Why are the entities that hold the largest short positions on the planet custodians of the bullion depositories for the largest ETF’s? That’s like putting a sex offender in charge of the Children’s Day Care Center or Bernie Madoff in charge of your company pension fund!” Adrian Douglas Oct 10, 2009

We all know the old saw about Real Estate, Location, Location, Location. The reason is simple. An identical home can have a higher or lower value depending on its location. The question that Adrian Douglas poses can be crystallized into one about possession. For Gold in one’s physical possession is nobody’s liability. The big questions hanging over the Gold ETFs are: Do they actually have the Gold they say they have and if so where exactly do they store it. These questions can also be asked about Central Bank Gold Reserves.

How much Gold do Central Banks actually have?

Central Banks regularly report their Gold holdings to the IMF but because they are allowed to report both Gold Bullion and Gold Receivables as Gold Reserves we do not know exactly (or even vaguely) how many tonnes of Gold they possess. Below I’ve included tables of Central Bank Reserves from the latest IMF reports. The tables divide Central Banks into various regional or economic blocs.

Where exactly are Central Bank Gold Reserves?

Just as important as the size of Central Bank holdings is their location. Central Banks store their Gold locally or use the Custodial Services of foreign Banks. There are three large holdings of such Central Bank Reserves at the New York Fed, the Bank of England and the Swiss National Bank. In addition, Hong Kong recently announced that it would be offering similar custodial services at its new high security depository at Hong Kong Airport.

The website of the New York Fed has a 24 page booklet written in 2004 that describes its custodial role. At that time the Fed held 266 million ounces of Gold (about 8270 tonnes) very little of which belonged to the US whose Reserves are mainly stored at Fort Knox and West Point. The custodial gold at the NY Fed is stored in 122 individual compartments belonging to foreign nations or international organizations. These compartments are identified by number only, the identity of the owners known only to a very few Bank Officials. The Bank of England also acts as custodian for other Central Banks. In a 2003 speech given at the LBMA annual conference the Senior Manager, Foreign Exchange Division, Graham Young made these remarks:

“…we (the Bank of England) are a very significant custodian of physical gold. Primarily this is gold that belongs to other central banks, but we also store gold in our vaults on behalf of a number of commercial firms that are active in the market. In fact, most of the gold we store is not our own.”

According to the September 2009 IMF report, Central Banks (plus the IMF and BIS) held a total of 29,633.9 tonnes of Gold (and receivables). If we subtract about 8000 tonnes of US Gold Reserves that are supposedly held at Fort Knox and West Point, then one could argue that up to two thirds (and perhaps more) of the remaining 21,000 tonnes are held by the three custodial Banks mentioned above.

Why do Central Banks use these Custodial Services?

The NY Fed booklet says:

“Foreign governments and official international organizations store their gold at the Federal Reserve Bank of New York because of their confidence in its safety, the convenient services the Bank offers, and its location in one of the world’s leading financial capitals.

Confidence results from the Bank’s being part of the Federal Reserve System — the nation’s central bank and an independent governmental entity. The political stability and economic strength of the United States, as well as the physical security provided by the Bank’s vault, also are important factors.”

Looking at the Tables below and the ongoing political instability in many parts of the world one can understand the logic of holding national gold reserves overseas. In addition, such gold can be used as collateral in order to borrow funds.

Who Audits the Custodial Gold?

In the case of the NY Fed the following is the case:

Once inside the vault, the gold bars become the responsibility of a control group consisting of representatives of three Bank divisions: Auditing, Vault Services, and Custody. A member of each division must be present whenever gold is moved or whenever anyone enters the vault. All bars brought into the vault are inspected and weighed. These steps are critical, because the weight and purity of a bar determine its value and acceptability in international transactions. A modern electronic balance scale weighs each bar to the nearest 1/1000 of a troy ounce. The vault control group verifies the weight, serial number, and purity measure stamped on each bar against an accompanying manifest. If everything is in order, the gold is either moved to one or more of the vault’s 122 compartments assigned to depositing countries and official international organizations or placed on shelves in one of the “library” compartments shared by several countries. The bars are stacked one at a time in an overlapping pattern similar to that used to stabilize a brick wall. Each compartment is secured by a padlock, two combination locks, and an auditor’s seal.

