellers and from
led to heightened retail purchases of 100-ounce well connected to cities. Overall, retail silverware/jewellery fabricators. Both of these
bars. Again, demand was so marked that jewellery consumption grew by 6% in 2009, groups deemed prevailing silver prices to be
shortages emerged in the bar market, which again driven primarily by an improvement in undervalued, with expectations therefore of
encouraged a number of new entrants to begin demand from rural areas, which are the strong future gains. Conversely, the rush to
their own production. backbone of the heavy jewellery market in disinvest in 2009 was arguably of little surprise,
In 2010, although US bar demand has fallen weight terms. The modern jewellery segment given that rupee silver prices had broadly
noticeably, US coin minting has continued to saw considerable growth in 2009, both locally fulfilled investors’ expectations, resulting in
grow, driven by firm demand at home and and for exports. Among other things, higher both actual dishoarding and the manufacture of
overseas, principally in Western Europe, gold prices spurred substitution into silver. bars into jewellery and silverware, which would
encouraged by Europe’s sovereign debt crisis. Ongoing urbanisation, concerns over elevated also be classified as dishoarding. This pattern
prices and issues related to under-karating was spread throughout the year, despite the fact

In terms of
recent trends in the
Indian market, the record level
of investment in 2008 was due to
a combination of strong demand
from urban dwellers and from

page 9

that until July the average year-on- Michael DiRienzo

year silver price was some 7% lower. serves as the Executive
According to GFMS, this Director of the Silver
disinvestment was not price-related Institute, an international
and essentially was the consequence association whose
of the conversion of bars, acquired by membership comprises The London Gold Market Fixing
the trade the year before, into major participants in the
jewellery and silverware. Toward the silver industry. In that
latter part of the year, disinvestment capacity, Michael manages Limited has announced that
took a more conventional form – the Institute’s overall daily
investors taking profits on escalating activities, budget
prices. development and there will be no afternoon gold
This year, it appears as though management, implementing the annual plan,
India may see a modest return to net and public affairs activities.
hoarding. With local prices hovering From 1999-2002, Michael served as Fixings on Christmas Eve,
around Rs29,000/kg at the time of Vice President of the Gold Institute, managing
writing, many investors have been that association’s government and public
discouraged from entering the silver relations activities. Prior to 1999, Michael Friday 24th December 2010,
market. It therefore appears that served as a government affairs representative for
prices below Rs25,000/kg may be Janus/Merritt Strategies, a political and
required to stimulate retail interest in strategic management firm. Michael also nor New Year’s Eve,
the Indian market. However, as gold represented a member company of the Toyota
continues to push higher, the Indian Group as Director of Government Relations.
investor’s desire may increase, Formerly, Michael served as Legislative Assistant Friday 31st December 2010.
especially if bountiful monsoon rains and Press Secretary to the Chairman of the
bring better harvests. n House Rules Committee, U.S. Congressman
David Dreier (R-CA). During his tenure with
1World Silver Survey 2010, which is the Chairman, Michael worked on Banking
produced by GFMS Ltd on behalf of the Committee and Small Business Committee issues.
Silver Institute

Broking: Computerwelt
By Darryl Hooker, Global New/Emerging Market Manager, ICAP plc

