The Grand LBMA Exposé: A Collective-Mind Analysis

Part - 6

October 13, 1997
 
 
 
 
 
 

 

This writer will present the entire situation via a chronicle of all the news publications about the subject, providing dates sources and authors - where possible. Nearly all available information was researched from Internet sources. Most comments are verbatim from respective authors. Occasionally, this writer added comments of clarification and/or conclusions where the research leaves off.

Internet Commentary #31 -

Posted on the Internet October 7, 1997 by JTF

@the_turning_point

Vronsky -- I really enjoyed your most recent LBMA expose #5. My name in lights! I am especially intrigued by the posts from ANOTHER -- just as captivating as the posts by BIG TRADER. ORACLE OF ALBERTA's comments are interesting as they allude to a "powerplay by London to replace New York and Tokyo". The Rothschilds would have alot to lose if the launching of the ECU is a disaster -- I like the idead of an e-gold "backup" currency. Who would know better the true value of gold than a Rothschild? The terms offered to Britain to join the ECU will give us a clue to the reality of the situation. One wonders - what is so special about Britain - perhaps it is because of the location of the LBMA, and the fact that Britain has not yet agreed to commit to the ECU. As the Oracle of Alberta says -- the Rothschilds may be standing behind the Brits to step in if the ECU ( supported by the regular banking establishment of Europe and America ) falters. As I recall a common European currency was attempted approximately 500 years ago, and failed. Perhaps this time there will be a backup.

Internet Commentary #32 -

Posted on the Internet October 8, 1997 by JTF

@LBMA - Sherlock Holmes, where are you?

My brainstorming last night was an attempt to analyze logically ANOTHER's statements on the assumption they are true. Inconsistencies come out of such an analysis, so that one can discern truth from falsehood. I have no inside information of my own, and my interest is to stimulate discussion on a mystery which seems to be controlling much of our futures. I doubt that we will ever know fully what is going on with the LBMA, and why for the last year or so the dollar and gold are inversly coorelated, but that gold in non-US$ linked prices has not dropped anywhere near as much!

kuston: If gold is only insurance during oil transactions, then it should only play a passive role, and gold price should not be affected. Are you saying that the gold is to be used only as collateral, until the deal is closed? Couldn't some of the oil-producing coutries demand gold and get it? Heaven forbid! Gold as money -- heresy. Please let us all know what you know. If we all do this, we might be able to unwrap the enigma.

Organ: I printed your post that you say contradicts Oracle of Alberta. I also have read somewhere that a number of banks that represent "old money" in europe have considerable influence over our Fed Reserve. I don't know details, but something like this is highly likely. It may not be a conspiracy in the true sense, and there may be several conflicting agendas. Our A. Greenspan is undoubtedly aware of most of whats going on behind the scenes. I don't know what his real priorities are. I think it's worthwhile to gather as much information as possible and analytically decipher this, to separate the truth from the falsehood. One thing I've learned over the years is that the opposite of imperfect is not perfect -- we will never know exactly what is going on -- but we should keep at it, and work continuously on our model -- much the same as coming up with a new physical model of the universe!

Sherlock Holmes, where are you?

Internet Commentary #33 -

Posted on the Internet October 9, 1997 by JTF

@LBMA

What would you do if you were A Greenspan, and you had a currency collapse that involved 1/3 of the world, and the world currency is still dollars? Ans: Print dollars like crazy! How would you prevent the inflationary consequences at home ( and elsewhere? ) . Ans: Sell gold. I don't know how one does this without buying something else, but perhaps some clever economic gurus have figured out how to do this with some kind of derivative gold trading at the LBMA. E-gold to the rescue again? I think what has happened is the the Central Banks (and LBMA) are using derivatives to amplify the effect of their gold to achieve the activity that we now see. However, my intuitive feeling is that no matter how cleaver they are, the game is still up when they run out of gold, or they come to their senses. Derivative gold trading just delays the inevitable.

Is ANOTHER right? Is part of the problem that oil prices are about to go up more, and the LBMA has to sell gold to boost the dollar? The alternative is that this is all speculative trading. This seems unlikely due to the magnitude of the trend for the last 1 1/2 years, but I bow to the gold gurus on this.

Internet Commentary #34 -

Posted on the Internet October 10, 1997 by Aurator

Anyone looking for clues on LBMA, perhaps the answer lies in the other London Metals Exchange. Why not? Surely the good folk (grinnie) behind the LME, may, well just perhaps *may*, be behind the LBMA.