In this description no mention is made of the owners of the Gold. Are they allowed to visit the compartment where their Gold is stored? Can they audit and assay their Gold? Do they receive paper reports listing the weights and serial numbers of their Gold.? Are they present when any changes take place to the contents of their compartment? What we seem to have is a system of allocated Gold but what’s to prevent the managers of the Vault to order the removal of Gold from “dormant” compartments?

What about Central Bank Gold Receivables?

Take a quick look at the Tables below. Notice how many nations report no changes to their holdings over decades. This has led to arguments that unlike other Central Bank reserves such as US Bonds, Gold does not earn its keep. Or as Graham Young of the Bank of England states:

“Comparative international data on turnover in the wholesale gold market are sparse, but London is generally considered to be the most significant centre for spot and forward purchases and sales, Over-The-Counter gold derivatives, and, in particular, for gold lending. …A further activity, one that grew out of the Bank’s custodial role, is that we are prepared to accept gold deposits from other central banks, which we lend on to the market in our own name, at a margin to reflect the cost and credit risk incurred. Our central bank customers thereby gain the convenience of being able to generate a return on part of their gold holdings, whilst only having to manage a single front and back office relationship. The assets and liabilities denominated in gold on the Bank’s own balance sheet derive entirely from this borrowing and lending activity. Since we publish these figures on our website each month in accordance with the IMF’s disclosure standards, anyone who is interested may track this business from there. At end-April it totalled around forty-five tonnes, reflecting the current interest rate environment. It has been above one hundred tonnes in the past. “

Do the three large Banks have other reasons for encumbering Custodial Gold?

The following is entirely speculative on my part but let’s see where it leads. The Central Banks of the USA, the UK and Switzerland have a more important reason to lease Gold than just to earn a tiny income. The leased Gold, especially when leveraged by the use of derivatives, can be used to suppress the Gold price and thereby defend the current Dollar based Monetary System from competition. Both the UK and Switzerland have sold over half their Gold Reserves during the past decade in such a defence. Eurosystem sales were also used in this way. However, all these sales do not add up to the estimates that GATA has made that as much as half (if not more) of Global Central Bank Gold has been encumbered in the defence of the System. Which leads to the following questions:

Whose Gold is encumbered? Several years ago the IMF hinted at a Rule change concerning Central Bank Reserve reports that would have separated Gold Bullion from Gold Receivables but in the end nothing was done.
Were those Nations properly informed about the risks involved in encumbering their Gold?
Was the Gold encumbered without the knowledge of the nations involved? Here we must recall the principal of Fractional Reserve Banking. If the Gold was stored in “dormant” compartments at the NY Fed for decades what are the chances that requests for the return of more than a small fraction of the custodial Gold would be made at any one time? How easy would it be for the custodian to “borrow” the Gold to defend the Dollar with the intention of returning it later when the Gold price fell.
Why are various nations demanding the return of their Gold now?
There have been reports and rumors that Germany, Switzerland and Hong Kong have requested the return of their Gold. The Swiss report seems particularly odd given their role as custodian for other nation’s Gold. And to this let us not forget the new Hong Kong Depository.

On Sept 2nd it was reported that the Hong Kong Airport Precious Metal depository was officially open: see www.hongkongairport.com/eng/media/press-releases/pr_969.html

“The 340-square-metre depository will enhance Hong Kong’s position as a trading and logistics hub for precious metals by providing secure storage and physical settlement services to central banks, commodity exchanges, bullion banks, precious metal refineries and issuers of exchange traded funds (ETF).

“The Precious Metals Depository will also provide a safe and secure storage facility for local and overseas government institutions. The Hong Kong Monetary Authority is planning to transfer its physical gold reserves stored at other vaults to the Precious Metals Depository later this year.”

“The depository will help to tap into opportunities from the growing demand for gold and other commodities in the region. The agreement signed today will authorise the depository to conduct storage and physical settlement activities for the Hong Kong Mercantile Exchange. It also paves the way for the launch of new financial products.”

Given that Hong Kong’s Gold Reserves amount to little more than two tonnes, the purpose of this new depository must lie elsewhere. I suggest it has more to do with providing an alternative to the services now provided by London, Berne and New York. But why?

