[video=youtube;BfCn8NlLHko]http://www.youtube.com/watch?v=BfCn8NlLHko&feature=player_embedded#at=90[/video]
4:20 Jeffrey Christian, formerly a staffer at the Commodities Research Group in the Goldman Sachs Investment Research Department and now head and founder of the
CPM Group, Douglas confirms that the "
LBMA trades over 100 times the amount of gold it actually has to back the trades."
I've taken the time to look through a report by someone claiming that LBMA is a fractional reserve scam. Here's that document:
http://www.gata.org/files/ThunderRoadReport-10-15-2009.pdf.
On page 5, the author states that clearing statistics are based on the "daily average amount of gold transferred by the LBMA's six clearing members each month." The author then complains that the clearing statistics reflect net volumes--if one buyer buys 10,000 ounces of gold and sells 10,000 ounces of gold to the same counterpart for the same date, there is no clearing, even though 20,000 ounces of gold technically traded. I should stop here and say that this criticism makes no sense. If you buy and sell 10,000 ounces of gold in the situationI just described, you didn't actually trade anything--your positions were perfectly offset--so it makes sense that the clearing statistics wouldn't reflect your position. There really is no position, since any gain on the ounces bought will be exactly canceled out by loss on the ounces sold.
On page 6, the author notes that daily clearing volume is 22.3 million ounces, or 693 tonnes. He then uses this quote: "Previous estimates of the daily volumes traded in the London market have suggested that the quantities are a positive multiple of the clearing volumes with a multiplier of between 5 and 9." So the trading volume is 5-9 times 693 tonnes, or between 3,500 and 6,200 tonnes. From here, the author claims "is conservative" and assumes that only 2,744 tonnes of gold trade through London daily. He then tries to suggest that this an unrealistic amount of gold to trade, given that world production and market-permissible metal is so limited in supply.
The problem with the author's argument should be immediately clear: exchange volume is irrelevant. Let's say Microsoft has 10 billion shares, and in one day 20 billion shares trade hands. This doesn't mean that all of Microsoft's stock in existence was actually traded or that there are fake Microsoft share certificates floating around. 2 traders could have sold the same 100 million block of shares 200 times in a single day, producing 20 billion shares worth of volume even though it was the same 100 million share block.
The volume of gold traded is irrelevant because there are offsetting hedges that cancel out many of the positions. This is why clearing volume at the end of the day is significantly less than trading volume (5-9 times more). Your video clips explain this hedging.
Edit: You realize what you put in quotes is some other person's spin on what the guy meant by what he said, right? Because the person testifying in that video doesn't say what's in quotes at 4:20, he says there's a difference in how the market uses the term "physical market" versus how another group uses the term "physical market." I wasn't clear on what the distinction between the uses actually is.
I draw attention to this, from an article that used that quoted text: "if we look at the physical market,the LBMA, it trades 20 million ozs of gold per day on a net basis which is 22 billion dollars. That’s 5.4 Trillion dollars per year. That is half the size of the US economy. If you take the gross amount it is about one and a half times the US economy; that is not trading 100% backed metal; it’s trading on a fractional reserve basis." Again, an exceedingly misleading statistic. If I bought the gold yesterday for $1,200 an ounce and sold it to someone else for $1,250 today, $2,450 in gold was traded between the days. This does not mean that you need $2,450 worth of gold, only that bars worth that amount traded hands. The amount of money that changed hands with $2,450 in volume, in these two transactions, was only $50.
If the difference in price on the 20 million ounces traded each day is $10 for the day, that's $200 million actually changing hands, even though the value of the gold bars being passed around is substantially higher. If that were a daily average, we'd only be talking about $73 billion actually changing hands.
Accordingly, this data does not support the idea that the London market is engaged in fractional reserve trading.