It was a balmy August morning in potent tool if they can communicate well with 12 or 16 boxes and conduct business. The
together. volume of noise however was immense, as this
1980 when I turned the corner After three months, I was given a chance to was open outcry in every sense.
be a ‘link man’, which meant I spoke to other This to me was technically superior to any
into New Broad Street and stared brokers in other centres to see if we could other trading environment I had seen – voice
effectively put our orders together. I spoke to boxes everywhere, tap on/tap off mute
at the stone façade of Friars Dublin, Brussels and Paris – but I was still one features, hand signals, acronyms, banter and
step removed from talking to my own set of abuse, all writhing around me and threatening
House, the home of Woellwarth & banks. Eventually, I was let loose on an exotics to pull me under! Everyday, I was totally
desk, where I had free reign over spot, short exhausted, and when offered the chance six
Co, a brokerage house, which was and forwards in a slew of Far Eastern months later to go and work overseas, I had no
currencies. Of course, I had loftier ambitions, hesitation in accepting – but that’s another
part of the Mercantile House so a year later, I threw my toys out of the pram story.
and demanded to work on a bigger desk or I remember around this time that the
Group. overseas. English daily tabloids could not get enough of
the trading markets, young guns with their fast
I had started my career in the financial markets cars, high energy, high jinks, beautiful girls and
and first held what could be considered a bad habits. However, I believe it was one of the
Dickensian position – trainee scribe.Yes, I had broadsheets that wrote a very serious article
arrived in the City! Now, this meant that I was addressing the uptake of technology in the
the chap who watched the guy who wrote the financial markets, and finally asked the
deal tickets for the broker who did the question of a chief dealer at a large and
deals. However, my biggest challenge reputable American bank in London:
during the first few weeks was not only “Would technology one day replace his
to remember the lunch orders, but also brokers?” His answer was loaded with
to stay awake. I sat facing a dealing the champagne-bubble bravado of the
board covered in almost 200 eighties: “Never – because the machine
rectangular plastic plugs inscribed with can’t buy me a beer!” But this article
the names of banks. Now to further has stayed in my mind ever since, and
the hypnotic effect of staring at these all these years later, it could be argued
all day, the plugs went from grey to that the chief dealer was both right and
blinking white to red, rather like a wrong.
Christmas tree, as the banks and In 1982, I saw my first Reuters
brokers talked to each other all day, screen – black background and green
transacting short date sterling swaps. The characters. A Swiss colleague had joined
noise only came from the brokers us in London on the proviso that he was
themselves as they called out their orders given his own Reuters screen. I was
and executed their customers’ trades. mesmerised by the way he could type in a four
The role of the broker is a remarkably character code and tell me the weather in
simple one – all you have to do is find a buyer Grenoble, or the football scores from Spain last
and a seller of the same product, at the same night or what the gold prices were across a
price, in the same amount, at exactly the same group of contributors – it was love at first
time. The broker is not a principal in the trade sight!
and works purely on behalf of his customers’ In those days, people listened and reacted The developments from the ‘squawk boxes’
interests. So why should these brokers be so quickly, it was the nature of the markets we and ‘bat phones’ (an open link to several
highly regarded – surely it wasn’t a difficult were being blooded on, and so it was a week broking offices around the world) soon
job? Of course, you then have to consider other later that I started on the spot USD/DEM accelerated as I recall seeing the first
factors – the broker is typically working for a (Deutschmark) at Marshalls London – the microphones giving multi-quotation to 16
number of clients at once with varying number one spot desk in London, and indeed customers at once, and this was accompanied
interests, he also has to be aware of what all the the world. (on busier desks) by light systems to indicate
other brokers are doing on the desk and in Spot FX (or spot anything for that matter) bids and offers at the top of the book. The idea
what order their interests are to be executed (if was renowned for two things – speed and behind all this was of course to increase
at the same price), and then of course, there simplicity. It wasn’t rocket science, but you had efficiency, speed up the execution, move on to
may be breaking news. As activity increases, so to have great mental agility to make sense out the next trade and ultimately do as much
too does the noise, adrenaline levels rise and of apparent mayhem. Due to the speed and business as ‘humanly’ possible. But therein lay
fall, as do egos, and the ability to master the frequency of trading, each bank required a the fate of some heavily commoditised
turmoil becomes of paramount importance. A ‘squawk box’ so that it could be heard, and this products, be it XAU/USD or EUR/USD, as by
good broker is possibly a bank dealer’s most also meant a good broker could comfortably sit 1990, we had maxed out how much was

page 11

‘humanly’ possible to transact. The only way it and it was in 2000 that EBS became the first ‘old hand’ saying very little and maybe
could have got bigger was for the trade sizes to electronic platform to offer quotations in sometimes pining for the old days. The seconds
have got bigger, which would have meant banks XAU/USD and XAG/USD too. This was a have become milliseconds (I remember an IT
taking on much larger positions and greater massive step in a new direction for a platform chap correcting my Freudian slip one day when
risk. But surely this bubble would never burst? that had made its name in spot FX. Again, he said: “You mean 300 milliseconds not 30 –
In the early nineties, Reuters developed a brokerage levels were slashed and, literally it’s not possible for a round trip deal time!” But
‘matching’ system that would automatically overnight, the voice brokers found that these he’s wrong now): volumes are now counted in
match buyers and sellers, according to pre- two precious metal spot markets had found a billions, not millions; and STP systems and
screened credit and price, who remained new venue for execution. This story was arbitrators keep track of trades and actions
anonymous until a ‘match’ took place, duplicated a few years later when EBS (now (keystrokes) beyond any manual capability.
whereupon both parties’ names were disclosed owned by ICAP) launched spot platinum and Voice and electronic broking are still
to each other. It was wonderfully efficient, it palladium too. working side by side in an uneasy alliance, but
was quiet, it didn’t miss prices (the trader Electronic broking has been embraced with both offer unique opportunities to customers.
did!), it offered immediate name give-up and varying degrees of success by many others. The more negotiable a product, the more it
never changed the details on a trade – and as if CME could tell a similar story of the transition lends itself to voice broking; the more
that wasn’t enough, brokerage rates were from the pit to on-screen trading. I remember vanilla/commoditised it is, the more it lends
savagely cut too. being quizzed by a colleague as to why CME itself towards electronic broking.
A turning point for me was in 1997, as a electronic volumes in precious metals had This month marks my 30th anniversary in
broker on a desk in New York. I casually asked a suddenly and dramatically risen by 90% (a lead the financial markets, with similar periods of
trader in Toronto if she could show me a price, story from a respected media source). Scrolling time spent both voice and electronic broking. I
and immediately she said she would “check the through the article and down to the reported am taunted by some of my old broker friends
toy”. That was the day that I knew a few digits figures, I also saw that the pit volumes were that I have defected to the “dark side”, but to be
on a computer screen offered more reliability down by about 90% too (it was the time of honest, these are all shades of grey. There is no
and comfort to the trader than I did. transition). dark side, both types of broking offer unique
So how could Reuters Matching possibly be e-Broking (as we refer to it now) is still a services and they finesse the work they are
equalled or indeed improved upon – it just tremendously vibrant business as one given. I like to think that being a good broker
didn’t seem likely and, for a while, it did enjoy innovation relentlessly follows another. The (electronic or voice) is akin to being a good
a monopoly in this unique space. As we have buzzwords these days are ‘latency’, ‘efficiency’ referee – if you don’t notice him, he’s doing a
seen over many decades, one’s customers often and ‘liquidity’, and we use acronyms like API, good job of running the game.
become one’s competitors, and so it was that, HFT and MQL. The language may have So finally, was the American banker in the
in 1993, a group of a dozen of the world’s changed, but the sentiment hasn’t – make it early eighties right or wrong when he said that
largest banks formed EBS. The mandate was simpler, make it quicker, make it cheaper and the voice broker cannot be replaced “because
simple: to create a tool as good as or better make it more liquid. the machine can’t buy me a beer”? I hope we
than Reuters Matching and reduce the costs to I used to brag to my friends back in my can discuss it over a pint at the LBMA
the banks – workstation charges and brokerage hometown pub about how many millions I had conference in Berlin – and that will be another
– even further. transacted between my customers, and how I story! n
Within a few years, EBS had in the eyes of did all these trades in a matter of a few seconds
its board member banks done precisely this, and could keep track of the chaos. Now I am an

