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The evolution of London’s gold market

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After a century of tradition, changes in how gold is traded are on the way

When the precious metals industry meets in Singapore next week for an annual gathering, one of the key topics will be the coming changes to how gold is traded in London.

A new trade-reporting service and the introduction of exchange-traded futures will be the latest developments in a market that until recently remained largely unchanged for about a century. Here’s a timeline of main events over the past 350 years, according to the London Bullion Market Association.

1676

After moving to London from Amsterdam, Moses Mocatta partners with the East India Co. to ship gold to India. The firm he built, the oldest member of London’s bullion market, has today evolved into ScotiaMocatta, part of the Bank of Nova Scotia.

1717

As master of the Royal Mint, Isaac Newton set gold at 4.75 pounds an ounce, a price which lasted two centuries. Gold costs about 1,033 pounds ($1,260) today.

1732

With gold volume rising in London, the Bank of England opened the city’s first bullion vault. By then, almost two-thirds of the world’s gold production was passing through London.

1817

The Royal Mint produced the first gold sovereigns, replacing the guinea, a coin equal to about a quarter-ounce of gold.

1871

The BOE began accepting 400-ounce bars (up from 200 ounces previously) — the traditional size accepted globally today — to meet demand from central banks in Europe for their reserves.

1897

The first silver fixing took place at the London office of Sharps & Wilkins, with dealers Mocatta & Goldsmid, Pixley & Abell, and Samuel Montagu & Co. The daily process used by brokers, mining companies and jewelers to trade and set prices would remain largely unchanged for more than a century.

1919

The first gold fixing took place. Meetings were held in a wood-paneled room at N.M. Rothschild & Sons Ltd.’s offices until the process switched to a telephone conference call in 2004. Dealers who met in the room each had small Union Jack flags to signal the need to change orders.

1934

The U.S. fixed gold at $35 an ounce, with the American assay office buying large amounts of the metal at that price. London’s good delivery list, which set quality standards for gold bars, expanded to include refineries and mints in eight countries.

1985

The London Metal Exchange closed its gold futures market after just three years because of a lack of domestic investor and speculator interest.

1987

The BOE establishes the LBMA, the international trade association representing and overseeing London’s gold and silver market.

2014 and 2015

Silver became the first precious-metal fixing to move to an electronic auction after Deutsche Bank AG withdrew from the old phone system amid a pull-back from commodities. Regulatory scrutiny of how benchmarks are set intensified after traders manipulated Libor rates. Platinum, palladium and gold fixings were also replaced by new electronic auctions.

2016

The LME, World Gold Council and a group of banks said they’ll introduce centrally-cleared gold and silver futures in the first half of next year. Separately, the LBMA picked technology firm Boat Services Ltd. to develop a trade reporting service to boost transparency in the over-the-counter market.

By Nicholas Larkin

© Bloomberg

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Tesco pulls Unilever products in pricing row

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Unilever products have been removed from Tesco website after Brexit symptom pricing row

Tesco has pulled dozens of Unilever products from sale on its website after a disagreement on pricing. The consumer goods supplier wanted to raise prices to counteract the effect of the sterling slump and a standoff had developed with retailer Tesco.

The Guardian reported Unilever wanted to raise prices by about 10%. Unilever wanted to implement the price change across a wide range of goods stocked in the big four supermarkets – Tesco, Sainsbury’s, Asda and Morrisons – in order to offset the higher cost of imported commodities, two people with knowledge of the situation told Reuters.

As of last night Unilever products including Marmite spread, Ben & Jerry’s ice cream, Lynx body spray and PG Tips tea were no longer available on Tesco’s website, but the shortage had not yet affected stores, a Tesco spokesman said.

Shares in Tesco were down 1.6% while Unilever was down 1.4%.

 

 

What’s really keeping corporate treasurers awake at night?

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A new report from the Economist Intelligence Unit reveals the top concerns of treasurers worldwide

Against a challenging macroeconomic and regulatory backdrop, corporate treasury is expanding its company-wide responsibilities, according to Managing risk in challenging economic times, a white paper published today (October 12th) by The Economist Intelligence Unit (EIU) and sponsored by Deutsche Bank. The report builds on a survey of 150 corporate treasurers and 150 CFOs. Respondents were drawn from across the world, with 100 in the Americas, 100 in Europe, the Middle East and Africa, and 100 in Asia-Pacific.