I know, if i was a aurochild von Morgan, why, I'd make darnt sure that my grandchildren wouldn't be suprised by any Johnny Come Lately, especially after that Rhodes fella tried to take it all, no, I'd plan in advance, remember, Kondratieff and the only practical use is for inter-generational planning.. but i digress, I peregrinate, why is ALL NOT WELL with this institution that is older than, why even the good ol U.S. of A.... ( I¹m just warming up...)

LME: Not such a shining example

MONDAY OCTOBER 6 1997 (London Financial Times)

By Stefan Wagstyl and Kenneth Gooding

"Thousands of metals traders and their clients this week gather to mark another record year for the London Metal Exchange, one of the world's most important commodity markets.

The exchange has recovered with remarkable speed from the shock of last year's crisis when Sumitomo Corporation of Japan, the LME's biggest client, disclosed copper trading losses of $2.6bn (£1.6bn). A survey of exchange users last year made by the Securities and Investments Board, the regulator, revealed some shortcomings in LME procedures, but no fundamental weaknesses. Turnover is at record levels, running at 20 per cent above last year. There are profits aplenty to finance this week's champagne.

But celebrations will be tempered by fears that all is not well with the 121-year-old institution. The exchange is investigating suspicions that several big trading companies are exerting excessive influence on metals prices.

In recent months, the authorities have intervened to limit trading in aluminium and zinc to stop excessive price swings. With limits already in place in copper and lead, four of the LME's seven metals are subject to controls.

The LME contributes to the confusion. Its rules do not require the exchange to explain its actions. Even the membership of the committees that decide on intervention is secret.

Following closely after the Sumitomo affair - where the company's head trader admitted buying huge amounts of metal through fraudulent transactions - such turmoil raises doubts about whether LME prices truly reflect international supply and demand. This is of serious economic concern because almost every non-ferrous metals contract in the world is drawn up with reference to LME prices.

The LME draws vociferous criticism from Nymex, its New York rival. Nymex conforms to tough US laws and claims the LME needs fundamental reforms to make it more transparent. Some London-based analysts agree, including Wiktor Bielski, head of commodities research at Deutsche Morgan Grenfell, a Deutsche Bank subsidiary, who says: "The LME works like a club. The only way to change it is to bring in American-style external regulation."

Mr Bielski is in a minority. SIB's review found most LME users "were broadly content with the service provided". This view is echoed by Robert Wilson, chairman of Rio Tinto, the world's biggest mining company. "There is nothing that the LME is doing that we think it should not be doing," he says. "It is taking steps to improve. This is not to say that the LME is the ideal pricing mechanism, but I'm not sure we could think of anything better."

The LME has grown rapidly in the past decade with turnover increasing tenfold to more than 50m lots, worth $2,000bn, last year. The traditional privately owned London companies, which once dominated LME membership, have been replaced by subsidiaries of international metals and financial companies.

But the exchange still suffers from the same fundamental challenge as 10 years ago: it does not control the markets it sets prices for. Most metals trading takes place outside the LME and outside the UK, far from the reach of the LME authorities. This became painfully clear in the Sumitomo affair, when LME trading revealed no sign of Osaka-based Sumitomo's huge purchases.

However, the modest part of the world's metal that does go through the LME's warehouses plays a disproportionately important role in influencing prices. The LME stocks, for which figures are published each working day, are the most visible part of the global supply chain. The stock levels often change rapidly, generating abrupt price movements. In the long run, the fundamentals of global supply and demand assert themselves. But in the short term, the LME tail frequently wags the dog of the world metals trade.

Such a market can be prone to manipulation. A trader who grabs control of a chunk of LME stocks can wreak havoc among those who happen to be short of metal at a given time. Because LME contracts are traded on margin (where clients put up just 5 per cent of the contract value), determined operators do not need huge financial resources. As little as $20m could be enough to manipulate LME copper stocks.

With considerably more money at his disposal, Yasuo Hamanaka, Sumitomo's trader, controlled up to 1m tonnes of copper, or about 10 per cent of world annual consumption. However, since he concealed his trades through non-LME member intermediaries, the exchange had little evidence that anything was amiss.

Now the LME authorities are keeping a close eye on zinc and aluminium. In zinc, prices started rising after reports surfaced earlier this year that Chinese smelters had gone short (selling metal they did not have, hoping to buy it later at cheaper prices). But prices soared instead of falling. When traders heard Chinese companies were short of metal, they snapped up supplies, exacerbating the shortage, or "squeeze".