Darryl Hooker joined
call[would sir like a drink?] ICAP (then EBS Dealing
Resources) in 2000.
Previously, having worked
for an underwriter at
Lloyds of London, Darryl
moved onto Foreign
Exchange broking with MW
Marshall Inc, where he
worked in 8 countries on 5
continents. Darryl was
promoted to Managing
Director of the New Zealand office and was
the youngest appointed Managing Director
Having worked for MW Marshall for 17
years, Darryl moved onto Reuters America, in
the position of Senior Business Development
Executive, where he oversaw all Spot trading
in the United States.

page 12

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LBMA Edelmetalle Conference 2010

By Edel Tully, Chair, LBMA Public Affairs Committee

It is LBMA Conference market entered a new paradigm, or is gold

another boom to bust story? This will
time once again, for this permeate the Conference sessions, including
investment, the traditional physical market and
delegate just a short the official sector – all of which have
experienced significant changes in recent years.
hop away, in Berlin.The The potential impact of regulation receives
attention, and not forgetting that this is a
storied Hotel Adlon is precious metals Conference, we devote a full
session to the world of auto catalysts, Southern
our venue, and I’m sure Africa and PGM investment.
The core argument of the Conference will
we shall add to its be dissected further in the presidential style
debate by industry experts specialising in
legends. different areas of the market. But we don’t just
stop there; this platform will venture beyond
The LBMA’s choice of Germany makes perfect will not be a backward-looking Conference. the current metals story, so have your questions
sense; Germany is after all the second largest No other platform offers the opportunity to ready for the panel. This year, we have again
official sector holder of gold. explore the multi-layered precious metals installed Steve Branton-Speak of Goldman
Through companies such as markets with experienced industry Sachs to chair what has proven to be one of the
Heraeus Metallhandelsgesellschaft mbh and professionals and select external experts. It most popular sessions. To wrap it all up, John
Degussa AG, Germany has a multi-century also offers the best opportunity to network and Reade, of Paulson Europe, will summarise the
relationship with all precious metals. Its debate – heated or otherwise – the issues most highlights from each session.
affiliation with physical gold was quite obvious pressing to our markets and industry going Finally, as Chair of the Public Affairs
this summer as sovereign risk fears heightened forward. Committee, which has the challenging task of
in May and June, pushing gold to record highs Further networking opportunities can be organising the annual Conference, I must thank
and fuelling a surge in small bars and coin found at the cocktail party on Monday 27th, my committee members who work alongside
demand – with Germany one of the largest kindly sponsored by the Fachvereinigung the LBMA Executive to bring you the best
consumers. Let’s not forget Germany’s auto Edelmetalle, followed by the Conference dinner precious metals Conference each year. After
industry, which is a significant consumer of at Charlottenburg Palace. And of course, at the all, it is the Conference, by the industry, for the
platinum group metals. lunches and session breaks. industry. n
Demand for this Conference has been The International Platinum Group
exceptionally strong and we’re delighted that Metals Association is the kind sponsor of Dr Edel Tully is
we have a full house of 450 delegates, making the Welcome Reception, beginning this responsible for precious
this our largest ever. Due to the unprecedented year’s event. In the opening session, we metals strategy at UBS
demand, we closed registration at the end of will be fortunate to hear William White, Investment Bank. Edel has
August, and disappointed delegates have been Chairman of the OECD, and George been a member of the
added to a waiting list. Clearly, based on this Magnus, Senior Economic Adviser at Public Affairs Committee
Conference, interest in precious metals has UBS, lay the foundations of the since 2008 and became its
never been higher! economic and financial backdrop to this Chairperson in June 2009.
The past year has served up volatile price year’s discussion. We are, as ever, Prior to joining UBS earlier
action for all the precious metals, but interest in grateful to all speakers and chairmen for this year, Edel was head of
gold and silver remains steadfast, while giving their time and expertise. This precious metals research at
platinum and palladium have experienced some year, we attempt to look at the two sides Mitsui and Co. Precious
dramatic changes in investor appetite. But this of the gold argument – has the gold Metals Inc. She holds a PhD in gold
calendar seasonality dynamics from
University of Dublin,Trinity College.

