13-Jun-2010
Demand for bullion puts strain on vaults
Demand for bullion puts strain on vaults
By Javier Blas in London
Published: June 11 2010 22:33 | Last updated: June 11 2010 22:33
Veteran gold traders are fascinated by the sea-change in bullion demand – and the strains it is putting on banks and security companies’ network of cavernous vaults.
Neil Clift, managing director at JPMorgan, told an industry conference recently he remembered going down to the bank’s vault, one of the biggest in London, more than a decade ago and seeing “literally one pallet of gold, which was all we had”.
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“If you go to our vault now or you go to HSBC’s vault or certainly the Bank of England’s vault, you will see a very, very different story,” he said.
Banks estimate that at least 250m ounces of gold are stored in London, the world’s most important vaulting hub, equal to $310bn – about two years of mine supply. The Bank holds a substantial chunk of that gold, much of it on behalf of other parties.
Additional, and significant, amounts are stored in other gold hubs, including New York, Zurich, Geneva, Toronto, Johannesburg, Hong-Kong and Singapore.
The boom in vaulting demand comes on the back of what industry executives say is a “new gold market”, driven by investors rather than by the jewellery sector.
GFMS, the precious metals consultancy, says investors last year bought more gold than buyers of jewellery for the first time in three decades. Investment demand doubled to 1,820 tonnes, while jewellery purchases fell 23 per cent to 1,687 tonnes, a 21-year low. The change is critical for the networks of vaults because investors tend to buy and to hold their bars and coins, needing vault space for years if not decades, while fabricators of jewellery only use vaults as a short stop-over.
The surge in investor demand has fuelled prices, pushing gold this week to a nominal all-time high of $1,251.20 a troy ounce. Adjusted for inflation, gold prices are still a long way from their record above $2,300 in 1980, however.
Much of this investor demand comes from physically backed exchange traded funds. Bullion holdings of the world’s largest ETF, the New York-listed SPDR Gold Trust, on Friday hit a record of 42m ounces, more than the holdings of most central banks. Its gold is stored at an enormous HSBC vault in London.
The rapid growth of gold ETFs, together with investors buying bars and coins, is straining the logistics to store and move physical gold worldwide. “Demand has been strong this year as there has been increased interest from different segments of the client community,” a Swiss-based banker says.
Vault space is at a premium in a business dominated by few names. Among them are banks such as HSBC, JPMorgan, The Bank of Nova Scotia, UBS or Credit Suisse, security companies Brink’s and Via Mat International and refiner Johnson Matthey.
Some central banks, including the Bank of England and the Federal Reserve Bank of New York, also provide vault space to banks, countries and international institutions, such as the International Monetary Fund. But central banks tend to keep their vaults for themselves, even if space is ample nowadays due to large disposals of gold during the last 20 years, particularly in Europe.
Yet while some bankers say space is available – particularly in Zurich – others still acknowledge problems at times of peak demand, such as now.
The size of vaults is not the main bottleneck. More important is staff – some of which retired years ago and were never replaced as vaulting services languished during the 1990s – and the fleet of armoured trucks to move the gold. “Vault staff are doing overtime, working six days a week,” says a senior dealer. Another industry executive says: “[The vaults are] absolutely up to the ceiling. Space is really short.”
Frank Ziegler, head of precious metals at BayernLB, says to get enough staff inside the vault is a challenge. “You have to pick and pack the gold – if you have orders which are 300 per cent higher than usual you have not got the manpower,” he says. “We have put 20 per cent more people on the vault.”
Executives add that the supply of armoured tracks can also form bottlenecks.
Last month alone, banks in London made transfers of 24.7m ounces of gold, a 54.9 per cent monthly rise, the biggest month-on-month jump since these statistics were first produced in 1996, according to the London Bullion Market Association.
Limits imposed by insurers, as prices have risen 85 per cent during the last three years, constrain the amount of gold shipped in planes.
Tight vault space, lack of staff and transportation bottlenecks strain the logistics of moving and storing gold. But the industry is not complaining. Banks and security companies are cashing in on the boom, reaping record fees for storing the precious metal.
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31-Mar-2010
Win big by playing your cards right
By Jennifer Hughes, Senior Markets Correspondent
Published: March 29 2010 16:32 | Last updated: March 29 2010 16:32
Foreign exchange is one of the few markets that can be said to have had a good crisis.
As credit froze – and many corners of that world are only now beginning to thaw – currency trading continued apace. Spreads widened and volatility increased, but that only added to the ability of banks – the main centres of liquidity – to rake it in.
“In 2008, 2009, you’d have to have been an idiot not to have made money,” admits one senior FX banker.
But that does not mean the future is equally rosy. Politicians and regulators are threatening to impose clearing restraints that bankers fear will damp trading volumes. And bid-offer spreads have returned to their pre-crisis narrows, squeezing temporarily juicy profit margins.
