Gold Fix: Life on the Bullion Desk

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A Brief History of Time

The years since the turn of the millennium have witnessed tremendous change in the Bullion market. The exchanges finally went fully electronic, terrorism and several wars attracted supposed safe-haven funds, the emerging middle classes of India and China amongst others became increasingly significant purchasers. The advent of ETFs fueled commodity speculation. Horrendous budget deficits from developed economies caused many to question fiat money. Central Banks became net buyers of gold for the first time in decades. The tech bubble was followed by a housing bubble which preceded a bond bubble and finally a commodity bubble. Financial engineering almost consigned the very notion of capitalism to a footnote in history. Europe realized deficit funding has to be paid for eventually after all. The American solution is to borrow ever more and have the central bank in a unique position in the world in that it operates under a dual mandate – low or steady inflation and full employment. The current methodology being deployed is for perpetual monetary stimulus, with the only notable effects being an increase in asset prices and artificially suppressed interest rates. The intended wealth effect for stimulating the economy via the stock market has concomitant unintended consequences - higher commodity prices including gold.

When I first got involved, the price of gold breaking above $400 was considered a big deal, an ounce of silver could be had for the price of a Starbucks latté.

Much has changed indeed.

In retrospect I guess it was always my fate to become a metals trader but was certainly not my expectation and the route I took was indeed scenic. I joined The Maritime Bank of Canada in 1997, the same year that they acquired Goldschmidt Metals from another bank. The history of Goldschmidt is quite esteemed, being formed just a few years after the Great Fire of London when King Charles II occupied the throne.

After working my way up through Back Office into Risk Management and eventually Middle Office a strange turn of events landed me on the trading desk in New York. A year or so into my Middle Office role there was a management change. Goldschmidt had been earning peanuts for years and had been run essentially as an independent subsidiary, largely unaltered since the acquisition. The Head of FX, Harry Weismann, gave up control of the Money Markets operation and took over the metals business.

What usually happens after any takeover? Cuts. One of the first to go was the base metals business. They had been trying to sell it and were unable to find a suitable buyer. So, they just shut it down. Knowing that their time was up, the base metals guys did the only thing they could. They plundered the expense accounts as much as possible, taking $1,000 lunches. What was the worst that could happen, they get fired? That was already on the cards.

The timing of leaving base metals turned out to be a genius move, getting out as close to the bottom as you can imagine. Take copper for example which was around 70c/lb at the time. Today it trades for nearly $4/lb! They don’t like to talk about that. Worse still, Harry decided that getting BACK into base metals in 2010 would be a good idea! They do like to talk about that. Copper hasn’t traded higher since. The head of the precious metals desk in Toronto, Derek Griffin, was made global trading head of metals and initially approached my immediate manager in Middle Office about joining Front Office. He turned it down; citing working for the sell side is no fun. I was next on the list. I jumped at the chance. I’d always wanted to be a trader but getting into my late twenties I’d given up hope. My wife wasn’t happy. She was a Canuck and we’d bought a house in the spring of 2002 which we later found out came with a lot of issues. It was a lemon. I tried to explain that if we did this move for a few years we could buy any house we wanted. I moved down to New York in May 2003, just a week before ten months of house renovations were completed in Toronto. We would never get the opportunity to live in our finished house.

Before getting the job in New York I had to be interviewed by the local trading head there, Billy Maserati. That was a bizarre interview. We had a brief private introductory conversation for about ten minutes and then I sat on the trading desk for an hour or so. I was introduced to everyone and without exception was met with utter contempt. I was the spy from head office. We then left the desk and went into a conference room. He basically said there were a lot of changes going on, he didn’t like it, he didn’t like his new appointed boss – Derek - who had sent me down there and who Billy considered incompetent and undeserving. I would later learn that Billy was first choice to become global trading head but on the condition that he re-located to Toronto where the tentacles of head office oversight were within easy reach. He refused. He concluded that regardless of the situation I seemed like a nice guy. They had to hire someone so screw it, might as well be me! He advised I didn’t go back on the desk that day as the hostility was extremely unlikely to abate and that I should make myself busy until after the market closed, whereupon we would have lunch. Given the circumstances he was very professional and friendly, after all, the two guys that had sat either side of him for 20 years were about to be replaced by me.