London Precious Metals Clearing Limited has announced that the cut-off time for its Members accepting client
instructions for the transfer of gold and silver on Christmas Eve, Friday 24th December 2010, and
NewYear’s Eve, Friday 31st December 2010, will be 2-00 pm London time

London Good Delivery History

The Making of a Masterpiece
By Alice Toulmin, LBMA

When the proposal to publish a specially engraved bar bearing the title of the bars on the list! Having solved the problem of
publication. different widths, she constructed shims from
history of the Gold Good Delivery Rebecca Adamson has been an independent wood and card to raise the height of the bars by
consultant for the LBMA since 2008, being precise millimetres, to form a level surface for
List was put to the LBMA Physical employed initially in the creation of an intranet the photograph. Existing GD bars vary in
website containing a database of information height from 34 mm to 50 mm!
Committee in May, 2010, the about GD bars which is used by the London Most of the bars were from the vaults of the
vaults. After the departure of Douglas Beadle Bank of England, which supported the project
Committee agreed that this would earlier this year, Rebecca began assisting with great enthusiasm and allowed this very
Stewart in the maintenance of the LBMA Good special photoshoot to take place on their
be a valuable reference guide, not premises. HSBC and JP Morgan contributed a
few that were missing from the stock in the
only to the history of the London Bank’s own vaults. The final photograph
features 76 bars from 42 refiners, and one
gold market but also to the unique LBMA GDL bar specially produced by
PAMP SA. Good Delivery refiners whose bars
LBMA’s Good Delivery procedures did not happen to be in the London vaults were
invited to send them in for the photo.
and specifications. On the day, Rebecca and custody staff at the
Bank had an hour and a half to lay the bars out
Based on Tim Green’s many years of gathering on a specially built table. There had been a dry
information on the gold market and more run the previous week, when it took more than
recent painstaking research, the resulting Delivery System – processing applications for three hours to finish the layout, but practice
document is certainly that. However, when the accreditation and monitoring the Proactive made perfect and they were ready when the
LBMA Chief Executive, Stewart Murray, had Monitoring of GD refiners. This experience photographer, Mark Pickthall, of Ion River,
the idea of displaying as many GDL bars as prepared her perfectly for the task ahead of arrived at 9.30 am, complete with a huge
possible on the cover of the publication, he turning Stewart’s idea into a reality. collection of lights and reflectors.
unknowingly initiated the creation of a unique Realising that it would be difficult to fit all After three months of planning and a few
work of art. Stewart admits that his idea was the different refiners on the cover, Rebecca final adjustments, the photographs were taken
only partly original. He recalled the beautiful planned the diagonal layout with 1:3 mock-ups in a matter of minutes.The LBMA Executive
cover of “The Gold Companion”, issued by of the bars, cutting and pasting to find just the would like to thank Rebecca and the Bank of
MKS and PAMP in 1991 and showing a right angle. In the process she became very England Custody Team for their hard work in
diagonal array of their kilobars topped by a familiar with the dimensions of many of the allowing this unique photograph to be taken. n

Rebecca checks the final Rebecca

position of the LBMA bar with Adamson,
photographer Mark Pickthall LBMA

To see the final

photograph in
all its glory,
order a copy of
the Good Delivery List History (see
LBMA News) or visit Rebecca’s
stand at the LBMA Conference.

Mark Pickthall is a
designer and photographer
who has worked on many
LBMA publications.
He can be contacted at