GLOBAL GROWTH

Four in ten survey respondents list global economic growth among the top three most serious macro risks. More than half (55%) acknowledge that their function struggles to keep abreast of the rapidly changing macroeconomic environment. The difficult macroeconomic climate notwithstanding, 80% still hold fair or large amounts of excess cash. Hence, “expanding or modifying investment strategies for excess cash” is the preferred way to adapt treasury management strategies in light of low or negative interest rates in many markets.

LOW INTEREST RATES

Low interest rates are one long-term consequence of the financial crisis; the wave of financial regulation is another. Almost 40% think the workload resulting from regulation will remain unchanged over the next 12 months, and another 40% expect that it will actually increase.

CYBER RISK

More than seven in ten respondents say the adoption of new technologies is gaining momentum in their company’s treasury department. However, interviews conducted for the white paper reveal that treasurers are reluctant to embrace new technologies. Almost seven in ten survey respondents are concerned about cyberattacks, for example.

Martin Koehring, the white paper’s editor, said: “The macroeconomic, regulatory and technological challenges are not just shaping the outlook of corporate treasurers—they are also changing how the function is interacting with the rest of the business. Our white paper confirms that partnering with the business has increased in areas such as mergers & acquisitions and working-capital management. Encouragingly, more than eight in ten CFOs say that leadership teams now increasingly consult corporate treasurers on strategic questions.”

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British firms not adequately insured against cyber risk

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Inadequate insurance products leave companies exposing themselves to cyber threat

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The number of British firms insured against cyber threats has fallen sharply in the past year even though many doubled their security budgets after some high-profile companies suffered attacks, a survey by PwC showed on Wednesday.

The auditing and corporate advisory firm said companies were reluctant to invest in cyber insurance because they viewed products available as inadequate.

PwC interviewed 479 executives at British companies and only 38 percent said their company had a cyber insurance policy, downfrom 59 percent in a similar survey a year ago.

“The drop in take-up of cyber insurance shows that this is still maturing as a product,” Domenico del Re, insurance director at PwC, said.

“Companies do not see the cover currently on offer as targeted to their individual risks and therefore not value for money.”

The amount of cover insurers offer does not come close tothe potential losses seen by companies from a truly damaging cyber attack, PwC said.

Over the past two years, British companies such as broadband operator TalkTalk, Experian, the world’s biggest credit data company, and Sage Group, a financial software provider, have been targeted by hackers.

Cyber attacks cost British firms 34 billion pounds ($44billion) a year in lost revenue and increased IT spending after the attacks, research by the Centre for Economics and Business Research and computer security group Veracode estimated in a report last year.

PwC also spoke to 14 specialist insurance companies in London to look at how the insurers view cyber risks.

Half of insurers who responded sell cyber policies, or see cyber insurance as an area of growth, while the other half do not actively pursue it, often believing the risk to be “borderline insurable”, PwC said.

Most of the insurers who offer cyber cover, however, still “tread carefully” and tend to limit the amount of cover offered under each policy.

About 95,000 subscribers left TalkTalk following the cyber breach, when the personal details of 157,000 customers were stolen from its database via its website.

The cost of the attack was clear in TalkTalk’s full-year statutory pretax profit which more than halved to 14 million pounds after exceptional items of 83 million pounds.

British companies, which now spend about 6.2 million poundson average on security, are also more likely than firms around the world to keep their cards close to their chest and not share security knowledge, PwC said.

($1 = 0.7857 pounds)

(Reporting by Noor Zainab Hussain in Bengaluru; Additionalreporting by Sanjeeban Sarkar; Editing by Susan Fenton)

Copyright(c) Thomson Reuters 2016.

Finance firms commit to the 30%

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UK finance firms look to address the number of senior roles filled by women
(Bloomberg)

A number of large U.K. financial firms pledged to have almost a third of senior roles filled by women within five years as part of a government-backed drive to boost their ranks in an industry traditionally dominated by men.

Out of 72 firms that signed the government’s Women in Finance Charter in July, 60 committed on Tuesday to have 30 percent of senior roles filled by women by 2021, according to a statement from the U.K. Treasury. Thirteen organizations, including Legal & General Group Plc and Virgin Money Holdings UK Plc, are aiming for an even split between men and women among their highest ranks.

Virgin Money Chief Executive Officer Jayne-Anne Gadhia led a government-backed review that found women made up only 14 percent of financial services firms’ executive committees. The review, which was published earlier this year, recommended creating the voluntary charter, which asks firms to publish annual progress reports on their efforts boosting women in finance.