The Scenic Route to Wall Street

Having graduated in 1996 it was time to grow up and get a real job. My original plans were fairly conventional. I was going to teach English in Japan for a year or two and then travel the world. However, having met my future first wife during a yearlong sabbatical in Canada those dreams had shifted. The current objective was to immigrate to Canada as soon as possible which needed money. Getting any job though was a nightmare.

I applied to every bank in London and that went nowhere so I had to take some real shitty jobs in order to survive. Some memorable hits included sweeping the floors in a binder factory for a while. There were two of us doing this, me, the undergraduate and the other guy who was a bit special, if you know what I mean. He was a nice guy but a bit slow. Actually, he was legitimately, slightly, mentally retarded. Another job was on a farm, adding some chemicals to zucchini which was then pressed to extract some kind of juice for pharmaceutical research. There was also the night shift in a factory that involved injecting glue into plastic tubes which was used for wrapping cables. I needed a lot of pot to get through that one for £4 an hour. The final job before things got a bit better was working twelve hour shifts, four nights on, one day off followed by four days on at Dartford docks. I was responsible for checking the condition of containers that arrived by truck. It was grim sitting in a portacabin, in the middle of nowhere at 3am with nothing to do. For £6 an hour though I felt comparatively rich. It was then that I started learning Japanese to kill the time and keep my brain active. That lasted a few months before cutbacks meant ‘last in first out.’ A guy that I would meet when turning shifts over found this hilarious. He had no prospects himself but took great joy in the outcome. Look where your degree got you. He had a point.

The final stop gap job was processing case updates for Legal Aid in Chancery Lane. It was £4.25 an hour but that was before spending 40% of those earnings on commuting. At least I was now in an office.

I started wondering what career to consider next. I was getting nowhere in finance and no closer to Canada. All that changed in January 1997 when I received a letter from Maritime Bank of Canada (MBC). The standard rejection letter often states we will keep your CV on file and if anything comes up we’ll let you know. They actually meant it and seven months after receiving my CV they called me in.

On February 10th 1997 I began my career at MBC in London. £13 grand a year and I was delighted. After the first interview went well with HR I cut off my ponytail and officially sold out. I maintained counterparty limits and reported overruns. It was dull but it was fine. A year later I was married to my first wife and then another year later was long enough to get some work experience and so immigrated to Canada. I also managed to get a transfer with the bank.

I did the same job for six months in Toronto before I managed to get a lucky break. You can be smart, you can be hard working but you need to know someone or get lucky or both to get ahead. A manager who ran Middle Office in London had been transferred to Canada to run the VaR group. He needed someone he trusted to join him. I got the nod.

The next step, getting to Middle Office was another act of fate. While I was working in Risk Management I began to receive calls from headhunters to work at one of the other banks (in effect there are only five banks in Canada that control the market, hence, when poaching talent, options are limited). After confiding with a colleague about one of the positions and seeking his advice, something quite unexpected happened. This nice guy, Mike, decided to contact a headhunter and find out for himself about the job and applied behind my back! I found out because the would-be manager at the prospective bank knew the head of Middle Office at MBC and called him to ask about this guy and let him know what he’d done. The end result was that the head of Middle Office at MBC offered me a job looking after FX and Precious Metals. It was strange. The head of our Middle Office told me the other bank was going to call me and make me an offer and that he was going to counter, which is exactly what happened. Mike was left to fester unaware that his actions were known to all on Bay Street.

A year later the New York offer came up.

Let the games begin

What else changed under Harry? Well he’s one lucky bastard that’s for sure. Profit soared. Not particularly because of some inspired reorganization but more a function of the market circumstances. I’ll explain.