By Stewart Murray, Chief Executive, LBMA

MEMBERSHIP List will be sent a complimentary Metals Market. This has been COMMERCIAL ACTIVITIES
Credit Suisse was reclassified as a copy of the publication, which is prepared with input from the Reference Materials
spot and options Market Maker priced at £25. LPPM so that the document can Gold & Silver Reference
on 19 August, bringing the total cover platinum and palladium as Materials have now been
number of LBMA Market Makers COMMITTEES well as gold and silver. The MOU distributed to all the Good
to ten. Management will be circulated to all Members Delivery Refiners who pre
In order to qualify as an In addition to its normal meetings once it has been discussed with ordered them. It is encouraging
LBMA Market Maker, a company in July and September, the and approved by HM Revenue & to see that sales of the Reference
must offer two-way quotations in Committee held a special strategy Customs. The Committee Materials are now mostly to
both gold and silver to the other meeting in July to look at some of discussed at its most recent companies which are neither
Market Makers throughout the the longer term issues meeting the implications for the members nor represented on the
London business day. confronting the Market. The Market of the ideas put forward Good Delivery List. The LBMA is
Reclassification is the Committee has also reviewed the in the Editorial in the July now beginning to plan for the
responsibility of the LBMA operation of the Market Making Alchemist written by Tim Wilson next phase of the Reference
Management Committee. In system in London for spot, of JP Morgan Chase. He Materials project. A frequent
deciding on the issue of forwards and options. suggested that the LBMA should suggestion has been that materials
reclassification, the Committee have a greater focus on what is suitable for x-ray fluorescence
takes account of the views of the Physical happening in the Asian market. analysis would be useful. Any
other Market Makers on the At its meetings in July and comments on this idea would be
performance of the candidate September, apart from Public Affairs most welcome.
company during an approximately monitoring progress with Good The Committee’s work has been
three-month probationary period. Delivery applications and continuously dominated by Data Commercialisation
The full list of Market Makers proactive monitoring, the Physical intensive discussions on the The automated production of the
on the LBMA website now shows Committee considered a draft speaker programmes for both the LBMA Market Makers’ Gold
in full the products (spot, Best Practice document for upcoming conference which will Forward Curve will be delivered
forwards and options) provided bullion vaults. It is felt that this is be held in Berlin, as well as the at the end of September. There
by each company, their the most appropriate way of Biennial Dinner and the has also been good progress on
participation in the gold and providing guidance to the vaulting associated seminar on 25th the LBMA/LME legal
silver fixes and whether they act community, including those November. The Committee has arrangements. We expect to
as clearers. companies which may be also been investigating possible finalise these legal arrangements
interested in setting up new recipients for the LBMA bursary, shortly and look forward to
GOOD DELIVERY LIST facilities. The Committee is now in addition to its continued further development in the area
The silver refinery of Kazakhmys close to finalising a Memorandum development of the LBMA’s main of LBMA data commercialisation.
plc, located in Balkhash, of Understanding on the PR activities such as the website
Kazakhstan, was added to the application of VAT in the Precious and the Alchemist. Use of Good Delivery List
Silver List on 21 July, 2010. Possibly the LBMA’s most
PT Antam’s refinery in valuable intellectual property is
Jakarta, Indonesia – better known that contained in the Good
as Logam Mulia – registered a BIENNIAL DINNER - 25 NOVEMBER Delivery List. Until now,
new gold bar in July 2010 with Exchanges and Funds which make
amended dimensions and The Biennial Dinner this year will be held on the evening of use of the List have been able to
markings which fully comply with do so free of charge. In future,
the LBMA’s Good Delivery 25th November in Goldsmiths' Hall. Details of the event however, such use will be subject
specifications. to a licence and an annual charge.
will shortly be circulated to all Members and Associates.
The Executive has started to
Good Delivery History – Tickets will cost £110 plus VAT per person. The LBMA has contact Exchanges which make
A New Publication use of the List in this way.
The LBMA has commissioned as usual invited a number of guests from the precious
Timothy Green, the well-known EVENTS
author on gold, to write a history metals industry and the official sector. Visitors
of the Good Delivery List. His On the afternoon of the same day, the LBMA is holding Recent visitors to the LBMA
work covers the era from the first included delegations from two
listing by the Bank of England of a seminar in Goldsmiths' Hall which will address a number Chinese banks, ICBC and the
refiners whose bars were Bank of Communications.
acceptable to it in 1750 to the of topical issues, including regulation, developments in the
modern era in which the List is
London Market and issues facing central bankers.
maintained by the LBMA. All
Members, Associates and
companies on the Good Delivery

page 17

The LBMA’s work on REACH is
almost complete, at least for the
moment. Pre-registered companies
will shortly be contacted by the
Brussels-based Precious Metals
Consortium about how they can gain
access to the necessary Registration
Dossier to complete their
registration (and importantly the
cost of obtaining it).

We are delighted to welcome two
new members of staff who joined us
in the past month. Stuart Playford is
our new Operations Director. He
will take day-to-day responsibility
for general administration of the
Association, including specific
responsibilities in Finance, Human
Resources, IT Systems and Office
Management. Prior to joining the
LBMA, Stuart was the Operations
Manager at Triland Metals Ltd in
London. He has thirteen years of
experience in similar Operations
roles, with a particular focus on
Finance. He is also a fully qualified Chief Executive Presentations
Member of the Chartered Institute
of Management Accountants. The Chief Executive was the guest of honour at the 7th International Gold Convention held in
The other new member of the Goa from 27-29 August, where he delivered a paper on “London and India – Two Great
Executive team is Alice Toulmin who Interlocking Markets”. A copy of his presentation can be found on the website.
takes up the role of looking after the
Alchemist and website, among other The Chief Executive also gave a presentation to a group of Asian Market Makers at a meeting
things. Alice is no stranger to the held in Beijing on 18th September.
LBMA, having previously worked
here in a similar capacity on a
temporary basis. n