“Too few women get to the top and many don’t progress as quickly as they should,” Prime Minister Theresa May said in the e-mailed statement. “The U.K. is a world leader in financial services, but the sector could do even better if it made the most of many talented women who work in finance.”

Financial services has the widest pay gap between genders of any industry, with women making about 60 pence for every pound a man receives, according to the Treasury. All of the largest U.K.-based lenders and many major asset management firms have signed on to the charter.

As part of the charter, established by the Treasury, firms also agreed to make an individual executive responsible for the company’s commitments. The finance ministry said 20 firms named their CEOs as the person accountable for progress against their targets. The charter also commits financial-services firms to link the remuneration packages of their executive teams to gender diversity targets.

 Reporting by Richard Partington
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Acquisition and revenue upgrade drive foodie forecast changes

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Revenue upgrade in convenience food sector drives forecast change

Wealth management group Davy today released a statement announcing a FY 2017 forecast change, of which the dominant driver is a 7.3% (c.£86m) revenue upgrade for the UK Convenience Foods segment. The upgrade is a function of the Sandwich Factory acquisition (c.£40m in revenue), by Greencore Group plc, which was announced in July, and on-going business development with the group’s Food Retail customers in the Food-to-Go category.

The Sandwich Factory operates from a single facility in Atherstone, Warwickshire, where it produces a range of food to go products for distribution in the convenience store and food service channels. Net revenue from manufactured products in the financial year ended 31 March 2016 was £42m.

The new forecasts imply 8.5% year-on-year (yoy) growth for the UK Convenience Foods segment and 14.8% yoy growth for the Food-to-Go business. Their forecast models for a 30bps decline in segment operating margins to 8.1% (previously 8.2%) to allow for start-up costs at Northampton (new sushi facility), the dilutive impact of M&A and on-going labour rate pressures (National Living Wage) in the UK. The operating profit contribution for UK Convenience Foods increases by £6.1m to £103.4m, implying yoy growth of 4.8%.

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How top CFOs plan to get through Brexit

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Deloitte’s Q3 survey hints at strategies for battling Brexit woes

Yesterday Deloitte published their Q3 survey of 124 Chief Financial Officers in the UK, and the results point to strategies to shore up against potential Brexit-related issues.

The majority of firms are planning to cut back on capital expenditure and hiring. The top priorities mentioned are reducing costs (47%) and increasing cash flow (42%).

There are still some more comfortable with risk – 18% of CFOs still believed that now is a good time for more balance sheet risk, at the time the survey was conducted in mid-September. And 19% are planning M&A activity.

While 51% expect employment to decline, 40% see flat jobs growth and 9% predict job gains.

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Stay calm, say investment strategists after sterling nosedive

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The pound is pounded but investors urged to avoid knee-jerk reactions

The pound might have been taking a pounding in recent days, but investors should avoid knee-jerk responses, warns a leading analyst at one of the world’s largest independent financial advisory organisations.

tom-elliott-hi-res-webTom Elliott, International Investment Strategist at deVere Group, is speaking out following sterling’s nosedive of 6 per cent in two minutes in an overnight ‘flash crash’ late last week.  On Friday morning, at its nadir, the pound was being traded at $1.1841, which is its lowest since 1985.

Mr Elliott observes: “Currency markets are reacting to three things.

“First, the realisation that British Prime Minister, Theresa May, has opted for a risky ‘hard’ Brexit strategy.

“Speeches at the Conservative Party conference last week suggested that the UK government will be willing to sacrifice membership of the single market, and possibly the E.U’s free trade area, in order to ‘take back control’ of immigration and end ‘meddling from Brussels’ on a range of issues.

“A hard Brexit carries a much greater risk of economic dislocation as investment plans are put on hold by UK businesses, and by foreign ones considering investment in the UK, as they wait to see what tariffs and conditions will apply to UK/EU trade once the Brexit negotiations are completed. Consumer confidence may weaken, with purchases of big-ticket items put off if consumers fear a slowing economy and a rise in unemployment. A weaker economy usually is bad news for a currency.

He continues: “Second, the UK runs the largest current account deficit in the developed world.

“The UK current account deficit (which is the total of these) is -5.4% of GDP (£162bn). It is-2.6% for the U.S, and +3.2% for the eurozone. This means the UK relies on foreigners to buy their debt, equity, buildings, factories and so on to the tune of £162bn each year in order for the books to balance. There is a real risk that with slower growth and Brexit uncertainty increased, these inflows shrink. Then sterling must fall in order to bring the current account deficit and matching inflows into balance.”

He goes on to say: “And third, there is the possibility of higher U.S. interest rates and possibly lower ones in Britain.