Gold in 2009: The Three Gold Wars

The Ruling Classes around the world that control their nation’s Central Banks and Gold Reserves are simultaneously fighting three battles to defend their positions and associated privileges. The first of these battles is internal against the interests of the public. It is to maintain the Fiat Currency regime that allows them to skim the system surreptitiously by taxing wealth through inflation.

The second battle is external and concerns the division of the Tribute that primarily benefits the United States. This Tribute consists of the goods and services purchased by (given to) the US not in exchange for American products but rather by IOUs of various form that now make up a large part of global Central Bank Reserves.

It is finally dawning on the holders of these IOUs that they will never be repaid in anything but depreciated Dollars. The global Monetary system needs reform to correct the current imbalances caused by the irresponsible actions of the American government. The reform anticipated is not the return of the Classical Gold Standard but rather a fairer division of the Tribute now flowing mainly to the USA. The Gold Standard provides a mechanism whereby large trade imbalances are prevented from developing and therefore the need to hold large foreign exchange reserves never arises. Thus there is no Tribute to fight over.

The third battle concerns the return of Central Bank Gold now held in the three Banks mentioned above. Recall the main reasons for storing Gold overseas: Confidence in the safety of the gold and the Political stability and Financial strength of the USA. Given the shocking events of the past two years including the fraudulent activity of many of America’s largest financial institutions and the negligent regulatory agencies, one can understand the current anxiety concerning the safety of their Gold.

The problem for all Central Banks is that the external battles now being fought may unleash internal forces demanding an end to the fiat currency regimes now in place. The last thing they want is a return to the Gold Standard.

The Gold Reserve Tables

With the above in mind as you look at the Tables below ask yourself how many of these nations are somehow tied to the US either because of American Military Bases on their soil or because of their Elites dependence on the US financially. Where is their Gold? Has it been swapped, leased or otherwise encumbered? Given the suspect American reputation for honesty and fairplay has the US swapped, leased or otherwise encumbered other nation’s Gold held in New York without the prior approval of those nations?

Each table I have prepared shows Central Bank Gold Reserves in Tonnes for 1980, 1990, March 2005 and to this I’ve now added Sept 2009. At the bottom of each table are the Bloc Totals in Tonnes and then in US Dollars converted at $420 per oz (March 2005) with the latest total in blue converted at $1050/oz (in Blue for Sept 2009). All the numbers come from Tables found at the World Gold Council Website. The numbers are derived from Official Central Bank releases that may or may not be accurate.

Let’s begin with the Muslim Nations.

Muslim Nations Reserves in Tonnes
1980
1990
2005
Sept 09
Comment

Algeria

173.6
173.6
173.6
173.6
Stable 25 years

Egypt

75.6
75.6
75.6
75.6
Stable 25 years

Indonesia

74.5
96.8
96.5
73.1
Stable 20 years, now reduced

Kazakhstan

—
—
57.4
71.4
Ex Soviet Union, increasing

Kuwait

79.0
79.0
79.0
79.0
Stable 25 years

Lebanon

286.8
286.8
286.8
286.8
Stable 25 years

Libya

95.7
112.0
143.8
143.8
Increasing

Malaysia

72.2
73.1
36.4
36.4
Sold down during Asian crisis

Morocco

21.9
21.9
22.0
22.0
Stable 25 years

Pakistan

56.6
60.6
65.3
65.4
Increasing

Saudi Arabia

142.0
143.0
143.0
143.0
Stable 25 years

Syria

25.9
25.9
25.9
25.8
Stable 25 years

Tunisia

5.8
5.8
6.8
6.8
Stable

Turkey

117.2
127.4
116.1
116.1
Little change over 25 years

Totals

1226.8
1281.5
1328.3
1318.80
=US$18 Billion $44.27 Billion

The most striking thing about these numbers is the lack of change. Many of the holdings have not changed in 25 years. But neither have their rulers. Assuming this Gold is still there we can argue that it is not in play today. This Gold will not be used to save the US Dollar. (That was written in 2005. We cannot rule out the possibility that some of this Gold is stored in New York or London and may have been encumbered)