7 23-25 2-3 24
World Gold Investment Congress 2010 Mongolia Investment Summit 2010 China Gold and Precious Metals LBMA Annual Party
London London Summit London
T: +44 (0)20 7092 1322 T: +44 (0)20 7827 5997 Shanghai T: +44 (0)20 1196 3067
F: +44 (0)20 7242 1508 F: +44 (0)20 7242 1508 F: +44 (0)20 1196 2112

15-17 25
2010 China International Silver LBMA Biennial Dinner
Conference London
Beijing T: +44 (0)20 1196 3067
T: +86-10-58276078 F: +44 (0)20 1196 2112
T: +86-10-62561821

page 18



©2010 NYSE Euronext. All rights reserved. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent
of NYSE Euronext. NYSE Euronext and its affiliates do not recommend or make any representation as to possible benefits from any securities or investments, or third-party products
or services. Investors should undertake their own due diligence regarding securities and investment practices. This material may contain forward-looking statements regarding NYSE
Euronext and its affiliates that are based on the current beliefs and expectations of management, are subject to significant risks and uncertainties, and which may differ from actual results.

Meet the LBMA Executive

LBMA Conference Team

The LBMA Executive comes to Berlin
in full force to run the LBMA’s annual
Stewart Murray
Precious Metals Conference. The Chief Executive
LBMA Conference is the premier event Conference Host
After qualifying with a first class honours degree in metallurgy from London University, Stewart
in the industry calendar. 2010 has studied for a PhD on titanium at Imperial College, London. In the decade up to 1984, he worked
been a record year with the highest for the International Wrought Copper Council, serving as its Secretary General from 1980 to
1984. He then joined Consolidated Gold Fields where he was responsible for the group's base
attendance of 450 delegates forcing metals commodities research. In 1989, he set up Gold Fields Mineral Services (GFMS) of which he
registration to close on 23rd August. was Chief Executive for the next nine years. His own area of research at GFMS focused on the
Middle East and the Indian Sub-continent.
In 2011, we are looking forward to a His earlier interest in base metals was reflected in his involvement over a twenty-year period
larger venue in Montreal, Canada with the World Bureau of Metal Statistics, of which he was chairman from 1989 to 1991.
In October, 1999, he was appointed Chief Executive of the LBMA.
(18-20 September).
Stewart Murray, LBMA Chief
Stuart Playford
Executive, founder of the LBMA Operations Director
Conference and host, welcomes the Exhibitor Manager
Stuart will take day-to-day responsibility for
market back to his 11th Annual LBMA general administration of the Association,
Precious Metals Conference. Ruth including specific responsibilities in Finance,
Human Resources, IT Systems and Office
Crowell, Commercial Director for the Management. Prior to joining the LBMA, he
LBMA, is the LBMA’s Conference was Operations Manager at Triland Metals Ltd
in London. He has thirteen years’ experience
Organiser. Stuart Playford, in similar Operations roles, with a particular
Operations Director who has recently focus on Finance. Stuart is also a fully qualified
Member of the Chartered Institute of
joined the LBMA Executive, will make Management Accountants.
his debut at the Conference. Collett
Roberts is the LBMA’s On-Site
Conference Manager; and Varsha is
Collett Roberts
Head of Registration. Alice Toulmin Bookkeeper/
has recently returned to the LBMA Administrator
On-site Manager
and during the conference will act as Collett is responsible for providing support to
the main contact for speakers and the Chief Executive in the management of the
LBMA’s financial resources. Collett is the
press. Reference Materials manager as well as the
Welcome to the Conference, and events day manager.

please come to meet the team!

page 20

Varsha Peiris
PA to Chief Executive
Head of Registration
Varsha is responsible for providing support to
the Chief Executive and Commercial Director
in the administration of the Executive Office,
including office management, membership
applications, the LBMA annual conference, the
LBMA website and publications.

Alice Toulmin
PR and Media Assistant
Press and Speaker Contact
Alice’s focus is on the Alchemist and LBMA
website. She also works on other publications
and PAC-related activities.

Ruth Crowell
Commercial Director
Conference Organiser
Prior to joining the LBMA, Ruth worked in bank finance and US corporate law at the law firms of
White & Case and Norton Rose, as well as acted as a monitor at the UN Commission on Human
Rights in Geneva. She has an MSc in History of International Relations from the London School of
Economics and a degree in English Literature from Kenyon College in Ohio.
Ruth is responsible for the strategic commercial development of the Association, including
Intellectual Property, Communications, and Events. Ruth is also responsible for overseeing the
development of the LBMA Conference, the LBMA's quarterly publication the Alchemist and the
LBMA website.

