January 22, 2018 / 1:12 PM / 4 months ago

Exclusive: World Gold Council investigates standard for gold kilobars

LONDON (Reuters) - The World Gold Council (WGC) is studying the creation of a global standard for gold kilobars so they can be deployed as collateral in futures markets and potentially encourage demand, sources close to the matter said.

Kilobars — 1 kilogram gold bars — dominate Asian trade but a lack of transparency about their origin and the absence of a global standard hinders their use on exchanges elsewhere.

Clearing houses, some of which allow bullion to be used as collateral on futures markets, might accept such bars if they all met a set of internationally recognized criteria.

London Metal Exchange clearing arm LME Clear cannot accept the kilobars used in Asia because they differ from London Good Delivery standard bars, typically around 400 ounces, as specified by the London Bullion Market Association (LBMA).

Independently of the WGC initiative, the LME has been looking at accepting kilobars as collateral for all its contracts which include copper, aluminum and zinc, sources familiar with the matter said.

The council and the LME declined to comment.

Intercontinental Exchange’s ICE Clear Europe and CME Group’s U.S.-based clearing house accept bullion as collateral, but only if it conforms with LBMA criteria, which typically would rule out bullion traded in Asia.

“We continuously evaluate new forms of collateral based on client demand and at this time, we haven’t heard interest from clients,” CME said when asked whether the exchange was considering accepting kilobars.

ICE declined to comment when asked.

WGC talks on creating a global kilobar standard would aim to include companies from the world of gold refining, banks and brokers that trade the precious metal in the futures and physical markets and the LBMA.

The LBMA said it was not currently involved in any specific discussions over the creation of a new standard.

KILOBARS DOMINATE

“The plan is to create a standard for kilobars that can be adopted around the world, delivered anywhere, possibly using blockchain to identify the bars, their origins,” a physical gold trading source said.

“Rigid standards and blockchain would bring in people who are worried they could be getting conflict metal,” he said.

Blockchain, the technology behind cryptocurrencies like bitcoin, is drawing interest from a range of industries as a means to track minerals or create more security and transparency in trade and other financial transactions. [nL8N1PB4GZ]

Sources estimate top consumer China imports about 95 percent of gold in kilobars, while world No. 2 consumer India imports 80 percent in kilobars. The WGC estimates China’s gold demand at 900 to 1,000 tonnes last year and India’s at 650 tonnes.

Gold contracts on the Shanghai Gold Exchange, Shanghai Futures Exchange and Hong Kong Exchanges and Clearing are in kilobars.

“The Asian consumer market is in kilobars, it dominates gold trade,” a gold industry source said. “If you want to trade on the LME and you want to lodge your collateral in kilobars in another location, why shouldn’t you be able to? There are vaults all over the world.”

Brinks, London-listed G4S and Loomis International provide gold storage facilities around the world.

Vaults in London as of September 2017 held 7,743 tonnes of gold, worth $334 billion at today’s prices, LBMA data shows.

The gold vaulting business in London is dominated by LBMA members JP Morgan and HSBC, the two largest gold traders in London’s over-the-counter market with total traded volumes estimated at about $5 trillion a year.

The gold they hold is on the LBMA’s Good Delivery list, which was defined in 1750 by the Bank of England. The LBMA was founded in 1987 to oversee that list.

However, the London market was designed for central banks, many of which have diversified reserves into currencies and government bonds, so are no longer as active in the gold market.

“What (London has) in place is a simple standardized format that allows large volume trade. The large bar format doesn’t work outside London,” the physical gold trading source said.

“Kilobars should be included in the London Good Delivery list, it would be less costly and more efficient for a lot of people, but it is not in the interests of some LBMA members.”

Anyone wanting to deliver kilobars in London has to accept a deep discount from the vault owners on the value of their gold or they have to be melted and remoulded into Good Delivery bars.

Sources say refiners are split on the idea of encouraging the use of kilobars, with those opposed worrying about the loss of income from remoulding.

Supporters say it would boost the market, particularly if the identification process used blockchain, scrapping paper documents for their digital equivalent and giving the buyer the assurance the gold had not been mined to finance a conflict.

“You can add a lot of information with blockchain, where the gold was mined, where it was refined, serial numbers, who owned it previously. It could bring new demand to the market,” a physical market source said.

Reporting by Pratima Desai; Additional reporting by Jan Jarvey; Editing by Veronica Brown and Edmund Blair

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