Eastern European Bloc Reserves in Tonnes
1980
1990
2005
Sept 09
Comment

Bulgaria
—
—
39.8
39.9
Increasing

Czech Republic
—
—
13.6
12.9
Increasing, now lower

Hungary
64.4
9.3
3.1
3.1
Decreasing

Latvia
—
—
7.7
7.7
Increasing

Lithuania
—
—
5.8
5.8
Increasing

Macedonia
—
—
6.1
6.8
Increasing

Poland
23.6
14.7
102.9
102.9
Increasing

Romania
115.5
68.7
105.0
103.7
Increasing

Russia
—
—
386.5
568.4
Increasing now dramatically

Slovakia
—
—
35.1
31.8
Increasing

Slovenia
—
—
7.6
3.2
Increasing

Ukraine
—
—
15.9
26.8
Increasing

Totals
203.5
92.7
729.1
913.0
=US$9.8 Billion $30.6 Bill

Although many of the Nations listed in the above Table are now (or soon will be) members of the European Union I listed them with Russia because I believe their Gold reserves are not in play. Unlike many Western European countries, these ex Soviet nations have minimal Gold Reserves. Compare France with 51% of its reserves in Gold with Poland (only 3.9% ) or Russia (with 4.1%). In fact one could argue that as these nations prosper they will become Gold buyers as Russia certainly is. (That was written in 2005. Since then the total has risen by 25% mainly because of Russian purchases)

Latin America Bloc Reserves in Tonnes
1980
1990
2005
Sept 09
Comment

Argentina
136.0
131.7
55.1
54.7
Recently escaped USA Bloc

Aruba
—
—
3.1
3.1

Bolivia
23.6
27.8
28.3
28.3
Stable

Ecuador
12.9
13.8
26.3
26.3
Increasing

El Salvador
16.0
14.6
13.0
7.3
Slight decrease

Guatemala
16.2
6.4
6.9
6.9
Decrease

Netherlands Antilles
17.0
17.0
13.1
13.1
Slight decrease

Peru
43.5
68.7
34.7
34.7
Decrease

Venezuela
356.4
356.4
357.0
356.4
Stable

Totals
621.6
636.4
537.5
530.8
=US$7.25 Billion $17.8 Billion

This bloc is mainly the story of Venezuela and Argentina. Brazil, Chile, Columbia and Uruguay are missing (see below). Until 2003 Argentina would have been in the USA bloc as its Gold reserves had dropped to less than a tonne. But now it is buying Gold and its currency no longer is tied to the US Dollar. Venezuela has had such turmoil over the years one has to wonder whether or not those 357 tonnes are really there. If not they cannot be sold twice. If they are there, given the current government, I do not think they are in play.

Asian Bloc Gold Reserves in Tonnes
1980
1990
2005
Sept 09
Comment

Bahrain
—
—
4.7
0

Cambodia
—
—
12.4
12.4

China
398.1
395.0
600.0
1054.0
Increasing

India
267.3
332.6
357.7
357.7
Increasing

Japan
753.6
753.6
765.2
765.2
Stable

Korea
9.3
10.0
14.2
14.4
Increasing

Mongolia
—
—
3.0
0

Myanmar
7.8
7.8
7.2
0
Stable

Nepal
—
—
4.8
0

Philippines
59.7
89.8
221.4
157.9
Increasing

Singapore
—
—
127.4
127.4
No report until 2001

Taiwan
97.8
421.0
423.3
423.6
Stable

Thailand
77.4
77.0
83.6
84.0
Stable

Totals
1671.0
2086.8
2624.9
2996.6
=US$35.4 Billion $100.6 Billion

This Table does not include Indonesia and Malaysia which are in the Muslim Bloc above. China now dominates Asia with India growing quickly. Both nations are adding to their Gold reserves and will continue to do so. Japan, which has the largest Asian economy, has been in and out of recession for 15 years now. Given this and especially the ultra low interest rates, I find it hard to believe Japan has retained all the Gold it had in 1980 but that’s what they claim. Taiwan added Gold until 1990 and then stopped. We know that thousands of tonnes of Gold have been leased but we do not know by whom. Japan and Taiwan would be good candidates.

As we all know India has recently added 200 tonnes to its Reserves which now total 557.7 tonnes.