page 21

Regulation and Cleared Forwards

Editorial Comment by David Gornall, Vice Chairman, LBMA

Regulation has recently been a topic of bullion market. However, a likely

interest for all financial markets, not impact of financial reform legislation
excluding the bullion market. On 2nd on the bullion market will be further
September, the European Union voted use of a Central Counter Party (CCP)

in favour of the establishment of three to clear forward contracts.
pan-European financial regulators. This
followed the precedent set by the US Clearing via CCP
Financial Reform Act which President New rules set by the CFTC and the
Obama signed into law on 21 July this SEC are expected to address the
year. While significant legislation has clearing of OTC derivatives via a CCP.
been passed in both the US and the EU, On 26th March, 2009, Tim Geithner, William Tankard
it remains to be seen what the impact United States Secretary of the Senior Mining Analyst
on the bullion market will be, if any. Regulation Treasury, proposed to force all vanilla OTC GFMS Ltd
may be a hot topic at the moment, but it is certainly derivatives to use a CCP. It is still unclear whether
not a new one. the CFTC will make clearing via a CCP mandatory
for all OTC derivatives. Although it may not be The Rise and Fall of the
Impact on the Precious Metals Markets mandatory, the alternative to CCP may be to
At the time of writing, it is still unclear how exactly remain bilaterally settled. However the regulator is Gold Producer Hedge
Dodd-Frank will be enforced in the US and beyond. likely to charge a higher counterparty credit risk
Although the law has been passed, the rules which fee, which may make this prohibitive. The pension Book
will enforce it still need to be written by the SEC fund industry in particular looks poised to be
and the CFTC. In particular, regulators have until affected by these new rules. If derivatives and other It was just a few years ago that the
July 2011 to provide details and definitions for key markets are forced to be cleared via a CCP, it is hedging activity of certain gold
terms. The definitions of these terms are especially currently expected that it will be the buyside that producers was the main topic of
important in regards to OTC derivatives. Many of will bear any additional costs. conversation in the gold market.
the key terms in the derivatives legislation are either At their worst, the hedgers were
undefined or have been left for the regulators to fill Market Response blamed for depressing the gold
in. How regulators define those terms will directly Following my article in the Alchemist in April 2009, price and, at their best, they were
shape the impact of the new legislation on the Cleared Forwards have gained momentum. On praised for ensuring the survival of
21st September, 2009, the CME Group launched its their companies in a period of low
cleared forward product. Now LCH.Clearnet is set gold prices.
The Dodd-Frank Act and the OTC
to launch its own product in a joint initiative with With a sustained gold bull run
Market the LME on 8th November, 2010. The LBMA has to over US$1,200/oz, hedging
The Act aims to: “promote the financial stability also moved ahead in this area with the creation of became a factor on the demand
of the United States by improving accountability the LBMA Forward Market Makers’ Gold Forward side of the market and, most
and transparency in the financial system, to end Curve. This data set has been collated for the past recently, has hardly been a factor
“too big to fail”, to protect the American year by the LBMA and will be automated by the at all.
taxpayer by ending bailouts, to protect end of September. LBMA Market Makers have put In this article, we trace the
consumers from abusive financial services the bullion market ahead of the game with the history of hedging in the modern
practices, and for other purposes.” creation of the LBMA Gold Forward Curve data gold market.
set, which is designed to assist all cleared forward GFMS calculates that at end-
Regulatory agencies and procedure will be products. June 2010, the global gold
streamlined, redistributing existing powers in producer hedge book amounted to
addition to new ones provided by the Act. While we will have to wait and see whether all just 224 tonnes, less than 7% of
OTC derivatives will be forced to use a CCP, the the hedge book volume at its peak
The SEC and CTFC have regulatory power over option to do so is already there. And while there is in mid-1999 of 3,300 tonnes. The
OTC derivatives. Cleared derivatives may be a lot of fear of the unknown surrounding cleared scope for de-hedging to materially
required to go through central clearing houses, contracts, there are also potential benefits. Having support the gold price, as has been
with greater regulator involvement, while un- the option of clearing contracts via a CCP would the case in a number of rallies
cleared trades will require a capital offset. allow better and cheaper credit mitigation. This during the current bull run, is
would also allow more clients, without large now very limited, making it an
Improving transparency translates to greater bilateral credit facilities with their counterparty appropriate time to briefly review
data collection, to be published for the use of banker or dealer, to access OTC markets. In my the rise and fall of the practice of
regulators and customers. opinion, the use of CME Clearport for the energy gold producer hedging, which has
markets has already achieved this. n at times over the past 20 years
been a significant driver of the
The emergence of producer
hedging being undertaken against