“Interest rate trends currently favour the dollar over other currencies, as the Federal Reserve is clearly itching to raise rates. Slower growth in the UK as a result of a hard Brexit may lead to the Bank of England cutting interest rates again, down to zero.   A widening interest rate differential against the dollar will lead to a weaker pound, everything else being equal.”

Mr Elliott concludes: “What should investors do? For the moment: Sit still and avoid knee-jerk responses. Recent economic data from the UK has been stronger than had been expected in the wake of the 23 June referendum. Doom and gloom forecasters may continue to be proved wrong as a hard Brexit is negotiated.”

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Are we facing a sterling crisis?

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Volatile, falling and unstable, sterling evokes prior UK and emerging FX crises
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LONDON, Oct 7 (Reuters) – Sterling’s slump to its lowest in more than 30 years against the dollar this week in increasingly volatile trading has raised fears Britain’s exit from the European Union could yet trigger a currency crisis like those of 1967, 1976 or 1992.

By some measures, such as the speed of the losses and volatility of its market trading, the pound is showing crisis-like symptoms. Most market observers expect it to fall further on the foreign exchanges before it stabilises.

But for a classic ‘currency crisis’ to unfold, sterling losses would have to choke off the foreign portfolio investments critical to balancing the economy’s massive external payments deficit. That risks a spiral of selling of UK bonds and stocks, sinking the currency further, stoking inflation and complicating the central bank’s ability to ease credit more if needed to support the real economy.

For investors fearing such a vicious circle there were worrying signs on Friday that overseas holders of UK assets may be losing their nerve. The last three days have seen UK government bonds and domestically-exposed mid-sized stocks fall in tandem with the pound for the first time since the immediate aftermath of the Brexit referendum.

The selling has not yet turned into a rout, however. Few observers are flagging a match with prior sterling crises just yet, even if the economic, political and financial uncertainty unleashed by Brexit is likely to cast a dark cloud over the currency for some time.

The crisis in 1967 saw sterling come off the gold standard and devalue; in 1976 Britain was forced to seek a multi-billion dollar aid package from the International Monetary Fund; and in 1992 billionaire investor George Soros famously “broke the Bank of England” when Britain was ejected from the Exchange Rate Mechanism, the pre-cursor to the euro.

Market veterans reckon for the current turmoil to turn into a crisis, there would have to be clear evidence foreign funds and central banks were losing faith in the UK economy and policy framework, and offloading their UK assets accordingly.

Britain has the biggest current account deficit in the developed world at nearly 6 percent of its annual economic output. In the words of Bank of England governor Mark Carney, it relies on the “kindness of strangers” to fund the gap.

If that flow of capital from abroad dries up, Britain has a problem. This has been the root cause of most emerging market currency crises in recent decades, notably in Mexico in 1995, Thailand in 1997 and Brazil in 1998.

“This is not a sterling a crisis, but it has the potential to become one,” said Nick Parsons, global co-head of FX strategy at National Australia Bank, and a 30-year veteran of the currency market.

David Bloom, global head of FX strategy at HSBC, agreed, noting that overseas investors have not called time on UK Plc.

“Foreign holders of UK assets will not be worried, at least not yet. This is an adjustment. Nobody should be surprised. Adjustments can be smooth or they can be rocky,” he said. “But policymakers will be concerned.”

Sterling plunged to a fresh 31-year low of $1.14 from $1.26 early on Friday before quickly recovering most of that ground. The Bank of England said it is investigating the cause of the short-lived fall.

WORST IN THE WORLD

The volatility comes at the end of a tumultuous week, kicked off by Prime Minister Theresa May saying said she would trigger the process to leave the EU by the end of March. Markets took fright, interpreting this to mean there will be a “hard” Brexit with Britain having less access to the European Single Market.

Investors were also taken aback when May criticized the “bad side effects” of the BoE’s low interest rates and bond-buying. Aides said she was not trying to influence Carney but some saw the comments as a warning to the Canadian who is in the process of deciding whether to extend his governorship of the BoE beyond his scheduled departure in 2018.

The yield on benchmark 10-year British government bonds shot up above 1 percent from 0.70 percent a week ago, still low by historical levels but reflecting investors’ fears that the weak exchange rate will fuel an inflation boom.

Inflation expectations as measured by the so-called five-year, five-year forwards jumped to 4.5 percent, the highest since the June 23 Brexit referendum.