Glencore, the Swiss trading group, was reported to have bought control of substantial stocks. Willy Strothotte, the chairman, denied he was profiting unfairly: "We don't believe in cartels and squeezes. But if we are sometimes cautious [buying metal] so that we can cover our needs, that has to be accepted." The shortage of metal for immediate delivery was so acute that the LME authorities set limits on price movements, which are still in force.

In aluminium, shortages developed after Glencore bought metal on the LME at a time when Barclays Metals, a subsidiary of the UK bank, was holding aluminium stocks off the exchange, from which it was supplying customers. Unfortunately for Glencore, it sought particular grades that were in short supply. The price of metal for immediate delivery soared above the price for metal for delivery in three months, an abnormal switch that upset the market. The LME intervened in August and controls remain in place.

How much these squeezes matter is a moot point. The LME says long-term studies show prices move broadly in line with long-term supply and demand and that price volatility has not increased since the 1970s.

Critics counter that, even if periods of volatility are short, they still greatly inconvenience users. As BICC, the British cable maker and a big copper user, says: "We don't think the LME needs fundamental changes. But this year has seen some strange behaviour, which leaves users worried about prices."

Given that the LME executive operates in a difficult market, could it do its job any better? The answer is a qualified yes.

In its review, SIB made 38 recommendations for reform, covering transparency of prices, warehouse stock control and governance. SIB says the LME's supervisory structures, including personnel and computers, have not kept pace with its growth. As Jane Lowe, SIB's head of derivatives markets supervision, will say in a speech today: "I personally see the review as a catalyst for change at the LME, so that its regulatory role keeps pace with its commercial evolution."

In response, the LME is increasing its staff from 40 to 50 and is considering buying new computers. It will publish more trading data, including - for the first time - information about large positions held by LME clients, which could yield signs of possible squeezes.

To counter complaints that it is too protective of its members, the exchange has increased the number of board members from outside the metals trade from two to four, including Kit Farrow, a former senior Bank of England official. However, they are still a small minority of the 18-member board.

Metals companies mostly welcome the changes, though they want them implemented more urgently. "They're moving in the right direction," says Jean-Pierre Rodier, chairman of Pechiney, the French aluminium producer. "But, as we all know, change is a slow process."

Concern remains about how vigorously the exchange will police its markets. The board already has powers to punish members breaking rules with fines, suspensions and even expulsions. After the Sumitomo affair, Lord Bagri, the chairman, promised abusers he would hang them high. But no offenders have been publicly identified, let alone brought to book. David King, chairman of the LME, says inquiries take time.

The LME is also vulnerable to charges that it suffers from a fundamental conflict of interest. In the long run, its members benefit from the exchange authorities' efforts to stamp out manipulation. But in the short term, brokers who are fast enough to take advantage of a squeeze can profit handsomely. The exchange says it avoids conflicts of interest by delegating market investigations from the member-dominated board to committees made up of people with no interest in the metal under investigation - including respected outsiders, among them a High Court judge.

Mr King insists that the safeguards are effective. He says the LME is a "professionals' market" where clients understand the risks. There are no retail investors to protect. So the exchange has not spent too much time in the past promoting its image in the wider financial world. "Our primary audience is our membership, the trade and industry," says Mr King.

But satisfying the interests of those most closely involved with the LME is not be enough. If the exchange is to rid itself of doubts about its practices, those practices must not only be fair. They must be seen to be fair."

Vronsky note: Does the strange shroud of secrecy enveloping the LME and LBMA someway link them... ?

Internet Commentary #35 -

Posted on the Internet October 10, 1997 by JTF

@LBME

Re- Aurator's comments 10/10/87 2:29 about the real LBME secret lying inside the LME, which apparently works like a private, unregulated club. Perhaps the distinction between CB activity and private speculative activity is blurred -- if there are few rules -- the activity of the central banks and private investors/speculators may be indistinguishable. The only way one can separate actions of one party or another would then only be by what happens to the market.

I am in favor of having free markets, but I think there should be some rules to prevent massive manipulation -- which in my opinion is not conducive to a free market. Remember the Hunts and Silver in 1980?

 

THE RED BARON

(October 13, 1997)

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(Part - 7 coming in a few days)

Gold is found in nature in quartz veins

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