Europe Bloc Reserves in Tonnes
1980
1990
2005
Sept 09
Comment

Austria
656.6
634.3
307.5
280.0
Decreasing

Belgium
1063.1
940.3
257.8
227.5
Decreasing

Denmark
50.7
51.3
66.5
66.5
Stable

European Central B
—
—
766.9
501.4

European Union
2663.3
2909.5
—
–
Distributed

Finland
30.7
62.3
49.1
49.1
Decreasing

France
2545.8
2545.8
2977.8
2445.1
Stable

Germany
2960.5
2960.5
3433.2
3408.3
Possibly encumbered

Greece
119.3
105.8
107.7
112.4
Stable

Ireland
11.1
11.2
5.5
5.5
Decrease

Italy
2073.7
2073.7
2451.8
2451.8
Stable

Luxembourg
14.2
10.7
2.3
2.3
Decreasing

Netherlands
1366.7
1366.7
767.5
612.5
Decreasing

Portugal
689.6
492.4
462.3
382.5
Probably encumbered

Spain
454.3
485.6
523.3
281.6
Stable

Norway
36.8
36.8
0.0
0.0
Not listed

Sweden
188.8
188.8
170.4
131.0
Small Decrease

Switzerland
2590.3
2590.3
1332.1
1040.1
Done selling

Totals
17515.5
17466.0
13681.7
11997.6
=US$184.2 Billion US$402.7 B

Here we have the Challenger. The Europeans wants the Euro to be a Reserve Currency. The Euro has some Gold backing. Europeans own almost half the Official Gold in the whole world. During the last 20 years, while the Euro project was in its formative stage this Bloc sold over 4400 tonnes of Gold. This stabilized the US dominated system. However, the Europeans are now claiming they will sell very little Gold going forward.

They want their portion of the Tribute mentioned above increased.

USA Bloc Reserves in Tonnes

1980
1990
2005
Sept 09
Comment

Australia
246.7
246.7
79.7
79.9
Decreasing

Brazil
58.3
142.1
13.8
33.6
Decreasing

Canada
652.6
459.2
3.4
3.4
Almost gone

Chile
53.0
57.8
0.2
.2
Almost gone

Columbia
86.7
19.5
10.2
6.9
Decreasing

Israel
37.1
26.1
0.0
0.0
All gone

Jordan
31.8
23.3
12.8
12.8
Decreasing

Mexico
64.1
28.6
4.2
8.1
Almost gone

Oman
6.5
9.0
0.0
0.0
All gone

Qatar
14.8
25.9
1.3
12.4
Almost gone

South Africa
377.9
127.2
123.9
124.8
Possibly no longer in Bloc

United Arab Emir
17.9
24.8
0.0
0.0
All gone

United Kingdom
585.9
589.1
312.2
310.3
Decreasing

United States
8221.2
8146.2
8136.2
8133.5
Deep Storage Gold

Uruguay
106.4
74.5
0.3
.3
All gone

Total
10560.9
10000.0
8698.2
8726.2
=US$117.4 Billion $292.9 Billion

Finally we come to the USA Bloc. This is an amazing Table. All of America’s closest allies are SOLD OUT. Australia claims to have 80 tonnes that may be encumbered. The UK may still have 312 tonnes but, assuming it isn’t already encumbered, this Gold may be required to obtain currency union with the Euro zone.

The key figure of course is the American Deep Storage Gold. If that Gold does not exist or is encumbered then the USA bloc is broke!

Conclusion:

For decades many nations were content to store their Gold Reserves in the three great global financial centers in the USA, the UK and Switzerland. This Gold was in the physical possession of the host countries that were responsible for the safety and integrity of the Gold bars. At the same time we have strong circumstantial evidence that thousands of tonnes of Official Gold have been sold in a desperate attempt to save the Dollar based monetary system. What we do not know is whose Gold was sold.

Over the last few months, despite a record Gold price, the Gold ETFs have been unable to exceed their record holdings established when Gold previously broke through the $1000 mark. One possible explanation for this non-confirmation of the Gold move is the doubt many investors have that the ETFs actually possess the Gold they say they have. These investors want physical possession.

Are foreign Central Bankers now questioning the wisdom of storing their Gold Reserves overseas? If not they should because when it comes to Gold it’s all about possession, possession, possession.

Cheers from Auckland,

Ed Wener
ed.na@xtra.co.nz