Alan Clarke, an economist with Scotiabank in London, said sterling’s post-referendum fall was set to add up to 2 percentage points to consumer price inflation, which he now thought would peak at 2.6 percent in November 2017. Inflation was 0.6 percent in August.

The pound is one of the worst-performing currencies in the world this year. Since the referendum, it has fallen 17 percent against the dollar and euro. On a trade-weighted basis, it is down 18 percent this year, putting it on course for its second biggest annual fall since the 1970s.

So far, the BoE has sat on the sidelines and allowed sterling to find its own level. Many argue that the Bank’s post-referendum interest rate cut and revival of its quantitative easing bond-buying programme has turbo-charged the pound’s fall.

UK finance minister Philip Hammond said on Friday that the pound’s fall this week reflected investors’ realisation that Brexit is a cold, hard reality. He expects more “ups and downs”.

“A crisis is when there is a sense that the falls in sterling reflect a lack of confidence about the UK’s economic prospects and/or the economic policy framework, rather just a benign – i.e. stabilising – response to shocks,” said Charlie Bean, former chief economist at the Bank of England.

It’s hard to imagine the Bank intervening directly in the FX market now to prop up the pound like it did in 1992. Then, it blew billions of its FX reserves in its ultimately futile battle against Soros and the market.

BoE deputy governor Broadbent said this week that the Bank could, “in principle”, reverse its ultra-loose policy and raise rates if sterling’s fall was sufficiently steep and rapid. But few analysts believe that is on the cards.

Sterling’s all-time low against the dollar is around $1.05, struck in 1984. That’s around 15 percent from current levels and as the last three months show, it’s not out of reach. Parity against the dollar or euro would certainly ring alarm bells for the government and the Bank of England.

“When the pound is worth less than a dollar or less than a euro, there’s no doubt that is a sterling crisis,” Parsons at NAB said.

(Reporting by Jamie McGeever; Additional reporting by William Schomberg; editing by Mike Dolan and Peter Graff)

Copyright(c) Thomson Reuters 2016.

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Strategic approach to regulation could boost exports

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Government standards and regulations can help or hinder SMEs’ export prospects

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Governments have a massive opportunity to boost national trade if they think strategically about how standards and regulations help or hinder SMEs to export, the Geneva-based International Trade Centre (ITC) said in a report published on Thursday.

“If you want to maximise your chances of getting your share of international trade, you need to be very strategic about where is the potential that you are not tapping into,” the ITC’s Executive Director Arancha Gonzalez told Reuters.

“The government has a possibility to open the door for businesses to follow, rather than the government following the regulatory framework of businesses that are trying to swim in this current by themselves.”

The ITC, a joint agency of the United Nations and the World Trade Organization that helps SMEs to trade, says its 300-page report, “Meeting the standard for trade”, offers a guide for small businesses and an action plan for governments.

Standards and regulations are key to competitiveness and one of the defining elements of trade in the 21st century, Gonzalez said, as consumers become more and more savvy and picky about where products come from and what they contain.

“Consumers are asking for more sophisticated standards. This is a huge challenge for SMEs, for governments, and for institutions. The option of no standards or lower standards is not an option,” Gonzalez said.

Standards are diverse. They determine whether a plug fits into a socket, whether a medicine can be sold, and whether we can understand foreign traffic signs. Regulations can mean safety rules for food or cars, or privacy rules for data storage. In all cases governments need to back the rules up with testing and certification.

The report identifies areas where countries are underperforming their export potential, which standards and regulations they should target to meet that potential, and what investments are needed.

There is an opportunity for trade in processed and fresh food within the Middle East and North Africa, for example, where the number of technical regulations for fresh food imports is four times higher than in other regions, Gonzalez said.

“There is no internal trade because the manner in which they are regulating is hugely burdensome. So they don’t trade with each other, they only trade with the rest of the world.”

Countries in the region could increase food exports to each other by $7.6 billion and to developing countries in Asia by $16.5 billion, the report said.

The Asia-Pacific region could export $400 billion more in IT and consumer electronics, and $1.7 trillion more overall, and had strong potential to diversify into chemicals exports, the report said.

Meeting standards can open markets and raise prices, but Gonzalez said governments should “craft” regulation with SMEs in mind, since smaller firms make up 98 percent of businesses and their ability to trade suffers disproportionately from red tape.

“A 10 percent increase in the regulatory burden means 1.6 percent less trade for large companies but 3.2 percent less trade for SMEs,” she said.

(Reporting by Tom Miles; Editing by Toby Chopra)

Copyright(c) Thomson Reuters 2016.