Most insiders concede that this year will be tougher for making money, but this has done little to curb general optimism over the market outlook. FX, they point out, is a market that not only is critical to the functioning of the global financial system in a way no other asset class is, but it is also the most liquid. This is an added attraction in a post-crisis era when investors are re-examining exactly what value they place on liquidity.
“More and more people are interested in trading FX because they’re looking at it from a liquidity point of view,” says Frederic Boillereau, global head of FX at HSBC. “If they want to get out, they know they can and there will always be a two-way price.”
If increased investor interest has whetted some banks’ appetite for the business, it has an added attraction: the long-mocked “FX spot monkeys” do not place huge demands on banks’ already strained balance sheets.
“It’s the world’s largest OTC market. It’s a real world business which cuts across many client bases from sovereign wealth and hedge funds, to real money, corporates and pension funds,” says Zar Amrolia, global head of FX at Deutsche Bank. “Everyone has to use FX to manage their portfolios. It can be an investment decision but most of it is fundamentally linked to trade and capital flows.”
Some banks are now aggressively stepping up their efforts to build a significant presence in what they consider to be a potential goldmine. But those already at the top are not very worried by the threat.
“People forget that before you strike gold you spend many years in a dark, dusty hole working very hard,” says Troy Rohrbaugh, head of FX at JPMorgan. “The banks that generated the most revenue during the crisis were primarily the banks that have been in FX the whole time investing in the business.”
He adds: “Coming in now is like showing up at 1 am for a New Year’s Eve party and all the champagne is gone.”
Other top FX banks have echoed this, pointing to the need for continuous investment in unsexy areas such as the trading system “plumbing” that make the business a hard slog.
“FX is about doing thousands of little things right every day for long periods of time, and most institutions don’t have the stamina for that, ” says Mr Rohrbaugh. “It is going to be back to the basics such as infrastructure and investing not millions, but tens of millions, of dollars in technology over multiple years.”
If that sounds like a challenge, it is.
“People who’ve come in late may find that their investments don’t necessarily return the yields that they hoped they would. Just looking at our numbers and thinking that they can replicate that, it is a lot harder,” says Anil Prasad, global head of FX at Citigroup.
Bank business fashions are notoriously faddy, but Mr Prasad does not see the interest in FX going away any time soon given the ongoing globalisation of the financial system and the resulting cross-border flows.
Trading volumes dropped sharply last year in the aftermath of the financial crisis, but appear to be picking up strongly once more. In October 2008, activity peaked in the frantic trading that followed the collapse of Lehman Brothers, but then slipped 20 per cent by April 2009, according to data from the Bank of England, which oversees the London market – the biggest single FX centre. However, by October last year average daily volumes had risen from their lows by a hefty 13 per cent.
Supporting the growing activity are reports of recovering interest from hedge funds, which have long liked the liquidity and round-the-clock nature of the market. In addition, bankers are reporting new entrants in the form of investors who were previously focused on equities.
Like hedge funds, they like the liquidity and appreciate, too, that FX moves are not closely correlated with their main investments even in generalised terms – the two often move in opposite directions, providing something of a hedge. When volatility in FX goes up, there are more money-making opportunities and typically, that is when stock markets are falling. In good times, when investors are profiting from rising stocks, FX volatility comes down and profits subside.
A lot of the new entrants are algorithmic, or “algo,” traders who use computer models to trade in lightning-fast millisecond moves. Many of them have a background in equities, where algos have the strongest presence, and are now bringing that thinking to the currencies world.
Not everyone likes this. Early algo traders were sometimes kicked off bank trading platforms for their habit of using their speed to exploit anomalies in the market and arbitrage prices between slower-moving trading platforms. Now, the official line from the big banks is more positive.
“There’s this sense that some algo traders do take advantage of the market but banks have become smarter in identifying which traders they can provide liquidity to on terms that are financially OK for them and those we can’t deal with,” says Mr Prasad.
Most traders are welcomed, but some are still encouraged to go elsewhere.
“We run a business ranging from tourists drawing foreign exchange from an ATM and at the very far, other end of the scale is high-frequency algo trading. There are people who just want to trade efficiently and access liquidity wherever it is best. This is great – its normal – but there are those who are just trying to arbitrage the system, says Mr Boillereau. “I wouldn’t say that arbitrage is necessarily unhealthy for the market but we choose not to be taken advantage of.”
Banks are the traditional centre of the FX market because of their ability to handle the risks associated with such a fast and heavy market. The last figures from the Bank for International Settlements in 2007 put global daily trading at $3,200bn. New figures are due in September.
But that dominance is under threat as never before. The past decade has seen a series of internet-based trading platforms flourish and now the volume of trading by algos has added another candidate for future centres of liquidity.
Yet again, however, the banks are confident in their business model.
“I think the core of the market will remain remarkably similar because what the crisis illustrated was the value of relationships,” says Mr Amrolia, adding that, during the darkest days, electronic trading volumes dropped as clients preferred to speak directly to traders. “It’s great to get a 0.1 better price on one day but when the markets are going crazy, will the algos and others be there? Clients have become a little bit more understanding that best execution involves consistency of service as well as price.”
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