You lease silver to an industrial client. Let’s say their credit spread is 500 bps (basis points, 1/100 of 1%). Keeping that rate constant leads to a big difference in terms of dollar revenue when silver is $20 an ounce as opposed to $5. Quadruple the profit without even trying.

What else? The financial meltdown in 2008 after Bear Sterns and more specifically Lehman Brothers. Credit spreads blew out for all businesses, though we suffered far less than other banks. But all industrial credit spreads widened. This means you have to charge the customer more, and so more profit.

What else? Under the chairmanship of Federal Reserve Bank Chief Ben Bernanke interest rates are driven to the floor. Now your basis spread blows out as the cost of borrowing short term money becomes virtually free, your funding costs get lowered and the poor suckers you lease to are already locked in. This is a simple function of the liquidity preference theory. Lend long, borrow short and the yield curve steepening dramatically.

What else? American and European banks were roiling. Canada came through practically unscathed due to tighter housing market regulations and their banks were able to fund even cheaper than before. Why? If I have $50million I need to put on deposit overnight am I going to choose Bear Sterns and hope they survive until the morning no matter what rate they offer me? No, give it to us for nothing. It was the same with central bank gold deposits. I still find it shocking that’d they’d lend 2 lakhs (200,000 ounces) to anyone for 1 year for 6 basis points! Do the math, just not worth the risk for $¼ billion worth of gold. The Central Bank of Venezuela was a big client, they liked Canada but more importantly Hugo Chavez hated America.

What else? Invading Afghanistan after 9/11 was expected and you could argue somewhat reasoned. But Iraq? I think there are two types of people in the world, those that know the reasons for invading Iraq were bullshit and those that deny it. It helped the gold price though.

Success in FX land for Harry Weismann came by minimizing risk and maximizing customer spread. FX markets are extremely deep and liquid, 1bp bid/offer spreads. USA is Canada’s biggest trading partner so there was continuous flow of two-way customer business. Lots of it from small unsophisticated companies who get to pay a bigger spread. Think about it, you go to a bank to change currency for your two week Mexican vacation, what’s the spread between ‘We Buy at’ and ‘We Sell at’? Four cents? Maybe more? That’s 400 bps. Hedge it and forget it. Add to that some derivatives transactions (swaps with returns based on U.S. stock indices for example) and you get the tertiary currency hedging overflow too. Harry hated trading and traders. He’d never been a trader, never understood it. Some leaders, like Steve Jobs are inspirational and you look up to. Not this guy. He was politically adept. Well he must have been because from a pure business perspective he was ruthless but clueless. He would speak in a very measured way, like you knew that he wanted to make sure every word counted but meant very little. He looked like a carp and had the personality of one. He relied on his Rottweiler, Dick Muskoka, who worked out of the Toronto office to do all his dirty work, like a henchman. Dick was charged with learning how precious metals worked and gave his handler the Cliffs notes. I liked Dick, he had done well to get where he was and was a straight talker. There was just one thing I didn’t like and that was his boasting that for a million bucks a year he’d be anyone’s lackey. Hard to disagree with but still, there’s no need to be so obnoxious about it. He wasn’t afraid to court controversy in the name of the bank. His second wife was a trader on the FX desk. When that one didn’t work out he started an affair with one of the credit officers for Goldschmidt. That was too close for comfort; one of them had to leave their job. It wasn’t Dick. Harry and Dick were universally despised.

One of Harry’s personality traits soon became familiar. At first his catchphrase was amusing.

Are we making money?

Yes of course.

It was the first thing out of his mouth when you saw him.

It got tiring very quickly.

Are we making money?

It became evident that it was the only thing he said.

Are we making money?

You couldn’t say no!

Yeah trying.

Actually I’m getting screwed and this looks really bad but you don’t want to hear it so I’m just going to pray.

Are we making money?

Hmm. Do you really mean am I making money because from where I’m sitting you don’t do shit, just