A detailed article on the operation of the LBMA and how it will be affected by the SGE gold fix starting today, 19/4.
The Post LBMA-Era Price Reset
We now approach an event that may provide the catalyst for the inevitable repricing of gold and expiry of the LBMA paper/digital gold scheme. That event is the April 19, 2016 initiation of a daily spot domestic Gold Fix on the Shanghai Gold Exchange (SGE) that will be followed at a later date for the SGE international gold market. The SGE is very different from the LBMA unallocated paper gold market in that for a standard kilo gold contract to be issued, first a kilo of 99.99% pure gold delivered directly from an approved refinery must be deposited with the SGE.
This creates a problem in that a daily spot SGE Gold Fix based on actual gold trading in Shanghai is going to diverge at some point from the LBMA daily Gold Fix trading unallocated paper gold contracts in London. A price premium on physical gold in Shanghai cannot be extinguished with paper gold from London.
To date, 10 Chinese banks have announced that they will participate in the benchmark Fix at the SGE but no Western banks have indicated that they will participate. In response to this reluctance, China has threatened that if Western banks do not participate they will lose access to the Chinese gold market.
This lack of Western bullion bank interest in the new SGE Gold Fix is understandable as it would create a conundrum that a participating bank would have to explain if there were two materially different spot gold prices posted daily that could not be arbitraged away: one price for spot gold on the SGE for physical gold and a second price for spot 'gold' in London based upon trading paper. The market will then progressively degenerate into a much higher global price for gold as the LBMA is pushed to the sidelines.
The end of the LBMA paper spot gold market setting the global reference price of gold is inevitable. As to the timing, keep an eye on the new Shanghai Gold Fix and for further signs that the market realizes that paper gold is faux gold and the LBMA is being abandoned.
When the gold market crisis breaks it will rapidly become apparent that one of the few sources of real gold lies in the hands of miners. When this realization occurs, it will create a hellacious run into gold mining equities of miners that have real gold and silver resources.