page 22

substantial volumes of gold a major hedging strategy early on, massive speculatively-driven spike multi-year put/call option
commenced in the 1980s. such as Newcrest and Normandy in lease rates, with gold for one structure to secure the viability of
Forward sales were the initial (subsequently acquired by month briefly reaching 10%. The its gold assets out to 2015,
mechanism, but they were soon Newmont) were the stand-out consequent hedging crisis led to hedging remains firmly out of
joined, and effectively superseded, winners, with Barrick Gold not margin calls being made against vogue with most of the key
by the gold loan, generally put in far behind: by 1997, their earlier several producers’ positions and, producers. This does lead one to
place against projects as a means hedges were enabling these in some cases, caused insolvency beg the question of whether we
of establishing finance for mine companies to beat the London in late 1999. It certainly caught now find ourselves at the end of
development. The other theme of average price for gold by $100/oz out one of the largest hedgers, the hedging era or whether this
the late 1980s was the limited use or more, representing a premium Ashanti Goldfields, which was marks the bottom of the first
of opportunistic forward selling in of 30-40% on their sales forced to hastily seek a cycle. Since the price will not
order to secure prices perceived as compared with unhedged restructuring of its positions with always be going up and a decent
high relative to the cost of producers. As margins were its banking counterparties, leading contango will likely return from
production. These initiatives were progressively squeezed, the stark to the sale of 50% of one of its the current low levels, don’t write
in the main led by Australian and contrast between the ‘haves and major assets, Geita, to AngloGold off a return to hedging forever! n
North American producers, with have-nots’ served to further (and ultimately, the loss of the
the former, even today, often encourage more producers to corporate identity in 2003, when
regarded as being a leader where hedge as companies vied for it was acquired by AngloGold to William Tankard
hedging trends are involved. At survival as an increasing number form AngloGold Ashanti).
the other end of the scale, some of producers’ margins turned In the wake of these dramatic
companies sold forward in order negative. In addition to events the previous year, 2000
to secure cash flow in times of establishing a floor for a gold price represented a period of apparent
distress; at least one high-cost – which, to many, it seemed calm, or more appropriately,
South African miner managed to inevitable would decline further – uncertainty, before the situation
stay in business in the early 1980s producers could achieve a changed dramatically. Since the
as a result of such activity. premium to spot sales by selling gold price bottomed out, and
Towards the end of the decade, forward in a market in contango, subsequently enjoyed an almost
hedging intensity waned as the which for a contract 12 months continuous rally, producers have
gold price pulled back and the forward was generally around 3.5- aggressively de-hedged in order to
pipeline of projects that required 4.5% and could be significantly gain greater exposure to the rising
financing contracted, leaving the improved if compounded over price. With high production cost
total hedge book standing at several years. In due course, this inflation broadly following the
around 900 tonnes. led to hedge positions gold price rise, hedged producers
As price volatility remained representing valuable balance have suffered increasingly
low, but with the price itself sheet assets as the gold price did diminishing profits due to the
trending gradually lower, through fall, which of course was partly price-capping effect that much
the early 1990s, the book being driven lower by the hedging has had on sales revenue.
registered a steady but accelerated supply of gold by the These factors, and occasionally the
unremarkable build, with the practice of hedging itself. lack of transparency of hedging
exception of a handful of large These factors were appreciated by structures, have led to the now
project financings, many of which company management, staunchly anti-hedging sentiment
were tied to capital-intensive shareholders as well as the banks that is prevalent among gold
deepening projects in South that structured and aggressively equity investors and gold mining
Africa. From 1996, a renewed marketed lucrative products, and companies alike. This has led to
slide in price (over a decade to which led to a hedging explosion. the elimination of over 3,000
end-1997, gold lost roughly 40% This was the case not only in tonnes of hedged gold on a delta-
of its value in nominal terms, volumes hedged, which GFMS adjusted basis since the peak, as
falling below $300/oz) reinforced estimates had reached almost producers not only delivered into The Alchemist is published
the utility of hedging: 3,300 tonnes in mid-1999, but hedges as they matured, but in quarterly by the LBMA.
Firstly, entering into hedge also in the increasing complexity several significant instances, For further information please
Cover image from

positions had become an and potential short gold exposure proactively bought back ahead of contact Alice Toulmin,
The Alchemist is designed by Ion River

increasingly necessary means of of exotic products that were schedule, backed by investors, 3-14 Basinghall Street
facilitating debt finance for those structured for some producers. while other significant hedges London EC2V 5BQ
that required it. This had been The first Central Bank Gold were restructured in the process Telephone: 020 7796 3067
Fax: 020 7796 2112
exacerbated by greater investor Agreement, signed on 26th of industry consolidation or
caution towards resources stocks September, 1999 in an effort to unwound by the administrators of
in the wake of the Bre-X scandal, calm market fears about sporadic failed enterprises. Latterly, the
making raising capital via the large-scale official sector sales, historically low interest rate
equity markets especially limited the participating environment has eroded the Given the freedom of expression offered to contributors

challenging. signatories to combined official contango, reducing any incentive and whilst great care has been taken
to ensure that the information contained in the
Secondly, the revenue sector sales of around 400 tonnes to hedge. Alchemist is accurate, the LBMA can accept no
responsibility for any mistakes, errors or omissions or
enhancement that could be per year. Possibly of more Although a small handful of for any action taken in reliance thereon.
achieved versus the spot market significance at the time, it froze producers have recently engaged
was plain to see. Those that had the amount of gold out on loan. in project hedging and one
the foresight, or luck, to embrace This caused a price rebound and a diversified miner entered into a

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